Effects of the method of payment and the mode of acquisition on performance and risk metrics

Abstract

Purpose – The purpose of this research is to investigate post‐acquisition differences in share and operating performance, and in risk characteristics, for acquirers who pay cash versus those who employ stock, as well as for acquirers who merge with targets as opposed to those who directly approach target shareholders to tender their shares.Design/methodology/approach – The paper uses event study methodologies, incorporating recent methodological advancements, to determine the effect of the acquisition by various classes of US acquirers during 1975 to 1996, on the variables of interest, by comparing these to a benchmark of similar firms who did not acquire any targets.Findings – Mergers, especially in conjunction with cash payments, are risk increasing transactions. Equity risk increases for cash mergers over three years following acquisitions. Mergers experience a post‐acquisition increase in the intrinsic business risk, a decline in the degree of operating leverage and a small deterioration in the operat...