Glamour Acquirers, Method of Payment and Post-Acquisition Performance: The UK Evidence

Abstract

We study the effect of different acquirer types defined by financial status and their payment methods on their short and long-term performance in terms of abnormal returns using a variety of benchmark models. For a sample of 543 UK acquirers during 1983-95, we examine the relative performance of acquirers based on their pre-bid financial status as either glamour or value acquirers using both the PE ratio and market to book value. We also investigate the interaction between the pre-bid financial status of acquirers and the method of payment. We find that value acquirers outperform glamour acquirers in the three-year post-acquisition period. Price Earnings Ratio proves a better proxy for the glamour status than the market to book value ratio. We report that glamour firms tend to exploit their status and use equity financing rather than cash. However, the pre-bid financial status of the acquirer has a greater impact on the long run post acquisition performance than the method of payment. Glamour acquirers seriously underperform value acquirers irrespective of how they finance their acquisitions. Our results for the UK are broadly consistent with those for the US reported by Rau and Vermaelen (1998). As in their study, we find stronger support for the extrapolation hypothesis than for the method of payment hypothesis. Our conclusions based on a range of bench mark models for abnormal returns suggest that stock markets in both the US and the UK may share a similar proclivity to overextrapolation of past performance at least in the bid period. They also tend to reassess the acquirer performance in the post-acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries.