1

Do Wealth Creating Mergers and Acquisitions Really Hurt Acquirer Shareholders?*

Ron Masulis†, Peter L. Swan

‡ and Brett Tobiansky

§,

School of Banking and Finance, Australian School of Business, UNSW

Draft: June 16, 2011

ABSTRACT

We examine the expected economic benefits of mergers and acquisitions. We conclude that

both signaling and revelation biases are responsible for the commonly reported finding that

on average takeovers are harmful to acquirer shareholder wealth. After accounting for these

two biases that lead to a price fall on announcement of 18.9% ($563.9 million), we

demonstrate that acquirers generally benefit from takeovers with an average 81% share of the

economic gains from the transaction. By studying bids that fail for exogenous reasons, which

are largely free of signaling and revelation biases, we confirm the neoclassical view that

takeovers are positive NPV projects for a typical acquirer, which produce a sizeable return on

capital of 21% to the acquirer ($626.6 million) and 21.2% ($772.2 million) to the combined

acquirer-target. This conclusion is based on two important findings. First, on a failed

acquisition announcement, the combined acquirer and target value on average falls, where

both target and acquirer suffer significant negative abnormal returns. Second, acquirers share

in a significant portion of the economic benefits of a successful acquisition, reflected in a

significantly positive relationship between acquirer and target stock returns utilizing a 60-day

initial bid announcement window and a 100-day period following the termination

announcement. Over the same window, exogenously failed cash bidders significantly

underperform successful cash bidders by 10.7% and exogenously failed stock bidders

significantly underperform successful stock bidders by a further 15.5% making a total

differential of 26.2%. Moreover, in the long term, stock-funded targets typically only receive

half the premium of cash targets.

Key Words: M&A, takeover bids, acquisition benefits, acquirer gains, acquisition synergies,

failed bids.

JEL Codes: G34, G14

*

We thank Ken Ahern and Emir Hrnjic for constructive comments. Also, participants at Financial

Intermediation Research Society (FIRS) Conference, Sydney 2011. Eugene Chua, Nick Orlic, and Ewe Helmes

provided assistance earlier on. † Email: r.masulis@unsw.edu.au.

‡ Contact author. Department of Banking and Finance, ASB, UNSW Sydney NSW 2052 Australia. Tel: +61 (0)

2 9385 5871. Email: peter.swan@unsw.edu.au. § Email: brett@unsw.edu.au.

2

Do Wealth Creating Mergers and Acquisitions Really Hurt Acquirer Shareholders?

Draft: June 16, 2011

ABSTRACT

We examine the expected economic benefits of mergers and acquisitions. We conclude that

both signaling and revelation biases are responsible for the commonly reported finding that

on average takeovers are harmful to acquirer shareholder wealth. After accounting for these

two biases that lead to a price fall on announcement of 18.9% ($563.9 million), we

demonstrate that acquirers generally benefit from takeovers with an average 81% share of the

economic gains from the transaction. By studying bids that fail for exogenous reasons, which

are largely free of signaling and revelation biases, we confirm the neoclassical view that

takeovers are positive NPV projects for a typical acquirer, which produce a sizeable return on

capital of 21% to the acquirer ($626.6 million) and 21.2% ($772.2 million) to the combined

acquirer-target. This conclusion is based on two important findings. First, on a failed

acquisition announcement, the combined acquirer and target value on average falls, where

both target and acquirer suffer significant negative abnormal returns. Second, acquirers share

in a significant portion of the economic benefits of a successful acquisition, reflected in a

significantly positive relationship between acquirer and target stock returns utilizing a 60-day

initial bid announcement window and a 100-day period following the termination

announcement. Over the same window, exogenously failed cash bidders significantly

underperform successful cash bidders by 10.7% and exogenously failed stock bidders

significantly underperform successful stock bidders by a further 15.5% making a total

differential of 26.2%. Moreover, in the long term, stock-funded targets typically only receive

half the premium of cash targets.

Key Words: M&A, takeover bids, acquisition benefits, acquirer gains, acquisition synergies,

failed bids.

JEL Codes: G34, G14

3

1. INTRODUCTION

Many studies document that acquirers systematically destroy shareholder wealth in

mergers and acquisitions (M&As), while targets benefit at their expense.5 Moeller,

Schlingemann, and Stulz (2005) find that shareholders of acquiring firms over the 1998-2001

period lose 12 cents per dollar on takeover announcement and an incredible $240 billion in

dollar terms. In their survey, Betton, Eckbo, and Thorburn (2008) find a significantly

negative abnormal return of -2.21 percent for large stock bidders of public targets, which

shrinks to -0.3 percent for large cash bidders of public targets. Small stock bidders

approximately break-even, while small cash bidders gain 3.06 percent. Thus, if one sets a

zero NPV as the floor return to the bidder in an auction market, only small bidders, not large

bidders where most of the investment is, satisfy this rationality criterion. Bayazitova, Kahl,

and Valkanov (2011) find that these large acquirers (mega-mergers) account for 43% of all

merger outlays. Apparent value-destroying deals representing large negative NPV projects do

not represent some minor backwater in which irrationality flourishes. Strangely, in view of its

wealth-destructive properties, M&A activity plays a significant role in the global economy,

constituting $2.1 trillion in the US in just one year alone, or 15% of GDP (see Bao and

Edmans (2011)).

The virtually universal finding that acquiring shareholders do not gain from M&A activity

features in practically every major textbook (see, for example, Ross, Westerfield, and Jordan

(2008, p. 835) or Copeland, Weston, and Shastri (2005, p. 778)). The overall synergistic

benefits made up of the net change in the value of the bidder and target on takeover

announcement are marginally positive, where acquirer shareholders are distinct losers, while

target shareholders are clear winners.

These virtually universal findings stand in stark contrast to what may be termed the neo-

classical theory of M&A (see Ahern and Weston (2007)) which asserts the profit motive of

the acquirer will naturally drive the ownership of assets to their highest value use. It follows

from this motivation that the initiator (acquirer and its shareholders) will benefit from such

wealth-enhancing transactions, rather than suffer losses. Thus, if there are changes in

technology due (say) to innovation, regulatory changes, or shifts in demand for goods and

5 For an early example of a study showing that acquirer value falls at the time of takeover announcement see

Dodd (1980). Betton, Eckbo, and Thorburn (2008, Table 6) summarize 16 relatively recent large-sample studies

of acquirer returns. Most report sizeable takeover samples in which the bidder‟s share price reaction is negative.

4

services such that the existing ownership of assets is no longer optimal, M&A activity should

occur to redistribute the ownership and control of assets from a target to a bidder so as to

enhance the overall value of the merged firms, resulting in improved utilization of the

combined firm‟s assets.

In this paper and consistent with neoclassical theory, we show that there is no foundation

for the belief that, even where target shareholders benefit, this typically comes at a

considerable cost to acquirer shareholders. To the contrary, we demonstrate that not only are

the net economic benefits of M&A large, but they are typically shared between acquirer and

target. In fact, an acquirer on average gains the lion‟s share from a typical acquisition,

capturing a 81% share or US$626.6 million of the associated total economic benefits, which

average US$772.2 million. These gains are not obvious to researchers since making a bid also

releases bad news about a bidder‟s value, which reduces its equity capitalization by $563.9

million or 18.9%. While this loss in value is offset by the prospective benefits of a typical

M&A bid, the net effect implies little change in a bidder‟s equity value.

Most recently, behavioral financial economists have focused on the use of the acquirer‟s

own stock, rather than cash as the means of payment for the target (e.g., Shleifer and Vishny

(2003) and Dong, Hirshleifer, Richardson, and Teoh (2006)). It is argued that managers of

acquirers may use their firms‟ relatively overvalued stock to benefit their own shareholders at

the expense of target shareholders, with no combined economic gain to bidders and targets,

but potentially huge losses to society as a whole.

