Determinants of Returns of Acquiring Firms Around Public Tender Offer Announcements: The Evidence Related to French Control-Oriented and Parent-Subsidiary Offers

Abstract

We examine the wealth effects of 101 tender offers, completed by French companies between January 1980 and December 2000 and we distinguish two categories of tender offers: Control-oriented ones, i.e. offers involving a change in control, and parent-subsidiary ones, i.e. offers where the acquirer holds more than 50 percent of the target's outstanding shares before the bid. We obtain the following results. First, we show that tender offers are much more profitable for target shareholders. Second, we observe that, on average, bidder returns are positive and significant for control-oriented offers, whereas they are negative and significant for parent-subsidiary ones. Third, results suggest that control-oriented acquisitions tend to create value, whereas parent-subsidiary ones tend to destroy value. Since we show that bidders exhibit low or negative returns at the announcement of the offer, we examine the determinants of these low or negative returns. The determinants under study are related to the characteristics of the offers, as well as to some characteristics of the acquirers. We observe that returns of French acquirers are affected by the quality of their management, by the relatedness of their activities with those of the targets and by the level of competition to acquire the target. Specifically, bidder returns are higher for companies that are indebted, with a high market-to-book ratio (i.e. 'glamour' firms), whose activities are similar to the targets' ones, and that do not face competition during the tender offer. However, returns of French acquirers do not appear to be related to the method of payment, nor to the bidders' shareholdings in their target prior to the bid.