Value Creation Estimates Beyond Announcement Returns: Mega-Mergers versus Other Mergers

53 Pages Posted: 18 Mar 2012

See all articles by Dinara Bayazitova

Dinara Bayazitova

University of North Carolina at Chapel Hill

Matthias Kahl

University of California, Los Angeles (UCLA) - Anderson School of Management

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Date Written: February 7, 2012

Abstract

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

Bayazitova, Dinara and Kahl, Matthias and Valkanov, Rossen, Value Creation Estimates Beyond Announcement Returns: Mega-Mergers versus Other Mergers (February 7, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2024126 or http://dx.doi.org/10.2139/ssrn.2024126

Dinara Bayazitova

University of North Carolina at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Matthias Kahl (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States
(310) 825-7687 (Phone)

Rossen Valkanov

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

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