Cash is King: Revaluation of Targets after Merger Bids

Abstract:     
We provide evidence that a significant fraction of the returns to merger announcements reflects target revaluation rather than the causal effect of the merger. In a sample of unsuccessful merger bids from 1980 to 2008, we find that targets of cash offers are revalued by 15% after deal failure, which is a sizeable portion of the average announcement effect of 25%. In contrast, stock targets revert to their pre-announcement levels. These results hold for deals where failure is exogenous to the target's stand-alone value. We show that the differential revaluation of cash and stock targets is not explained by differences in future takeover activity. We also find that the values of cash bidders revert to pre-announcement levels, while stock bidders fall below. Our revaluation estimates imply economically large mismeasurement when using naive announcement-based estimates of the causal effect of mergers.

Number of Pages in PDF File: 46

Keywords: mergers & acquisitions, synergies, misvaluation, revaluation, medium of exchange

JEL Classification: G14, G34, D03, D82

working papers series