We show the findings, that acquirer shareholders and, particularly, large acquirer

shareholders, do not gain from takeovers and may be worse off, is due to a fundamental

“revelation bias” in the standard event study methodology used to identify synergistic gains

and, to assess whether acquirer shareholders are victims of manager-shareholder agency

problems.

First, acquirer managers rewarded for short-term performance often instigate a “signaling

bias” by deliberately timing the “good news” of the bid announcement to coincide with the

release of bad news such as unmet earnings targets (see Bhagat, Dong, Hirshleifer, and Noah

(2005)). This common practice, documented in the Wall Street Journal, 1998, p. C1,

confounds the information about an acquisition‟s value to a bidder that is capitalized into the

bidder‟s stock price on the acquisition announcement, and results in a downward revaluation

of a bidder‟s stand-alone value.

5

Second, the bid itself typically releases bad news about an acquirer, even when there is no

motive to distort the market‟s perception of company value. For example, it may reveal

serious empire-building tendencies of incumbent management, or management perception

that the bidder has run out of profitable internal growth opportunities (see Fuller, Netter, and

Stegemoller (2002), and Hietala, Kaplan, and Robinson (2003)). Shleifer and Vishny‟s (2003)

market timing explanation for stock bids when the stock is relatively overvalued falls into the

same category.

Third, the acquirer may already have a long history of generally successful bids, such that

a new acquisition announcement is no surprise to the market, which leads to a close to zero

market reaction even to a beneficial acquisition. Serial acquirers such as General Electric,

Cisco, GlaxoSmithKline and Capital One for example are possible examples in this activity.6

Fourth, for reasons relating to conflicts between existing and new shareholders put

forward by Myers and Majluf (1984), stock financed acquisitions represent new equity issues

that by their very nature can represent bad news about the stock‟s true value since stock may

be preferred to retained earnings and debt when it is overvalued.

Finally, the initial bidder announcement return could be downward-biased because of the

likelihood of failure, perhaps because of the subsequent entry of competing bidders. Bhagat,

Dong, Hirshleifer, and Noah (2005) introduce the probability scaling method (PSM) that uses

post-bid data to factor in the probability of a successful bid and the intervention method (IM)

to take account of the likelihood of competing bids. They show that both of these methods

increase the perceived value of the takeover and reduce the likelihood of finding that the

bidder is overpaying for the target. Hence, release of information that is extraneous from the

critical question of whether an acquisition will create bidder shareholder value poses a severe

problem from the perspective of traditional M&A event study methodology. The PSM and

IM methods tackle only limited dimensions of this complex problem.

Our study builds on the well-known contribution by Shleifer and Vishny (2003) that put

forward a conditionality explanation for stock acquisition offers as opposed to cash bids.

Acquiring shareholders may gain and target shareholders correspondingly lose from the

resulting swap of the firm‟s own equity for the target‟s relatively underpriced equity. Hence,

the issuance of stock bids is endogenous in this arbitrage operation and is conditional on

management discovering that their stock is overpriced relative to the targets. This mechanism

6 The point made here about expectations and share price reaction is quite distinct from the considerable

empirical literature on whether serial acquirers are successful or not.

6

is a major contributor to the “revelation bias” that occurs on a bid announcement as it signals

that the offer‟s acquisition currency, bidder stock, is relatively overvalued. Stock price falls

on announcement of a stock financed bid, not because it is a bad bid, lacking synergies and

likely to destroy shareholder wealth, but because this is a strong signal that the stock is

currently relatively overvalued, much like the signal released by a seasoned equity offer

announcement.7 Here, decisions to issue equity by a stock offer are conditional on some

value-destruction occurring within the firm itself that reveals itself to the market along with

the offer to the target or, less plausibly, that target shares are undervalued.

The most recent contribution to this literature is a study by Savor and Lu (2009) who

restrict their analysis to acquirers only. They find that withdraw stock bids suffer a more

severe value reduction than those that are not withdrawn. They interpret this finding to be due

to the unsuccessful bidders inability to swap their overvalued equity for fairly valued target

equity and conclude that, indeed, stock acquirers realize sizable benefits from successful bids.

In our analysis, we include the market responses of matched targets following bid failures to

show that value reduction occurs because failed bidders are unable to realize the synergistic

benefits associated with their bids, with both bidders and targets losing value as a

consequence. Both Shleifer and Vishny (2003) and Savor and Lu (2009) assume a complete

absence of synergistic gain, but since neither investigates the price changes in the associated

targets, their argument remains only partially tested. Since firms with relatively overvalued

equity are likely to have insufficient internal growth prospects, it makes sense for such firms

to concentrate on external growth prospects achieved via synergistic gains.

Our contribution is related to the fact that failed bids are subject to a much weaker

“revelation bias” relative to new bids, and this is especially true for stock bids. The bidder

stock price following the initial bid already reflects the endogenous valuation error of

announcing a stock bid due to perceived relative overvaluation, managerial empire-building

incentives, evidence of weak internal growth prospects, and all other revelation problems. By

contrast, the induced change in a stock bidder‟s value following an offer withdrawal

represents a much cleaner experiment than the market reaction to the initial bid

7 Seasoned equity issues by overvalued but mature firms are rare but nonetheless have statistically significant

effects in terms of explaining the probability of an SEO (see DeAngelo, DeAngelo, and Stulz (2010)). This

rarity could be explained in part by the likelihood that investors see through the ploy and thus underprice the

offering. Conditionality problems also plague event study analysis of stock splits, as well as stock-based

takeover announcements and seasoned equity issues. Stock splits generally occur only following stock price run-

ups. Hence, an event study of stock splits will show considerable value-enhancement whereas in reality none

has occurred (see Brown, Goetzmann, and Ross (1995)).

7

announcement. This is especially the case where a bid has failed for exogenous reasons

unrelated to the existing value of the bidder or the target. Unlike Savor and Lu (2009), by

matching our bids with their targets, we show that both bidder and target are subject to large

losses in value on bid withdrawal due to exogenous failure, consistent with both being subject

to loss of synergistic benefits. The more the target falls, the more the bidder falls, and vice

versa, indicating that the bidder as well as the target suffers a loss of synergistic benefits.

Thus our fundamental insight is that when failed bidders are matched with their associated

failed targets and the reason for deal failure is exogenously triggered, then it is possible to

impute the share of gains received by the bidder when the deal succeeds.

We find that studying failed bids yields a great deal more insight than conventional

approaches concerned largely with successful bids. With failed bids, one can observe the

subsequent long-term history of both the bidder and target, whereas with successful bids one

cannot generally observe either individual firm post-acquisition, as they are combined

entities. Thus, failed bids are a huge and largely untapped mine of new information about the

fundamental causes and consequences of mergers and acquisitions.

In this study, we overcome the problems in the existing empirical literature by devising a

new approach to assessing the economic benefits of the M&A offers by using successful and

failed takeover deals in our sample of both bidders and targets. Moreover, as a means of

increasing our analysis of matched bidders and targets when the bid fails, we compile a much

larger database of mergers and acquisitions over four countries: Australia, Canada, the United

Kingdom and the United States, compared with conventional studies that focus on a single

country.8 Using our new database, we take a novel approach to analyzing the gains and

distribution of the synergistic benefits in mergers and acquisitions between bidder and target.

Following Savor and Lu‟s (2009) approach of studying bidders in M&A offers that are

cancelled for exogenous reasons, we extend this concept to analyze target firms and a

matched sample, where requisite financial information about both an acquirer and a target of

an offer is available for our offer sample. Utilizing this large sample, we incorporated new

variables into our cross-sectional regression models, which include indicators of failed offers

and exogenously failed offers and acquirer and target reactions to their counterparty‟s

abnormal announcement returns.

