The Wealth Effects of Horizontal Acquisitions on Rivals: Distinguishing between Public, Private and Subsidiary Targets

Abstract

This study investigates the wealth effects of 182 European horizontal acquisitions in the manufacturing industry on rivals of the merging firms, thereby distinguishing between acquisitions of public, private and subsidiary targets. Based on a case-by-case investigation of the European Commission over 800 publicly-listed rivals were indentified. The event study indicates that rivals gain significant positive abnormal returns when a private firm is acquired and zero abnormal returns when a subsidiary or public firm is acquired. We hence contribute to the acquisition literature by highlighting that acquisitions of private and subsidiary targets, which until now have been treated as a single category, have different effect on rival returns. Furthermore, we argue that motives for acquiring a private, public or subsidiary target are highly distinct and consequently affect rival firms differently. Acquirers of publicly-traded firms are prone to agency risks and hubris, while acquirers of subsidiary targets are buying poorly performing lines of business.