This bachelor thesis sets out to investigate whether the observed past and present effects of M&A deal announcements on target and acquirer cumulative abnormal returns (CARs) to shareholders, also occur on an industry-specific level in the U.S. Technology, Media & Telecommunications (TMT) industry, and over time by reviewing three distinct time frames between 2000 and the end of 2019. This thesis emphasizes “mega-deals”, which are M&A transactions with values greater than or equal to USD 500m.
The recentness of the data and the emphasis on deal-value and industry-specific M&A deals make these findings unique. The event study method is applied to examine the concrete effects that an event, an M&A deal announcement, exerts on acquiring and target firm stock returns. Hereby, the difference between the actual stock returns–which occur due to the event–and the expected stock returns is analyzed and subsequently tested for significance. The main and null hypothesis of this thesis is that M&A deal announcements have no effect on the average of the stock returns of acquiring and target firms.
A frequently studied area and old research question of corporate finance, ever since its initial inception in the 1960s, is the effect of mergers and acquisitions (M&As) on the wealth of shareholders of the acquiring and target companies. As recently as the early 2010s, a near-universal consensus amongst research and business press has existed, that M&As tend to generate little to no shareholder value for acquiring firms, while target shareholders incur significant returns. These findings draw on the theory of market efficiency and rational expectations to assume that such changes to the stock prices, abnormal returns (ARs), reflect the discounted value of expected future profits, i.e. cash-flows and rapidly price-in new publicly disclosed information, such as a merger announcement.
Since 2012, however, a novel strand of research has emerged which has observed these previously low ARs for acquiring shareholders becoming on average significantly positive for the first time in history on a global scale following the Great Financial Crisis (GFC). This is attributable to an ensuing overall improvement to corporate governance frameworks and M&A dealmaking. Markedly, this trend was later found to start reversing back to previous pre-GFC levels.
Table of Contents
List of Figures
List of Figures in Appendices
List of Tables
List of Tables in Appendices
List of Appendices
List of Abbreviations
1 Introduction
2 Literature Review
3 Data & Methodologies
3.1 Data
3.2 Methodology
3.2.1 General Setup
3.2.2 Estimation of Expected Returns
3.2.3 Estimation of Abnormal Returns
3.2.4 Testing of Hypotheses
4 Empirical Results
5 Discussion and Interpretation
5.1 Setup
5.2 Acquiring Shareholders
5.3 Target Shareholders
6 Conclusion
Appendix VI
References XXVIII
Abbildung in dieser Leseprobe nicht enthalten
List of Abbreviations
AR(s) Abnormal Return(s)
CAR(s) Cumulative Abnormal Return(s)
GFC Great Financial Crisis
SAR(s) Standardized Abnormal Return(s)
SCAR(s) Standardized Cumulative Abnormal Return(s)
TMT Technology, Media & Telecommunications
M&A(s) Merger(s) and Acquisition(s)
1
1 Introduction
A frequently studied area and old research question of corporate finance, ever since its initial inception in the 1960s, is the effect of mergers and acquisitions (M&As) on the wealth of shareholders of the acquiring and target companies. As recently as the early 2010s, a near-universal consensus amongst research and business press has existed, that M&As tend to generate little to no shareholder value for acquiring firms, while target shareholders incur significant returns. These findings draw on the theory of market efficiency and rational expectations to assume that such changes to the stock prices, abnormal returns (ARs), reflect the discounted value of expected future profits, i.e. cash-flows and rapidly price-in new publicly disclosed information, such as a merger announcement. Since 2012, however, a novel strand of research has emerged which has observed these previously low ARs for acquiring shareholders becoming on average significantly positive for the first time in history on a global scale following the Great Financial Crisis (GFC). This is attributable to an ensuing overall improvement to corporate governance frameworks and M&A dealmaking. Markedly, this trend was later found to start reversing back to previous pre-GFC levels.
This bachelor thesis sets out to investigate whether the observed past and present effects of M&A deal announcements on target and acquirer cumulative abnormal returns (CARs) to shareholders, also occur on an industry-specific level in the U.S. Technology, Media & Telecommunications (TMT) industry, and over time by reviewing three distinct time frames between 2000 and the end of 2019. This thesis emphasizes “mega-deals”, which are M&A transactions with values greater than or equal to USD 500m. The recentness of the data and the emphasis on deal-value and industry-specific M&A deals make these findings unique. The event study method is applied to examine the concrete effects that an event, an M&A deal announcement, exerts on acquiring and target firm stock returns. Hereby, the difference between the actual stock returns–which occur due to the event–and the expected stock returns is analyzed and subsequently tested for significance. The main and null hypothesis of this thesis is that M&A deal announcements have no effect on the average of the stock returns of acquiring and target firms.
The thesis is organized as follows. Section 2 reviews the findings of past and contemporary corporate finance literature on the effects of M&A deal announcements on shareholder CARs and identifies any novel trends. Section 3 describes the selection and composition of the sample data, reviews the applied methodology in conducting an event study, and lastly conducts the testing of hypotheses. Section 4 presents the results for acquiring firm and target firm shareholders over three distinct time periods and also includes a brief robustness test. Section 5 interprets and discusses the results. Lastly, Section 6 concludes the thesis.
