“The short-term effect of M&A announcements on the wealth of European bidder and target firms shareholders”

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University of Amsterdam

Amsterdam Business School

Master in International Finance

Master Thesis

“The Short-Term Effect of M&A Announcements on The Wealth of

European Bidder and Target Firms Shareholders”

Author:

Ebru Ipek

Thesis Supervisor:

Dennis Jullens

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Abstract

The aim of this paper is to analyze the short-term wealth effects of the intra-European mergers and acquisitions (M&A) announcements, over the period 2008 and 2013, in a sample of 220 deals. The detailed information about the characteristics of the M&A announcements, including the nature of the bid (friendly or hostile), the method of payment (cash, stock or mixed), the takeover strategy (focus or diversification), and domestic or cross-border M&A, are provided and it is seen that the estimated shareholder wealth effect depends on the different attributes of M&As. The expected value from possible synergies is analyzed through testing shareholders’ cumulative average abnormal returns (CAAR). Target firms experience a statistically significant CAAR of 4.30% in a five-day event window around the announcement day. However, bidders’ CAAR remained almost at zero so an M&A announcement does not destroy or boost the wealth of the bidding firm’s shareholders. The evidence is consistent with previous empirical findings in the field. Despite the fact that the share price reaction is sensitive to the nature of bid, the method of payment, the takeover strategy, and domestic or cross-borders strategies, there is not enough statistical evidence found to document a significant difference between them.

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Each wave is characterized by a concentration of the type of merger and specific industries. In the beginning of the 1990s, mergers emerged in the US, and since then, through the introduction of the 1992 Single Market Program, the European Monetary Union, the development of new European stock exchanges as well as deregulation, privatization, and growth in the technological industries, the number of European M&A deals increased dramatically (Johnson et al, 2001).

When we compare the industrial structure across Europe with the United States, the European industrial structure remains heavily concentrated within national borders. In the late 1980s, the growth in M&A activities was impacted by a significant increase in the number of transatlantic deals of US acquirers. However, in the 1990s, the opposite occurred, through the increase in intra-European transactions as a result of the challenges brought about by the development of the single European market and the introduction of the Euro. Since then, takeover deals were considered as a means to survive the tougher regional competition created by the new market as well as corporate diversification.

The most recent wave, globalization, is the result of the need of established corporate companies to become multi-national. In recent years, these companies have focused on spending their cash to augment growth via M&A in more distant destinations. Together with high cash balances, favorable credit markets with low interest rates

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have enabled higher leverage. As an indicator of the sixth wave, private equity firms have been seeking liquidity with IPO and M&A activities through which to cash-out.

In particular, M&A activities have been conducted as a means of corporate diversification. The benefits of corporate diversification are justified by existing literature, through the theories of an efficient internal capital market, coinsurance effect, economies of scope, and market power, while agency arguments, overinvestment and cross-subsidization problems, and inefficient resource allocation within the firm support the idea of a diversification discount (Banerjee and Dey, 2011; Maksimovic and Philips, 2007; Martin and Sayrak, 2003; Kiymaz and Muhkerjee 2000).

This study investigates the effects of M&A announcements on shareholders’ value of European acquiring and target firms in the short term. It is commonly known that M&A announcements generate a value for the combined entity. However, target firms, on average, achieve a substantial wealth gain while acquiring firms experience the insignificant and even negative wealth changes (Jensen and Ruback 1983; Kaplan and Weisbach 1992). Therefore, shareholder wealth effects of M&A are still ongoing debate among academicians, especially for the shareholders of acquiring firms.

As presented earlier in this section, M&A activities are cyclical hence; it can be argued that each M&A wave are of interest in its own right. While, previous literature provides little evidence for the period after the sixth wave, examples of unique time period and the participating companies in general, could contribute to our understanding of the wealth effects of M&A activities and provide further empirical evidence. This study intends to provide evidence for M&A profitability in the short-term period surrounding the announcement date by using the event study methodology through analyzing abnormal stock returns to shareholders. The short-term approach offer more accurate evidence because, like any other company, companies involved in the M&A activities are exposed to systematic and unsystematic risks over the long term, which could undermine the shareholder wealth effects. A force-majeure event, for example, could reverse all the gain, if any, of the target and/or the acquirer company after an M&A activity. This approach is also consistent with previous literature.

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This study aims to answer the following question: do M&A announcements increase the shareholders’ value of European acquiring and target firms in the short term?

The following sub-questions will also be addressed in connection with the main research question:

a) Do the estimated shareholder wealth effects vary depending on the nature of the bid (friendly or hostile)?

b) Do the estimated shareholder wealth effects vary depending on the method of payment (cash, stock or mixed)?

c) Do the estimated shareholder wealth effects vary depending on the takeover strategy (focus vs. diversification)?

d) Do the estimated shareholder wealth effects vary depending on the target firm or the acquiring firm being involved in domestic vs. cross-border M&A?

The rest of the paper is outlined as follows. Section 2 reviews the relevant theories and motives behind M&A activities. Section 3 presents the main findings from existing literature and relevant hypotheses for the thesis. Section 4 describes the data collection procedure, sample statistics, and methodology used to compute cumulative average abnormal returns (CAAR). Section 5 presents the empirical findings and factors explaining wealth gains, and Section 6 concludes the paper, discusses the potential limitations, and presents some directions for future research.

2. M&A Motives and Related Theories

In modern finance theory, shareholder wealth maximization is often considered the driving force behind investment and financing decisions made by managers (Manne, 1965). Merger drivers that increase the value of the firm and the wealth of managers can be classified as strategic, financial, and managerial motives (Table 2).

Table 2. Three Main Motives of M&A Activities

Strategic motives Financial Motives Managerial Motives

Focused on improving and developing the business

Focused on making best use of financial resources for shareholders

Focused on the self-interest of managers

Closely linked to competitive advantage

Concerned with improved financial performance

Not necessarily in the best interest of shareholders

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In order to simplify the exposition, Section 2.1 lists the merger drivers that increase the value of the firm and Section 2.2 lists those that increase the wealth of manager.

2.1. Shareholder Gains

Shareholders directly benefit from the increase in the market value of the firm. A firm may increase its market value by increasing its profits through decreasing costs, operating more efficiently, implementing optimal incentives to managers, or enhancing market power. To be in line with modern finance theory, it is expected that the value additions should exceed the transaction costs and the acquisition premium. As a result, both bidder and target firms gain positive returns through the synergy (Berkovitch and Narayanan, 1993).