8 We are not the first to consider acquisitions outside of the United States. For example, Netter, Stegemoller, and

Wintoki (2011) examine a comprehensive set of mergers and acquisitions.

8

Our central line of reasoning is as follows. One would assume that a rational economic

motivation for a bidder to enter into a merger and acquisition transaction would be the ability

to invest in a positive net present value investment and thus, return excess abnormal returns

to their long-term shareholders. This view is in line with the findings of Schlingemann

(1994), Cooney and Kalay (1993), and Lang et al. (1991). Hence, we seek to investigate

whether mergers and acquisitions are positive NPV investments for acquirers using either

cash or stock financing and yield genuine economic gains and do not simply transfer wealth

(theft!) from target shareholders in the case of stock bids.

Our research question follows from the above reasoning, which examines whether the

pursuit of synergistic economic benefits serves as the primary motive for acquiring firms

participating in merger and acquisitions. We find support for our first hypothesis that (HI) on

the announcement of a failure of a merger, the combined value of the acquirer and target fall.

Having shown that synergistic benefits do exist for the combined firm, we then evaluate our

second hypothesis that (HII) acquirers gain a significant share of the synergistic benefits

created on announcement of a merger or acquisition.

We conduct our analysis in two stages. First, using our entire sample of 2,963 acquirers

and 4,606 targets, we conduct an investigation into the abnormal returns around: (i) the initial

announcement of a merger or acquisition, and (ii) the announcement date that the merger and

acquisition either succeeds or fails with certainty. Specifically we find a mean stock price

run-up and announcement return for acquirers of two percent and −1 percent respectively,

representing an approximate net gain to acquirers on announcement of one percent. This

result is consistent with evidence from Ahern and Sosyura (2011) suggesting that stock

acquirers release a string of positive announcements in the lead up to a merger or acquisition

announcement, thereby boosting their share price. In their sample, merger talks begin on

average 64.5 days prior to the public announcement. Consistent with the findings of Andrade,

Stafford and Mitchell (2001), we find that acquirer and target abnormal returns over a five-

day window are −1.05 percent and 19.22 percent, respectively. Hence, our sample replicates

the standard finding using conventional methodology that acquisitions are destructive of

acquirer value, thus earning (apparent) negative synergies. We find that the combined firm

announcement returns appreciate on the initial offer announcement (2.67 percent) and fall on

the announcement of an offer failure (−1.82 percent). Thus, this evidence yields strong

support for the existence of overall synergistic gains in our sample, consistent with

Hypothesis I and the findings of many prior empirical studies.

9

The second stage of our analysis utilizes a series of cross-sectional regression models to

investigate the creation, and subsequent loss of synergistic benefits. Using an innovative

method of examining synergistic benefits, we split our analysis into three subsections. The

first subsection analyses the creation of synergistic benefits using an event study of an initial

announcement of a merger or acquisition. We improve on existing methodology by extending

the event window to include a 60-day period preceding the initial announcement to capture

any price run-up, potentially due to proprietary information leaks, and define the dependent

variable to be equal to this run-up plus the five-day window around the offer announcement.

We find that for long-horizon models of target abnormal returns, the market predicts offer

failures and exogenously failed bids, where targets of these bids earn significantly lower

returns leading up to and on the initial offer announcement. Additionally, we find a

significant positive relationship between acquirer and target returns, hence finding leading

support for Hypotheses I and II.

How can we rule out reverse causation - that the deal failed because the target found a way

to trigger deal failure after it correctly anticipates poor future acquirer performance? This

might occur when the target obtains information about acquirer overvaluation from its due

diligence investigation. We rule out this otherwise plausible story by also incorporating the

target‟s reaction to the announcement of deal failure when examining bidder abnormal

returns and vice versa when examining target abnormal returns around the same

announcement. Were the reverse causality story true, both the bidder and target would

decline in value together due to release of bad news about the bidder until the endogenous

collapse of the bid. The bidder would then continue to fall in value as it could no longer

receive the benefit of the relatively underpriced target, but the target‟s stock would shoot up

in value as it is now free of the yoke of being tied to the overvalued bidder. We do not find

evidence consistent with this scenario. In fact, we find quite the opposite. The values of both

the target and bidder continue to fall pari passu together for the next 100 days, consistent

with a mutual loss of synergistic benefits.

As noted by Fuller, Netter and Stegemoller (2002) and Hietala, Kaplan and Robinson

(2003), information is released on the M&A offer announcement. The takeover

announcement reveals information about the stand-alone value of the bidder and target in

addition to any potential synergies arising from the combination of the two firms, and

distribution of these gains between target and acquirer. Due to this complication in measuring

synergistic gains on the initial announcement of an acquisition, we study the loss of

synergistic benefits on the announcement of a failure of an acquisition. We find evidence in

10

favor of negative abnormal returns to acquirers, targets, and the hypothetical combined firm

on the announcement of failed bids.

A third form of analysis involves investigating the relationship of the expected synergistic

benefits found in a long-horizon study of acquisition wealth creation, and the subsequent

losses of these synergistic benefits. Measuring abnormal returns commencing 60 days prior

the initial announcement until 100 days post the date participants know whether the bid is

successful or fails, we find strong evidence for the existence of synergistic benefits for

acquirers, supporting Hypothesis II. Specifically, we find that failed cash bidders

significantly underperform successful cash bidders by approximately 10.7 percent and failed

stock bidders underperform successful stock bidders by a further 15.5 percent in bids that fail

for exogenous reasons. Additionally, we find that failed target stock prices in stock bids fall

back to their pre-bid levels, which is the reverse of the predictions made by Savor and Lu

(2009). We also find that after 100 days following deal outcome successful stock bidders do

only about half as well (relative return of -13.3%) as successful cash bidders. This

substantially subtracts from the target‟s premium and synergistic share.

According to the market timing hypothesis, acquirers purchasing targets use relatively

overvalued equity as currency. One would expect that on the news of bid failure, long-term

target shareholders would react positively, which is the exact opposite of our findings. We

agree that bidders with overvalued stock use their shares as currency. Our point is that the

market is not entirely fooled. The terms on which targets accept bidder stock reflects to some

extent the bidder overvaluation and collective synergistic gains so that the target price can

only fall on deal failure, not rise as proponents of no synergistic gains predict. Additionally,

we find strong positive correlations between acquirer and target announcement return,

suggesting that there is a strong complementarity and sharing of synergistic gains between

acquirer and target shareholders. This complementarity is inconsistent with the Roll (1986)

hubris hypothesis, which predicts a more positive bidder stock return (with a larger target

price fall) following a bid failure announcement reflecting a reversal of a bidder‟s stock price

discount for its expected overpayment for the target. It is also inconsistent with the Shleifer

and Vishny (2003) and Savor and Lu (2009) “theft” explanation as the bidder price falls and

target must rise in response to deal failure and the unwinding of the “theft” of the target‟s

relatively undervalued equity, according to this explanation.

Our study makes at least two valuable contributions to the literature. First, we propose a

new approach to examining the synergistic benefits in merger and acquisitions. Our evidence

suggests that looking at failed bids provides an additional opportunity to more clearly identify

11

the gains in mergers and acquisition by studying the unexpected loss of these expected gains.

Second, we show the possibility of improvements to current methodology by including the

acquirer price run-up as a dependent variable when studying acquirer and target returns in

M&A. This price run-up is significantly negatively correlated with the unexpected losses

incurred if the bid subsequently fails typically many months hence. Remarkably, it is not only

correlated with the fall in the price of the bidder, but also with the target with the impact on

the target only slightly smaller in magnitude. This is to be expected if there is sharing of the

synergistic gains, with on-going private negotiations occurring between bidder and target

during the run-up period.

