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, targets of cash offers are revalued by +15% after deal failure, whereas stock targets revert to their pre-announcement levels. This result holds for the subsample where deal failure is exogenous to the target's stand-alone value. We also show that cash bidders revert to their pre-announcement levels, while stock bidders fall below. The results suggest that cash bids signal target undervaluation and stock bids indicate acquirer overvaluation.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Number of Pages in PDF File: 60

working papers series