Merger Announcement Research Articles

Exploring the Dynamics between M&A Activities and Industry-Level Performance

This study investigates the correlation between mergers and acquisitions (M&As) activities and industry-level performance. While extensive research on M&As has focused on financial performance at the firm-level around the merger announcement, not much focus has been given to the relationship between M&A activities and financial performance at the industry level. Using global data from the S&P (Standard & Poor’s) Capital IQ platform database, this study examines the significance of relationships of 12 industry-level financial values with M&A frequency and transaction value across 11 industry sectors throughout 2009–2018. The results show that M&A activities play a key role in identifying industries with lots of potential and that strategic investment planning can be drawn from both industry and time lag perspectives. This study bridges the gap by exploring the complexity of M&A performance across various firms and industries, and supports forward-looking investment processes by delineating emerging industries with expected positive returns.

Defined Contribution Pension Risk and Mergers and Acquisitions: Evidence from United Kingdom

The extant empirical evidence suggests that defined benefit (DB) pension obligations, deficits, and costs increase corporate leverage and cost of capital, reduce corporate investment and aggravate valuation uncertainties. In the M & A context, DB schemes of target firms may reduce the takeover likelihood and bidder DB schemes may influence payment currency choice and reduce shareholder value. However, the impact of defined contribution (DC) pension scheme risk on M & A has not been explicitly investigated so far inspite of the increasing and substantial shift from DB to DC schemes by firms. In a sample of 138 takeover bids for United Kingdom (UK) listed companies during 2002-12, we find that bidder and target DC costs decrease the likelihood of takeovers, influence percentage of cash and stock offered as consideration, and diminish shareholder value gains on merger announcements. Further, the negative economic impact of DC scheme risk on synergistic value from mergers is even larger than that of DB scheme risk. These results are robust to potential biases due to self-selection by merger partners and endogeneity of payment currency choice. Our analysis indicates that DC scheme risk significantly and pervasively affects the takeover decision, target selection, payment currency choice and shareholder wealth and should not be neglected in view of the growing trend away from DB to DC schemes.

Informed Options Trading Before Corporate Events

There is sufficient evidence in the popular, legal, and financial literatures that informed options trading ahead of scheduled and unexpected corporate events is pervasive. In this review, we piece together the extant evidence on this topic into a cohesive picture, which includes abnormal activity ahead of announcements of earnings, mergers and acquisitions, as well as numerous other corporate events. We also discuss the more limited evidence on informed trading in other derivatives markets, such as credit default swaps. In addition, we characterize the impact and features of illegal insider trading and insider trading networks. We also provide a brief overview of the legal framework in the United States concerning legal and illegal insider trading to emphasize the challenges associated with identifying informed options trading. We end with our suggestions regarding future research opportunities in this broad topic.

Investor Attention and Merger Announcements

This article analyzes investor attention around merger announcements and its impact on price reactions and investor trading activity. The authors find that (1) investor attention to target firms increases significantly during the preannouncement period, especially when merger-related news are present; (2) investor attention to both acquirer and target firms increases on the announcement day but increases more for the target firms and large deals; and (3) stock return and abnormal trading volume responses related to announcement are more pronounced when investor attention is higher. Overall, the results suggest that investors anticipate merger announcements and that investor attention affects how investors incorporate information into asset prices.

How do stock-for-stock acquirers manage earnings? The accruals feature of real earnings management

This paper investigates whether stock-for-stock acquirers undertake real activities to manage earnings before merger announcements. Our results show that stock-for-stock acquirers present unusually high levels of credit sales and overproduction in the quarter immediately before the merger announcement. We also find that the accruals feature of real earnings management can explain the stock-for-stock acquirers’ high discretionary current accruals. In addition, stock-for-stock acquirer firms that accelerate their credit sales experience subsequent market underperformance. Overall, we provide a novel insight into the accruals feature of real earnings management.

