Stock returns in mergers and acquisitions

Strategic Management Journal, Vol 13, 67-84 (1992) FACTORS INFLUENCING WEALTH CREATION FROM MERGERS AND ACQUISITIONS: A META-ANALYSIS DEEPAK K DATTA and GEORGE E PINCHES School of Business, University of Kansas, Lawrence, Kansas, U.S.A V K NARAYANAN Graduate School of Management, Rutgers-The Newark, New Jersey, U.S.A State University of New Jersey, This study analyzes the empirical literature concerning the influence of various factors on shareholder wealth creation in mergers and acquisitions using a multivariate framework Overall, results indicate that while the target firm’s shareholders gain significantly from mergers and acquisitions, those of the bidding firm not Findings also indicate that the use of stock financing has a signijicant impact on the wealth of both the target and bidding firms’ shareholders The presence of multiple bidders and the type of acquisition inpuence the bidders’ return, while regulatory changes and tender offers influence the targets’ returns The paper also provides a comparison of our findings with that of previous narrative reviews and discusses their implications from the viewpoint of managers and researchers regression analysis using observations from 41 studies The results indicate that a select set of factors explain a substantial proportion of the wealth gains to both bidding and target firm shareholders By ‘bidding’firm we mean the firm initiating the acquisition transaction; the object of their interest is the ‘target’ firm The paper is structured as follows First, we provide an overview of the literature on wealth creation in mergers and acquisitions, discussing five key factors which have been hypothesized to influence shareholder wealth Next we describe the method employed in this study, the studies used in our analysis and the way the variables are coded from the studies Third, we present the results of the regression analysis assessing the influence of various factors on shareholder gains Finally, in the concluding section, we discuss the findings and compare them with those identified in two prior narrative reviews of the literature We also raise important theoretical questions and issues for future research, and Key words: wealth creation,mergers and acquisitions, discuss their implications for both practice and research in strategic management meta-analysis The performance implications of mergers and acquisitions have been of considerable interest to researchers over the last couple of decades Recent studies have focused on the market performance of individual mergers and acquisitions both in the area of strategic management (e.g Barney, 1988; Chatterjee, 1986; Lubatkin, 1983, 1987; Shelton, 1988; Singh and Montgomery, 1987) and in financial economics (Jarrell, Brickley and Netter, 1988 and Jensen and Ruback, 1983 provide narrative reviews of this literature) In this paper we provide a metaanalytic synthesis of the findings of studies on wealth creation or the market peformance of mergers and acquisitions where ‘market performance’ or shareholder wealth gains refers to the stock market appraisal of specific merger transactions Unlike traditional literature reviews we employ a multivariate framework and 014~2095/9uo10067-18$09.00 19!Z by John Wiley & Sons, Ltd Received 27 July 1990 Revised 15 July 1991 68 D K Datta, V K Narayanan and G E Pinches THEORETICAL OVERVIEW Measuring wealth creation Research on wealth creation from mergers and acquisitions, both in strategic management and financial economics has been primarily undertaken using the event study methodology (see Brown and Warner, 1980; 1985 for a detailed description of the market and other models used in such methodology) This approach is based on the proposition that in an efficient market the immediate wealth effect reflects the capital market’s overall unbiased assessment of the present value of the future benefits of the merger or acquisition This focus on present value incorporates both: of the empirical estimates examined in this study indicate that while the average shareholder gains for target firms in the month of the merger announcement is about 22 percent, gains to bidding firms in the same period are less than one-half of one percent To provide an indication of the magnitude of wealth creation and variability therein we have plotted on a month-to-month basis the means and variation (mean & one standard deviation) of the prediction errors (the indicator of weath gains) for both bidders and targets during and around the month of the announcement of the merger or acquisition (Figure 1).2 Note that only in month zero (the month of the announcement) is there any indication of substantial wealth increases, and then only for targets Figure also highlights that The actual flow of cash or securities incurred by the bidder during the transaction; and The expected incremental cash inflow generated during the integration phase by combining the operations of the target and bidder (the expectation being formed by an unbiased assessment of all available information) The merger transaction itself may span several weeks The negotiations may be started before any public announcement, and the acquisition is consummated some time after the initial public announcement (if it is consummated at all) Although negotiations may be conducted in strict -6t -6 -5 -4 -3 -2 -1 secrecy, often there is speculation, news begins Month to leak, and/or the market begins to anticipate the acquisition However, the market’s expectations are almost fully formed by the announcement date of the merger or acquisition with wealth effects being insignificant around the consummation date (Asquith, 1983; Dodd, 1980) As a consequence, studies examining the wealth creation in mergers and acquisitions have typically Man f one standud Dcviltirn employed relatively short event periods surrounding the announcement date This is consistent Figure Mean and standard deviation of prediction with both the efficient market hypothesis as well errors for bidders and targets around the announcement month (t = 0) as available empirical evidence - - Factors influencing wealth creation Evidence from previous narrative reviews indicates that the wealth created in mergers and acquisitions accrues almost exclusively to the target firms’ shareholders (Jarrell, Brickley and Netter, 1988; Jensen and Ruback, 1983) Analysis I Traditionally, the term ‘abnormal returns’ (ARs) or ‘cumulative abnormal returns’ (CARS) has been prevalent in the literature to connote the wealth effects of an event However, more recently, this has been redefined as ‘prediction errors’ (PEs) or ‘cumulative prediction errors’ (CPEs) to be more congruent with what is actually measured The data for Figure came from previous studies using monthly data which reported wealth effects in and around the announcement month Wealth Creation from Mergers and Acquisitions there is considerable cross-sectional variability in the wealth effects for both bidders and targets This cross-sectional variability has been obscured in previous narrative reviews What contributes to this variation in wealth creation as measured in the observations across various studies? While the question has been addressed in both the strategic management and the financial economics literature, the two have adopted somewhat different frames of reference in identifying the sources of shareholder wealth in mergers and acquisitions The ‘market for corporate control’ perspective, where mergers and acquisitions have been viewed as contests between competing management teams for the control of corporate entities, is common among financial economists The proponents of this perspective argue that the total economic value created in a merger or acquisition, and its partitioning between the bidding and target firms’ shareholders is determined by market characteristics, including its competitiveness (e.g number of bidders and regulatory changes affecting the market) On the other hand, strategic management researchers, while sometimes adopting the financial economists’ methodological tools, have typically emphasized factors which are management controlled For example, based on the existing literature on diversification strategies, they have argued that the type of merger (i.e whether it involves the acquisition of related or unrelated business units) is an important determinant of performance Other factors, such as the bidders’ approach (i.e merger or tender offer) and the mode of financing, while also being management controlled, have been examined primarily in the finance literature from a market for corporate control perspective A review of the theoretical and empirical literature on shareholder wealth creation in mergers and acquisitions identifies a number of factors which may explain differences in wealth creation Primary among these are regulatory changes, the number of bidders, the bidder’s approach (i.e merger vs tender offer), the mode of financing (i.e cash vs stock), and the type of merger or acquisition (i.e conglomerate vs non-conglomerate) This study is limited to these five factors-factors that have been examined in a sufficient number of previous studies so their impact (or, lack thereof) can be systematically assessed It should be emphasized that additional 69 factors may also impact wealth creation, however, they have not been examined with sufficient frequency in previous research to be considered in this empirical analysis and ~ynthesis.