Robert F. Bruner - Applied Mergers and Acquisitions

A final comment: Statistical significance is not the same as economic materiality. To say that M&A transactions create or destroy value on average, one needs not only the proof of significance (i.e., that the result is not due to chance) but also materiality , that the wealth effect is something that shareholders or society should worry about. Many of the significant abnormal returns reported in event studies are as low as 1 or 2 percent—one might ask whether this is enough to care about. The answer is emphatically “yes.” Usually these returns occur over a few days. Abnormal returns of this magnitude in a short period of time are enough to cause concern or elation among institutions or other sophisticated investors whose performance in turn can be greatly affected by these kinds of events. One also needs to compare apples to apples: the M&A event returns must be annualized to compare them to other rates of return that investors experience. For instance, a 1 percent abnormal positive return to announcements by buyers that occurs over a week should be annualized by compounding one percent across 52 weeks to yield a 68 percent annualized gain. 6 This is merely theoretical: Reinvestment risk will frustrate attempts to invest in a way that reliably yields a 68 percent abnormal return each year. But in order to make fair comparisons of the materiality of M&A activity with other investing activity by corporations and institutions, it is necessary to adjust for differences in time frame.

EXHIBIT 3.2 Comparison of Research Approaches Regarding the Profitability of M&A

Source: Author’s analysis.

Event studies yield insights about market-based returns to target firm shareholders, buyers, and a combination of both.

Target firm shareholders enjoy returns that are significantly and materially positive. Exhibit 3.3summarizes the findings of 25 studies, which reveal returns that are material and significant, despite variations in time period, type of deal (merger vs. tender offer), and observation period. In short, the M&A transaction delivers a premium return to target firm shareholders.

The pattern of findings about market-based returns to buyer firms’ shareholders is more problematical.

There are 22 studies that report negative returns with 14 of the 22 significantly negative (see Exhibit 3.4). The significantly negative returns vary between 1 and 4 percent.

There are 32 studies (see Exhibit 3.5) that report positive returns—23 of these report significantly positive returns.