Market-driven Indian Bank Merger Announcements and Stock Returns

The Government of India, Reserve Bank of India and bank managers, in general, favour bank consolidation for various reasons. They support consolidation to create a few large global banks, to achieve rapid growth and to gain from economies of scale and scope. However, international studies and Indian studies on bank mergers indicate that the evidence in favour of bank mergers is mixed, at best. Hence, this study was conceived to analyse the effect of market-driven Indian bank-to-bank mergers on stockholders during the post-reform period, 1999 – 2014. Event study analysis was performed using the „market model‟ with the BSE-500 stock index as the reference index. Each merger announcement was considered as an event and daily stock returns in a 30-day time window were computed before and after the event. Overall, if the abnormal returns had been positive it could be implied that merger announcements have a positive impact on the stock prices. However, the results indicate that stock returns of acquiring banks and acquired banks generally declined in the time period around merger announcement. In the case of acquiring banks, adverse reaction was observed in six out of nine mergers that were analysed. Among the nine acquired banks, five were listed and adverse reaction was noted in three cases. Overall, merger announcements appear to have had an undesirable effect on stock returns of acquiring and acquired banks. Hence, future merger decisions should be taken only if other alternatives are not available and such decisions must be driven by due diligence.

Pre-announcement merger trading by investment bank-affiliated mutual funds

PurposeThis study examines whether mutual funds buy or sell the stock of merger targets advised by their investment bank affiliates in advance of merger announcements and withdrawals. Existing literature finds mixed evidence on whether financial conglomerates act on conflicts of interest across divisions.Design/methodology/approachAffiliations between investment banks and mutual funds are identified, and the incidence and characteristics of mergers where funds trade the stock of targets advised by affiliates are examined.FindingsMutual funds buy or increase holdings of merger targets advised by their investment bank affiliate in advance of merger announcements, capturing highly positive abnormal returns. Mergers with this pre-announcement trading by affiliates are more likely to be completed successfully. Furthermore, mutual funds are more likely to liquidate holdings of a target in advance of a merger withdrawal if the fund is affiliated with the target's investment bank advisor, thus avoiding negative abnormal returns surrounding merger withdrawals. Results are robust after controlling for potential sample selection bias.Originality/valueThese findings contribute to the literature on affiliations between investment banking and mutual fund management, M&A outcomes, and to the discussion of potential conflicts of interest within banks. Also, this study is the first to examine trading activities by mutual funds affiliated with merger investment bank advisors during value-sensitive periods beyond the pre-announcement phase, such as the time period leading up to merger withdrawals.

The wealth effects of mergers and acquisitions by dividend payers

We document a more favorable market reaction to the announcement of mergers and acquisitions (M&As) by dividend-paying acquirers when compared to non-paying acquirers. Dividend-paying acquirers are associated with greater improvements in return on assets post-M&A. Furthermore, dividend-paying acquirers hold higher levels of cash and are more likely to engage in cash financed deals. We infer that an existing dividend payment policy acts as a disciplinary mechanism forcing managers to engage in value-adding M&As, restricting self-motivated empire-building acquisitions. In order to preserve their ability to maintain dividends, dividend paying acquirers seek targets that can contribute to free cash flow.

Event Studies in Merger Analysis: Review and an Application Using U.S. TNIC Data

There is a growing concern that U.S. merger control may have been too lenient, but empirical evidence remains limited. After reviewing event studies as a method to acquire empirical insights into the competitive effects of mergers, I propose a novel application using Hoberg-Phillips TNIC data. This application allows for the ready approximation of abnormal stock market returns of likely competitors to 1,751 of the largest U.S. mergers since 1997. I document that likely competitors experience on average an abnormal return of close to one percent around a merger announcement. Abnormal returns are also strongly associated with concerns of market power, which suggests that competitors benefit at least in part because of an anticipation of anti-competitive effects -- and hence insufficient merger control.

IMPACT OF MERGER ANNOUNCEMENTS ON CORPORATE PERFORMANCE

IMPACT OF MERGER ANNOUNCEMENTS ON CORPORATE PERFORMANCE

Real activities manipulation in stock-for-stock mergers

This study examines whether firms that primarily use stock of their companies to pay for acquisitions manipulate real activities in the year preceding the merger announcement to inflate earnings. Using post-SOX data of mergers and acquisitions completed between 2003 and 2013, the findings of this study show that acquiring firms in stock-for-stock mergers inflate earnings by cutting discretionary expenses, manipulating sales to increase revenue, and overproducing goods to reduce the cost of goods sold.