~ Regulatory changes Changes in the environment over time, including regulatory changes, play a key role in influencing the selection of a firm’s strategy and also determining the consequencesof various strategic decisions In the case of mergers and acquisitions Jarrell and Bradley (1980) and Schipper and Thompson (1983), among others, point to two important regulatory changes, namely, the 1968 Williams Amendment and the 1969 Tax Reform Act Two specific mechanisms have been postulated in relation to their impact on wealth creation First, the 1968 Williams Amendment required bidding firms to provide targets adequate time (10 trading days) to evaluate tender offers, thereby allowing additional bidders to enter the process and increasing the competitivenessof the market for corporate control This, in turn, can be expected to increase the bid price, benefiting the target firms’ shareholders at the expense of the bidding firms’ shareholders Second, the 1969 tax reform disallowed the interest deduction on convertible bonds issued to finance a merger and also taxed negotiable bonds given to the seller as installment payments Since both these regulatory changes imposed additional costs on the bidder, the returns to the bidding firms’ shareholders should be lower in the post-1969 period; the opposite being true for targets Number of bidders The extent to which the market for corporate control is competitive is ultimately an empirical question However, in a situation where there are a number of bidders, there is an increase in the level of competitiveness resulting in a negative impact on the stockholder gains of bidding firms On the other hand, target firms are likely to benefit when there are multiple bids At the extreme, the rivalry among bidding firms might even result in the price of the target being bid Only factors where we had a minimum of five observations were included in this study The number of observations on each of the factors are available from the authors 70 D K Datta, V K Narayanan and G E Pinches up until the takeover is a zero net present value (or at times, even a negative) investment for bidders This argument is the essence of Barney’s (1988) theoretical analysis and Roll’s (1986) ‘hubris’ hypothesis Ruback’s (1982) case study of the DuPont-Conoco merger also illustrates that restricting the number of bidders (in this case the court ordered withdrawal of Mobil from the bidding process) can have an impact on stockholder gains BidderS approach The approach used by the bidding firm (i.e merger or tender offer) has figured fairly prominently in the empirical literature on mergers and acquisitions (e.g Bradley, 1980; Huang and Walking, 1987; Kummer and Hoffmeister, 1978; Kusewitt, 1985) Mergers, by definition, are negotiated directly with the target firm’s management andor the board of directors and approved by them before going to a shareholder vote On the other hand, in tender offers, which may be friendly or unfriendly, the offer is made directly to the target firm shareholders It is then up to the shareholders (and not the management) to decide whether or not to tender their shares to the bidding firm There are at least two reasons why the target firms’ shareholders are likely to benefit more in tender offers First, the announcement of a tender offer can alert other firms to the intent of the bidding firm, thereby attracting other bidders and initiating a competitive (auctiontype) process for the target firm This increased competition should result in higher bid premiums being paid by the bidding firm, benefiting the target firm at the expense of the bidder Second, as Bradley, Desai and Kim (1988) suggest, mergers permit payment of a ‘control premium’ diectly to target firm’s management in the form of favorable post-acquisition contracts In tender offers such premiums go directly to the target firms’ shareholders, who thereby stand to benefit more from the transaction In either case, tender offers allow targets to benefit at the expense of bidders (or some combination of the two) While the choice depends on how the transaction is negotiated, the mode of payment can influence shareholder wealth creation in a variety of ways First, the mode of payment affects the speed, and, with it, the cost of the transaction In stock offers, the bidding firm must obtain the approval of the Securities and Exchange Commission (SEC) before target shareholders can exchange their shares This process tends to increase the competitiveness of the acquisition market and benefits targets at the expense of the bidders Second, financial theory (e.g Myers and Majluf, 1984) sugg6sts that the issuance of stock is viewed negatively by the capital markets DeAngelo, DeAngelo and Rice (1984) provide empirical evidence with respect to stock issues that is in line with the theoretical position of Myers and Majluf Alternatively, a common stock offer may also lead to wealth transfer from stockholders to bondholders, implying a fall in stock prices (e.g Eger, 1983; Travlos, 1987) Third, unlike stock offers, cash transactions impose an immediate tax liability on the shareholders of the target firm, who, obviously, seek compensation in the form of higher premiums (e.g Franks, Harris and Mayer, 1988; Hayn, 1989) The above arguments suggest that both bidders and targets are likely to be better off in cash-financed rather than in stock-financed transactions Type of acquisition The type of acquisition as a factor in wealth creation has been of concern to researchers in strategic management given their interest in linking wealth effects of mergers and acquisitions to the diversification literature Thus, it has been argued that synergistic benefits through a transfer of core skills between the bidding and target firms in related acquisitions should result in greater wealth creation than in unrelated or conglomerate transactions (Salter and Weinhold, 1979) In extending Salter and Weinhold’s work, Lubatkin (1983,1987) and Singh and Montgomery (1987) hypothesized three additional mechanisms: merger-related economies of scale, economies of scope, and market power economies, all of which help enhance the total value of related Mode of payment acquisitions However, others have hypothesized In making an acquisition, the bidding or acquiring there are factors which favor conglomerate firm can choose either cash and stock financing acquisitions: cheaper access to capital (Steiner, Wealth Creation from Mergers and Acquisitions 1975); improved income stability, lower bankruptcy probabilities and increased market value of debt of the combined firm (Higgins and Schall, 1975; Leontiades, 1986; Lewellen, 1971) Recently, the relatedness argument has also been extended to targets: in related acquisitions, the targets should gain more since such acquisitions result in greater overall value and most of the gains in these transactions accrue to the target firms’ shareholders Singh and Montgomery (1987) provide some empirical support for this hypothesis On the whole, this literature views related acquisitions more favorably than conglomerate acquisitions in terms of shareholder wealth creation for both bidders and targets In summary, a review of the theoretical and empirical research suggests a number of factors which influence shareholder wealth creation in mergers and acquisitions Table 1summarizes the nature of the influence and also the hypothesized direction for these five factors It is important to note that previous studies have investigated the influence of these factors on shareholder wealth creation within a univariate framework, i.e one factor at a time The central thrust of this study is to assess the significance of various factors simultaneously in a multivariate framework, one that allows the impact of individual factors to be examined after partialling out the effects of others METHOD In this study, we utilize a meta-analytic procedure to estimate the significance of the hypothesized independent variables on merger returns for both bidders and targets Meta-analytic procedures have been extensively used in areas such as organization theory (e.g Gooding and Wagner, 1985), marketing (e.g Assmus, Farley and Lehman, 1984), and more recently in