| Summary: | The effects of takeovers on the value of both, target and bidder firms
have been studied by many researchers. While in the United States there
is extensive empirical evidence on the effects of consolidation on share
price movements, the empirical literature remains limited in Europe.
Reviewing the relevant literature suggests that the majority of previous
work concludes that the bulk of mergers perform strongly pre merger and
poorly afterwards. It is subject of the Hubris Hypothesis that bidders
outperform the market pre merger and that bidder and target combined
value is around zero. Systematically nonzero abnormal share returns after
a particular event is inconsistent with market efficiency. The hubris
hypothesis argues that bidders make systematic mistakes. Modigliani and
Miller stress in their irrelevancy preposition that the means by which an
investment is financed is irrelevant. Splitting merger deals into relevant
characteristics suggests that the majority of research does not support
this hypothesis.
In terms of methodology, this study uses an event-study type approach,
in which changes in the prices of specific financial market assets around
the time of the announcement of the acquisition are analyzed. Different
valuation approaches brought up in research and practical approaches are
presented. The data is a sample of major European deals from 1995 to
2004. Abnormal returns are derived from the market model.
The author finds that pre merger, companies outperform the benchmark
and that during the event period there is insignificant underperformance.
However, during the post event period, the sample firms significantly
underperform on average.
By and large, the main conclusion is that acquisitions destroy
aggregate wealth. It is found that pre acquisition performance is not
an indicator for post acquisition performance. Several effects are
identified (higher combined bidder-target stock returns for friendly
offers and lower for related offers). The long-run post-acquisition
performance is insignificant for equity to shares offers.
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