Value Creation Estimates Beyond Announcement Returns: Mega-Mergers versus Other Mergers
53 Pages Posted: 18 Mar 2012
Date Written: February 7, 2012
Much of the literature considers only short-term acquirer announcement returns when analyzing which mergers create and which destroy value for the acquirer. However, announcement returns combine information about value creation directly because of the merger and a revaluation of the acquirer’s stand-alone value. We use three methods to measure the direct effect of the merger on the acquirer’s value, free from such revaluation. One approach analyzes acquirer returns around the withdrawals of mergers. The second approach uses Value Line analyst forecast revisions. The third approach follows Bhagat et al. (2005) and is based on acquirer returns when a competing bid occurs. Our findings are consistent across these three methods and reverse several important conclusions from the literature on acquirer announcement returns. First, we find that despite their negative average acquirer announcement returns, typically, acquisitions of public targets on average do not destroy value for the acquirer and, by most measures, create value. Second, the only set of mergers that on average destroys value for the acquirer are mega-mergers, the largest one percent of mergers in absolute transaction value. These mergers are important, because almost half the money spent on mergers is spent on mega-mergers. In contrast, all other mergers create value for the acquirer. In addition, we provide evidence that mega-mergers are driven by managerial motives and poor corporate governance.
Keywords: mergers, value creation, announcement returns, corporate governance
JEL Classification: G34
Suggested Citation: Suggested Citation