strategic management (Datta and Narayanan, 1989) The procedure is useful for synthesizing an existing body of evidence and is particularly appropriate when there is a substantial body of empirical evidence already available In a meta-analysis, empirical studies of a phenomenon are viewed as a natural unplanned experiment Since it is often difficult to account for all relevant factors within a single study, a number of studies are necessary to shed light on 71 various aspects of a phenomenon ‘me studies naturally differ along a number of dimensions; hence, the evidence from them is not directly comparable without controlling for interstudy differences Study observations are viewed as estimates in a multi-factor analysis of variance, with the experimental factors corresponding to the interstudy and/or intercase differences This allows us to exploit the empirical evidence available from previous merger and acquisition studies to draw statistically meaningful conclusions In contrast, narrative reviews adopt ad hoc procedures to cumulate their findings In this study we adopt a form of meta-analytic procedure called replication analysis (Farley, Lehman and Ryan, 1981).We array the estimates of merger gains (i.e prediction errors) from previous empirical studies as observations in a multi-factor natural experiment, with the experimental factors corresponding to the factors hypothesized to influence wealth creation Thus the factor levels for each estimate are identified, and the estimate of wealth created (the prediction error) is the dependent variable Using multiple regression analysis the impact of each factor on the dependent variable is assessed As in any meta-analytic review, we are forced to identify the factor levels based on the data available in the existing studies For some factors the data precludes finer refinements of factor levels For example, although the ‘mode of payment’ may vary from ‘all cash’ to ‘all stock’ along a continuum, we could identify only two levels for analysis: cash or stock The factor level ‘mixed mode of payment’ was not generally represented in the studies This is common in meta-analysis, since individual studies are driven less by a planned program and more by the specific researchers’ concerns; consequently, the studies form an unplanned experiment Key methodological issues to be resolved in a meta-analysis are: sample selection, operationalization of dependent and independent variables, and analytic procedures for drawing conclusions Sample The sample consisted of studies identified through a comprehensive search of articles that have examined the issue of shareholder wealth creation in mergers and acquisitions using the event study Mechanisms Stimulates the market for corporate Regulatory changes in 1968 & control and increases the cost of 1%9 transactions Stimulates the market for corporate Number of bidders control Type of Tender offers stimulate the market for transaction corporate control and lead to an (tender offer vs auction type process merger) Mergers provide less stimulation in the market for corporate control Mode of payment Use of cash reduces time required to (cash vs stock) complete transaction and gains, if any, are not shared after the transaction with target shareholders Use of stock viewed negatively by the capital market; may result in wealth transfer to bondholders Type of Economies and transfer of core skills acquisition in related (i.e non-conglomerate) (conglomerate vs mergers, vs cheaper capital, lower non-conglomerate) bankruptcy probability and increased market value of debt in unrelated mergers Factor Bidders Stimulates the market for corporate control Tender offers stimulate the market for corporate control and lead to an auction type process Mergers provide less stimulation in the market for corporate control Cash transactions require additional premium to compensate for immediate tax consequences Use of stock viewed negatively by the capital market; may result in wealth transfer to bondholders Value, if any, of relatedness primarily captured by targets Negative Negative Positive or uncertain Positive Positive Negative Stimulates the market for corporate control Mechanisms Targets Negative Direction of influence Table Mechanisms and direction of influence of factors on shareholder wealth creation Positive or uncertain Negative Positive Negative Positive Positive Positive Direction of influence a n Wealth Creation from Mergers and Acquisitions methodology Using the market model, or other similar models, researchers have tried to assess whether mergers and acquisitions result in increases in shareholder wealth The search was initiated by a systematic examination of articles appearing in major journals over the past 15 years.4 Next, additional studies published in books or other journals were identified from the references provided in these articles For the purpose of analysis we used four screens in selecting studies First, the study had to be based on either daily or monthly returns Second, we confined our analysis to studies on acquisitions in the United States so as not to confound the value gains due to country specific factors and cross-national differences Third, we omitted a small number of studies which focused on unique or very specific industries (e.g REITs and banking) Finally, only those studies which reported wealth effects based on the announcement (and not the outcome or consummation) date of the merger or acquisition were considered In our analysis, we examined a total of 41 studies with a total of 409 usable observations (i.e estimates of wealth creation) for both bidders and targets, each over four event period^.^ The Appendix provides a list of the studies used along with the number of usable observations contained in each study.) The 41 studies have drawn their samples from 16 different sources, and have used different time periods (dating as far back as 1948) and widely different screens or sampling criteria.6 Although the population of acquisitions from which the studies have drawn their ‘samples is finite, the sampling criteria are so different that observations are treated as being independent of one another Similarly, while multiple observations from the same study have been used, they represent wealth estimates from samples unrelated to each other.’ However, as with any The list of 41 journals examined is available from the authors We have 75 observations for bidders and 79 for targets for the main analysis, and 32, 51 and 31 for bidders and 40, 62 and 39 for targets for the event periods (-10,-2), (-1,O) and (1.6) respectively Together they constitute a sample of 409 usable observations * Less than 25 percent (10 out of 41) of the studies used FTC large merger series The list of sources, time periods and sampling criteria on a study-by-study basis is available from the authors For example, Asquith (1983) provides prediction errors around the announcement date for bidders and targets for both ‘completed’ and ‘not completed‘ mergers Therefore, 73 meta-analytic study, the data used suffers from a ‘publication bias,’ due to the use of studies that have passed a reviewing process Dependent variable: wealth effects Wealth creation in mergers and acquisitions has typically been estimated using the technique commonly referred to as an ‘event study.’ The procedure entails analyzingcommon stock returns of a firm that is hypothesized to have been affected by a particular ‘information event’ (in this case the announcement of the merger or acquisition).*The return for any period is defined as the change in the value of the stock plus any dividends (if appropriate) as a percentage of the stock price at the beginning of the period In the absence of new information which impacts the price (and returns) for the stock, the difference between the actual and expected (i.e ‘normal’) returns will, over a large number of firms, be approximately zero However, when unusual new information is present, the actual returns might exceed or be less than expected giving rise to positive or negative prediction errors, respect i ~ e l y In ~ an efficient capital market these prediction errors represent the investment communities’ unbiased expectation of the present value of the long-run benefits of the event Thus, they capture both immediate and anticipated longer term impacts of the merger Of course, as additional information about the merger and its success or failure becomes known, it is assimilated by the market and the value of the firm may be further affected In this study we operationalize shareholder wealth creation as the prediction errors (PEs) at four usable and independent observations (two for bidders and two for targets) are available from this study Virtually all studies use the date on which the announcement was first reported in the Wall Srreer Journal as ‘the announcement day,’ or day ‘0.’ Most of the studies employed the market model to estimate the expected return Under the market model the expected return is estimated via Expected return = a + p (return on the market) where, Q and p are estimated on a security-by-security basis over some relevant time period (often 100 to 200 trading days before the announcement) and the return on the market is based on a CRSP (Center for Research in Security Prices) index In the studies which reported PEs via a graph we estimated the returns 74 D K Datta, V K Narayanan and G E Pinches and around the transaction announcement date Our analysis focused on wealth creation separately for both bidders (or acquiring firms) and targets For studies using daily return data this involved examining the gains in the (- 10,lO) period In other words, the total prediction error over the 21-day period beginning 10 days before the announcement date, and continuing for 10 days after the announcement date was examined lo For studies which utilized monthly data, we used the prediction error during month zero (i.e the month of the announcement) Secondary analysis involved employing only daily data and using the prediction errors in the (-10, -2), (-1,O) and (1,6) time periods representing pre-announcement, announcement and postannouncement periods relative to the specific date the merger or acquisition was announced Variables: factors influencing wealth creation From the available studies, we coded the factor levels for the five independent variables identified in the literature review Four were identified directly: number of bids (single vs multiple), bidder’s approach (merger vs tender offer), type of financing (cash vs stock), and type of acquisition (conglomerate vs non-conglomerate) The number of studies and/or cases available did not permit us to code multiple bidder cases in finer detail nor to consider mixed modes of financing (i.e cash and stock) Similarly, studies did not permit us to code the type of acquisition using more complex classifications such as the FTC scheme, or Salter and Weinhold’s (1979) typology For the fifth variable, namely, regulatory change, direct identification of factor levels was not possible However, the empirical work of Asquith, Bruner and Mullins (1983), Jarrell and Bradley (1980), and Schipper and Thompson (1983) suggest the regulatory changes in 1968 and 1969 (Williams Amendment and the Tax Reform Act) had a significant impact on wealth ’OTwenty-one trading dates is approximately equal to month The window was allowed to vary for the (-10,lO) window, depending on the data available in a study The beginning day could vary between -20 and -5 and the ending day between and 20, providing there are a minimum of 16 observations in the interval Statistical tests (available from the authors) indicate this variation does not effect the results effects in mergers and acquisitions The year of the transaction was used as a proxy for regulatory change and studies were classified based on whether the mergers and acquisitions in the study pertained to the 1969 and after period, or not Control variables: methodological artifacts Since studies differed along methodological dimensions, we also controlled for four methodological artifacts: the source of the merger sample, type of sample employed, the kind of data employed, and the outcome of the proposed merger or acquisition The first control variable relates to whether or not the study sample was drawn from the FTC data base (the FTC merger series was last published in 1981, covering mergers through 1979) Since the FTC only listed mergers in the manufacturing sector that are valued in excess of $10 million, samples selected from the FTC data base are biased in favor of larger mergers Second, the criteria used in selecting the sample has also differed across studies Some studies have used only ‘clean’ samples (i.e excluding mergers where the announcement occurred along with other significant firm-specific announcements) On the other hand, in studies which did not systematically consider the possibility of other announcements (e.g earnings releases, dividend announcements, capital expenditures, etc.), the samples are contaminated We distinguish between ‘clean’ and ‘contaminated’ samples Third, as previously mentioned, studies have differed on the kind of data used in assessing wealth effects Some studies, especially the earlier ones, used monthly return data while the more recent studies have predominantly used daily return data We distinguish between whether returns data is daily or monthly Finally, we control for ‘outcome’, i.e whether the transactions were completed or not completed ‘Completed’ acquisitions are those which were eventually consummated while ‘not completed’ relates to those which were not Theoretically, there is no reason to suspect that the market can anticipate the outcome at the time of the announcement; however, we included this factor to enable us to meaningfully compare our conclusions with previous narrative reviews The above variables, namely, the source of merger sample (FTC or other), type of sample Wealth Creation from Mergers and Acquisitions 75 (contaminated or clean), kind of data (daily or monthly) and outcome (completed or not completed), were included to control for potential variability across studies in estimates of wealth gains arising from methodological artifacts rather than substantive factors the effects of the other independent and control variables This is a form of multi-factor analysis of variance with the interaction terms suppressed; the regression intecept is the main effect and each zerolone variable adds to or subtracts from the main effect Analysis RESULTS To assess the impact of the five independent factors on the wealth effects in mergers and acquisitions, we employed a multiple regression approach using dummy variables The following regression model was estimated: PEW = f(TIME, MBID, TEND, MERG, CASH, STOCK, CONG, NCONG, FT'C, CONTAM, DAILY, OUTCOME) where: PEW = Prediction error for event period W = Time period of merger (1 = 1969 and after, = Pre-1969) = Number of bidders (1 = Multiple MBID bidders, = Otherwise) = Tender offer (1 = Tender offer, TEND = Otherwise) = Merger (1 = Merger, = MERG Otherwise) = Cash-financed transaction (1 = CASH Cash, = Otherwise) = Stock-financed transaction (1 = STOCK Stock, = Otherwise) = Unrelated or conglomerate mergCONG ers (1 = Conglomerate, = Otherwise) = Related or non-conglomerate NCONG mergers (1 = Non-conglomerate, = Otherwise) = Sample drawn from FTC data FTC base (1 = FTC, = Other sources) CONTAM = Type of sample (1 = Contaminated, = Non-contaminated) = Kind of data (1 = Daily, = DAILY Monthly) OUTCOME = Outcome of merger (1 = Not completed, = Completed) TIME Our primary focus was on shareholder wealth creation for bidders and targets as assessed by examining the PEs in the combined (-10,lO) time period (for daily data) and month zero (for monthly data) Based on 75 observations for bidders and 79 for targets, the mean PEs were 0.388 percent for bidders and 21.814 percent for targets with standard deviations of 2.105 and 7.256, respectively (see Table 2).Thus, bidders had, on average, a gain of less than half of one percent when the merger was announced, while target firms' shareholders experienced over a 20 percent increase in value The overall results for targets are consistent with those arrived at by Table Regression analysis of factors influencing wealth creation as measured by prediction errors Bidders Targets -Mean prediction errors Standard deviation Regression analysis" Factor TIME (1 = 1969 and after) -0.547 4.913' MBID (1 = multiple bidders) -1.133+ 3.176 -0.310 8.060"' TEND (1 = tender offer) MERG (1 = merger) -0.001 -1.300 CASH (1 = cash-financed) 0.909 3.159 STOCK (1 = stock-financed) -2.738"L5.606' CONG (1 = conglomerate) -0.950 -1.866 NCONG (1 = non-conglomerate) 1.789' 2.488 FTC (1 = sample drawn from FIT) 0.024 -0.443 CONTAM (1 = contaminated) 1.121t 1.539 DAILY (1 = daily data) -0.786 2.546 OUTCOME (1 = not completed) -0.980 0.285 Intercept 0.565 14.743" R2 0.509 0.470 Adjusted RZ 0.414 0.373 F 5.350" 4.873"' N 75 79 ~ This procedure allows us to test the impact of each independent variable after controlling for 0.388 21.814"' 2.105 7.256 ~~ * ~ Values shown are unstandardized coefficients + p < 0.10, p c 0.05, *' p < 0.01, p < 0.001 - 76 D K Datta, V K Narayanan and G E Pinches Jarrell et af (1988) and Jensen and Ruback (1983); however, our results for bidders are, on net, more pessimistic than theirs In addition, an examination of the standard deviations indicates there is considerable variability in the prediction errors across studies, a fact that is obscured in the previous reviews Multiple regression analysis was employed to assess the extent to which the five independent and four control