Do Mergers Create or Destroy Value? Evidence from Unsuccessful Mergers

Abstract

In this study, we examine unsuccessful takeover attempts for new evidence on whether mergers create or destroy value for acquirers and targets. We contribute to the literature in three important areas. First, we contribute to the literature on signaling by investigating whether a takeover attempt signals investors about the quality of firm management as well as the quality of the specific firm investment under consideration. We find that bid announcement returns are partially, but not completely, reversed by termination announcement returns, evidence that the merger proposal itself contains information about the value of the bidding firm. Second, we contribute to the literature on the value of diversification by examining how merger bids and terminations affect the relative values of bidders attempting diversifying and focusing takeovers. Our evidence enables us to differentiate between the synergistic and agency views of mergers. We find significant differences in the responses of firms attempting focusing versus diversifying mergers. The reversal of bid announcement returns by termination announcement returns is significantly different for focusing and diversifying firms. There is no reversal for diversifying firms while there is a partial reversal for focusing firms. This provides evidence in support of both the synergistic and agency views of mergers. Synergies are evident in focusing mergers while agency costs are evident in diversifying mergers. Third, we contribute to the literature on the valuation effects of mergers by using data from the 1991-2000 period to re-examine the important topic of who wins and who loses when mergers are terminated.

Keywords: diversification, focus, merger, signaling, terminated merger

JEL Classification: G14, G34