Cash is King: Revaluation of Targets after Merger Bids

Abstract

Cash- and stock-financed takeover bids induce strikingly different target revaluations. We exploit detailed data on unsuccessful takeover bids between 1980 and 2008, and show that targets of cash offers are revalued on average by 15% after deal failure, whereas stock targets return to their pre-announcement levels. The differences in revaluation do not revert over longer horizons. We find no evidence that future takeover activities or operational changes explain these differences.While the targets of failed cash and stock offers are both more likely to be acquired over the following 8 years than matched control firms, there are no differences between cash and stock targets, neither in the timing nor in the value of future offers. Similarly, we cannot detect differential operational policies following the failed bid. Our results are most consistent with cash bids revealing prior undervaluation of the target. We reconcile our findings with the opposite conclusion in earlier literature (Bradley et al., 1983) by identifying a look-ahead bias built into their sample construction.