Merger Announcement Research Articles

Abnormal Returns around Mergers and Acquisitions in the Nepali Stock Market

A merger includes two relatively equal entities that are combined to form one legal entity worth more than a sum of its two separate parts. In the last few years, many Nepali financial institutions have been consolidating through mergers and acquisitions. This paper aims to investigate how the stock market reacts when financial institutions announce mergers and acquisitions. This paper also examines the impact of cross-sectional variables on the abnormal returns obtained around merger announcements. The study covers 22 successful merger deals that occurred among 48 financial institutions over the period of 2004 to 2013. This paper used the event study method based on the market model to derive abnormal returns associated around the merger announcement date. The event dates are specified as the dates on which the mergers and acquisitions were announced. The results show that leaving a very few exceptional cases, none of the merged financial institutions received significant cumulative abnormal returns on the merger announcements, regardless of the use of different event periods. The cross-sectional regressions show that the pre-merger performance of target and relative market value are the significant influencing variables on acquirers' cumulative abnormal returns. The finding implies that Nepali financial institutions merge merely to increase their capital base without producing any synergistic effect. Therefore, they need strategic plans for choosing the right partner and achieving other benefits like synergy effect, economies of scale and cost reduction from mergers and acquisitions.

Political ideology in M&A

AbstractWe study the effect of shared political identity between acquirers and targets on merger outcomes. In a sample of public US mergers, we find that targets are more likely to merge with firms of similar political orientation. We document that acquirers in politically matched mergers experience significantly worse cumulative abnormal returns around the merger announcement, compared to their non‐politically matched counterparts. Acquirers in those mergers pay lower takeover premiums, experience worse post‐merger operating performance, retain more from the target management, and receive larger bonuses. Our results indicate that politically matched mergers create less value to shareholders.

Deal characteristics and M&A performance: How do hospitality firms fare?

The global hospitality industry has experienced significant consolidation in the past several decades. While evidence in the general business literature suggests that the target firm shareholders gain instead of the acquiring firm shareholders, some studies in the hospitality industry have suggested that mergers and acquisitions (M&As) are also beneficial to acquiring firms. Using a comparative study design and a comprehensive sample over 41 years, we empirically examine whether M&As create more value in the hospitality industry than in other industries and whether certain deal characteristics may explain the potential performance differential. Overall, we find that M&As in the hospitality industry outperform M&As in non-hospitality sectors. When examining deal attributes, we find that relative size of target, cash method of payment, and an unlisted target are characteristics positively related to merger performance and help explain some of the performance differential. We contribute theoretically and empirically to the literature by demonstrating that industry and deal effects play an important role in M&A performance. • Mergers and acquisitions (M&As) in the hospitality industry outperform those in the non-hospitality industries. • Industry relatedness is insignificantly related to acquirer abnormal returns around the merger announcement. • Relative size, cash payment, and unlisted target are positively related to acquirer announcement abnormal returns. • Industry relatedness, relative size, and cash payment are higher in hospitality vs. non-hospitality acquisitions. • Unlisted target is not significantly different between hospitality and non-hospitality acquisitions.

The Effect of Industry Restructuring on Peer Firms

We study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. We argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction. Consistent with these hypotheses, we show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, we document that, cross-sectionally, the abnormal returns we observe from peer bondholders are concentrated among firms that have the highest expected risk reduction benefit from a potential acquisition. In order to distinguish a potential reduction in risk as the explicit return driver, we show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected risk reduction benefit.

Does competition increase quality? Evidence from the US airline industry

This paper studies the impact of competition on quality provision in the US airline industry exploiting a novel source of exogenous variation in competition. While mergers among market incumbents may stifle competition, a merger may increase the probability of entry if the merging airlines were not operating prior to merger in the market but each of them had presence at different route endpoints. We find non-merging incumbent airlines increase their flight frequency upon entry threat and accommodate entry of the newly merged airline by lowering flight frequency upon entry. While non-merging incumbents reduced arrival delays only upon entry of the newly merged airline, we find that incumbents decrease their cancelation rates and departure delays both upon merger announcement and entry of the newly merged airline. Our evidence suggests an increase in competition may increase consumer surplus, because non-merging incumbents increase quality and convenience, while keeping their prices unchanged.