The studies of returns to buyer firm shareholders around the time of announcement are distributed with a slight positive bias: 26 percent (14) show value destruction (significantly negative returns); 31 percent (17) show value conservation (insignificantly different from zero): and 43 percent (23) show value creation (positively significant returns). EXHIBIT 3.3 Summary of Shareholder Return Studies for M&A: Returns to the Target Firm ShareholdersStudyCumulative Abnormal Returns (% or avg$/acq)Sample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesLangetieg (1978)+10.63% *1491929–1969(–120,0)71.6%Mergers; uses effective date as event date.Bradley, Desai, Kim (1988)+31.77% *2361963–1984(–5,5)95%Tender offers only; subperiod data available for 7/63–6/68, 7/68–12/80, 1/81–12/84; acquirer returns have increased from +19% to +35% over time.Dennis, McConnell (1986)+8.56% *761962–1980(–1,0)70%Jarrell, Poulsen (1989)+28.99% *5261963–1986(–20,10)N/ATender offers only.Lang, Stulz, Walkling (1989)+40.3% *871968–1986(–5,5)N/ATender offers only.Franks, Harris, Titman (1991)+28.04% *3991975–1984(–5,5)N/AMergers and tenders offers; segment data available on means of payment and competition.Servaes (1991)+23.64% *7041972–1987(–1,close)N/AMergers and tender offers; segment data by payment method.Bannerjee, Owers (1992)+$137.1 MM *331978–1987(–1,0)85%White knight bids.Healy, Palepu, Ruback (1992)+45.6% *501979–1984(–5,5)N/ALargest U.S. mergers during period.Kaplan, Weisbach (1992)+26.9% *2091971–1982(–5,5)94.7%Mergers and tender offers.Berkovitch, Narayanan (1993)+$130.1 MM *3301963–1988(–5,5)95.8%Tender offers.Smith, Kim (1994)+30.19% *+15.84% *1771980–1986(–5,5) (–1,0)96.0% 91.3%Successful and unsuccessful tender offers.Schwert (1996)+26.3% *6661975–1991(–42,126)N/AMergers, tenders offers; segment data available for various transaction attributes.Loughran, Vijh (1997)+29.6% *merger +126.9% *tender +47.9 *combined419 1351970–1989(–2,1,250)N/AFive-year postacquisition returns; segment data also available on form of payment.Maquieira, Megginson and Nail (1998)+41.65% *conglomerate +38.08% *nonconglomerate47 551963–1996(–60,60)61.8% 83.0%Study of returns for conglomerate and nonconglomerate stock-for-stock mergers.Eckbo, Thorburn (2000)+7.45% *3321964–1983–40,0)N/ACanadian targets only.Leeth, Borg (2000)+13.27% *721919–1930–40,0)N/AMulherin, Boone (2000)+21.2% *3761990–1999(–1,+1)N/AMulherin (2000) DeLong (2001)+10.14% *+16.61% *202 2801962–1997 1988–1995(–1,0) (–10,1)76% 88.6%A sample of incomplete acquisitions. Studied deals where at least one party is a bank.Houston et al. (2001)+15.58% *(1985–90) +24.60% *(1991–96) +20.80% *(all)27 37 641985–1996(–4,1)N/ADeals in which both parties are banks.Beitel et al. (2002)+10.48% *981985–2000(–1,0)53%Sample of European bank mergers.Kuipers, Miller, Patel (2003)+23.07% *1811982–1991(–1,0)N/AU.S. targets of foreign acquirers.Renneboog, Goergen (2003)+9.01% *1361993–2000(–1,0)N/AEuropean transactions.Billett, King, Mauer (2003)+22.15% *2651979–1997(–1,0 month)N/AUnless otherwise noted, event date is announcement date of merger/bid. *Significant at the 0.95 confidence level or better. EXHIBIT 3.4 Studies Reporting Negative Returns to AcquirersStudyCumulative Abnormal ReturnsSample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesLangetieg (1978)–1.61%1491929–1969(–120,0)47.6%Mergers; uses effective date as event date.Dodd (1980)–1.09% *601970–1977(–1,0)N/AMergers only. Daily data.successful–1.24% *unsuccessful66Asquith, Bruner, Mullins (1987)–0.85% *3431973–1983(–1,0)41%Varaiya, Ferris (1987)–2.15% *–3.9% *96 961974–1983 1974–1983(–1,0) (–20,80)N/A 42%Morck, Shleifer, Vishny (1990)–0.70%3261975–1987(–1,1)41.4%Measured return by comparing change in bidder market value to market value of target’s equity.Franks, Harris, Titman (1991)–1.45%3991975–1984(–5,5)N/AMergers and tenders offers; segment data available on means of payment and competition.Servaes (1991)–1.07% *3841972–1987(–1,close)N/AMergers and tender offers; segment data by payment method.Jennings, Mazzeo (1991)–0.8% *3521979–1985(–1,0)37%Bannerjee, Owers (1992)–3.3% *571978–1987(–1,0)21%White knight bids.Byrd, Hickman (1992)–1.2% * *1281980–1987(–1,0)33%Healy, Palepu, Ruback (1992)–2.2%501979–1984(–5,5)N/A50 largest U.S. mergers during period.Kaplan, Weisbach (1992)–1.49% *2711971–1982(–5,5)38%Mergers and tender offers.Berkovitch, Narayanan (1993)–$10 MM3301963–1988(–5,5)49.4%Tender offers.Sirower (1994)–2.3% *1681979–1990(–1,1)35%Eckbo, Thorburn (2000)–0.30%3901964–1983(–40,0)N/AU.S. acquirers of Canadian targets.Mulherin, Boone (2000)–0.37%2811990–1999(–1,+1)N/AMitchell, Stafford (2000)–0.14% * †–0.07%366 3661961–1993(–1,0)N/AFama and French three–factor model, applied to monthly returns.Walker (2000)–0.84% * ‡–0.77%278 2781980–1996(–2,+2)41.4% 46.4%DeLong (2001)–1.68% *280(1988–1995)(–10,1)33.6%Deals in which at least one party is a bank.Houston et al. (2001)–4.64% *(1985–1990)27(1985–1996)(–4,1)N/ADeals in which both parties are banks.