As a result of the synergy effect, the merger company's post-merger share price would increase. Thus, shareholders will benefit from this expected synergy which can be achieved through enhanced revenues, combined talent and technology, or cost reduction. Synergies involve either a process of learning, the close integration of specific hard-to-trade assets, or a transfer of know-how among the merging firms (Motis, 2007). According to Porter (1985), economies of scale may, in the short run, result from mergers because joining two firms allows getting rid of double fixed costs and it can also be achieved by a reallocation of output across the different units of operation of the merged firm. In order to benefit from economies of scale in the long run, investing in new technologies that substantially improve its production process and its research and development areas might be essential.

According to Röller et al. (2000), high financial costs can be included as a motive for merging but not as real cost savings, since they reallocate cost savings from shareholders to debt holders through tax advantages, competitive interest rates, and diversification. Modigliani and Miller (1958) claim that financial synergy does not exist in a perfect market without taxes, informational asymmetries, and default costs as the market value of a firm is determined by its earning power and by the risk of its underlying assets, regardless of its capital structure. In contrast with their view, the existence of financial synergies is supported through leveraging M&A activities. The modern portfolio theory claims that the market value of a firm can be increased if it incurs in optimal risk by investing in many uncorrelated instruments (Motis, 2007).

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On the other hand, Lang and Stulz (1994) and Berger and Ofek (1995) raise the issue of the harmful effect of diversification on the value of firm, operating in an imperfect market through their empirical study. They found out that diversified firms have been less valuable (measured by Tobin’s q) than a portfolio of specialized firms. As a result, it is not definitely true to say diversification is completely beneficial to firms from a financial perspective. Therefore, the economical and operating synergies from M&A activities are better to achieve value maximization motives.

2.2. Managerial Gains

Managerial motives for M&A activities are built on the x-inefficiency theory

proposed by Leibenstein (1966). This theory asserts that the firm does not operate as efficiently as predicted by the economic theory due to the complexity of organizations in which there is a separation between shareholders and managers. Since vital decisions affecting the level of efficiency are taken by managers, and they might have objectives other than firm’s value maximization, these conflicts are also stated in the principal–agent problem, which emphasizes the conflicts between the shareholders and managers whenever there is incomplete and asymmetric information between them.

Managerial motives are also mentioned in the growth maximization model, which argues that managers aim to increase the size of the organization they want to lead due to the fact that their compensation is directly related to the size of the company (Mueller, 1969). Likewise, Trautwein (1990) and Zalewski (2001) noted that managers may engage in ‘empire building’ in order to maximize their own utility instead of shareholders’ value.

Another merger driver in the section is managerial hubris, proposed by Roll (1986), where excessive self-confidence of managers can cause the error of optimism in evaluating merger opportunities. Thus, they have willingness to pay for a target, which does not necessarily turn into a profitable deal. This consequence of managerial hubris is arguably corresponding to the winner’s curse of overpayment for the auctioned item in common-value actions. The market considers this overpayment as a manager’s mistake, so the shareholders of the acquiring firm lose from the deal.

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3. Literature Review and Hypotheses

There is an extensive literature on the implications of M&A in value creation for the target and bidder shareholders, with the majority of gains accruing to the target shareholders.

3.1. Market reaction to M&A announcements

The expectation of creating significant synergetic value, the premium, in the future makes the deal attractive for both bidding and target firms. Based on the assumption that stock prices reflect the present value of the expected gains created by the merging firms, the effects of M&A on stock prices of acquiring and target firms around the M&A announcement are estimated using daily stock prices. Martynova and Renneboog (2006) assert that M&As are expected to increase the combined market value of the merging firms’ assets, since target shareholders earn large positive abnormal returns and the bidder shareholders do not lose, on average.

According to Schwert (1996), significant increase in share prices of target shareholders are not limited to the announcement day but can be observed 42 days prior to the initial public announcement of the bid. Georgen and Renneboog (2004) reported a significant abnormal return of 9.01% to target shareholders. Whereas, on average, investors owning shares in the target firm for a period starting 2 months prior to the event day and selling their shares at the end of the event day earn a return of 21%.

In contrast with large share price returns of the target firms, the price reactions for the bidding firms remained negligible at 0.5% (Martynova and Renneboog, 2006). While Andrade et al. (2001) reported small negative returns for the acquirers, zero or small positive announcement abnormal returns were reported by Moeller et al. (2005) and Schwert (2000). Schwert (1996) also found that the share price run-up prior to a takeover announcement over a one-month period is positive, but mostly insignificant for bidder shareholders.

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H1A: M&A announcements by European firms yield positive target CAARs in the

short-term.

H1B: M&A announcements by European firms yield positive bidder CAARs in the

short-term.

3.2. Determinants of share price reactions

There are different attributes that affect the value of bidding and target firms at the announcement of M&A deals:

3.2.1 Friendly versus Hostile Bids

While the announcements of hostile bids generate higher target returns than the announcement of friendly M&As, bidder returns on the announcement day are significantly lower in hostile bids than in friendly M&As (Gregory, 1997). Martynova and Renneboog (2006) analyzed the market reactions to the different types of takeovers by splitting all bids into three groups, based on the target firm’s attitude towards the bid (hostile vs friendly) and by the form of the bid (tender offer vs. negotiated M&A). They found a strong positive increase in the target share prices at the bid announcement and the largest abnormal return generation to the target shareholders on the announcement day in the hostile bids (15%). In addition, the returns of hostile takeover bids are significantly higher than the ones for friendly M&As (3%) and unopposed tender offers (12%). Unopposed tender offers are not considered as hostile, as by definition they are somewhere between a friendly bid and a hostile one. Therefore, unopposed tender offers are expected to trigger large share price increases for the target firms.

The following hypotheses can be set in view of previous empirical literature: H2A: Target CAARs for hostile bids are significantly higher than for friendly bids.

H2B: Bidders CAARs for hostile bids are significantly higher than for friendly bids.

3.2.2 Means of Payment

There are different methods of payment in M&A transactions and the method chosen is considered to be an important signal of the quality of the target firm on account of the agency costs of free cash flow. Jensen (1986) found evidence that free cash is frequently used for managerial empire building and argues that cash and debt usage as

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a medium of exchange will generate larger benefits than those accomplished through exchange of stocks, due to the motivational effect on managers to use resources more efficiently.

Martynova and Renneboog (2006) discuss that asymmetric information between the bidder’s management and outside investors may influence the choice of the means of payment and the consequent market reaction to the announcement of the payment method. Likewise, Myers and Majluf (1984) argue in the pecking order theory that managers know more about their companies’ prospects, risks, and value than outside investors, and are more concerned about the interests of their current shareholders. Therefore, they will only use equity as means to raise capital when their shares are overvalued or take advantage of the peak of the stock market cycle. Otherwise, they will fund the acquisition by other mediums, such as cash or debt.