factors explain the variability in the bidder and target gains (i.e conglomerate vs non-conglomerate), was not significantly related to wealth creation for targets None of the control variables, i.e the source of the sample (FTC), type of sample (CONTAM), kind of data (DAILY) or outcome of the transaction (OUTCOME) contributed significantly to the variation in estimates of shareholder wealth effects for targets Secondary analysis Secondary analysis was undertaken to obtain a better understanding of the influence of the Table also presents the results of the multiple hypothesized factors on wealth creation in the preregression analyses As shown, the set of indepen- announcement (- 10,-2), announcement (- 1,O) dent variables explained a significant amount of and post-announcement (1,6) periods.'2 Table variation in the PEs for both bidders and provides the means and standard deviations of targets (with adjusted R2 being 0.414 and 0.373, the prediction errors for each of these periods respectively") One factor, namely, the mode of for both bidding and target firms For bidders payment (STOCK) was significantly related to the mean PE for the 2-day announcement period changes in shareholder wealth for both bidders was 0.167 percent compared to a mean of PE of and targets Its direction of influence is consistent 0.388 percent (from Table 2) for the combined with the theoretical predictions identified in sample using both monthly and daily data Table This finding substantiates that both Similarly, for targets, the mean PE for the 2-day bidders and targets are worse off in stock announcement period was 14.596 percent vs 21.814 percent for the combined daily and transactions In addition, the number of bids (MBID) monthly sample This is consistent with Jarrell et and the type of acquisition (NCONG) were al's (1988) results which indicate that as the time significantly related to changes in shareholder period for estimating returns is extended over wealth for bidders Multiple bids had a negative more than the 2-day period (-l,O), the estimates effect on the wealth of bidding firms, while non- are higher conglomerate mergers provided higher returns We also estimated separate regression estimates for bidders All these results were consistent with for the 2-day announcement period (-l,O), as the theoretical arguments presented earlier Only well as pre-announcement (- 10,-2), and postone control variable was significant in the case announcement (1,6) periods In the regression of bidders: the use of contaminated data provided model the type of data (DAILY) control variable a higher estimate of returns than where no other was not used since only daily data were relevant firm-specific announcements occurred around the Also, because of insufficient data, we could not announcement of the merger or acquisition estimate the effects of MBID in these regressions As hypothesized, the target firm's shareholders The results of these secondary analyses are also registered higher gains in transactions that took presented in Table place during or after 1969 (as indicated by A detailed examination of Table points to TIME) Also, as hypothesized, target firm four important findings First, for both bidders shareholders experienced substantial wealth gains and targets, stock transactions depressed the when tender offers were employed The other key gains significantly around the announcement independent variable, namely, type of acquisition date, a result that is consistent with that of the Multiple regression analyses The possible existence of multicollinearitywas assessed by computing the tolerance (i.e 14:) for each independent variable, where R f is the variance in an independent variable which is explained by the other independent variables Results available from the authors indicate multicollinearity is not a problem l2 The pre-announcement and post-announcement periods were allowed to vary The beginning day of the (-10,-2) period could vary between -18 and -5 and the ending day in the (1,6) period between and 18 Statistical tests available from the authors indicate this variation does not effect the results Wealth Creation from Mergers and Acquisitions 77 Table Regression analysis of factors influencing wealth creation as measured by prediction errors: Pre-announcement, announcement and post-announcement periods Targets Bidders (-10,-2) Mean PE Std Dev (-1J) 0.600" 1.106 (1,6) (-10,-2) (-170) (196) 0.167 1.589 -0.538"' 0.900 6.606"' 2.558 14.596"' 6.337 0.075 0.334 0.052 -0.437 -2.676"' 0.539 -0.249 0.287 0.285 -0.778 -0.501 -0.773+ 0.329 -0.247 -1.006 -0.923 -0.662 1.149 0.774 -0.232 0.947 0.713 -0.441 2.414+ -1.341 -5.103"' -0.204 1.553' 0.885 1.406 5.133" 5.088" -3.238' 4.943+ -6.999' -1.796 -0.271 -1.619 -7.814"' 5.229' 2.013 6.101" -0.762 4.610t 1.979 4.330+ 7.166" -3.22Pt 0.190 -3.232 0.227 0.403 -0.755 0.433 0.149 1.526 31 4.934" 0.679 0.569 6.141"' 16.436"' 0.617 0.542 8.219"" 62 0.141 0.464 0.272 2.421 * 39 2.823' * * 4.037 Regression analysis" Factor -0.415 TIME TEND 0.450 MERG 0.780t CASH -0.408 STOCK -0.551 CONG -2.583" NCONG -1.444 FTC 1.316 CONTAM 1.732" OUTCOME 0.460 Intercept -0.765 R= 0.708 Adjusted R2 0.569 F 5.093" N 32 A 0.254 * 2.702' 51 40 Values shown are unstandardized regression coefficients p C 0.10, * p < 0.05, primary analyses Second, the explanatory power of the regression for bidders pertaining to the 2day (-1,O) period fell off substantially (adjusted R2 of 0.254) from the full model (adjusted R2 of 0.414) reported in Table 2) Third, the lower explanatory power of the regressions for both bidders and targets (adjusted R2 of 0.149 and 0.272, respectively) in the post-announcement (1, 6) period indicates the lack of systematic factors impacting wealth creation after the announcement date of a merger or acquisition Finally, the relative impact of various independent variables differ markedly over the three periods for both bidders and targets This suggests researchers must be careful in interpreting their findings since the different periods employed or emphasized may significantly impact the results and interpretations DISCUSSION ** p < 0.01, '*+ p < 0.001 impact of a number of factors The multi-factor model employed explained a substantial portion of the variance in wealth gains reported by previous studies The findings of our analyses provide robust evidence that shareholders gains are lower in stock-financed transactions for both bidders and targets Further, multiple bidders and conglomerate acquisitions have a negative impact on the wealth of the bidding firm shareholders On the other hand, targets benefit more in tender offers than mergers, and regulatory changes in 1968 and 1969 benefitted target shareholders Our discussion is arranged in three sections: (1) a comparison of our results with previous reviews, (2) the implications of our findings for practitioners and, (3) a discussion of some of the larger theoretical issues raised by our conclusions A comparison of reviews In Table 4, we have compared our meta-analytic This study was based on the hypothesis that results with the conclusions provided in the two shareholder wealth creation in mergers and previous narrative reviews by Jarrell et al (1988) acquisitions is influenced by the simultaneous and Jensen and Ruback (1983) As indicated in Some univariate r-tests Selective Announcement period, Sample selection Explanatory factors considered Explanatory power of factors b Targets Central findings a Bidders Primarily narrative General thrust Statistical tests declined over time Recent bidders show no gains Returns to bidders have Tender offers Time Sources of gains, defensive tactics and related issues Selective Primarily narrative Some univariate t-tests Jarrell, Brickley & Netter Cannot provide Cannot provide In completed transactions, gains Targets of completed tender are higher in tender offers than offers gain in mergers Returns have increased in the Targets not lose in either 1970s and 80s over the 1960s mergers or tender offers which are not completed Bidders in completed tender offers gain Bidders in mergers and bidders in tender offers which are not completed not lose Bidders lose in not completed mergers sometimes through completion date Mergers and tender offers Completed vs not completed Sources of gains, antitrust, defensive tactics and related issues Jensen & Ruback Criterion Table A comparison of merger and acquisition reviews Can provide: R2, Adjusted R2, F Bidders don't gain, whether completed or not Bidders lose in multiple bid situations and in stockfinanced transactions Bidders gain in nonconglomerate acquisitions Targets gain Returns have increased over time The gains are more in tender offers than in mergers Targets lose in stock-financed transactions Regulatory changes (1969 and after) Number of bidders Type of transaction (mergers vs tender offer) Mode of