Shareholder Wealth Effects of Large European 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, but the cumulative abnormal return that includes the price run-up over the two-week period prior to the event rises to 20%. The share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the type of takeover bid has a large impact on the short term-wealth effects of target and bidder shareholders with hostile takeovers triggering substantially larger price reactions than friendly mergers and acquisitions. When a UK target or bidder is involved, the abnormal returns outperform those of Continental European bids. We also find strong evidence that the means of payment in an offer has a large impact on the share price reactions. High market-to-book ratio of the target lead to a higher bid premium combined but trigger a negative price reaction for the bidding firm. Bidding firms should not further diversify by acquiring target firms that do not match the bidder's core business. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. We find a significant positive correlation between target shareholder gains and total gains for the merged entity as well as between target gains and bidder gains. This suggests that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.