What Drives Private and Public Merger Waves in Europe

Abstract

Our paper conducts the first analysis of the drivers of the European Merger Wave of the 90s and the drivers of merger waves involving private firms. We argue theoretically that the differences between private and public firms make private firm merger waves less likely to be driven by the inefficiencies which are the foundation of market driven theory and the agency costs of overvaluation. Our empirical investigation finds that industry merger waves involving private firms represent efficient responses to economic shocks in which overvaluation theories do not play a major part, while public firm merger waves seem to be driven by agency issues related to the stock market overvaluation of the EU in the late 90s. Firstly, we show that private firm industry merger waves occur at different times than public firm industry merger waves. Secondly, we find that these differences are attributable to the significant influence of economic industry shocks on the timing private firm merger waves and a significant influence of stock market overvaluation on the timing of public firm merger waves. Thirdly, our study of post-merger (accounting) performance confirms that private firm merger waves are more efficient than public firm merger waves, which are close to although the statistical significance is weak. The evidence for merger waves involving public acquirers and private targets, and private acquirers and public targets is less clear. However, our study of post-merger operating performance offers weak evidence that these merger waves are not efficient.