We structure the study as follows. Section 2 reviews existing literature and develop a

contextual basis for our key hypotheses. Hypotheses are further constructed in Section 3.

Section 4 describes our data sources, acquisition sample and empirical methods. Section 5

contains the empirical work and discusses the results, Section 6 presents our estimates as to

how synergistic gains are shared and Section 7 concludes.

2. LITERATURE REVIEW

Real synergy involves combining assets in the form of positive net present value (NPV)

projects, creating positive excess (abnormal) returns to an acquirer‟s long-term shareholders.

By contrast, Roll (1986) posits the hubris hypothesis that at least some managers over-bid for

targets due to errors in valuing synergies, leading to no overall value improvement. These

inefficient investments can also be due to agency problems such as empire-motivated

managers not acting in shareholder interests.

Jennings and Mazzeo (1991) conclude that bidders learn nothing from the share price

reaction to a bid. Thus, a negative share price reaction does not make deal completion less

likely. Luo (2005) disagrees with the earlier finding, utilizing a larger deal set and different

methodology and set of tests. We find that the pairwise correlation coefficient between the

cumulative abnormal returns (CARs) of the bidder over the five-day window is uncorrelated

with bid outcome in agreement with Jennings and Mazzeo (1991). When we add in a full set

of controls, the market is able to predict failure of the sample inclusive of endogenously

failed bids but not exogenously failed bids. Failure significance disappears even for

endogenous sample inclusive of the run-up period after maintaining the full set of controls.

Hence, the full market reaction to the bid does not appear to predict bid failure, suggesting

that the presumed inside information is not affected by the reaction of outside investors. This

12

evidence is consistent with our finding that the market reaction to the bid announcement does

not say a great deal about likely synergistic gains accruing to the bidder. We do find,

however, a significant negative correlation between the target announcement CAR and bid

failure that disappears when a full set of controls is included. Once we take account of the

target‟s price run-up and thus the information leakage, the market appears able to predict deal

failure for targets, but not for bidders. This is not so surprising when one considers that the

target event is much cleaner as it is not so contaminated by the revelation of bad news about

the bidder.

Schlingemann (1994) conducts a study of 623 cash takeovers during the period

1984−1998. He concludes that retained-earning sourced cash transactions positively relate to

bidder announcement abnormal returns. He attributes this finding to firms using internally

generated cash to invest in positive NPV investments (Cooney and Kalay (1993)).9 The

results of the study are also consistent with Lang et al. (1991) who hypotheses that managers

at times have incentives to waste excess free cash flows in wealth destroying investments.

Martynova and Renneboog (2009) conclude that transactions financed by internally generated

funds underperform those financed with debt. Lang et al. (1991) also identifies a relationship

between Tobin‟s q and investment policy such that that high q firms, compared to low q

firms, are more likely to have positive NPV projects. Hence, low q firms should on average

pay out their excess cash, rather than invest in poor acquisition prospects.

Grinblatt and Titman (2002) suggest, “the stock returns of the bidder at the time of the

announcement of the bid may tell us more about how the market is reassessing the bidder‟s

business than it does about the value of the acquisition”.10

Similarly, Hietala, Kaplan and

Robinson (2003) note that the announcement of takeovers reveals information about the

stand-alone value of the bidder and target, any potential synergies arising from the

combination, and the distribution of gains between the target and acquirer. Additionally, they

state that it is often not possible to infer the respective synergies, overpayment, and

distribution of gains simply from the change in the market price of the bidder and target. Our

model hopes to fill this gap by including a failed sample where the bid has failed for

exogenous reasons. Thus, an unexpected offer failure provides valuable additional evidence

about the value of an offer captured in the forgone economic gains of the offer.

9 Cooney and Kalay (1993) adopt the innovative methodology of including negative NPV projects into the

financing decision, shows that the new issue of equity to finance projects can signal an exceptional valuable

project, where the market may react positively to the news. This is contrary to the prediction by Myers and

Majluf (1984) where they believe that the market will never react positively to new issue of equity. 10

Grinblatt and Titman (2002, p. 708).

13

A negative share price reaction to offer withdrawal announcements for targets should

indicate the size of the loss of synergistic benefits (Bradley, Desai, and Kim (1983) and

Samuelson and Rosenthal (1986)). Bradley et al. (1983) find that after an offer withdrawal

the target‟s share fall back over an extended time-period toward its previous pre-offer levels,

as it becomes clear that no subsequent acquisition bid is likely. Comparatively, those targets

that receive subsequent offers experience additional increases in share price. Bradley‟s (1980)

study of 100 percent cash offers shows that bidders experience severe negative reactions to

offer failure, compared to positive reactions for successful offers.

Savor and Lu (2009) incorporate failed bid announcements into their sample. They

interpret the larger reduction in share price for failed stock offers, compared with successful,

as an inability to swap overvalued equity for more fairly-valued target equity. A more

plausible explanation is the inability of failed bidders to attain anticipated synergistic

benefits. Savor and Lu also point out that failed cash bids do not suffer such a loss in value

and continue to perform relatively well compared to failed stock bids. We agree but our

explanation is entirely different: stock bids by their nature, with high relative Tobin‟s q and

high-priced equity indicative of bidder relative managerial advantage, achieve far higher

synergistic gain. Hence, the loss on exogenous deal failure is also far higher. Their

supposition of no synergistic gain for stock bids predicts the exact opposite of their finding:

their failed stock bids should do much better than failed cash bids as the former suffer no loss

of embodied synergistic gain by assumption.

An important part of Savor and Lu„s approach is their solution to the endogeneity problem

that arises from the inclusion of failed bids. Bidders with overvalued stock have greater

incentives to propose stock as the mode of payment rather than cash. This complicates

matters as the bid may fail due to target shareholders discovering the acquirer‟s

overvaluation. Savor and Lu solve this endogeneity issue by attempting to create an

“exogenous failed subsample” where mergers fail for exogenous reasons outside of the

control of the bidder or target, and thus are unrelated to the acquirer‟s or target‟s valuation.

M&A researchers rarely use the technique of failed acquirers in their analysis.

A natural extension of the Savor and Lu approach is to focus on target reactions to bid

failure. If the market-timing theory is correct and no synergistic benefits exist, then rational

target shareholders should expect that a bidder‟s stock to be relatively overvalued. If this

happens systematically over time then in anticipation of future acquirer price falls, the price

of the target may fall below the notional cash value of the equivalent acquirer stock even

though the acquisition seems very likely to go ahead. Thus, upon the announcement of the

14

stock bid failure, the target share price could go up if the target‟s price has significantly fallen

for this reason. Alternatively, it may drop slightly representing only a fraction of the notional

value of the bid. In contrast, this study postulates that synergistic gains exist. Hence, upon the

offer failure announcement, we expect to see a fall in the combined value of the acquirer and

target equity capitalization due to a loss of jointly shared synergistic gains. More specifically,

we do not expect to see a target‟s share price rise because shareholders are no longer to

receive burdensome stock that may be rapidly falling in value. Instead, we expect the bidder

stock price to fall in a complementary fashion to the fall in target price, due to a shared loss in

synergistic benefit.

Ahern (2011) finds that in terms of dollar gains, targets do not do a geat deal better than

acquirers that tend to be much larger. Moreover, in vertical acquisitions a target‟s relative

scarcity and product market dependence help explain its share of total merger gains. Cai,

Song, and Walkling (2011) present evidence to show that some bids come as more of a

surprise to the market than others. In particular, the first bid in an industry has both greater

surprise and a higher return than subsequent bids. They conclude that, after accounting for

anticipation, bidding activity generates wealth. Malmendier, Opp, and Saidi (2011) find that

targets react much more favorably to cash bids than do stock bids on a deal failure

announcement utilizing a relatively short 25-day window. They suppose that cash targets are

initially undervalued so that by paying in cash rather that stock, the bidder captures the entire

gain. We find no difference in the way stock and cash bids react negatively to deal failure

with a much longer event window post the deal outcome news. It is true that we find stock

financed targets return to their pre-bid levels within the 100-day window following a deal

failure announcement and cash financed targets do not. Hence, we believe that failed targets

of cash bids remain in play for longer, even though Malmendier, Opp, and Saidi (2011) find

no evidence that they do subsequently become targets.

