Shareholder Wealth Effects of European Domestic and Cross-Border Takeover Bids

Abstract

In this paper, we analyse the short-term wealth effects of large (intra)European takeover bids. We find large announcement effects of 9% for target firms and a cumulative abnormal return that includes the price run-up over the two-month period prior to the announcement date of 23%. However, the share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the status of a takeover bid has a large impact on the short-term wealth effects of target's and bidder's shareholders, with hostile acquisitions triggering substantially larger price reactions than friendly mergers and acquisitions. We also find strong evidence that cash offers trigger much larger share price reactions than all-equity offers or combined bids consisting of cash, equity and loan notes. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. Also, our results suggest that bidding firms should not diversify by acquiring target firms that do not match their core business. Surprisingly, domestic bids create larger short-term wealth effects than cross-border mergers and acquisitions. The country dummies we use proxy for institutional differences, such as different corporate governance regimes (ownership concentration, takeover regulation, protection of shareholder rights, and informational transparency). In addition, we investigate whether the predominant reason for mergers and acquisitions is synergies, agency problems or managerial hubris and find that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.