The Sharing of Economic Benefits between Acquirers and Targets

Abstract

We examine the creation and subsequent loss of expected economic benefits in mergers and acquisitions. By studying failed bids along with successful ones and analyzing acquirer and target abnormal returns using a new approach, we document two important findings. First, on the announcement of a failed acquisition, the combined value of the acquirer and target on average falls. Further, both the target and acquirer on average suffer significant negative abnormal returns from offer termination. Second, we find that acquirers share in a significant portion of the economic benefits of a successful merger or acquisition. Specifically, we find there is a significantly positive relationship between acquirer and target returns utilizing a longer-term 60-day announcement window and at the termination announcement indicating an expected sharing of synergistic benefits. Further, examining subsequent stock performance over a 100-day window once the outcome is known, failed cash bidders significantly underperform successful cash bidders by approximately 11% and failed acquirers using stock bids underperform successful stock acquirers by a further 9.4 to 11.6%. These findings indicate sizeable expected acquirer economic benefits for both offer types.