2 Literature Review
The effect of M&As on the stock returns of the bidding and target companies is an old and widely covered research area. One of the first scientific works to review this topic was from Manne (1965), who scrutinizes the adequacy of anti-trust laws of the United States (U.S.), which, at that time, forbade most horizontal mergers between competing firms due to the premise that such mergers weaken competition in the pursuit of a greater market share. In response, Manne (1965) reviews three different techniques of gaining control over other firms and concludes that mergers present the most efficient takeover method–a preferable alternative to a complete merger prohibition and a potential increase in bankruptcies. Manne (1965) further posits two novel theories on the effects of merger announcements on the prices of shares. If the motivation behind a merger is the acquisition of control, a premium will be paid and the share price of the acquirer should decrease, while the target share price should increase (cf. Manne, 1965, p.120.). In contrast, if the merger aims to gain market power or economies of scale, the stock prices of acquirer and target should increase. However, due to a lack of data at the time, Manne (1965) was not able to provide concrete empirical evidence for his theory.
Dodd/Ruback (1977) review the effect of tender offers, a form of acquisition, on the returns of acquiring and target shareholders. Distinguishing between successful and unsuccessful tender offers, they test four hypotheses, three of which–contingent on a successful offer–should empirically imply positive ARs for the acquirer and/or target, while the last–also contingent on a successful offer–implies no impact on returns. In the case of an unsuccessful offer, all hypotheses imply negative returns. Using a market model (cf. Fama, 1976, p.100.) to calculate ARs following tender offers, Dodd/Ruback (1977) find that target shareholders incur large and positive ARs, regardless of the success of the offer. Acquiring shareholders, contrarily, incur small positive ARs if the offer was successful and no returns if the offer was unsuccessful.
Jensen/Ruback (1983) review the majority of past literature and research on forms of corporate takeovers and analyze the different effects on shareholder returns. Differentiating between the effects of tender offers and mergers on share prices, their findings suggest that target shareholders incur positive ARs around the announcement date of tender offers, regardless if the bid has been successful. In the case of successful and unsuccessful mergers, target shareholders experience positive and negative returns, respectively, around the announcement date. Acquirer returns, contrarily, yield inconclusive results, pointing towards generally positive ARs and zero gains, respectively, around the announcement date of successful tender offers and mergers. Negative ARs are incurred by the acquirer shareholders if the tender offer or merger fails.
In consideration of the widespread, generally consistent findings of prior research, Bradley et al. (1987) investigate the synergistic effects of such acquisitions. They find an average combined synergistic gain of c. 7.4% between target and acquirer shareholders, with target shareholders incurring the greatest gain of c. 32% average ARs. In contrast, acquiring firms incur c. 0.97% average ARs, with c. 91% and c. 47% being positive observations, respectively (cf. Bradley et al., 1987, p.10-13.). By further factoring in the competition between bidding firms for a target, the return of target shareholders increases at the expense of acquirer shareholders in multi-bidder scenarios, despite the creation of additional synergistic gains through the transaction alone. In total, the return to acquiring shareholders is almost indifferent to zero.
Moeller et al. (2005) investigate ARs for acquiring shareholders from 1998 to 2001 and compare their findings to the merger wave of the 1980s. They observe positive aggregate acquirer ARs until 1997, after which negative returns between 1998 and 2001 completely eliminate previous shareholder profits. The majority of these losses are caused by only c. 2% of the merger announcements which, when removed from the observations, leads to an overall increase in shareholder gains.
Similarly, according to Cools et al. (2007), while the combined shareholder gain of bidding and target firms between 1992-2006 has been positive at c. 1.8%, with c. 56% of transactions generating positive CARs, bidding shareholders encounter a net loss of c. 1.2% globally, with c. 58.3% of transactions eliminating value. Additionally, the net loss has been at 2.2% in the U.S. with 62% of M&A deals leading to value destruction (cf. Cools et al., 2007, p.14-15.). The latter observation is most prominent amongst mega-deals–in this case defined as deals of at least USD 1bn–which have historically destroyed nearly double the value compared to smaller transactions (cf. Cools et al., 2007, p.19.).
To summarize, the past research and literature reviewed until now generally observes two empirical findings of global and market-wide M&As between listed firms. Firstly, a shareholder value-destroying effect on acquiring firms, expressed generally as small CARs (both negative and positive depending on the research) to the value of the stock, is observed. Secondly, target firms are found to incur positive CARs to their stock value in the majority of cases. This consistent empirical evidence and the effect of M&As on stock returns were widely accepted in research and practice until recently, when a novel finding in corporate finance research emerged, which introduced the observation that previously negative CARs of bidding firms in M&As have, for the first time, on average become positive around the M&A announcement date, i.e. not shareholder value-destroying for bidders after the GFC, starting in c. 2012 (cf. Kengelbach et al., 2019, p.11.).
