Acquirers gain twice as much as targets in M&As: a different perspective on a longstanding perception

Abstract

We propose a structural event study methodology, which explicitly models the interaction of two merger and acquisition (M&A) effects: synergy (total value) and dominance (bargaining power). This interaction simultaneously determines the acquirer's and the target's observed abnormal returns around the transaction announcement. Accordingly, we propose a structural estimation approach of which estimates suggest that acquirers get twice as much gains as targets. The structural parameters are uniquely identified with the reduced forms’ coefficients. We use this feature to validate our structural approach. Moreover, the reduced forms' estimates are consistent with the M&A literature. However, the interpretation/intuition from the structural estimates offers a new perspective on how acquirers and targets share synergies. More generally, the structural approach allows testing theories and hypotheses related to M&As under an empirical framework that captures the interdependency of the parties' abnormal returns. The efficiency of the empirical procedure is higher than the efficiency of methods that overlook this interdependency.