A Systematic Review on Non-Performing Assets in Banks in India

Lending is a cruttial part of financial sector that is Banks/NBFCs in India. It is main revenue génération business of Bank/NBFCs. Financial Institution i.e. Bank and NBFCs used to borrow funds from the market i.e. from other institution & public and then lend the same again to its clients to gain profits to its owners/investors. There were 27 Public Sector Banks in India (Incl. SBI Associates Banks) before announcement of merger of some Banks by Union Govt. Of India in the year 2019 and there are multiple other Pvt. Sector Banks and NBFCs, co-operative bank and regional rurul bank which we studied in this paper. Lending business of the Banks/NBFCs is facing slowdown in recent years. Non-Performing Assets are increasing day by day which is creating big problem not only to financial sector i.e. Bank/NBFCs but also for other industries. In this paper we will systemtically review the literature/artiles already pubilshed on NPAs in India and to know the main reasons and factor which are resposible for rising NPA in financial institutions and to find out scope of further research on this topic.

Deal motivations and bargaining power: do executives show their hand in SEC filings?

Our study tests the bargaining power hypothesis by examining how the operating, marketing, and financial deal motivations cited by the merging-firm managers in company filings with the Securities and Exchange Commission affect their relative bargaining power in value-increasing mergers. We find that acquiring-firm shareholders capture an average of 40.1% of the total shareholder gain. Further analysis shows that acquiring-firm managers gain bargaining power when the target-firm executives cite the acquirer’s technological expertise as a reason for the merger, whereas acquiring-firm managers lose bargaining power when the acquirers cite the target’s technological expertise. Acquirers also lose bargaining power when the target managers cite the acquirer’s manufacturing/resource capacity as a motivation. These results support the role that strategic fit and industry factors play in driving the managers’ relative bargaining position. Finally, our finding that acquiring-firm managers gain bargaining power when the targets cite access to capital or expanding the customer base as a deal motivation sheds light on why firm size is an important determinant of bargaining power. Our study contributes to the literature by providing evidence that acquiring-firm managers often have more bargaining power than previously thought based on empirical studies that analyze the cumulative abnormal returns earned by target- and acquiring-firm shareholders at the merger announcement date.

The role of investor protections on the value of investment banking relationships: International evidence

This paper examines the role of country-level investor protections on the value of relationships between investment banks (IBs) and their corporate clients. Using an event-study approach and an international sample of consolidation activities in the investment banking industry, we document that clients of target IBs acquired by banks from stronger (weaker) investor protection countries realize lower (higher) returns upon merger announcement. This is consistent with a substitution effect between country-level investor protections and IB-level monitoring of client firms. Overall, our analysis highlights the economic role of country-level investor protections on the relationships between IBs and client firms in an international context.

What drives acquirers’ myopic marketing management?

ABSTRACT Acquiring firm managers should allocate marketing investments to maximize synergies from already announced mergers or acquisitions. However, managers may deliberately redistribute marketing capabilities and assets as a response to investor pressure formed by weak stock return around an announcement. We propose that stock returns that are below expectations may create investor pressure, which drives managers to practice myopic marketing management. We present evidence that acquirers are more likely to engage in myopic marketing management when they experience a negative stock market reaction around a merger announcement. Acquirers tend to report lower-than-normal advertising and R&D investments. Empirical results suggest that acquirers use marketing activities as an efficient tool to confront negative stock market evaluation. Our study contributes to the myopic management literature by showing when and how firms in mergers and acquisitions are more likely to exhibit opportunistic managerial behaviour. We provide some policy suggestions for both acquiring firm managers and investors.

Bank mergers: the cyclical behaviour of regulation, risk and returns

Purpose The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification strategies. It also observes determinants of M&A deals criteria, product and market diversification positioning, crisis threshold and other regulatory and market factors. Design/methodology/approach This research examines the impact and association between merger announcements and regulatory reforms at bank and system levels by investigating the impact of various bank consolidation strategies on firms’ risks. We estimate beta(s) as an index of financial institutions’ systematic risk. We then develop an index of the estimated equity value loss as the long-rum marginal expected shortfall (LRMES). LRMES contributes to compute systemic risk (SRISK) contribution of these firms, which is the capital that a firm is expected to need if we have another financial crisis. Findings Large acquiring banks decrease systemic risk contribution in cross-border M&As with a non-bank financial institution, and witness profitability (ROA) gains, supporting geographic diversification stability. Capital requirements, activity restrictions and bank concentration increase systemic risk contribution in national mergers. Bank mergers with investment FIs targets enhance productivity but impair technical efficiency, contrary to bank-real estate deals where technical efficiency change accompanied lower systemic risk contribution. Practical implications Financial institutions are recommended to avoid trapped capital and liquidity by efficiently using local balance sheet and strengthening them via implementing models that clearly set diversification and netting benefits to determine capital reserves and to drive capital efficiency through the clarity on product–activity–geography diversification and focus. This contributes to successful ringfencing, decreases compliance costs and maximises returns and minimises several risks including systemic risk. Social implications Policy implications: the adversative properties of bank mergers in respect of systemic risk require strict and innovative monitoring of bank mergers from the bidding level by both acquirers and targets and regulators and competition supervisory bodies. Moreover, emphasis on regulators/governments intervention and role, as it provides a stabilising factor of the markets and consecutively lower systemic risk even if the systematic idiosyncratic risk contribution was significant. However, such roles have to be well planned and scaled to avoid providing motives for banks to seek too-big-too-fail or too-big-to-discipline status. Originality/value This research contributes to the renewing regulatory debate on banks sustainable structures by examining the risk effect of bank diversification versus focus. The authors aim to address the multidimensional impacts and risks inherent to M&A deals, by examining the extent of the interconnectedness of M&A and its implications within and beyond the banking sector.