The announcement of an equity bid would signal a lack of confidence in the board and that the bidding managers believe that their firms’ shares are overpriced, so that investors adjust the bidders’ share prices downwards. In the case of uncertainty in target valuation, bidders make stock offers considering the contingency pricing effect; thus, they share part of the risk in evaluating a stock offer (Hansen, 1987). On the other hand, an optimal mix of cash and stocks, as a payment method, is proposed to exist as a result of two-sided information asymmetries between the bidder and target (Martynova and Renneboog, 2006). They also found in their study that all cash offers (12%) as well as bids combining cash, equity, and loan notes (10%) trigger substantially higher abnormal returns at the announcement than all equity bids (7%).

The following hypotheses can be set in view of previous empirical literature:

H3A: Target CAARs for cash bids are significantly higher than for stock and mixed

bids.

H3B: Bidder CAARs for cash bids are significantly higher than for stock and mixed

bids.

3.2.3 Focus versus Diversification M&A

The operational and/or financial synergies are expected to be created by conglomerate acquisitions, but a number of disadvantages, such as rent-seeking behavior by

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divisional managers (Scharfstein and Stein, 2000), bargaining problems within the firm (Rajan et al. 2000), or bureaucratic rigidity (Shin and Stulz, 1998), may outweigh the alleged synergies and result in wealth destruction for the shareholders of both the bidding and target firms.

In addition to the improved financial performance, acquiring firms consider M&A activities as a means of corporate diversification. The theory of necessity to focus or diversify is the motivation for the relatively high volume of European M&A transactions. Theories of an efficient internal capital market, coinsurance effect, economies of scope, and market power theoretically justify the diversification premium. On the other hand, diversification discount is supported by agency arguments, overinvestment and cross-subsidization problems, and inefficient resource allocation within the firm (Banerjee and Dey, 2011; Maksimovic and Philips, 2007; Martin and Sayrak, 2003; Kiymaz and Muhkerjee, 2000).

Market reactions to diversifying acquisitions are controversial in the existing literature. Agrawal et al. (1992) found that the stocks of acquiring firms perform poorly after M&As. Conversely, Akben-Selcuk and Kiymaz (2013) argue that diversifying acquisitions create higher abnormal returns for acquirers, compared to focused acquisitions, and smaller firms experience higher abnormal returns compared to larger firms. Holl, Sudarsanam, and Salami (1996) did not report any difference between the gains to shareholders in related and unrelated acquisitions. However, Martynova and Renneboog (2006) found that, irrespective of the takeover strategy, abnormal returns were significantly higher for related M&A announcements compared to unrelated M&A announcements.

The following hypotheses can be set with regard to the above review of empirical literature:

H4A: Target CAARs for diversified bids are significantly higher than for focused bids.

H4B: Bidder CAARs for diversified bids are significantly higher than for focused bids.

3.2.4 Domestic versus Cross-Border M&A

Merging with or acquiring cross-border companies has been unveiled as a strategic tool for corporate growth among US firms. Through European economic integration

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and the introduction of the single currency, cross-border M&A deals have also become prominent among European companies. Cross-border M&As would not only be advantageous through the acquisition of valuable and unique resources, such as technology management and marketing skills, production skills, patents, etc., that enhance the firm’s resource base, but also create disadvantage because of country- and firm-specific knowledge deficiencies (Barney, 1991). This is seen especially in the situations where the foreign target has a high level of intangible assets (Reuer et al, 2004).

The share price of bidders acquiring foreign firms is significantly higher than that of domestic takeovers (Conn et al. 2005). On the other hand, according to Datta and Puia (1995), there is no abnormal return from cross-border acquisitions and, in the short term, foreign target shareholders benefit from information asymmetry, while Fatemi and Furtato (1998) reported small insignificant negative returns to shareholders of acquiring firms.

The above overview illuminates that empirical results do not fully agree with the shareholder wealth impact of bidding firm involved in cross-border M&A activity. However, target shareholders seem to gain from both domestic and cross-border M&A but gains from cross-border announcements are found to be higher. Thus, the following hypotheses can be set:

H5A: Target CAARs for cross-border M&A announcements are significantly higher

than for domestic M&A announcements.

H5B: Bidder CAARs for cross-border M&A announcements are significantly higher

than for domestic M&A announcements.

4. Data, Descriptive Statistics and Methodology

4.1. Sample Selection

The sample includes European M&A deals announced between January 2008 and December 2013, which starts from the end of the sixth takeover wave (2003-2008). Only domestic and cross-border intra-European takeovers were selected; thus, both the acquiring and bidder firms are from countries within Western Europe and the UK.

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The deal list is obtained from the Bloomberg database, which contained 4,336 M&A announcements and the daily stock prices and market returns are gathered from DataStream. Each M&A deal in the sample satisfies the following selection criteria:

a) The transaction must be completed.

b) Information, such as the names and location of the firms involved in the M&A, the transaction value, means of payment, industry sector, the stake obtained, and the type of deal must be available.

c) Financial institutions (e.g. banks, mutual funds, pension funds) are eliminated due to the special regulatory environment and accounting issues that are applicable for them that are different than other firms.

d) The deal must be successfully completed and the transaction value must be at least EUR 20 million.

The dataset was reduced to 234 after the above-mentioned filters were applied. Furthermore, manual review for the specifications listed below for each deal was conducted to verify the selection:

e) There should be no contaminating acquisitions announcements of the acquiring firm during the 5 days before and after the given transaction.

f) The acquiring and bidder firm is listed in the stock exchange with daily stock prices available at least 250 trading days prior, and 5 trading days after, the announcement date.

g) In case of clustered takeovers, where the same company acquires two or more targets within the same day, the largest one in terms of transaction value will be taken.

h) Only transactions involving a change in control are retained, and thus deals intending to buy minority participation are excluded.

i) Transactions should be between independent companies in order to reduce the problem of endogeneity and enhance the comparability of the deals. Thus, if the bidding party is the management or the employees, or if the target is a subsidiary, then this deal is excluded.

j) The bids, which are made by the same bidder and occur within less than 300 trading days since the previous announcement, are excluded to avoid confounding events.

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On the condition of not overlapping event windows, acquisitions in different years by the same company are considered separate events. As a result of screening the sample for the above filters, the dataset is reduced to 220 M&A announcements.

