Do Wealth Creating Mergers and Acquisitions Really Hurt Acquirer Shareholders?

Abstract

We examine the expected economic benefits of mergers and acquisitions. We conclude that both signaling and revelation biases are responsible for the commonly reported finding that on average takeovers are harmful to bidder shareholder wealth. After accounting for these two biases that lead to a sizeable price fall on the bid announcement we demonstrate that bidders generally benefit from takeovers capturing on average 67% of the economic gains from the transaction in cash bids and 91% in stock bids. By studying bids that fail for exogenous reasons, which are largely free of signaling and revelation biases, we confirm the neoclassical view that takeovers are positive NPV projects for a typical bidder. We base this conclusion on two important findings. First, on a failed acquisition announcement, the combined bidder and target value falls on average, indicating that both target and bidder suffer significant negative abnormal returns. Second, bidders share in a significant portion of the economic benefits of a successful acquisition, reflected in a significant positive relationship between bidder and target stock returns utilizing a 60-day initial bid announcement window and a 100-day period following the bid termination announcement. Over the same window, exogenously failed cash bidders significantly underperform successful cash bidders by 10.7% and exogenously failed stock bidders significantly underperform successful stock bidders by an added 15.5%, leading to combined underperformance in failed stock bids of 26.2%.

Keywords: M&A, takeover bids, acquisition benefits, acquirer gains, acquisition synergies, targets, bidders, failed bids.iled bids

JEL Classification: G34, G14