Abstract
Speculation spread in mergers and acquisitions (M&A), measured as the percentage difference between the offer price and the closing stock price of a target the day after the announcement, is the starting point for risk arbitrage returns, a topic receiving greater consideration both in practice and in the empirical literature. Reflecting the degree of risk in merger arbitrage investments, we found no significant difference between the speculation spread in domestic and foreign Polish deals, between 2000 and 2013. However, we found higher returns for cross-border portfolio, therefore investors seem more pessimistic with regards to the expected risk in cross-border deals. Also, on average, deal spreads do not correctly reflect the level of risk in merger arbitrage strategies with Polish targets.
Highlights
The mergers and acquisitions (M&A) activity creates opportunities for the companies directly involved in the process of merging or acquisition, and for the mergers arbitrageurs, seeking to benefit from the risk surrounding announced M&A transactions
This study adds more value to the existing literature, because, to our knowledge, it is the first article focusing on Polish deal spreads, by analysing deal spreads across different samples, which in our case are domestic versus cross border M&A Polish transactions
We observe that the cross-border coefficient evolutes from negative to positive in the period -10 to+10. This indicates that the offer price starting 10 days before the announcement is below the target market price and it is gradually adjusted only after the announcement is made, when the target stock price will trade above the offer price
Summary
The mergers and acquisitions (M&A) activity creates opportunities for the companies directly involved in the process of merging or acquisition, and for the mergers arbitrageurs, seeking to benefit from the risk surrounding announced M&A transactions. Nawrocki and Wielgus (2011) found evidence that during 2008 unusually large spreads between the bid price and the target stock price post-announcement were reported, due to investors’ increasing concerns that bidders could not finance the transactions. This article examines Polish domestic and cross-border transactions and the focus is on the relation between the ex ante indication (as measured by deal spreads) and the ex post completion in risk arbitrage. We expect to find larger spreads or higher returns for cross-border deals, to compensate for the additional risk involved by at least two different legal, cultural and political systems (unlike domestic transactions, were such costs do not apply).
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