Financial institutions mergers: a strategy choice of wealth maximisation and economic value

PurposeThis study Investigates Shareholders' value adjustment in response to financial institutions (FIs) merger announcements in the immediate event window and in the extended event window. This study also investigates accounting measures performance, comparison of post-merger to pre-merger, including several cash flow measures and not just profitability measures, as the empirical literature review suggests. Finally, the authors examine FIs mergers orientations of diversification and focus create more value for shareholders (in the immediate announcement window and several months afterward) and/or generates better cash flows, profitability and less credit risk.Design/methodology/approachThis study examines FIs merger effect on bidders’ shareholder’s value and on their observed performance. This examination deploys three techniques simultaneously: a) an event study analysis, to estimate and calculate abnormal returns (ARs) and cumulative abnormal returns (CARs) in the narrow windows of the merger announcement, b) buy and hold event study analysis, to estimate ARs in the wider window of the event, +50 to +230 days after the merger announcement and c) an observed performance analysis, of financial and capital efficiency measures before and after the merger announcement; return on equity, liquidity, cost to income ratio, capital to total assets ratio, net loans to total loans, credit risk, loans to deposits ratio, other expenses and total assets, economic value addition, weighted average cost of capital and return on invested capital. Deal criteria of value, mega-deals, strategic orientation (as in Ansoff (1980) growth strategies), acquiring bank size and payment method are set as individually as control variables.FindingsResults show that FIs mergers destroy share value for the bidding firms pursuing a market penetration strategy. Market development and product development strategies enable shareholders’ value creation in short and long horizons. Diversification strategies do not influence bidding shareholders’ value. Local bank to bank mergers create shareholders’ value and enhance liquidity and economic value in the short run. Bank to bank cross border mergers create value for bidders’ in the long term but are associated with high costs and higher risks.Originality/valueA significant advancement over the current literature is in assessing mergers, not only for bank bidders but also for the three pillars FIs of the financial sector; banks, real-estate companies and investment companies mergers. It is an improvement over current finance literature because it deploys two different strategies in the analysis. At a univariate level, shareholder value creation and market reaction to merger announcements are examined over short (−5 or +5 days) and long (+230 days) windows of the event. Followed by regressing, the resultant CARs and BHARs over financial performance variables at the multivariate level.

Expectation Management in Mergers and Acquisitions

Takeover bidders in stock-for-stock mergers have strong incentives to increase their own premerger stock prices to lower their acquisition costs. We find that before announcements of stock mergers, bidders manage down analyst earnings forecasts prior to earnings releases. Such expectation management benefits bidders by increasing their own stock prices and saving on acquisition costs. Additionally, analysts who have close relations with stock bidders are more likely to participate in expectation management. For identification, we use an instrumental variable analysis, a pseudo-event analysis, and a propensity score-matching approach. Our paper provides evidence on expectation management as a previously underexplored opportunistic behavior by takeover bidders. This paper was accepted by Shivaram Rajgopal, accounting.

Does Short-Selling Potential Influence Mergers and Acquisitions Payment Choice?

Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders with higher short-selling potential include a higher proportion of cash in their M&A payments to reduce price pressure resulting from arbitrage short sales. Consistent with this prediction, we find a positive impact of the ex-ante net lending supply of bidder shares on the percentage of cash in public target payments. We corroborate this result in a placebo analysis and several robustness tests. Our paper adds to a growing literature analyzing the interplay between corporate and investor behavior.