Dimopoulos and Sacchetto (2011) structurally estimate preemptive bidding and target

resistance based on an extension of Fishman‟s (1988) theoetical model. They show that only

rarely is there a second bidder, meaning that most initial bids are preemptive. Their

simulations imply that the initial bidder‟s valuation of the target is 97% of the pre-bid value

and potential rivals far lower at only 58%. This means that prospective synergistic gains are

likely to be the monopoly of just one bidder and the main barrier to the bidder extracting

most of the gains is target resistance. Our findings are the first to justify the high initial bidder

valuations that are otherwise unexplained by their modelling. Furthermore, in their

framework, deals fail endogenously because synergsitic gains are insufficient to overcome

15

target resistance. Thus, endogenously failed deals yield fewer synergistic benefits than

exogenously failed deals, which is precisely what we find with our sample of endogenously

and exogenously failed deals.

3. Hypothesis Development and Construction

3.a Hypothesis Development

As outlined above, despite a comprehensive body of research documenting the

performance of firms around acquisition announcements and the motives behind these

takeovers, there are serious limitations with these methodologies due to revelation and other

biases. We will analyze the short and long-term impacts of M&A offer failures. From this

analysis, we seek to fill some important gaps in our understanding of the motives for mergers

and acquisitions and in the process, to improve on the interpretation of M&A announcement

effects. We first assess whether the pursuit of synergistic benefits is a plausible motive for

bidders to make takeover offers.

Hypothesis I:

In our analysis, we include failed and exogenously failed takeover bids. In doing so, we

overcome the revelation bias issue posed by Hietala, Kaplan and Robinson (2003), where the

announcement of a takeover reveals information about the stand-alone value of the bidder

and target and their businesses, in addition to any potential synergies arising from the

combination of the two firms. Based on the existing literature and empirical evidence, we

propose the following hypothesis:

HI: On the announcement of the failure of a merger and acquisition offer, the combined

value of the acquirer and target will fall.

We foresee that this result will prove robust to a variety of samples, methodological

approaches, and estimation techniques, revealing that on an M&A offer failure there is a

decline in the combined acquirer and target equity capitalization, and hence a loss in

synergistic benefits.

16

Hypothesis II:

We hypothesis that:

HII: Acquirer shareholders gain a significant share of the synergistic benefits created on

the announcement of a merger and acquisition and, similarly, lose a significant

amount on failure of the bid.

To assess the validity of this proposition, we employ both event study analysis and cross

sectional regression models to analyze the returns around initial bid announcements and

failure announcements. We seek to assess whether bidders gain a significant share of the

expected synergistic benefits on announcement of an M&A offer. To test this proposition, we

examine whether on the announcement of a bid failure, bidder stocks lose their expected

portion of the synergistic benefits created at the bid announcement.

4. DATA AND METHODOLOGY

4.a Sample Construction

This study focuses on initial merger and acquisition offers and possible later withdrawals

announcements. We study merger and acquisition offers for public targets from four major

“Anglo” developed economies: Australia, Canada, the United Kingdom and the United

States, mainly to increase sample size particularly for the “failed offer” sample. Our study is

the first to combine data on matched acquirers and targets from a number of Anglo countries

with quite similar competitive tender offer rules. The core data used in this study represents

merger and acquisition characteristics, which comes from the Securities Data Corporation‟s

(SDC) Platinum Global and US Mergers and Acquisitions database. We examine initial bids

announced between January−1, 1985 and December 31, 2009 and obtain the following

information on from the SDC Platinum database: (i) the identities of the parties involved in

the transaction, (ii) whether the deal was consummated, (iii) the deal‟s mode of payment, (iv)

any toehold the acquirer or target held in each other prior to the offer, (v) the initial offer

announcement date, (vi) the announcement date of offer consummation or withdrawal, (vii)

offer characteristics, (viii) the industry and nation of the acquiring and target firms.

17

Where possible stock returns, firm size and accounting data, are obtained from the

CRSP/Compustat merged database. Due to the limited coverage in the CRSP/Compustat

merged database of international stocks, we used Datastream to collect stock returns, firm

size and accounting data. Since Datastream has limited financial statement coverage, we also

relied on Aspect Huntley, ORBIS and SDC Platinum to obtain the missing accounting

information.

The M&A sample criteria are as follows.

(i) The target is a public listed firm that is incorporated in Australia, Canada, the

United Kingdom or the United States.

(ii) The acquirer is a publicly listed firm.

(iii) The deal can be clearly classified as successfully completed or a failure.

(iv) The bidder seeks to acquire more than 50 percent of the target firm shares in order

to gain control and holds less than 50 percent of its shares beforehand.

(v) The deal value must be greater than one million dollars.11

(vi) The method of payment used in the bid must be solely cash or stock.

(vii) The firm‟s stock is actively traded and its stock price and market value must be

readily available from either CRSP or Datastream.

(viii) The firm‟s annual financial statement information must be available from

CRSP/Compustat Merged Database, Datastream, Aspect Huntley‟s FinAnalysis,

ORBIS or SDC Platinum.

(ix) Deal value must represent five percent or more of a bidder‟s equity capitalization

to insure that the deal has a material impact on a bidder‟s stock price.

The final sample includes 3,147 acquirers and 4,793 targets firms. Table 1 reports the

reduction in the sample as we impose additional sample criteria. We start with raw data

collected from SDC Platinum and in the end obtain our final sample shown in Table 1, Panel

A. We finally require the bidder and target firms to have stock price and accounting data

available, which yields our final dataset described in Table1, Panel B.

<<Insert Table1 about here>>

11

Deal value is defined in US$ as the consideration paid by the acquirer for the target, excluding fees and

expenses.

18

The four-country selection allows us to analyze the motives for cross-border acquisitions

and to analyze merger and acquisition activity outside the US, as well as to substantially

expand our sample size. Along with the usual sample criteria, we required that bidders seek

more than 50 percent of target shares since at this level of ownership an acquirer will

typically have full control over the target. We also find that setting an absolute cut-off on the

method of payment of either 100 percent cash or 100 percent stock, does not significantly

reduce the sample size.12

The final sample consists of 2,963 acquirers, 4,606 targets and 1,941 deals where data is

available for both acquirer and target. Figure 1 describes the time-series distribution of the

sample and the US dollar amount of stock bids relative to cash bids in each year. The figure

first shows that that we have more targets than acquirers with the required data and even

fewer deals where we have data for both bidder and target. Second, we identify the

frequencies of stock and cash financed deals in the sample. Stock based deals become more

popular than cash financed deals in the 1990s, which corresponds to the 1990s merger and

acquisition boom. The merger boom of the second half of the 1990s is noteworthy for the

largely stock financed transactions. Table 2 presents the sample distribution of completed and

failed bids, by country and by stock and cash financed deals.