4.2. Descriptive Statistics

Sample statistics are prepared based on information gathered from the Bloomberg database and Tables 3 and 4 provide some information on the sample composition. The distribution of the sample across the countries is shown in Panel A in Table 3. The total number of cross-border deals in the sample is proportionately the same at 50%, which is almost in line with the number of cross-border acquisitions in the EU in 2001, reported by the European Commission as 46%. International business theory suggests that cross-border mergers occur mainly between geographically and culturally similar countries. However, the sample does not show the same pattern, as the majority of cross-border mergers is Norwegian and British companies targeting German and French companies, respectively. Both target and acquirer subsamples are composed of firms from 21 EU member states and the below tables confirm that the main contributor to takeover activity in Europe is the UK, followed by France, Norway, and Germany. M&A announcement in Italy is lower compared to the other major economies in Europe. Neither samples seems to be fairly representative, as Croatia, Finland, Ireland, Luxembourg, and Portugal seem to be underrepresented in the target sample while UK deals in particular are overrepresented. Likewise, UK and France deals are overrepresented in the bidder sample, whereas Luxembourg and Slovenia are underrepresented. This deviation is acceptable in terms of geographical coverage.

In line with the fact that most merger deals are focus-oriented to capture potential synergy effects, M&A deals between bidders and targets operating in the same industry account for the 69% of the sample, while the remainder is diversifying acquisitions. Among the target sample, Consumer, Noncyclical is the leading industry sector in the number of total deals and basic materials industry has the highest total value. The highest numbers of acquirers is in Industrial industry, with 60 firms, and likewise to target sample, basic materials industry has the highest total value (Panel B in Table 3).

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As shown in Panel A in Table 4, the highest number of M&A deals within the sample occurred in 2008 with 68 deals, followed by 2012 with 38 deals, while the highest announced total value occurred in 2012 with EUR 54 billion, followed by 2008 with EUR 44 billion. The distribution of sample overtime is not stable and it seems that there is contradiction in the number and the total value of deals in the last few years, following the boom in 2012. The average takeover deal was worth EUR 656 million in 2008, rose to EUR 806 million in 2011, and reached the highest at EUR 1.4 billion in 2012. The average value in 2012 is considerably influenced by outlier. The largest deal in the sample is the EUR 33 billion bid by Glencore PLC (Switzerland) for Xstrata Ltd (the U.K), which occurred in 2012. The average value of diversifying bids (EUR 1.1 billion) is higher than that of intra-industry takeovers (EUR 524 million).

The sample of this study consists of 206 (94%) friendly M&As and 3 (1%) hostile bids, of which 117 are tender offers (Panel A in Table 3). The majority (69%) of all the M&A announcements are all-cash offers, which confirms the previous studies, 20% of the bids are all-equity, and 11% are mixed payment (Panel B in Table 4). It is seen from Panel C in Table 4 that there is also a clear relation between the method of payment choice and the takeover value, as the average transaction value for all equity deals (EUR 1.3 billion) is higher compared to all-cash bids (EUR 698 million).

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Table 3. Sample Composition by Country and Industry

Distribution of the number of M&A announcements by country and industry in a sample of 220 M&A announcements, which all took place among publicly traded firms in the EU during the period 2008-2013.

Target Acquirer

Total Value (EUR in million)

Total Deals

Total Value (EUR in million)

Total Deals Panel A: Breakdown by Country

Austria 728 3 803 4 Belgium 1,232 4 4,993 6 Czech Republic 1,966 2 - - Denmark 1,419 5 1,625 5 Estonia 390 3 - - Finland 200 1 679 4 France 15,558 24 46,415 39 Germany 19,551 24 24,235 25 Greece 1,762 5 2,532 4 Italy 9,967 8 6,899 7 Netherlands 13,266 13 4,144 14 Norway 12,572 28 3,288 11 Poland 562 4 - - Spain 9,681 5 7,847 7 Sweden 9,304 14 5,017 18 Switzerland 5,750 11 36,646 14 U.K. 75,235 62 31,852 55 Croatia 101 1 - - Ireland 152 1 2,400 5 Portugal 25 1 - - Luxembourg 152 1 69 1 Slovenia - - 130 1

Panel B: Breakdown by Industry

Basic Materials 44,223 17 44,220 20 Communications 15,442 22 15,432 23 Consumer, Cyclical 11,100 23 15,294 17 Consumer, Non-cyclical 25,937 54 27,921 45 Diversified - - 1,277 6 Energy 18,786 27 8,259 17 Industrial 28,781 40 24,768 60 Technology 2,264 27 1,274 20 Utilities 33,041 10 41,128 12 Grand Total 179,574 220 179,574 220

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Table 4. Sample Composition by Year, Nature of Bid and Method of Payment

Distribution of the number of M&A announcements by year, nature of bid and method of payment in a sample of 220 M&A announcements, which all took place among publicly traded firms in the EU during the period 2008-2013.

Total Value (EUR in million) Total Deals

Panel A: Breakdown by Year

2008 43,982 67 2009 14,342 25 2010 15,946 34 2011 27,406 34 2012 54,059 38 2013 23,840 22

Panel B: Breakdown by Nature of Bid

Friendly 159,609 206

Hostile 7,200 3

Unsolicited 1,267 5

Unsolicited to Friendly 11,499 6

Panel C: Breakdown by Method of Payment

Cash 106,095 152

Cash and Stock 12,713 19

Cash or Stock 6,676 6

Stock 54,090 43

Grand Total 179,574 220

4.3.Methodology

In line with existing literature, standard event study methodology was used under the assumption of market efficiency to measure the impact of M&A announcements. Although there are several event study methods, the following steps need to be taken so Campell and Mackinlay (1997)’s approach for an event study is followed: to begin, the event to be analyzed is identified and the event window, period over which the security prices of the firms involved in this event, is defined. The event of this study is the M&A announcement of a European company listed on the stock exchange. The event date of this study was determined as the official announcement day of the M&A deal. In order to estimate the market model parameters, a pre-estimation period was employed, in line with most event studies. The period over which the stock price of the firms analyzed was determined as 250 days prior to the start of the event window. The length of estimation period varies between 180 and 270 days in the existing event studies. Although it would be sufficient to restrain the event window only to include

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the event day in a perfectly efficient market, in practice the event window is often expanded to a couple of days to capture market reactions to announcements (Masulis, 1980). Therefore, 2 days prior to the announcement to 2 days after the announcement was used as an event window to detect abnormal returns on both sides of the event day while maintaining the statistical power of the event study methodology (Flugt, 2009). Furthermore, in order to prevent the case that the event itself influences the estimation of the parameters, the event window was excluded from the estimation period as suggested by MacKinlay (1997).

