Do Wealth Creating Mergers and Acquisitions Really Hurt Acquirer Shareholders?

Abstract

We examine the expected economic benefits of mergers and acquisitions. We conclude that both signaling and revelation biases are responsible for the commonly reported finding that on average takeovers are harmful to acquirer shareholder wealth. After accounting for these two biases that lead to a price fall on announcement of 18.9% ($563.9 million), we demonstrate that acquirers generally benefit from takeovers with an average 81% share of the economic gains from the transaction. By studying bids that fail for exogenous reasons, which are largely free of signaling and revelation biases, we confirm the neoclassical view that takeovers are positive NPV projects for a typical acquirer, which produce a sizeable return on capital of 21% to the acquirer ($626.6 million) and 21.2% ($772.2 million) to the combined acquirer-target. This conclusion is based on two important findings. First, on a failed acquisition announcement, the combined acquirer and target value on average falls, where both target and acquirer suffer significant negative abnormal returns. Second, acquirers share in a significant portion of the economic benefits of a successful acquisition, reflected in a significantly positive relationship between acquirer and target stock returns utilizing a 60-day initial bid announcement window and a 100-day period following the termination announcement. Over the same window, exogenously failed cash bidders significantly underperform successful cash bidders by 10.7% and exogenously failed stock bidders significantly underperform successful stock bidders by a further 15.5% making a total differential of 26.2%. Moreover, in the long term, stock-funded targets typically only receive half the premium of cash targets.