<<Insert Figure 1 and Table 2 about here>>

According to Shleifer and Vishny‟s (2003) market-timing hypothesis, overvalued firms

have a relatively greater incentive to make stock acquisitions. Hence, an acquiring firm may

use mispricing of their stock to swap their overvalued equity for relatively less overvalued

target equity. This is very similar to the adverse selection in the Myers and Majluf (1986)

model of stock offers. Thus, the acquirer is using its overvalued stock to purchase a target‟s

assets at a discount. This hypothesis corresponds to the evidence presented in Figure 1, where

we see that the stock market and merger booms of the 1990s corresponds to an increasing use

of stock over cash as an acquisition currency. An announcement of an equity-finance merger

and acquisition may signal that the acquiring firm is mispriced and overvalued. Accordingly,

one expects on this negative signal of overvaluation that the acquirer‟s stock should fall in

value. Hence, if synergies exist from combining two firms, then on the offer announcement

they will co-mingle with the negative signal. This makes it difficult to isolate the synergy

12

A table of bids lost by imposing the 100 percent cash or stock requirement is available on request.

19

effect when studying the distribution of returns on the announcements of M&A deals. Thus,

we construct a sample of failed bids caused by exogenous factors, where the bids fail for

reasons extraneous to the valuation or decisions of the acquirer or target.

4.b Exogenous Failed Bids: Sample Construction

We follow a method similar to Savor and Lu (2009) to construct a sample of exogenously

induced merger and acquisition bid failures, shown in Table 3. As postulated in the market-

timing theory, there is a positive relationship between a firm‟s overvaluation and the

probability of a stock-based acquisition when bids fail due to target shareholder recognition

that a bidder‟s equity is overvalued. Empirically, on the initial announcements of stock-based

deals, bidder returns significantly underperform cash-based deals.

<<Insert Table 3 about here>>

To account properly for loss of expected synergies, we must first be sure that expected

synergies are associated with the acquisition announcement. We know that a variety of

important pieces of information are released with the initial bid announcement. The

announcement reveals information about the stand-alone values of the bidder and target, the

expected synergies arising from the combination, as well as the distribution of the expected

synergies between target and bidder shareholders. Thus, we must exclude bids where the

offer is doomed to fail from the beginning, or failed because of any revelations concerning

bidder or target valuation. Thus, we construct an exogenously caused offer failure sample,

which reduces our “failed bid sample” by more than 50 percent

Our methodology differs slightly from Savor and Lu (2009) because we include target

firms and a matched sample (where we have both acquirer and target firms in our sample).

Therefore, we determine what is exogenous in context of the three different sample

categories. The goal of the exogenous sample is to keep only deals that fail unexpectedly and

for reasons that are outside of the two firms control, which in a semi-strong form efficient

market means that new information was not previously priced by the market. Ideally, we

want to study bids that trigger market capitalization of a bid‟s expected synergies on its initial

announcement date, which is subsequently lost on the bid‟s announced failure. It is critical

that the withdrawal news does not co-mingle with signals concerning revision in the bidder‟s

20

valuation. For this reason, acquirer and target samples differ from each other. Additionally,

the matched sample must only contain acquirers and targets in exogenously failed deals.

The subsample of exogenously failed acquirers contains deals that failed due to regulatory

disapproval, competing offers, and unexpected target developments. Likewise, the

exogenous subsample for targets contains bids that failed due to regulatory disapproval,

unexpected acquirer developments and competing offers such that the initial offer to the

target firm remained unconsummated. Finally, for the matched-sample, the merger must have

failed due to reasons outside the control of the acquirer and target, such as regulatory

disapproval and competing offers. This extends Savor and Lu (2009) approach which finds

that mergers are beneficial to acquiring firm shareholders. They compare post-event returns

to find that successful acquirers on average outperform failed acquirers. Our methodology

differs from theirs because we allow for a more plausible alternative explanation for this

performance difference, namely the loss of synergistic benefits on the failure of the deal, and

not because of the loss of the opportunity to buy the target with overvalued bidder stock.

Furthermore, we extend their “exogenous failed” sample to include targets so as to improve

our power to distinguish between the conflicting hypotheses.

The information sources used to determine why a takeover failed differs slightly from

Savor and Lu (2009). Due to the difference in size of the number of failed bids in their study,

355 for their sample compared to 1,394 in our sample, we use a variety of information

sources to determine the reasons for bid failures. We investigate every failed deal using the

combined resources of Factiva, LexisNexis, news articles from Google, and the synopsis and

deal history provided by SDC Platinum. We find a similar success rate to Savor and Lu

(2009) in being able to explain the cause for bid failures.

The process of constructing the exogenously failed sample begins with the “All Failed

Bid” sample and then we divide the failed bid sample into acquiring and target firms and a

third category in which both the bidder and the bidder‟s actual target remain to form a

matched sample. We arrange the “endogenous” reasons why deals failed by whether they are

(i) common to both acquirer and target, (ii) common only to acquirers and (iii) common only

to targets so as to leave only acquirers, targets and matched pairs of acquirer-target

companies where both the acquirer‟s bid and the target failed for exogenous reasons and

where information is complete on both parties.

Thus, we first exclude bids where there is insufficient information due to an indeterminate

cause for the bid failure, resulting in a more decisive exogenous sample with known reasons

for failure. Second, we exclude deals where there is a flat rejection of an acquirer‟s offer, or

21

where the deal failed within a very short period, i.e., 14 days, in which case we believe no

synergies would have manifested themselves into the share prices of the acquirer or target

during that period. Similarly, we exclude deals where the deal failed after one year following

the bid‟s initial announcement, because of a low probability that the stock returns over this

long time period solely reflected the information about the changes in the bid and its likely

outcome.

In addition, we exclude bids where there are disagreements over the bid premium and

merger terms. We also exclude bids where the bid failed due to revelations about the target

valuation, changes in macro-economic conditions or an inability to secure financing, as these

cases have valuation implications beyond the loss of the synergistic benefits of the proposed

bid. The end-point of this exclusion process is the collection of remaining deals that failed for

exogenous reasons unrelated to valuation changes. Ideally, we want the firms remaining in

the sample not to have a permanent fall in value due to anything other than the loss of an

acquisition‟s synergistic benefits. Thus, there will be some cases where an acquirer will lose

synergistic benefits and a target will not or vice-versa. For example, the acquirer loses the

chance to consummate the deal due to a successful competing bid, so that the target is still

acquired. Consequently, the acquirer loses the deal‟s expected synergies, while the target

realizes its share of the synergies through the takeover premium of the successful competing

bidder. Table 4 displays the time-series distribution of successful and failed acquisition bids

in our final sample that we term the All Failed sample, inclusive of consummated bids.

<<Insert Table 4 about here>>

4.c Variable Construction

In this subsection, we discuss variable definitions.

Acquirer and Target Returns

We measure market reactions to bid announcement and failure dates using cumulative

abnormal returns (CARS) defined over a specified event window around the announcement

dates, where returns are adjusted for market-wide effects using a one-factor market model,

, ,i t i i m t tR R . (1)

22

The one-factor market model is estimated using daily stock returns, Ri,t, over the pre-

announcement period [−250, −30]. Daily market returns, Rm,t, are defined as value-weighted

stock indices construct from listed stocks on the major stock exchanges in each country. For

Australian firms, we use the All Ordinaries Index taken from SIRCA database; for the US,

we use the CRSP Value Weighted Index; and for other countries, we use local value-

weighted market index taken from Datastream.13

Stock i‟s abnormal return, ARi,t, is defined

as the stock‟s raw return minus the estimated one-factor market model:

, , ,i t i t i tAR R E R , (2)

where ,i tE R is estimated from the one factor market model shown in equation (1) and t is

from the first day of the event window until the last day, n. The cumulative abnormal return

(CAR) is defined as:

1

,n

t

t

CAR t n AR

. (3)

For comparison purposes, we use the CRSP Equal-Weighted Index as the equal-weighted

benchmark for all firms in our sample. There are many concerns when modeling and

interpreting abnormal returns around short- and long-term event studies. Studies of gains and

losses in mergers and acquisitions for short-term events have typically taken the three-day

CAR (Betton et al. (2008), Moeller, Schlingemann and Stulz (2005), and Savor and Lu

(2009)), and five-day CAR (Masulis, Wang and Xie (2007) and Fuller, Netter and

Stegemoller (2002)) windows around the initial acquisition announcement dates. Fuller et al.