The first research to make these novel empirical observations is by Alexandridis et al. (2017), who have observed an average positive CAR of 1.05% for U.S. bidding firms around the deal announcement date in 54% of public deals. In total, they discovered a three-fold increase in synergistic benefits, compared to the previous 20 years expressed through average bidder and target CARs at 4.51% or USD 309m and USD 542m for mega-deals between 2010 to 2015, an increase of USD 618.3m (cf. Alexandridis et al., 2017, p.12-13.). This effect has been most pronounced in public mega-deals, defined as deals of at least USD 500m, at 2.54% bidder CAR (cf. Alexandridis et al., 2017, p.13.), as well as in private mega-deals, suggesting a general positive correlation of bidder CARs to larger deal size. By performing a cross-sectional regression, the authors confirm this correlation by observing that the majority of increases in returns post-GFC can be attributed to mega-deals (cf. Alexandridis et al., 2017, p.16.). This positive development of CARs for bidding companies is attributed by Alexandridis et al. (2017) to the implementation of regulatory reforms such as the “Dodd-Frank Wall Street Reform and Consumer Protection Act”1, and the voluntary market-wide adoption of reformed internal corporate governance and business practices by listed firms. These reforms, which include better incentive structures, diversity requirements, and greater shareholder influence, may have ultimately led to better investment decisions and an improvement in M&A deal quality (cf. Alexandridis et al., 2017, p.18-19.). Kengelbach et al. (2019) have made a similar observation, identifying that CARs of bidders and targets have become, on average, positive for the first time from 2012 through 2017 (cf. Kengelbach et al., 2019, p.11.).
However, as recently as 2019, evidence has emerged observing a decrease in CARs for bidders, starting in the mid-2010s. This is observed by Hu et al. (2020) who, while agreeing with the novel discovery of Alexandridis et al. (2017), also find that the positive CARs for bidders have started to decrease after 2015 (cf. Hu et al., 2020, p.8.). Dessaint et al. (2020) who researched the changes of announcement CARs for bidding firms over time, by reviewing the composition of acquiring firms, also find that the increase in acquirer CARs has occurred, but to a great extent reversed by the end of 2017 (cf. Dessaint et al., 2020, p.10.). This reversal was also identified to have decreased to an average of -0.4% by 2018 which is, however, still above the 1990 average of -1.1% (cf. Kengelbach et al., 2019, p.11.). They attribute this overall decline in bidder CARs to a decrease in investor confidence concerning the ability of bidders to materialize promised synergy effects through M&As, consistent with previous observations by Kengelbach et al. (2018).
To summarize the past research, three time trends of the effect of M&A deal announcements on stock returns can be identified. Before the early 2010s, most research has found that acquiring shareholder CARs, around deal announcement dates, were small and, varying from research, both negative and positive, while target shareholders generally incurred large and positive CARs. Post-GFC, novel research emerged which found that CARs for acquirers have become, on average, significant and positive for the first time. Most recently, these positive CARs for acquiring firms have started to converge back to negative pre-GFC levels, starting in 2015.
3 Data & Methodologies
3.1 Data
This thesis and the used M&A deal samples draw on daily stock return and merger announcement date data obtained from the Thomson Refinitiv Eikon (2021) database. A special emphasis on M&A transactions with the following criteria is made:
1. Publicly listed target and acquirer
2. Acquiring and target firms are based in the U.S.
3. Mega-deals2 with deal sizes of at least USD 500m
4. Technology, Media & Telecommunications (TMT) sector
5. Successfully completed M&A deals
6. Announcement dates between 1st January 2000 and 31st December 2019, divided into three time frames: (i) pre-GFC (2000-2009), (ii) post-GFC (2010-2015) and (iii) post-post-GFC (2010-2019)
The first criterion limits the sample to M&As of publicly listed acquirer and target firms, as this is a prerequisite for the availability of the daily stock return data required to perform an event study.
Concerning the second criterion, the thesis exclusively analyzes transactions where the acquirer and target firms are located in the U.S., as the Americas account for the largest proportion of M&A value by country at 46.5% of global value between 1997 to 2006 (cf. Cools et al., 2007, p.10.) and the U.S. currently accounts for the most M&A deal value per country at 41.52% between 2010 to 2019, according to White & Case LLP (2021). Additionally, past, and contemporary M&A research, including the formerly cited, frequently analyzed samples of exclusively U.S.-based or global acquirers. This criterion will, therefore, also allow for a potentially better qualitative comparability with past literature and research in terms of previous CAR observations, considering these also use samples of M&As of U.S. listed companies. This should allow for a degree of time-consistency across regulatory and governance frameworks in the timeframes this thesis analyzes, following the implementation of reform legislation, such as the Dodd-Frank Act, and potential changes to the composition of indexes and underlying companies.
[...]
1 Dodd-Frank Wall Street Reform and Consumer Protection Act is a U.S. federal law which was implemented on July 21, 2010.
2 The classification of a mega-deal is not strictly defined. The mega-deal size of USD 500m in this thesis is based on the mega-deal size classification by Alexandridis et al., (2017). Other referenced research in this thesis may define mega-deals differently (e.g. greater or equal to USD 1bn).
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