Meger & Acquisition: Most Powerful Growth Strategy

Introduction

Mergers and acquisition (M&A) continue to be the most powerful growth strategy for companies worldwide and always one of the most researched topics in the field of business & finance.

According to Moeller, Schlingemann & Schultz (2004), in between 1980 to 2001 approximately $3.4 trillion was spent on acquisitions, which make it an interesting topic to research on. (Need to elaborate – add some thing more over here)

A large amount of study reveals that there are tremendous amount of gains to the shareholders of target firms and that combined returns for bidder and target are positive. Key areas of the empirical studies were around announcement dates and its effect on the stock prices, discussions around gains or losses on private or public firm acquisition even though minimal information is available on the effects of takeovers on the share prices of acquiring firms; some studies have also been conducted looking at the long – run performance of acquiring firms after mergers. Recent studies (Put some Recent Reference) provide inconclusive results in the valuation effects of acquisition on the bidding firm’s common stock. Empirical study has consistently shown that bidding firm’s pay large premiums for target firms and a substantial wealth gains at the time of takeovers are announced. Again there exist a mixed feelings around negative and positive gains, Dodd (1980) on his study around merger proposals on the expected profitability of the bidding firm found that shareholders of the bidding firms experienced insignificant losses where Asquith  (1983), Mandelker (1974) found insignificant gains to stockholders of bidding firms.

Detail research identified that on the announcement of an acquisition, on average zero abnormal return observed on the shareholders of the acquiring firms. Bradley, Desai and Kim (1988) found there is consistent statistically significant fall on announcement returns to bidders from 4%, 1.3% and -3% consecutively in the year 1960, 1970 and 1980. There exist a definite variation in returns that rarely explained by the researchers.

Limited research has been carried out to identify the factors effecting negative impact on the stock prices on the eve of the acquisition announcement. Roll (1986) identified that overconfidence from the managers of the bidding firm affects the bidding price due to the overvaluation of the target firm. Exhaustive study found that mixed payment method has been used in different acquisition such as Travlos (1987) realised that firms having poor returns usually pay with equity and Myers and Maljuf (1984) figured out that firms that issue equity signal that market overvalues their assets.

The main motive of this paper is to focus at the short-term bidder returns and the factors that influence the short term stock prices of bidding firm. In this review I have measured the factors, which influence the short run price variation of the shares for the bidding firms by considering following key points:

Research Question Missing ?

• Mode of Payment
• Approach used by bidding firms (merger or tender offer)
• Target Status (Public or private)
•  Strategic relatedness of the bidder and target firms
• Overpayment by bidding firms.

If you can add size effect on bidder return?

Mode of Payment:

Mode of payment is a key factor that decisively affects the short term bidder returns. Mitchell, Pulvino and Stafford (2004) realized that when a payment method is stock, the bidding firms generally inclined to overpay.  They gone a bit further by quoting “ On average, the abnormal stock Price reaction to a merger announcement is -1.2% for the full sample of acquirers over the 1994-2000 period. When stock is used as the merger consideration, the stock price reaction is -2.65%. From the perspective of the acquiring firms shareholders, these mergers represent value – destroying decisions by management”*. Non-positive bidder returns were also observed by Eger (1983) in her research on pure exchange mergers. The paper inclined that statistically there exist a huge amount of decline in bidding firms stock prices and which on average by about 4% from 5 days prior to the announcement to 10 days after. Egar concluded accepting the fact that the difference between her findings and Asquith et al (1983) might be due to the difference between mergers involving cash and stock transactions.