(2002) find that for a random sample of 500 acquisitions from 1990 to 2000, the

announcement dates provided by SDC are correct for 92.6 percent of the sample.

Additionally, they find that for the remaining 7.4 percent SDC is incorrect by no more than

two trading days. For this reason, we employ a five-day event window around announcement

date, instead of a three-day event period.

Table 5 presents the summary statistics of the five-day CAR of both acquirers and targets

around the announcements of mergers and acquisitions. The results in the table are consistent

with existing empirical research on takeover announcement effects. We find that targets earn

significantly positive abnormal returns (20.9 percent) around M&A announcements, while

acquirers earn on average negative returns (−0.8 percent). The results are as expected and

appear to be contrary to Hypothesis II, which predicts that acquirers share a significant

portion of the synergistic benefits created by an M&A transaction. Interestingly, we find that 13

All Indices account for dividends.

23

targets of subsequently failed bids earn lower announcement returns. This observation holds

for targets of both the failed bid and exogenous failed bid samples. Bidders in the exogenous

failed bid sample suffer more severe negative returns (−1.2 percent) than the combination of

successful and failed bidders (−0.8 percent). In Panel−C, we show results for our hypothetical

combined bidder and target firm created from our matched sample. We see that all our

subsamples exhibit positive combined returns for takeover announcements. This finding

provides some initial evidence in favor of Hypothesis I and suggests that not only do

synergistic benefits exist, but they are observable in takeover announcements.

<<Insert Table 5 about here>>

Figures 2 and 3, respectively, plot average bidder and target cumulative abnormal returns

over 100 trading days before and after the bid announcement, measured in five-day

increments. Similarly, Figures 4 and 5 plot average acquirer and target cumulative returns

around the date when the market learns that the acquisition either is approved or fails. We

further separate the figures into subsamples of all firms (All), those acquisitions that were

successful (Successful), those that failed (Failed), and those that failed for exogenous reasons

(Exogenous). The effect of the announcements on targets is particularly evident in both the

initial announcement of the acquisition, creation of synergies and, secondly, on the

announcement of bid failure, loss of synergistic benefits. On the announcement, targets in our

sample earn on average abnormal returns of approximately 20 percent. Targets on bids that

subsequently fail earn significantly lower returns than targets that are successfully completed.

This is evidence that the market has some ability to predict which bids are likely to fail. Thus,

returns may only reflect an expected gain, conditional on the deal value and its likely

completion, and not the full value of the synergistic gains. This finding is consistent with

methodology employed by Bhagat et al. (2005), where they rescale returns using probability

scaling and intervention methods.

<< Insert Figures 2, 3, 4 and 5 about here>>

Plots of bidder returns in Figures 2 and 4 are consistent with the existing literature and

empirical findings, which report negligible returns and sometimes losses for acquirers around

acquisition announcements. In addition, Figure 4 is consistent with the findings of Savor and

24

Lu (2009) that acquirers in failed bids underperform acquirers in consummated bids over a

longer post-acquisition horizon. Thus, our results show that acquirers gain from takeovers

but, so far, we do not know why they realize gains.

There are two main methodological approaches in long-horizon event studies:

characteristic-based matching approach, also known as the BHAR (Buy-Hold Abnormal

Returns) and the Jensen‟s alpha approach, otherwise known as the calendar-time portfolio

approach (see Eckbo, Masulis and Norli (2000) and Fama (1998)). While the question of

which is the best model of returns for long-horizon event studies is yet to be resolved,14

in

this study we employ the BHARs to calculate the long-term abnormal returns and compare

the long-term performance of successful and failed acquirer and target firm pairs. With the

calendar-time approach, we face a similar obstacle to that of Savor and Lu (2009). They find

it difficult to implement due to the limited number of firms in their exogenously failed bid

sub-sample. The diversity of countries that our targets and acquirers come from exacerbates

this difficulty. Hence, this makes it extremely difficult to find an adequate number of firms

with similar size and book to market factors to implement the calendar time approach.

Researchers commonly utilize CARs in short-term event studies, but they find numerous

flaws to using them in longer-term studies: (i) CARs bear little resemblance to the returns

accrued by a long-term investor, and (ii) the process of aggregating short-term abnormal

returns over a longer time-period is likely to result in the emergence of spurious upward or

downward drift due to market microstructure issues, according to Conrad and Kaul (1993).

They also point out that accumulating single-period returns over longer time-periods assumes

portfolio rebalancing each period. Hence, the appropriate performance measure should be

buy-and-hold returns over longer intervals. However, in measuring CARs for the period

between announcement and failure dates, we hope to obtain a better understanding of the

stock returns around the two announcement dates and between these two announcements.

The second and most popular long-run event study technique is the buy-and-hold

benchmark approach, whereby we multiplicatively compound daily returns over the event-

window and then compare these returns to a given benchmark over the same period. We then

subtract the compounded returns for the benchmark from the compounded returns of the firm,

in order to obtain the stock‟s buy-and-hold abnormal returns (BHARs). Due to the diversity

of firms from multiple countries, we do not use an equal-weighted matching portfolio as a

benchmark for the firm. Instead, we use an equal-weighted index obtained from CRSP and

14

See Kothari and Warner (2007).

25

the same value-weighted index, as mentioned above for the CARs. This methodology enables

us to compare the BHARs and CARs, facilitating a more in depth robust analysis. Using the

broader benchmarks, we also avoid any cross-correlation problems, whereby correlation

occurs in the events of the firm of interest and have material effects on one or more firms.

Calculation of buy-and-hold returns for firm i and its associated market index over a given

time interval is as follows:

,21 1

n

i i ttR r

, (4)

where iR is the long-term buy-and-hold return of firm i, and ,i tr is the return of firm i‟s stock

on day t. We use the same process to calculate returns for the market index. The

buy−and−hold abnormal returns (BHAR) for firm i become:

2,

i

n i iBHAR R BR , (5)

where2,

i

nBHARis the buy-and-hold abnormal returns between two days prior announcement

andiBR is the return of benchmark i over the same period.

15

The technique that we use to measure firm performance of companies is a relative one.

Due to the large sample size of our merger and acquisition database, we are able to include a

large sample of merger pairs where we have complete data for both acquirer and target. Thus,

we are able to compute Tobin‟s q for both acquirer and target. Shleifer and Vishny (2003)

discuss relative overvaluations, rather than absolute valuations. We adopt their basic intuition

to use a relative performance measure, rather than an absolute one. Garvey et al. (2010),

employ a similar approach to investigate the link between the likelihood of a merger and the

market mispricing. The relative valuation method we develop in this study to account for the

mispricing and valuation hypothesis is a relative Tobin‟s q. We calculate the relative Tobin‟s

q by dividing an acquirer‟s Tobin‟s q, by its target‟s Tobin‟s q as show below:

Acquirer

Target

Tobin sRelative Tobin s

Tobin s

qq

q

. (6)

The variable definitions are given in Table 6.

<<Insert Table 6 about here>>

15

Summary information for bidders and targets on the date known announcement cumulative abnormal returns,

long-term buy-and-hold abnormal returns upon merger consummation or failure, and long-term cumulative

abnormal returns upon merger consummation or failure are available from the authors.

26

5. CROSS-SECTIONAL ANALYSIS

This section examines the cross-sectional analysis of returns to acquirers and targets

around acquisition bids and bid failure announcements. We begin with summary statistics for

our sample, followed by a cross-sectional regression analysis of abnormal returns around

these events. The cross-sectional analysis allows us to estimate the magnitude and

distribution of expected synergistic benefits created in acquisition bids. This section is split

into three parts. The first sub-section analyzes expected synergistic benefits around

acquisition bid announcement dates. The second sub-section analyzes the predictions of

Hypothesis I concerning the loss of expected synergistic gains on bid failure announcements.