After identifying the event and event window, firms to be included in the study were selected based on selection criteria mentioned in section 4.1. In order to appraise the event’s impact on shareholders’ wealth, the expected and abnormal returns were identified. The expected return in the absence of the event over the event window was defined as the normal and the abnormal return was measured through taking the difference of the actual ex-post return of the security over the event window minus the normal return of the firm. Under the assumption of the existence of a semi-strong form of the efficient market hypothesis, which asserts that all publicly available information is already incorporated in the stock prices, it is expected to be able to measure the effect of unanticipated M&A announcement. Finally, the abnormal return was tested for statistical significance by following the method of Brown and Warner (1985).

There are a number of statistical models to assess the expected normal return in the absence of the M&A announcement, for which the market model is the most commonly used in the previous studies of shareholder wealth effects of M&A announcements. Following FFJR (1969)’s measurement and statistical analysis of abnormal returns, the following market model can be applied for any given stock i:

Rit=

α

i +

β

i Rmt +

ε

it , t = -252, ...,-3 (1)

in which Rit and Rmt are the return on security i and the return of the benchmark market index (MSCI Europe Index) at time t.

β

i is theslope of the regression line of

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the firm i’s returns against the returns on the market index,

ε

it is the residuals, forecast

error, and

α

i is the intercept term.

The wealth effect is an abnormal return for common stock of firm i on day t, which is defined as the difference between the realized return and a benchmark return calculated based on the basis of the CAPM model:

ARit= Rit- (

α

i’ +

β

i' Rmt ) =

ε

it , t = -2, ...,+2 (2)

where

α

i’ and

β

i' are estimated market model parameters obtained by using the

pre-estimation period [-252, -3].

The CAAR from the announcement of an M&A event were calculated by taking the average of the sum of all abnormal returns for the entire event window [-2, +2] in which the market is expected to respond to new information to capture the total firm-specific effect on stock movements.

The choice of benchmark was considered to have crucial impact on abnormal return (Fama and French, 1996). In general, the benchmark is either estimated through the Capital Asset Pricing Model (CAPM) or a market index is used. Therefore, the MSCI Europe Index, which is a free float-adjusted market capitalization weighted index designed by Morgan Stanley Capital International (MSCI) to measure the equity market performance of the developed markets in Europe, was used as a benchmark of the market performance to estimate the effect of M&A announcements on bidder’s return.

The significance of abnormal return during the event window was tested based on standard parametric test statistics conducted by Brown and Warner (1985). Since the portfolio test statistic assumes that the ARs are larger for securities with higher variance, equal weights are given to the returns of individual securities. Following a Student t-distribution, the portfolio test statistic is approximately standard normal under the null hypothesis. The portfolio test statistic is calculated as:

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21 tp= CAARt / ∂(CAARt)

where CAARt is the cumulative abnormal returns for N securities over different event

windows and (CAARt)is the cross-sectional sample standard deviation of CAARs

over the event window t for the sample of N securities.

Based on the market model, the numerator of the t-test measures the impact for the M&A announcement relative to the normal expected return in the absence of the announcement, while the denominator scales the number using an estimated variance. The assumptions underlying a t-test are as follows: each observation follows a standard normal distribution under the null hypothesis, which is considered as an incontrovertible for the robustness of the parametric test by Keller (2005); independence of observations; a constant variance (homoscedasticity) of population; and an expected value of the abnormal return of zero.

The test statistic was used to check whether the average abnormal return for each deal is statistically different from zero at a 5% significance level and a t-test: Two-Sample Assuming Unequal Variances was used to detect a difference between the cross-border and domestic deals, hostile and friendly bids, cash and stock bids, and focused and diversifying deals.

5. Results

The empirical findings are presented in this section. In addition to the abnormal returns to bidders and targets, the CAARs were analyzed in relation to the nature of the bid, means of payment, the takeover strategy (focus versus diversification strategy), and domestic versus cross-border M&A deals.

5.1. Target versus bidding firms

The target’s shareholders are only motivated to sell their share stakes if they are offered a substantial premium, which is the future synergetic value through increase in the target firm’s share price, and the bidding firm intends to get significant additional corporate value through acquisition of the target firm. Figure 1 depicts that, on the event day, an abnormal return of 16.60% is realized, so this study confirms that

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the announcement of a takeover bid triggers substantial positive abnormal returns for the target shareholders. Table 5 shows the cumulative average abnormal returns to target firms over the event window. Two days prior to the announcement, target firms realized insignificant gains of 0.33%, whereas, the following day, abnormal returns increased to 1.58%, which is statistically significant. The reason for these returns to stay in these levels would be the potential information leakage, which enables investors to buy shares from the market. The most significant positive abnormal return of 16.60% was realized on the event day. The target shareholders continued to experience a significant gain of 2.11% on the day following the event day, whereas on the last day of the event window, abnormal return declined to an insignificant gain of 0.88%. The CAAR in the event window gained by European target shareholders was 4.30% and statistically significant different from zero.

The price reaction for the bidding firms was negligible compared to the target CAARs. Table 5 shows the CAARs to bidder shareholders over the event window. The CAARs fluctuated randomly in both directions, about zero percent prior to the announcement and strikingly negative. However, the day following the announcement, an insignificant small increase of 0.16% was realized. Figure 1 indicates that, on the event day, the CAAR of 0.05%, which is statistically insignificant, was realized. Thus, it can be inferred that M&A announcement does not destroy or boost the wealth of the bidding firm’s shareholders. Martynova and Renneboog (2006) claim that the negative return includes the effects of all revisions in expectations and in the offer price, and may therefore be a more complete measure of the impact of M&A announcements.

Table 5. Cumulative Average Abnormal Returns for Target and Bidder

This table presents the average values of CAAR for bidding and target firms for a five-day event window around the M&A announcement day. Abnormal returns are computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Target Bidder

Event window CAAR t-value CAAR t-value

-2 0.33% 1.11 -0.05% -0.32 -1 1.58% 2.18* 0.19% 1.65 0 16.60% 8.68* -0.10% -0.38 1 2.11% 2.84* 0.16% 0.74 2 0.88% 1.69 0.02% 0.1 [-2,2] 4.30% 9.76* 0.05% 0.51

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Figure 1. CAARs around the M&A announcement

This figure shows the market reaction to the announcement of M&A transactions over the event window. The MSCI-Europe index returns is used as a benchmark and the model parameters are estimated over 250 days prior to the event window [-2,2].