–2.61% (1991–1996)37–3.47% *(all)64Ghosh (2002)–0.96%1,190(1985–1999)(–5,0)N/AKuipers, Miller, Patel (2003)–0.92% *138(1982–1991)(–1,0)N/AForeign acquirers of U.S. targets.Unless otherwise noted, event date is announcement date of merger/bid. *Significant at the 0.95 confidence level or better. †Top return is based on an equal-weighted benchmark portfolio. Bottom return is based on a value-weighted benchmark portfolio. ‡Top return is a return adjusted for market average returns. Bottom return is adjusted for return on a matched firm. EXHIBIT 3.5 Studies Reporting Positive Returns to AcquirersStudyCumulative Abnormal ReturnsSample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesDodd, Ruback (1977)+2.83% *successful1241958–1978(0,0)N/ATender offers only. Monthly data.+0.58% unsuccessful48Kummer, Hoffmeister (1978)+5.20% *successful171956–1970(0,0)N/ATender offers only. Monthly data.Bradley (1980)+4.36% *successful881962–1977(–20,+20)N/ATender offers only. Daily data.–2.96% unsuccessful46Jarrell, Bradley (1980)+6.66% *881962–1977(–40,+20)N/ATender offers only. Daily data.Bradley, Desai, Kim (1982)+2.35 *successful1611962–1980(–10,+10)N/ATender offers only. Daily data.Asquith (1983)+0.20% successful1961962–1976(–1,0)N/AMergers only. Daily data.+0.50% unsuccessful89Asquith, Bruner, Mullins (1983)+3.48% *successful1701963–1979(–20,+1)N/AMergers only. Daily data.+0.70% unsuccessful41Eckbo (1983)+0.07% successful1021963–1978(–1,0)N/AMergers only. Daily data.+1.20% *unsuccessful57Malatesta (1983)+0.90% successful2561969–1974(0,0)N/AMergers only. Monthly data.Wier (1983)+3.99% unsuccessful161962–1979(–10, cancellation date)N/AUnsuccessful mergers only. Daily data.Dennis, McConnell (1986)–0.12% (–1,0)901962–1980(–1,0)52%+3.24% (–6,+6) *Jarrell, Brickley, Netter (1987)+1.14% *4401962–1985(–10,5)N/ATender offers only; subperiod data available for 1962–69, 70–79, 80–85; acquirer returns have decreased from +4% to –l%Sicherman, Pettway (1987)+4.026% *related +0.047% unrelated49 981983–1985(–10,+10)N/ACompared returns to buyers of divested assets in related and unrelated industries.Bradley, Desai, Kim (1988)+ 1% *2361963–1984(–5,5)47%Tender offers only; subperiod data available for 7/63–6/68, 7/68–12/80, 1/81–12/84; acquirer returns have decreased from +4% to –3% over time.Jarrell, Poulsen (1989)+0.92% *4611963–1986(–5,5)N/ATender offers only.Lang, Stulz, Walkling (1989)0%871968–1986(–5,5)N/ATender offers only.Loderer, Martin (1990)+1.72% *1966–1968 +0.57% *1968–1980970 3,4011966–1984(–5,0)N/AMergers and tenders offers; segment data available on size of acquisition.–0.07% 1981–1984801Smith, Kim (1994)+0.50% –0.23%1771980–1986(–5,5) (–1,0)49.2% 76.2%Successful and unsuccessful tender offers.Schwert (1996)+1.4%6661975–1991(–42,126)N/AMergers, tenders offers; segment data available for various transaction attributes.Maquieira et al. (1998)+6.14% *nonconglomerate deals551963–1996(–60,60)61.8% 36.2%Study of returns in conglomerate and nonconglomerate stock-for-stock deals.–4.79% conglomerate47Lyroudi, Lazardis, Subeniotis (1999)0%501989–1991(–5,5)N/AInternational acquisitions by European and Japanese firms.Eckbo, Thorburn (2000)+1.71% *1,2611964–1983(–40,0)N/ACanadian acquirers of Canadian targets.Leeth, Borg (2000)+3.12% *4661919–1930(–40,0)N/AKohers, Kohers (2000)1.37% *cash deals 1.09% *stock961 6731987–1996(0,1)N/ASample of mergers among high-tech firms.1.26% whole sample1,634Mulherin (2000)+0.85% *1611962–1997(–1,0)49%Sample of incomplete acquisitions.Floreani, Rigamonti (2001)+2.63% *561996–2000(–5,+5)N/ASample of European insurance company mergers.Kohers, Kohers (2001)+0.92% *3041984–1995(–1,0)N/ASample of technology mergers.Beitel et al. (2002)+0.06%981985–2000(–1,0)53%Sample of European bank mergers.Fuller, Netter, Stegemoller (2002)+1.77% *all +2.74% *1st time bidders3,1351990–2000(–2, +2)N/ABillett, King, Mauer (2003)+0.15%8311979–1997(–1,0 month)N/AMoeller, Schlingemann, Stulz (2003)+ 1.13% *all +1.496% *private –1.020% *public12,0231980–2001(0,36 months)N/ATested the difference in bidder’s returns at acquiring private company, public company, or subsidiary of public company.+2.003% *subsidiaryRenneboog, Goergen (2003)+0.70% *1421993–2000(–1,0)N/AEuropean transactions.Unless otherwise noted, event date is announcement date of merger/bid. *Significant at the 0.95 confidence level or better.