The value of CEOs' supply chain experience: Evidence from mergers and acquisitions

Acquirer CEOs with experience in the target's industry supply chain (‘supply chain CEOs’) are associated with wealth effects of first-order importance: they earn 1.5% higher merger announcement returns. Conversely, their targets get a lower share of the merger gains. Acquisitions by supply chain CEOs also exhibit higher synergies, better post-deal accounting performance, and less goodwill written off. These findings withstand checks for endogeneity, anticipation bias, and numerous robustness tests. In takeovers by supply chain CEOs, superior acquirer performance stems from both value creation and rents negotiated away from target shareholders.

Market Concentration and Bank M&As: Evidence from the European Sovereign Debt Crisis

Using a sample of 312 bank M&As announced between 1998 and 2016 in the EU-27 countries, this paper investigates the impact of market concentration and the European sovereign debt crisis on the way investors react to these corporate events. In Western European countries, we find results which contrast the conventional wisdom that acquiring banks lose around the merger announcement date. In fact, since 2009, acquiring banks shareholders gain approximately $34 million around the announcement, a $56 million improvement compared to the pre-crisis period. These documented shareholder gains are also accompanied by significant improvements in post-merger profitability. Markedly, we link this superior performance of the post-2008 acquirers with the degree of market concentration in the Western European region. Finally, results for the Eastern European countries indicate that the crisis did not have a significant impact on the quality of bank M&As in the region.

Board diversity and firm performance: The role of business group affiliation

There is little consensus globally on the relationship between board diversity and firm performance. Using the resource dependence and agency views, this paper examines how business group affiliation influences the relationship between board diversity and firm performance as a contextual/confounding factor. Based on data for listed firms in India, we find that board demographic diversity is positively associated with the firm performance (Tobin’s Q) of standalone firms, but this association is negative for group-affiliated firms. This negative effect of group affiliation is confirmed in a test based on a novel measure of firm performance using the stock market reaction to the announcement of mergers and acquisitions. For both measures of performance, we show that business group affiliation impairs the positive firm value effects of board demographic diversity. These findings imply that the relationship between board diversity and firm performance requires re-examination in the many countries where group affiliation is common. Our results also provide evidence of a new cost of group affiliation and show in a fresh context that cross-country studies should account for international variations in ownership and institutional structures.

Asymmetric Cost Behavior and Acquirer Returns:Evidence from U.S. Mergers

This paper investigates the asymmetric behavior of SG&A costs of acquirers,and reveals its effects on M&A performance.It is based on a sample of 6888 M&As completed in the U.S. during the 2003-2015 period and employs panel data regressions.The results show that 73% of the acquirers display asymmetric cost behavior.A significant negative relation is found between cost stickiness and acquirers'abnormal returns following the merger announcement. Competition in the market for corporate control is positiviley related with acquirer returns but exacerbates the negative effects of cost stickiness on abnormal returns of the acquirers.The acquirers' risk of default is significantly negatively related to the abnormal returns they generate.This adverse effect of default risk on returns is stronger for acquirers with anti-sticky costs Acquirer risk offsets the positive effects of competition on returns.Acquirers with sticky costs have lower abnormal returns than those with anti-stickycosts in a one-year window.The present study contributes to the literature by revealing the asymmetric cost behavior of acquirers involved in merger activity and provides an alternative explanation for the lower abnormal returns of the acquiring firms.

LABOR MARKET CONSEQUENCES FOR BUSY DIRECTORS: EVIDENCE FROM INTERNATIONAL MERGERS AND ACQUISITIONS

AbstractUsing 13,233 acquisitions from 57 countries, we examine merger and acquisition (M&A) decisions made by busy boards. We find that few busy acquirers originate from emerging markets and that they tend to undertake cross‐border mergers, favor public targets, finance with cash and equity, pursue nondiversifying mergers, avoid targets with multiple bidders, and long‐term underperform relative to nonbusy acquirers. Importantly, we discover a nonlinear relation between an acquirer's board busyness and merger announcement returns. We find that the labor market penalizes directors who approve bad acquisitions but does not reward them for good mergers. We find a similar nonlinear relation between an acquirer's board busyness and its long‐term performance along with a suggestion of an optimal board busyness.

Impact of Merger Announcement on Selected Scripts of CNX Nifty

Impact of Merger Announcement on Selected Scripts of CNX Nifty