payment (cash vs stock) Type of acquisition (nonconglomerate vs conglomerate) Control variables; source of sample, contaminated sample, daily data, and completed vs not completed Comprehensive Meta-analytic Multiple regression: Tests of significance controlling for other factors The present study P Wealth Creation from Mergers and Acquisitions the table, our study is based on a comprehensive sample of studies, unlike the selective samples utilized in previous reviews Further, the set of factors considered in this study are much more comprehensive and the use of multiple regression analysis enabled us to isolate the relative explanatory power of these factors Taken together, they testify to the benefits of meta-analytic synthesis over narrative reviews More importantly, some of the conclusions in this study are significantly different from those in previous reviews First, compared to Jensen and Ruback (1983), our results provide a much more pessimistic picture of bidder gains from mergers and acquisitions Second, Jensen and Ruback (1983) did not isolate the effects of the time frames over which returns are estimated Our study shows the influence of a narrow 2-day (- 1,0) announcement period vs a wider (month zero) period on the bidder’s gains Third, although Jarrell el al (1988) reported declining returns to bidders in the 1970s and 1980s (relative to the 1960s), we found that the decline over time is not statistically significant Fourth, while Jensen and Ruback (1983) found that bidders gain in completed mergers and lose in not completed transactions, our results suggest the distinction between completed and not completed mergers is of no consequence Since information about the eventual outcome at the time of announcement is speculative, our results are more consistent with theory and the efficient market hypothesis The extent of convergence among the three reviews is greater for targets First, a merger or acquisition results in significant gains for targets Second, when compared to mergers, targets achieve larger gains in tender offers Third, our findings that gains to targets were higher in the 1970s and 1980s compared to the 1960s is consistent with the observation of Jarrell et al (1988) In addition to the above, our findings emphasize the importance of the mode of payment (i.e cash vs stock) in mergers and acquisitions Our results indicate that both bidders and targets lose in stock-financed transactions; this is consistent with both financial theory (e.g Myers and Majluf, 1984; Krasker, 1986) and empirical evidence (e.g Asquith and Mullins, 1986; Masulis and Korwar, 1986) Of all the factors considered, mode of payment emerges as the most significant 79 explanatory factor in the wealth gains for both bidders and targets Additionally, while both of the previous reviews provide elaboration on the importance of the competitiveness of the acquisition market (i.e number of bidders), our results suggest this factor is significant only from the perspective of the bidding firm’s shareholders Finally, our results provide modest evidence of the positive effect of non-conglomerate mergers on the bidders’ wealth This finding is consistent with recent theoretical arguments in the strategic management literature Practical implications What our findings imply for practitioners? First, the results strongly suggest that it is the targets who benefit in acquisitions: therefore, from a shareholder wealth creation standpoint it is better to be a seller than a buyer More importantly, our findings highlight that managers considering acquisitions should be sensitive to the many factors that are related to wealth creation These include regulatory changes in the macroenvironment, the competitiveness of the market for corporate control, tactics employed by the bidder (tender offer or merger), the mode of financing, and the type of acquisition, all of which jointly influence the wealth gains to shareholders More specifically, target firm managers can maximize gains for their stockholders by avoiding stock-financed transactions or being acquired by a bidding firm in an unrelated industry Moreover, tender offers should be preferred over mergers, whenever possible From the bidders’ perspective, the findings suggest they should prefer non-conglomerate over conglomerate acquisitions In related acquisitions they stand to benefit from economies available through resource sharing and the transferring of distinctive competencies between bidding and target firms Related acquisitions also allow managers to minimize the risks associated with acquiring a business in an industry of which they may have only limited knowledge Moreover, bidders, like targets, should avoid stock-financed transactions By doing so, managers can send positive signals to the capital markets In addition, use of cash helps speed up the transaction, which, in turn, might reduce the cost of making the acquisition Finally, the findings suggest that bidding firms should avoid getting involved in 80 D K Datta, V K Narayanan and G E Pinches acquisitions where multiple bidders are involved-the increased competitiveness, in such cases, tends to drive up premiums and lowers potential gains to bidding firms’ shareholders The mode of financing seems to be a particularly important factor for both bidders and targets Historically, investment decisions and financing decisions have been treated as if they were independent; however, there is emerging theoretical recognition that these decisions are often interdependent (Myers and Majluf, 1984; Ravid, 1988) In acquisitions, which represent ‘investment’ decisions for bidders, our results indicate the strong influence the mode of payment has on shareholder wealth gains This has a larger implication when one considers that most strategic decisions are investment decisions (i e they describe the pattern of resource allocation needed to enhance shareholder wealth) and, hence, cannot be divorced from the decision about how to finance them In turn, this highlights the need for closer integration between strategic planning and the financial function of raising funds for an organization Larger theoretical questions The synthesis of ex ante event studies presented in this paper provides robust evidence that, on average, shareholders of bidding or acquiring firms not realize significant returns from mergers and acquisitions This conclusion is remarkably consistent with the available evidence on post-acquisition performance For example, Porter (1987), based on an analysis of acquisitions made by 33 Fortune-500 firms, concludes that acquisitions have been largely unsuccessful, when one considers that over half were subsequently divested Also, a recent study on post-acquisition integration by Ravenscraft and Scherer (1989) concludes that, on average, acquiring firms have not been able to maintain the pre-merger levels of profitability of the targets Finally, in perhaps the only study that measured performance in terms of both the actual cost and realized benefits, Alberts and Varaiya (1989) conclude that postacquisition gains to most bidding firms were not adequate to cover the premiums paid to acquire the targets The insignificant gains to bidders revealed in event studies and the pessimistic picture of postacquisition performance of targets leads one to wonder why firms are interested in acquiring other firms Paradoxically, the number of mergers and acquisitions in the U.S.have remained at very high levels, with more than 3,400 acquisitions, valued in excess of $230 billion, having been consummated in 1989 (Mergers and Acquisitions, 1990) A recent study by Walter and Barney (1990) on management objectives in mergers and acquisitions identified such objectives to be primarily economic; however, our findings suggests little economic justification for mergers from the bidding shareholders’ standpoint How can we explain the apparent anomaly that, even in the absence of economic justification, managers continue to invest time and their companies’ resources in making acquisitions? This remains an extremely important issue that needs further rigorous analysis, given the state of our knowledge about mergers and acquisitions The significant gains to targets in conjunction with the insignificant gains to bidders have led some to suggest that, when gains to targets and bidders are combined, acquisitions are wealth creating From a macroeconomic viewpoint one can argue (as many have done) that acquisitions channel resources from less to more productive sectors of the economy However, this argument presumes that bidders have incentives to be a participant in such transactions We find such incentives for bidders, at least economic incentives, to be minimal In other words, we believe that without an economic rationale for the bidder’s behavior, macroeconomic claims about the economic