Can the Stock Market Systematically Make Use of Firm- and Deal-Specific Factors when Initially Capitalizing the Real Gains from Mergers and Acquisitions?

Abstract

This study empirically examines the impact of firm-specific and deal-specific factors on the change in industry-adjusted operating performance around corporate mergers and acquisitions. The factors investigated are offer size, bidder leverage, the size of bidder's cash resources, whether the bidder's and target's businesses are in the same industrial category, the method of payment selected for the merger, whether the merger was friendly or hostile, different aspects of the bidder's ownership structure, and different aspects of the bidder's governance arrangements. Most of these factors are being examined for the first time in this context. The empirical analysis is based on UK firms merging between 1985 and 1994, and hence the paper also reports on real gains in corporate mergers for a sample of mergers outside the U.S. Our results indicate that the performance of merged firms improves significantly following their combination. However, the extent of improvement depends significantly on the method of payment selected for the merger, and whether the merger was friendly or hostile. The change in performance is also related to director and officer ownership as well as the concentration of ownership in the hands of outside blockholders.