Bidder CAARs are reported in Table 6 with respect to industry affiliation. It is observed that there are differences in CAARs to acquiring firms based on industry affiliation. Basic materials, communications, consumer cyclical and non-cyclical industries exhibited positive CAARs over the event window but only the CAAR of basic materials had statistical significance at the 5% level. Conversely, the share price of bidders from energy, industrial, technology and utilities industries endures an insignificant negative price correction.

Table 6. Bidder CAARs by industrial classification

Industry CAAR t-value

Basic Materials 0.46% 2.92* Communications 0.50% 1.47 Consumer, Cyclical 0.05% 0.16 Consumer, Non-cyclical 0.02% 0.11 Energy -0.04% -0.11 Industrial -0.07% -0.45 Technology -0.05% -0.29 Utilities -0.47% -1.05 Grand Total 0.05% 0.51

*Statistical significance at the 5% level

-2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% -2 -1 0 1 2 Target CAAR Bidder CAAR

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5.2. Hostile versus friendly bids

M&A deals are split into subgroups, based on the nature of the bid as friendly, hostile, unsolicited, or unsolicited to friendly. There was a strong positive increase in the target share prices at the bid announcement, as shown by Table 7; specifically, hostile and friendly bids generated a strong, positive increase (statistically significant at 5% level) in the target share prices. Furthermore, the returns of friendly M&A deals were significantly higher compared to the hostile bids (Figure 2). This result is surprising, as the share price of the target is expected to be immediately revised upwards due to the opposition.

Table 7. Target CAARs by nature of bid

This table presents the average values of CAAR for target firms depending on the nature of bid for a five-day event window around the M&A announcement day. Abnormal returns are computed as the difference between realized and the market model benchmark returns. T-test is used to assess the significance of the CAARs.

Friendly Hostile Unsolicited Unsolicited to Friendly

Event

Window CAAR t-value CAAR t-value CAAR t-value CAAR t-value

-2 0.23% 0.83 -1.70% -1.77 -1.05% -1.07 6.08% 1.28 -1 1.54% 2.04* -0.08% -0.06 7.67% 1.14 0.26% 1.29 0 16.66% 8.32* 10.50% 13.89* 10.18% 1.40 21.53% 2.18* 1 2.04% 2.62* 7.47% 1.69 5.15% 1.37 -0.41% -1.44 2 0.90% 1.64 2.14% 3.46* -0.42% -1.85 0.18% 0.24 [-2,2] 4.27% 1.54 3.67% 1.78 4.31% 2.18* 5.53% 1.48

Figure 2. Target CAARs by nature of bid

This figure shows the market reaction to the announcement of M&A transactions for target firms by bid nature of bid over the event window. The MSCI-Europe index returns is used as a benchmark and the model parameters are estimated over 250 days prior to the event window [-2,2].

-5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% -2 -1 0 1 2 CAAR Friendly Hostile Unsolicited Unsolicited to Friendly

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Figure 3 and Table 8 present the CAARs for the bidding firms by the nature of the bid and how the bidding firms’ shareholders reacted differently to the announcements of friendly, hostile, unsolicited, or unsolicited to friendly bids. Over the event window, the CAARs were slightly negative and statistically insignificant (at 5% level) for both hostile and unsolicited bids. It seems that friendly and unsolicited to friendly bids are expected by the market and evaluated positively, as the CAAR was positive at 0.04% and 0.37%, respectively. On the event day, the share price did not reflect any change for friendly bids, whereas hostile, unsolicited, and unsolicited to friendly bids experienced small negative price corrections (statistically insignificant at 5% level). The underlying reason for the price correction would be that shareholders of the bidding firms expect that their firms offer too high a premium in case of bid opposition; thus, the synergy value accruing to the bidder is destroyed.

Table 8. Bidder CAARs by nature of bid

This table presents the average values of CAAR for bidding firms depending on the nature of bid for a five-day event window around the M&A announcement day. Abnormal returns are computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Friendly Hostile Unsolicited Unsolicited to Friendly

Event

-2 -0.08% -0.47 -0.35% -0.56 0.98% 0.75 0.25% 0.41 -1 0.21% 1.70 0.75% 2.10* -0.93% -1.72 0.13% 0.62 0 0.00% -0.01 -3.02% -1.07 -0.28% -0.55 -1.55% -1.35 1 0.13% 0.55 0.82% 1.07 -0.50% -0.48 1.39% 2.28* 2 -0.04% -0.18 -0.01% -0.10 0.37% 0.50 1.62% 1.46 [-2,2] 0.04% 0.90 -0.36% -0.58 -0.07% -0.24 0.37% 0.73

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Figure 3. Bidder CAARs by nature of bid

This figure shows the market reaction to the announcement of M&A transactions for bidder by bid nature of bid over the event window. The MSCI-Europe index returns was used as a benchmark and the model parameters are estimated over 250 days prior to the event window [-2,2].

5.3 Means of payment in M&A

As mentioned before, the method of payment in M&A is an important signal of the prospective synergy value. In general, an M&A deal with cash payment is expected to generate higher target and bidder returns than one with stock payment. The reason is that the bidding firm prefers to pay off target shareholders via cash in order to fully exploit the future value increases of the merged firms. Additionally, the financing choice signals the firm’s valuation under or over and alters the share price of the bidding firm upwards or downwards. If bidding firms believe that the true value of the firm’s shares is worth more than the current share price, cash payment is preferred over issuing equity. Moreover, cash payments are taxable for target shareholders; thus, higher premiums paid may compensate for the taxes paid (Flugt, 2009).

Figure 4 indicates that the target’s share price reaction is sensitive to the means of payment employed in M&A transactions. Stock bids yielded the highest CAAR (17.46%, statistically significant at 5% level) while cash or stock bids brought the lowest abnormal return (9.39%, statistically insignificant at 5% level) to the target shareholders (Table 9). -4.00% -3.00% -2.00% -1.00% 0.00% 1.00% 2.00% -2 -1 0 1 2 CAAR Friendly Hostile Unsolicited Unsolicited to Friendly

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Table 9. Target CAARs by means of payment

This table presents the average values of CAAR for target firms depending on the method of payment for a five-day event window around the M&A announcement five-day. Abnormal returns were computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Cash Cash and Stock Cash or Stock Stock

Event

-2 0.39% 1.23 0.73% 0.58 -0.85% -1.92 0.16% 0.18 -1 1.39% 1.47 2.80% 1.76 -0.04% -0.10 1.97% 1.37 0 17.39% 8.60* 10.48% 4.13 9.39% 1.55 17.46% 2.74* 1 2.38% 2.35* 1.80% 1.24 3.01% 1.10 1.15% 1.09 2 0.31% 1.13 0.16% 0.23 21.86% 1.67 -0.07% -0.24 [-2,2] 4.37% 1.49 3.19% 1.90 6.67% 1.78 4.13% 1.38

Figure 4. Target CAARs by means of payment

This figure shows the market reaction to the announcement of M&A transactions for target by means of payment over the event window. The MSCI-Europe index returns was used as a benchmark and the model parameters were estimated over 250 days prior to the event window [-2,2].