benefits of mergers and acquisitions suffer from inadequate reasoning In the absence of a compelling economic justification for the continuing high levels of merger activity, we may need to look at other factors to explain acquisition behavior These include the incentive compensation of managers, lack of monitoring by board of directors, or as Caves (1989) has suggested, further examination of why managers apparently continue to make estimation errors in valuing targets Alternatively, as institutional theorists (e.g Scott, 1987) suggest, the acquisition acts of bidders may be modeled as processes of imitation: a manager does what other managers Most of these are behavioral and sociological factors which tend to elude the elegance of economic models However, given that they represent potentially important con- Wealth Creation from Mergers and Acquisitions tenders in any explanation of the continuing high level of merger activity, future research should be directed toward understanding their influence There is, obviously, a need for more satisfactory explanations of why bidders actually undertake acquisitions ACKNOWLEDGEMENTS Extensive research help provided by Chin Chin Soh is gratefully acknowledged The authors also thank two anonymous reviewers and numerous individuals who provided comments on an earlier draft of the paper REFERENCES Alberts, W A and N P Varaiya ‘Assessing the profitability of growth by acquisition’, International Journal of Industrial Organization, 7, 1989, pp 133-149 Asquith, P ‘Merger bids, uncertainty, and stockholder returns’, Journal of Financial Economics, 11, 1983, pp 51-83 Asquith, P and E H Kim ‘The impact of merger bids oh the participating firms’ security holders’, Journal of Finance, 37, 1982, pp 1209-1228 Asquith, P and D W Mullins ‘Equity issues and stock price dilution’, Journal of Financial Economics, 15, 1986, pp 61-89 Asquith, P., R F Bruner and D W Mullins, Jr ‘The gains to bidding firms from mergers’, J o u m l of Financial Economics, 11, 1983, pp 121-139 Assmus, G., J V Farley and D R Lehman ‘How advertising affects sales: Meta-analysis of econometricresults’, Journal of Marketing Research, 21(1), 1984, pp 65-74 Barney, J B ‘Returns to bidding firms in mergers and acquisitions: Reconsidering the relatedness hypothesis’, Strategic Management Journal, 9, 1988, pp 71-78 Bradley, M ‘Interfirm tender offers and the market for corporate control’, Journal of Business, 53, 1980, pp 345-376 Bradley, M., A Desai and E H Kim ‘The rationale behind interfirm tender offers: Information or synergy’, Journal of Financial Economics, 11, 1983, pp 183-206 Bradley, M., A Desai and E H Kim ‘Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms’, Journal of Financial Economics, 21, 1988, pp 3-40 Brown, S J and J B Warner ‘Measuring security price performance’,Journal of Financial Economics, 8, 1980, pp 205-258 81 Brown, S J and J B Warner ‘Using daily stock returns: The case of event studies’, Journal of Financial Economics, 14, 1985, pp 3-31 Bruner, R F ‘The use of excess cash and debt capacity as a motive for merger’, Journal of Financial and Quantitative Analysis, 23, 1988, pp 199-217 Caves, R E ‘Mergers, takeovers, and economic efficiency: Foresight versus hindsight’, International Journal of Industrial Organization, 7, 1989, pp 151-174 Chatterjee, S ‘Types of synergy and economic value: The impact of acquistions on merging and rival firms’, Strategic Management Journal, 7, 1986, pp 119-139 Chung, K C and J F Weston ‘Diversification and mergers in a strategic long-range-planning framework‘ In M Keenan and L J White (eds.), Mergers and Acquisitions, D C Heath, Lexington, MA, 1982, pp 315-347 Datta, D K and V K Narayanan ‘A metaanalytic review of the concentration-performance relationship: Aggregating findings in strategic management’, Journal of Management, 15, 1989, pp 109-123 DeAngelo, H., L DeAngelo and E M Rice ‘Going private: Minority freezeouts and stockholder wealth’, Journal of Law and Economics, 27, 1984, pp 367-402 Dennis, D K and J J McConnell ‘Corporate mergers and security returns’, Journal of Financial Economics, 16, 1986, pp 143-187 Dodd, P ‘Merger proposals, management discretion and stockholder wealth’, Journal of Financial Economics, , 1980, pp 105-137 Dodd, P and R Ruback ‘Tender offers and stockholder returns: An empirical analysis’, Journal of Financial Economics, 5, 197, pp 351-373 Eckbo, E B ‘Horizontal mergers, collusion, and stockholder wealth’, Journal of Financial Economics, 11, 1983, pp 241-273 Eckbo, E B ‘Mergers and the market concentration doctrine: Evidence from the capital market’, Journal of Business, 58, 1985, pp 325-349 Eckbo, E B and P Wier ‘Antimerger policy under the Hart-Scott-Rodino act: A reexamination of the market power hypothesis’, Journal of Law and Economics, 28, 1985, pp 119-149 Eger,C E ‘An empirical test of the redistribution effect in pure exchange mergers’, Journal of Financial and Quantitative Analysis, 18, 1983, pp 547-573 Farley, J U., D R Lehman, and M J Ryan ‘Generalizing from imperfect replications’, Journal of Business, 54, 1981, pp 597410 Franks, J R and R S Harris ‘Shareholder wealth effects of corporate takeovers: The U.K experience 1955-1985’, Journal of Financial Economics, 23, 1989, pp 225-249 Franks, J R., R S Harris, and C Mayer ‘Means of payment in takeovers: Results for the United Kingdom and the United States’ In A.J Auerbach 82 D K Datta, V K Narayanan and G E Pinches decisions and executive stock ownership in acquiring (ed.), Corporate Takeovers: Causes and Consefirms’, Journal of Accounting and Economics, 7, quences, University of Chicago Press, Chicago, IL, 1985, pp 209-231 1988, pp 221-263 Gooding, R Z and J A Wagner 111 ‘A meta- Lubatkin, M ‘Mergers and the performance of the acquiring firm’, Academy of Management Review, analytic review of the relationship between size and 8, 1983, pp 218-225 performance: The productivity and efficiency of the organization and their subunits’, Administrative Lubatkin, M ‘Merger strategies and stockholder value’, Strategic Management Journal, 8, 1987, Science Quarterly, 30, 1985, pp 462-481 pp 39-53 Gupta, A and L Misra ‘Illegal insider trading: Is it rampant before corporate takeovers?’ The Financial Magenheim, E B and D C Mueller ‘Are acquiringfirm shareholders better off after an acquisition?’ Review, 23, 1988, pp 453-464 In J.L Coffee, L Lowenstein and S.R Ackerman Gupta, A and L Misra ‘Public information and pre(eds.), Knights, Raiders, and Targets: The Impact announcement trading in takeover stocks’, Journal of Hostile Takeovers, Oxford University Press, New of Economics and Business, 41, 1989, pp 225-233 York, 1988, pp 171-193 Hap, C ‘Taxattributes as determinants ofshareholder gains in corporate acquisitions’, Journal of Financial Malatesta, P H ‘The wealth effect of merger activity and the objective functions of merging firms’, Economics, 23, 1989, pp 121-153 Journal of Financial Economics, 11, 1983, Higgins, R C and L D Schall ‘Corporate bankruptcy pp 155-181 and conglomerate mergers’, Journal of Finance, 30, Masulis, R W and A W Korwar ‘Seasoned equity 1975, pp 93-113 offerings: An empirical investigation’, Journal of Huang Y and R.A Walking ‘Target abnormal Financial Economics, 15, 1986, pp 91-118 returns associated with acquisition announcements: Payment, acquisition form, and managerial resist- Mergers and Acquisitions ‘1989 profile’ 24(6), 1990, p 57 ance’, Journal of Financial Economics, 19, 1987, Myers, S C and N S Majluf ‘Corporate financing pp 329-349 and investment decisions when firms have inforJarrell, G A, ‘The wealth effects of litigation by mation that investors not have’, Journal of targets: Do interests diverge in a merger?’ Journal Financial Economics, 13, 1984, pp 187-222 of Law and Economics, 28, 1985, pp 151-177 Jarrell, G A and M Bradley ‘The economic effects Porter, M E ‘From competitive advantage to corpoof federal and state regulations of cash tender rate strategy’, Harvard Business Review, 65(3), offers’, Journal of Law and Economics, 23, 1980, 1987, pp 43-59 pp 371-407 Ravenscraft, D J and F M Scherer ‘The profitability of mergers’, International Journal of Industrial Jarrell, G A and A B Poulsen ‘The returns to acquiring firms in tender offers: Evidence from Organization, , 1989, pp 101-116 three decades’, Financial Management, 18, 1989, Ravid, S A ‘On interactions of production and pp 12-19 financial decisions’, Financial Management, 17(3), Jarrell, G A., J A Brickley and J M Netter 1988, pp 87-99 ‘The market for corporate control: The empirical Roll, R ‘The hubris hypothesis of corporate takeovers’, evidence since 1980’, Journal of Economic PerspecJournal of Business, 59, 1986, pp 197-216 tives, 2, 1988 pp 49-68 Ruback, R S ‘The Conoco takeover and stockholder returns’, Sloan Management Review, 24(2), 1982, Jensen, M C and R S Ruback ‘The market for pp 13-33 corporate control: The scientific evidence’, Journal of Financial Economics, 11, 1983, pp 5-50 Ruback, R S ‘Assessing competition in the market for corporate acquisitions’, Journal of Financial Keown, A J and J M Pinkerton ‘Merger announcements and insider trading activity: An empirical Economics, 11, 1983, pp 141-153 investigation’, Journal of Finance, 36, 1981, Ruback, R S ‘Do target shareholders lose in pp 855-869 unsuccessful control contests?’ In A.J Auerbach Krasker, W ‘Stock price movements in response to (ed.), Corporate Takeovers: Causes and Consestock issues under asymmetric information’, Journal quences, University of Chicago Press, Chicago, IL, of Finance, 41, 1986, pp 93-105 1988, pp 137-155 Kummer, D R and J R Hoffmeister ‘Valuation Salter, M.S and W A Weinhold Diversification consequences of cash tender offers’, Journal of through Acquisitions: Strategies for Creating EcoFinance, 33, 1978, pp 505-516 nomic Value, The Free Press, New York, 1979 Kusewitt, J B ‘An exploratory study of strategic Scanlon, K P., J W Trifts and R H Pettway acquisition factors relating to performance’, Strategic ‘Impacts of relative size and industrial relatedness on returns to shareholders of acquiring firms’, Management Journal, 6, 1985, pp 151-169 Leontiades, M Managing the Unmanageable, AddisonJournal of Financial Research, 12, 1989, Wesley, Reading, MA., 1986 pp 103-112 Lewellen, W G ‘A pure financial rationale for the Schipper, K and R Thompson ‘Evidence on the conglomerate merger’, Journal of Finance, 26,1971, capitalized value of merger activity for acquiring pp 521-545 firms’, Journal of Financial Economics, 11, 1983, Lewellen, W., C Loderer and A Rosenfeld ‘Merger pp 85-119 Wealth Creation from Mergers and Acquisitions Scott, W R ‘Adolescence of institutional theory’, Administrative Science Quarterly, 32, 1987, pp 493-511 Shelton, L M ‘Strategic business fits and corporate acquisition: Empirical evidence’, Strategic Management Journal, 9, 1988, pp 279-287 Singh, H and C A Montgomery ‘Corporate acquisition strategies and economic performance’, Strategic Management Journal, , 1987, pp 377-386 Smiley, R H and S D Stewart ‘White knights and takeover bids’, Financial Analysts Journal, 41,1985, pp 19-26 Steiner, P Mergers, University of Michigan Press, Ann Arbor, MI, 1975 Travlos, N G ‘Corporate takeover bids, methods of payment, and bidding firms’ stock returns’, Journal of Finance, 42, 1987, pp 943-963 Varaiya, N P ‘An empirical investigation of the bidding firm’s gains from corporate takeovers’ In A.H Chen (ed.), Research in Finance, 6, JAI Press, Greenwich, CT.,1986, pp 149-178 83 Varaiya, N P and K R Ferris ‘Overpaying in corporate takeovers: The winner’s curse’, Financial Analysts Journal, 43(3), 1987, pp 64-70 Walter, G A and J A Barney ‘Management objectives in mergers and acquisitions’, Strategic Management Journal, 11, 1990, pp 79-86 Wansley, J W., W R Lane and H C Yang ‘Abnormal returns to acquired firms by type of acquisition and method of payment ’, Financial Management, 12, 1983a, pp 1622 Wansley, J W., W R Lane and H C Yang ‘Shareholder returns to USA acquired firms in foreign and domestic acquisitions’, Journal of Business Finance and Accounting, 10, 1983b, pp 647-656 Wansley, J W., W R Lane and H C Yang ‘Gains to bidder firms in cash and securities transactions’, The Financial Review, 22, 1987, pp 403-414 Wier, P ‘The costs of antimerger lawsuits: Evidence from the stock market’, Journal of Financial Economics, 11, 1983, pp 207-224 D K Datta, V K Narayanan and G E Pinches 84 APPENDIX: STUDIES AND NUMBER OF CASES ANALYZED PER STUDY; BY EVENT PERIOD ~ Study Asquith (1983) Asquith & Kim (1982) Asquith, Bruner & Mullins (1983) Bradley (1980) Bradley, Desai & Kim (1983) Bradley, Desai & Kim (1988) Bruner (1988) Chatterjee (1986) Chung & Weston (1982) Dennis & McConnell (1986) Dodd (1980) Dodd & Ruback (1977) Ekkbo (1983) Eckbo (1985) EEkbo & Wier (1985) Eger (1983) Franks & Harris (1989) Franks, Hams & Mayer (1988) Gupta & Misra (1988) Gupta & Misra (1989) Hayn (1989) Huang & Walking (1987) Jarrell (1985) Jarrell & Poulsen (1989) Keown & Pinkerton (1981) Kummer & Hoffmeister (1978) Lewellen, Loderer & Rosenfeld (1985) Magenheim & Mueller (1988) Malatesta (1983) Ruback (1983) Ruback (1988) Scalon, Trifts & Pettway (1989) Singh & Montgomery (1987) Smiley & Stewart (1985) Travlos (1987) Varaiya (1986) Varaiya & Ferris (1987) Wansley, Lane & Yang (1983a) Wansley, Lane & Yang (1983b) Wansley, Lane & Yang (1987) Wier (1983) Bidders Daily Monthly -10, -2 -1, 1, -10, 10 1 2 1 2 1 2 1 Targets Daily -10, -2 -1, 1, -10, 10 1 1 1 1 3 3 2 2 3 3 2 1 1 1 3 2 1 1 3 Monthly 2 21 21 2 2 2 12 11 3 2 12 1 1 1 1 3 2 2 1 1 4 4 3 3 1 40 62 39 44 1 1 32 51 1 31 1 38 37 35 [...]... Bidders don't gain, whether completed or not 2 Bidders lose in multiple bid situations and in stockfinanced transactions 3 Bidders gain in nonconglomerate acquisitions 1 Targets gain 2 Returns have increased over time 3 The gains are more in tender offers than in mergers 4 Targets lose in stock- financed transactions 1 Regulatory changes (1969 and after) 2 Number of bidders 3 Type of transaction (mergers vs... findings that gains to targets were higher in the 1970s and 1980s compared to the 1960s is consistent with the observation of Jarrell et al (1988) In addition to the above, our findings emphasize the importance of the mode of payment (i.e cash vs stock) in mergers and acquisitions Our results indicate that both bidders and targets lose in stock- financed transactions; this is consistent with both financial... Paradoxically, the number of mergers and acquisitions in the U.S.have remained at very high levels, with more than 3,400 acquisitions, valued in excess of $230 billion, having been consummated in 1989 (Mergers and Acquisitions, 1990) A recent study by Walter and Barney (1990) on management objectives in mergers and acquisitions identified such objectives to be primarily economic; however, our findings suggests little... stock- financed transactions By doing so, managers can send positive signals to the capital markets In addition, use of cash helps speed up the transaction, which, in turn, might reduce the cost of making the acquisition Finally, the findings suggest that bidding firms should avoid getting involved in 80 D K Datta, V K Narayanan and G E Pinches acquisitions where multiple bidders are involved-the increased... conglomerate acquisitions In related acquisitions they stand to benefit from economies available through resource sharing and the transferring of distinctive competencies between bidding and target firms Related acquisitions also allow managers to minimize the risks associated with acquiring a business in an industry of which they may have only limited knowledge Moreover, bidders, like targets, should avoid stock- financed... for mergers from the bidding shareholders’ standpoint How can we explain the apparent anomaly that, even in the absence of economic justification, managers continue to invest time and their companies’ resources in making acquisitions? This remains an extremely important issue that needs further rigorous analysis, given the state of our knowledge about mergers and acquisitions The significant gains... ‘Diversification and mergers in a strategic long-range-planning framework‘ In M Keenan and L J White (eds.), Mergers and Acquisitions, D C Heath, Lexington, MA, 1982, pp 315-347 Datta, D K and V K Narayanan ‘A metaanalytic review of the concentration-performance relationship: Aggregating findings in strategic management’, Journal of Management, 15, 1989, pp 109-123 DeAngelo, H., L DeAngelo and E M Rice ‘Going private:... objectives in mergers and acquisitions , Strategic Management Journal, 11, 1990, pp 79-86 Wansley, J W., W R Lane and H C Yang ‘Abnormal returns to acquired firms by type of acquisition and method of payment ’, Financial Management, 12, 1983a, pp 1622 Wansley, J W., W R Lane and H C Yang ‘Shareholder returns to USA acquired firms in foreign and domestic acquisitions , Journal of Business Finance and Accounting,... uncertainty, and stockholder returns , Journal of Financial Economics, 11, 1983, pp 51-83 Asquith, P and E H Kim ‘The impact of merger bids oh the participating firms’ security holders’, Journal of Finance, 37, 1982, pp 1209-1228 Asquith, P and D W Mullins ‘Equity issues and stock price dilution’, Journal of Financial Economics, 15, 1986, pp 61-89 Asquith, P., R F Bruner and D W Mullins, Jr ‘The gains... bidder’s gains Third, although Jarrell el al (1988) reported declining returns to bidders in the 1970s and 1980s (relative to the 1960s), we found that the decline over time is not statistically significant Fourth, while Jensen and Ruback (1983) found that bidders gain in completed mergers and lose in not completed transactions, our results suggest the distinction between completed and not completed mergers