Flipping the Coin: Are Spacs Post-Merger Value-Creating or Value-Destroying? An Empirical Study on the Value Effects of Special Purpose Acquisition Companies in the United States

This study examines the merger announcement and post-announcement value effects of special purpose acquisition company (“SPAC”) transactions in the United States from January 2010 up to March 2021. It finds positive cumulative abnormal merger announcement returns (“CARs”) and negative long-term buy-and-hold abnormal returns (“BHARs”) post-announcement - consistent with previous research. The short-term effect is considerably larger (10.50%) for post-COVID SPACs, with faster deals, fewer redemptions, and more frequent PIPE involvement during bull markets with high market volatility and a low cost of debt. The BHARs are on average positive up until 15 months after merger announcement and negative afterwards. This study shows the effect of long-term performance is influenced by several SPAC characteristics. Firstly, the post-merger performance is better for SPACs with management with C-suite operational experience. Surprisingly though, prior experience of managers with SPAC transactions is not indicative of future results, as serial sponsors consistently underperform first-time sponsors. Secondly, SPAC deals with a higher proportion of PIPE financing show superior long-term performance, due to external deal validation leading to fewer redemptions. This study contributes to the limited existing literature on the post-merger effects of SPACs, by introducing new explanatory variables, performing multivariate regressions, and incorporating post-COVID SPAC mergers, leading to larger sample sizes. Given recent SPAC popularity, my findings have important implications for U.S. public market investors, corporate finance advisors, regulators and early-stage companies considering merging with a SPAC.

The relationship between announcements of complete mergers and acquisitions and acquirers' abnormal CDS spread changes

Employing a sample of 492 merger and acquisition (M&A) announcements from 284 acquirers across North America and Europe between 2005 and 2018, this study analyzes the impact of M&A announcements on an acquirers abnormal CDS spread changes. We nd that spreads from CDS which are written on acquirers increase by 310 bps during a symmetric ve-day event window suggesting that investors expect an increase in the acquirers credit risk exposure due to M&As. Next to this baseline nding, we conduct a large variety of sensitivity analyses to gain more insight into the driving factors of the rising risk perception of CDS investors due to M&A announcements.

Market Power and Systematic Risk

We investigate the impact of product market competition on firms' systematic risk. Using a measure of total product market similarity, we document a strong negative link between market power and market betas. There is a more than threefold increase in the effect during the most recent low-competition period. Announcements of anti-competitive mergers lead to a significant reduction in market betas, underlining the causality of the market power--systematic risk relationship. Firms that face less competition appear to be partly insulated from systematic discount-rate shocks. Lower equity costs therefore mean that market power is in part self-reinforcing.

SPACs and Forward-Looking Disclosure: Hype or Information?

Regulators and legal scholars express concern that SPAC growth results from a disclosure-regulation loophole and that forward-looking disclosure by SPACs can mislead investors. We examine SPAC voluntary disclosure and associated outcomes. SPACs offer a means for firms to become public, but, unlike IPOs, we find SPAC firms frequently provide forward-looking information (e.g., earnings forecasts). Measuring disclosure by tone, the existence of a forecast, forecasting intensity, and forecast growth rates, our results suggest that forward-looking disclosure in SPAC merger announcements does not mislead small investors. Disclosures containing more forecasts are associated with positive returns at the announcement. However, our disclosure measures are not associated with subsequent return reversals. More forecasts are related to positive subsequent return drift, lower redemption rates and bid-ask spreads, and more retail investor buying. We do not find evidence that forecasted sales or EBITDA growth rates are associated with return reversals. In fact, we find a positive relation between forecasted sales growth and returns around the first post-closing earnings announcement. Moreover, correlations between outcomes and disclosure tone are not significant, suggesting that hype, if present, does not sway investors. Our findings do not support the concern that SPACs take advantage of apparent exemption from prosecution under the 1933 Act to hype forward-looking disclosure to deceive shareholders.

