Abstract
This study investigates how mergers and acquisitions (M&A) affect the wealth of shareholders of public firms in the United States (U.S). More specifically, it investigates whether the nature of the bid, the payment method used, and the type of M&A have implications for shareholders of U.S bidding firms. The study analyses 352 mergers and acquisitions in the U.S during the period 1999-2008, and its results indicate that bidding firms suffer significant negative buy-and-hold abnormal returns in the three years period after a M&A announcement. The results also suggest that, in the long-run, hostile bids and cash-financed bidders outperform friendly bids and stock-funded bidders, respectively. Furthermore, the study also finds that in the long-run bidder firms that focus on industry specialisation within their M&A targets significantly outperform firms that adopt a more diversified strategy. The analysis also investigates the effects of M&A specialisation/diversification in six different sectors, and finds that specialised bidders outperform diversified bidders in four sectors: consumer & basic materials, energy & utilities, communications and technology. Furthermore, bidder firms in the financial services sector perform significantly better when diversifying into other sectors, while the performance of bidder firms in the industrial sector appears unaffected by the degree of M&A specialisation or diversification.
Highlights
The number of mergers and acquisitions (M&As) has increased significantly in the past century, as has the size of the deals and geographical representation of the firms involved (Martynova & Renneboog, 2008)
The results suggest that the sample bidder firms generated a negative buy and hold abnormal returns (BHAR) of -1.79% during the 0-12 month window, -0.54% during the 0-24 month window and -5.04% over the three years after the M&A annoucement
This implies the shareholders of bidder firms suffered significant losses after the M&A announcement in the long term
Summary
The number of mergers and acquisitions (M&As) has increased significantly in the past century, as has the size of the deals and geographical representation of the firms involved (Martynova & Renneboog, 2008). With each M&A, a key concern for both bidder and target shareholders is return on investment and the manner in which the merger or acquisition affects share prices in both in the short and long term. Prior studies indicate that M&As typically create short-run value for the shareholders of the target entity (Martynova & Renneboog, 2008; Rau & Vermaelen, 1998) and may create value for bidder shareholders in the same time frame (Eckbo, 1983; Eckbo & Langohr, 1989). There are, limited studies on the long-run effects of M&As on shareholder performance, and these offer inconclusive findings about the impact on performance. Prior studies provide mixed results about the long-run effects of M&As on shareholder performance, and as a result, this area requires further research
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