Table 10 and Figure 5 verify the expectation of a correction on the share prices of the bidder: negatively for stock bids (-0.32%) and a positive one for cash bids (0.24%) at the announcement of day (neither of them is statistically significant at the 5% level). However, both cash paid deals (0.11%) and stock paid deals (0.05%) enabled a bidder’s shareholders to experience positive, yet statistically insignificant, CAARs over the event window. Remarkably, the CAARs for cash and stock (mixed) bids were -2.32% at the announcement (statistically significant) and -0.51% (statistically insignificant) over the event window. The negative returns would be related with the proportion of stocks in the mixed offers, which are higher compared to cash.

-5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% -2 -1 0 1 2 CAAR Cash

Cash and Stock Cash or Stock Stock

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Table 10. Bidder CAARs by means of payment

This table presents the average values of CAAR for bidding firms depending on the method of payment for a five-day event window around the M&A announcement five-day. Abnormal returns were computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Cash Cash and Stock Cash or Stock Stock

Event

-2 0.00% 0.01 -0.15% -0.31 -0.21% -0.40 -0.16% -0.43 -1 0.18% 1.21 -0.33% -0.94 0.20% 0.41 0.49% 2.03* 0 0.24% 0.83 -2.32% -2.60* 0.78% 2.08* -0.32% -0.45 1 0.26% 1.08 -0.33% -0.25 0.98% 1.44 -0.05% -0.16 2 -0.17% -1.02 0.58% 0.47 0.63% 0.65 0.31% 0.51 [-2,2] 0.11% 0.96 -0.51% -1.18 0.48% 2.49* 0.05% 0.40

Figure 5. Bidder CAARs by means of payment

This figure shows the market reaction to the announcement of M&A transactions for bidder by means of payment over the event window. The MSCI-Europe index returns was used as a benchmark and the model parameters were estimated over 250 days prior to the event window [-2,2].

5.4 Focus versus diversification strategies

The target and bidder sample is subdivided into M&A announcement with focus or diversification strategies, based on their industry sector information gathered from the Bloomberg database. 62 bids from the sample of 220 M&A announcements were diversifying takeovers, in which bidders and target operated in unrelated industries. As seen in Table 11, the CAARs of focus-oriented M&A deals were slightly higher than for diversification-oriented M&A deals. A potential explanation for this outcome is that, due to the future potential of focus-oriented M&A deals, concerns for disadvantages of diversification outweigh the synergies. Asymmetrical information

-2.50% -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% -2 -1 0 1 2 CAAR Cash Cash and Stock Cash or Stock

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could be another factor to explain the higher willingness for the focus-oriented deals, due to the difficulty of assessing potential of the diversified deals.

Figure 6 compares the CAARs of the target firms in diversifying M&A deals with the CAARs of focus-oriented deals. The CAARs at the event day were positive and statistically significant at the 5% level for both focused (16.85%) and diversified deals (16.05%). Over the event window, neither focus strategy nor diversifying strategy yielded a statistically significant CAAR, yet both brought positive returns at 4.35% and 4.19%, respectively.

Table 11. Target CAARs by takeover strategy

This table presents the average values of CAAR for target firms depending on the takeover strategy for a five-day event window around the M&A announcement day. Abnormal returns were computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Focus Diversification

Event

Window CAAR t-value CAAR t-value

-2 0.48% 1.25 0.00% 0.00 -1 1.62% 1.80 1.48% 1.23 0 16.85% 6.77* 16.05% 5.81* 1 1.79% 3.52* 2.80% 1.35 2 1.00% 1.48 0.63% 0.82 [-2,2] 4.35% 1.55 4.19% 1.56

Figure 6. Target CAARs by takeover strategy

This figure shows the market reaction to the announcement of M&A transactions for target by takeover strategy over the event window. The MSCI-Europe index returns were used as a benchmark and the model parameters were estimated over 250 days prior to the event window [-2,2].

-2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% -2 -1 0 1 2 CAAR Focus Diversification

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Unexpectedly, a negative price correction for bidder’s shares was observed for focus strategy over the event window, but this negative price adjustment was statistically insignificant at the 5% level (Table 12). It appears, in Figure 7, that the market anticipates the focus strategy of the bidder, as before the announcement of M&A deals, focus strategy experienced higher CAARs, but starting from the announcement day, diversifying deals beat focused deals.

Table 12. Bidder CAARs by takeover strategy

This table presents the average values of CAAR for bidder firms depending on the takeover strategy for a five-day event window around the M&A announcement day. Abnormal returns were computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Focus Diversification

Event

-2 0.02% 0.11 -0.20% -0.70 -1 0.23% 1.68 0.11% 0.51 0 -0.22% -0.67 0.16% 0.40 1 0.01% 0.04 0.48% 1.00 2 -0.12% -0.59 0.32% 0.69 [-2,2] -0.02% -0.24 0.17% 1.71

*The CAARs over the event window are statistically insignificant at 5% level.

Figure 7. Bidder CAARs by takeover strategy

This figure shows the market reaction to the announcement of M&A transactions for bidder by takeover strategy over the event window. The MSCI-Europe index returns were used as a benchmark and the model parameters were estimated over 250 days prior to the event window [-2,2].

5.5 Domestic versus cross-border

The CAARs over the event window were slightly higher for domestic targets (4.41%) than for cross-border targets (4.19%) and both were statistically insignificant at 5%

-0.30% -0.20% -0.10% 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% -2 -1 0 1 2 CAAR Focus Diversification

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level, whereas, at the announcement, both domestic and cross-border M&A deals yielded statistically significant abnormal returns to bidders, as seen in Table 13. Thus, it can be inferred from Figure 8 that, although at the announcement cross-border deals beat the focused deals, the market favors domestic deals over cross-border deals over the event window, as potential risk and uncertainty become crucial in cross-border deals. The reason for higher average premiums for domestic deals than cross border targets also relates to how the sample of M&A deals included a higher proportion of UK targets (39% versus 17%, respectively).