Financial Media, Price Discovery, and Merger Arbitrage*

Abstract Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices underreact to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced.

Insider trading in the run‐up to merger announcements. Before and after the UK's Financial Services Act 2012

AbstractAfter the 2007/2008 financial crisis, the UK government decided that a change in regulation was required to amend the poor control of financial markets. The Financial Services Act 2012 was developed as a result in order to give more control and authority to the regulators of financial markets. Thus, the Financial Conduct Authority (FCA) succeeded the Financial Services Authority (FSA). An area requiring an improvement in regulation was insider trading. Our study examines the effectiveness of the FCA in its duty of regulating insider trading through utilising the event study methodology to assess abnormal returns in the run‐up to the first announcement of mergers. Samples of abnormal returns are examined on periods, under regulation either by the FSA or by the FCA. Practically, stock price data on the London Stock Exchange from 2008 to 2012 and from 2015 to 2019 are investigated. The results from this study determine that abnormal returns are reduced after the implementation of the Financial Services Act 2012; prices are also found to be noisier in the period before the 2012 Act. Insignificant abnormal returns are found in the run‐up to the first announcement of mergers in the 2015–2019 period. This concludes that the FCA is efficient in regulating insider trading.

Corporate media connections and merger outcomes

We examine the relation between acquirer social ties with the media and merger outcomes. We find that, consistent with the media management hypothesis, media connectedness is associated with the higher bid announcement return, lower takeover premium, poorer post-merger operating performance, greater likelihood of deal closure, and greater acquisitiveness. The association between media connections and merger announcement returns is more pronounced for stock deals. Examining the underlying channel, we show that the media networks are positively related to acquirers' media coverage and sentiment of the news articles during the pre-bid announcement period. Our findings are robust to alternative variable measurement as well as tests for endogeneity.

Who Is Afraid of BlackRock?

Abstract We exploit the merger between BlackRock and Barclays Global Investors to study how changes in expected ownership concentration affect the investment behavior of funds and the cross-section of stocks worldwide. We find that funds with open-end structures and large exposure to commonly held stocks begin avoiding these stocks following the merger announcement. This leads to a permanent change in the composition of institutional ownership and a negative price and liquidity impact. We confirm these results in a large sample of global asset management mergers. Our findings suggest that market participants behave strategically in response to changes in expected financial fragility.

Vodafone and Idea Merger: A Shareholder’s Dilemma

In the month of May 2019, Ms Priya Vaidehi who works as a chartered accountant in a small firm in the city of Pune was pondering about her personal investment. While surfing on social media on the sunny hot afternoon of 2 May 2019, she came across the news of the biggest merger deal in the Indian telecom sector. The news was about how Britain’s Vodafone Group merged its Indian subsidiary with Idea Cellular, to create the country’s largest telecom firm. They mentioned how the combined entity will accelerate the pan-India expansion of wireless broadband services and also expand financial inclusion through mobile money services. Since the merger, the network has an outreach of 92 per cent of population of India. Ms Vaidehi planning for her future investments narrowed down her investment search to do a deeper analysis of the merger of two telecom giants Vodafone and Idea. The Indian telecommunication market has a subscriber base of 1.20 billion and is rapidly growing. The country’s wireless subscriptions has witnessed compound annual growth rate (CAGR) of 19.62 per cent to reach 1,183.41 million in the year 2018. Over the past few years, from the announcement of merger to the declaration of completion of merger, she has noticed that there has been volatility in the share price of Idea Cellular. Though the subscriber base of Vodafone, Idea’s is around 400 million, and sales had gone up 53.5 per cent in the third quarter of FY 2018–2019, but the share price had been plunging to an average fall of 14 per cent. She was in deep thought whether she should invest in buying the shares of Vodafone Idea? Will her instinct help her or the knowledge of financial markets aid in taking the right decision?

Do more mergers and acquisitions create value for shareholders?

How does an investor value the announcement of new business integration? The history of acquirer’s acquisition may matter for investors. Existing research are divided to the positive or negative answer to the question. Based on the global evidence of 24,263 acquisitions across 81 countries over 19 years, this paper argues that the current contradictory views have failed to take into account the time interval between acquisitions. This is because the wavelength of merger frequency can change the investors’ expectations of new business integration and so investment returns. With control of the time interval of a new merger we discover that more mergers generate lower abnormal returns. This finding extends our understanding of the value perception of investors on a merger announcement that can be affected not only by merger numbers but also by their time distribution.