Gaining a Competitive Edge Through Acquisitions: Evidence from the Telecom Industry

Abstract

In this paper, we study the announcement effects of all acquisitions in the recent telecom wave on both the acquirors and their non-merging competitors. We extend the analysis of traditional studies that measure the takeover performance along two dimensions (by studying the returns to acquirors over multiple mergers and by including the non-merging competitors) in order to differentiate between the potential theories for negative returns earned by acquirors. Our results are consistent with the Competitive Advantage Hypothesis that posits that acquisitions are a means of corporate restructuring in a changing environment, awarding the acquiror a competitive edge and thereby making these acquisitions costly for their non-merging competitors (rivals). We find that the rivals of the acquirors experience negative returns, especially around the announcement of non-horizontal acquisitions of -0.38\% on average. Further, we find that closer rivals of the acquirors experience higher negative returns: The competitors that are of similar size as the acquiror earn negative returns of -0.50\% and the ones that provide primarily the same service as the acquiror lose -0.65\% on average. Multivariate test results confirm most of the findings of the univariate tests. In addition, they show that for every -1\% return suffered by the acquiror at the announcement of its acquisition, its rivals suffer -0.04\% on average.