Table 13. Target CAARs in domestic and cross border bids

This table presents the average values of CAAR for target firms depending on the domestic or cross border M&A announcement for a five-day event window around the announcement day. Abnormal returns were computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Domestic Cross-border

Event

-2 0.44% 0.85 0.22% 0.73 -1 1.46% 1.34 1.69% 1.78 0 15.47% 6.77* 17.72% 5.79* 1 3.33% 2.37* 0.89% 1.99* 2 1.35% 1.36 0.42% 1.31 [-2,2] 4.41% 1.76 4.19% 1.38

Figure 8. Target CAARs in domestic and cross border bids

This figure shows the market reaction to the announcement of domestic and cross-border M&A transactions for target firms over the event window. The MSCI-Europe index returns were used as a benchmark and the model parameters were estimated over 250 days prior to the event window [-2,2].

-5.00% 0.00% 5.00% 10.00% 15.00% 20.00% -2 -1 0 1 2 CAAR Domestic Cross-border

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The acquiring firms enjoyed insignificant abnormal returns for both domestic (0.04%) and cross-border M&A deals (0.05%), and the difference of which was statistically insignificant over the event window (Table 14). Thus, it can be concluded, and also seen from Figure 9, that either domestic or cross-border M&A announcements do not impact the wealth of acquiring firms’ shareholders significantly over the event window.

Table 14. Bidder CAARs in domestic and cross border bids

This table presents the average values of CAAR for bidding firms depending on the domestic or cross border M&A announcement for a five-day event window around the announcement day. Abnormal returns were computed as the difference between realized and the market model benchmark returns. T-test was used to assess the significance of the CAARs.

Domestic Cross-border

Event

-2 -0.24% -1.11 0.16% 0.70 -1 0.30% 2.00* 0.08% 0.41 0 -0.51% -1.69 0.35% 0.81 1 0.38% 1.09 -0.08% -0.34 2 0.29% 0.86 -0.27% -1.24 [-2,2] 0.04% 0.28 0.05% 0.51

Figure 9. Bidder CAARs in domestic and cross border bids

This figure shows the market reaction to the announcement of domestic and cross-border M&A transactions for bidding firms over the event window. The MSCI-Europe index returns were used as a benchmark and the model parameters were estimated over 250 days prior to the event window [-2,2].

-0.60% -0.40% -0.20% 0.00% 0.20% 0.40% 0.60% -2 -1 0 1 2 CAAR Domestic Cross-border

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6. Conclusion

This study explores the influence of European M&A deals announced between January 2008 and December 2013 on the shareholders’ wealth of bidder and target firms in the short term. The analysis provides evidence that target shareholders experience, on average, positive and significant abnormal return over the [-1,1] window, resulting in a statistically significant CAAR of 4.30%. Nevertheless, the CAAR of bidding firms over the event window is not statistically different from zero. It can be inferred that M&A announcements enabled shareholders of target firms to increase their wealth, whereas M&A announcements neither increased nor destroyed the wealth of bidding firm shareholders in the short-term. Thus, the result of hypothesis testing is that H1A is accepted while H1B has to be rejected (presented in the

section 3.1).

These results are consistent with the findings of Campa and Hernando (2004), Bruner (2002), Martynova and Renneboog (2006), and Akben-Selcuk and Kiymaz (2013) who covered the preceding merger waves. The findings suggest that the agency motives and managerial hubris continue to restrain the shareholders of bidding firm to experience significant abnormal returns during the period between 2008 and 2010, in which M&A activity dropped to its lowest levels since 2004 due to the economic downturn, and the period starting from 2011 which is considered as the beginning of the expected seventh M&A wave. While unable to provide unique findings compared to previous literature, this study provides empirical evidence of the current performance of M&A announcements on shareholders’ wealth.

This study also conducted analyses on the market expectations about the impact of M&A deals, depending on the different attributes of the bids. To start with, M&A deals are split into subgroups based on the nature of the bid, and it was found that, on the event day, friendly bids (16.66%) triggered larger price reactions to the target shareholders than hostile M&As (10.50%). In contrast, hostile bids triggered a negative abnormal return of -3.02% while friendly bids did not generate either positive or negative abnormal returns to the acquirer shareholders. This result contradicts the findings of Martynova and Renneboog (2006) and Gregory (1997), who found that the announcements of hostile bids created higher returns for the target

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than friendly M&As. In contrast, it supports the findings of Feito-Ruiz and Menéndez -Requejo (2011), who found that the CAAR was positive (1.05%) for friendly M&As and negative (-4.51%) for hostile ones. Moreover, as seen in Table 16, there was no significant difference between the CAARs of friendly and hostile M&A deals over the event window for either target or acquirer shareholders. Therefore, the result of hypothesis testing is that both H2A and H2B are rejected (presented in section 3.2.1).

The means of payment is also considered a significant determinant on the shareholders’ wealth. Cash-paid deals yielded a CAAR of 4.37%, while stock paid and mixed deals brought CAARs of 4.13% and 3.19%, respectively, to the target shareholders. Also, for acquirer shareholders, cash deals triggered, at most, a CAAR of 0.11%, yet none of the group in the bidder and target sample was statistically different from zero (Table 15). These findings confirm the conclusions of Franks et al. (1991) and Andrade et al. (2001). Due to the missing statistical significance, both H3A and H3B are rejected (presented in section 3.2.2).

Additionally, over the event window, neither focus strategy nor diversifying strategy yielded statistically significant CAARs for the target or bidder, in line with the findings of Holl et al. (1996), who did not find any difference between the gains to shareholders in focused and diversified deals. Also, there was no statistical difference found between the announcement effects of takeover strategy, confirming that the market reacts differently based on industry relatedness (Table 15). Thus, both H4A and

H4B are rejected (presented in section 3.2.3).

Finally, the announcement effects of domestic versus cross-border M&A deals for the bidders and targets were also analyzed. Over the event window, neither domestic nor cross-border M&A deals yielded statistically significant CAARs for the target and bidder firms, and there were no differences between the CAARs for target and acquiring firms shareholders in domestic and cross-border deals Thus, both H5A and

H5B are rejected (presented in section 3.2.4). This result indicates that the

announcement of a cross-border merger, on average, generated a value at least as large as a similar transaction involving two domestic firms, in line with Campa and Hernando (2004). On the contrary, this empirical finding contradicts the empirical finding of Feito-Ruiz and Menéndez -Requejo (2011) who found that, on average,

“The short-term effect of M&A announcements on the wealth of European bidder and target firms shareholders”

University of Amsterdam

Amsterdam Business School

Master in International Finance

Master Thesis

“The Short-Term Effect of M&A Announcements on The Wealth of

European Bidder and Target Firms Shareholders”

Author:

Ebru Ipek

Thesis Supervisor:

Dennis Jullens

TABLE OF CONTENTS

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