Post merger profitability analysis of shareholders, evidence from Europe

Varun, Daga (2007) Post merger profitability analysis of shareholders, evidence from Europe. [Dissertation (University of Nottingham only)] (Unpublished)

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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.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 10 Mar 2008
Last Modified: 15 May 2016 16:24

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