The third sub-section analyzes abnormal announcement returns over a longer event window,

starting with the bid announcement until the bid outcome announcement of a bid‟s success or

failure. From this analysis, we obtain a clearer picture of whether there are expected

synergistic benefits in typical acquisition bids. This analysis also allows us to assess whether

the pursuit of synergistic benefits is a fundamental motive for acquisition bids.

If the pursuit of synergistic benefits is an important motive for acquisition bidders, then

acquirers should share in any synergistic benefits associated with a bid. It follows that bidder

stock price reactions to acquisition bid announcements should be significantly positive. Table

7 shows that acquirers have a mean price run-up of two percent prior to the bid and a

cumulative abnormal return on the bid announcement of −1 percent. Ahern and Sosyura

(2011) suggest that acquirers release a string of positive announcements in the weeks and

months leading up to the public announcement of an acquisition, boosting their share price

and in the case of script offers, obtaining a better ratio on a stock merger swap. Therefore, if

we take account of the acquirer‟s pre-bid price run-up in measuring a bidder‟s acquisition

announcement return, then bidders realize a positive acquisition bid announcement return of

one percent. This preliminary evidence provides support for Hypothesis II: on average

acquirers realize positive returns on acquisition bid announcements, even though the gain in

percentage terms is small. While targets appear to capture the bulk of the acquisition induced

synergies since they exhibit larger announcement effects compared to bidders, this is

somewhat misleading because targets tend to be much smaller in size than bidders. Thus,

even if there is an equal division of the synergies between bidder and target, the target would

exhibit a much larger percentage gain.

<<Insert Table 7 about here>>

27

The market for corporate control literature documents strong evidence that targets receive

a substantial share of synergistic benefits associated with acquisitions, based on significant

positive market reactions to acquisition announcements. Similar to Betton et al. (2008), Panel

B presents a positive announcement CAR for target firms of 21 percent and a price run-up of

seven percent. Thus, in the 60 days prior to announcement until two days after the acquisition

announcement, the target firm enjoys an abnormal return of approximately 28 percent.

The descriptive statistics in Table 7 depict an interesting relationship between the relative

Tobin‟s q of acquirers and targets. The mean value for Tobin‟s q for acquirers and targets is

respectively 2.07 and 1.78. However, using our matched sample of acquirers and targets, we

are able to compute the relative Tobin‟s q present in a deal. Utilizing the latest accounting

figures prior to the bid and a firm‟s equity market value 61 days prior to the bid

announcement, the mean relative Tobin‟s q is 3.92, indicating that on average acquirers have

a Tobin‟s q that is approximately four times greater than that of their targets.

At one level, this may provide evidence to support Shleifer and Vishny‟s (2003) market-

timing theory and the explanation of Savor and Lu‟s (2009) of relative overvaluation of

acquirers compared to targets. This large disparity in acquirer and target Tobin‟s q figures

provides evidence to support the view that overvalued high-growth acquirers tend to purchase

relatively lower growth (and less overvalued or more undervalued) targets. Thus, Savor and

Lu‟s explanation rests on acquirers exploiting target shareholders by paying them in

(relatively) overvalued stock. We depart from the behaviorist point of view by using of

rational economic decision making to explain acquirer motives arising from slower than

expected growth prospects, which lead managers to seek external growth options, including

the pursuit of synergistic benefits through acquisitions. What Grossman and Hart (1981)

define as “allocational mergers” create synergistic benefits, where assets transfer from low-

productivity to high-productivity firms, thereby increasing the economic benefits that an asset

can produce.

Table 8 presents the announcement period and the sum of the 60-day run-up period plus

announcement abnormal returns, as well as the announcement period and the sum of the 60-

day run-up period plus announcement aggregate dollar returns for the sample used in the

cross-sectional regression. For this sample, we find similar results to the past literature (e.g.,

Andrade et al. (2001)). We find that on bid announcements bidders on average earn

negligible returns, which are sometimes losses (of –1.05 percent and –0.44 percent,

respectively). Furthermore, we see large gains to target firms on announcement date (19.22

28

percent and 27.01 percent). As hypothesized, we see large losses to both bidders (-9.34

percent) and targets (-17.6 percent) on the date the market learns of a bid‟s failure. In

addition, consistent with Eun et al. (1996), we observe a gain to the combined value of the

bidder and target of 2.67 percent or 3.28 percent inclusive of the price run-up immediately

before the bid announcement. We also see a loss of −1.82 percent on the bid failure

announcement or a total loss of −13.39 percent over 100 days following the bid failure

announcement, inclusive of the immediate bid failure announcement loss. This evidence

shows that on average positive synergistic benefits exists for the large sample of deals in our

sample. These results are also consistent with the findings for aggregated dollar returns and

are robust to measuring returns based on a value-weighted index. In summary, the results in

Table 8 provide support for Hypotheses I and II, with both the existence of large synergistic

benefits from acquisitions and with acquirers realizing a significant share of these expected

benefits.

<<Insert Table 8 about here>>

Table 9 presents the pairwise correlations of our explanatory and dependent variables

broken down by acquirers and targets separately. There is a strong correlation between

method of payment and the size of announcement returns for both bidders and targets. Both

Tobin‟s q and Relative Tobin‟s q are significantly negatively related to bid failure

announcement returns (Date Known - DK). Furthermore, the bidder and target price run-ups

are negatively relates to announcement date returns (Date Announced - DA).

<<Insert Table 9 about here>>

5.a The creation of synergistic benefits

In Table 10, we report the results from our regression analysis of acquirer returns around

acquisition bid announcements, including the target stock‟s price reaction to the bid

announcement, after controlling for firm and deal characteristics. We benchmark the models

presented in Table 10 against an equal-weighted index. We find for all regression models and

time periods that the target price reaction to a bid announcement is statistically highly

significant and positively related to the acquirer announcement returns. Inclusive of the run-

29

up period, the magnitude is also very strong. Where target firms have positive returns on

acquisition bid announcements, due to their large bid premiums and consequently large share

of the synergistic gains; acquirers also have positive returns on bid announcements. Hence,

we find evidence that acquirers share some of the expected synergistic gains capitalized into

stock prices on the announcement of the acquisition bid.

We find the coefficient on stock bids is significant at 1% level for all models.

Furthermore, it has a significant negative effect in the short-horizon models and significant

positive effect in the long-horizon models. In the five days around the bid announcement,

stock bidders earn approximately 4.5 percent less than cash bidders consistent with a strong

downward signaling bias for stock bids. This result is robust to using the All Failed Bids and

Exogenously Failed Bids samples. Moreover, in the 60 days leading up to an acquisition bid

announcement until two days after, stock bidders outperform cash bidders by approximately

5.7 percent, which is again consistent with the evidence from the exogenously failed bids

sample. These results are strong evidence in support of Ahern and Sosyura‟s (2011) findings

that stock bidders increase their value prior to bid announcements by releasing positive news.

<<Insert Table 10 about here>>

A significant finding in this model is the level of significance of the failed bid and

exogenous failed bid indicator variables. We find that the market is unable to predict

exogenous bid failures, but in the short-term model, the market appears to able discern low

levels of synergistic benefit to predict endogenous deal failure, as occurs in Dimopoulos and

Sacchetto (2011). This further supports our methodology, which extracts estimates of an

acquisition‟s expected synergistic benefits from exogenous deal failures. If these bid failures

could be anticipated because they are not truly exogenous, then the market reaction to bid

failure announcements would understate the actual expected synergies that a successful

acquisition would create, since only highly synergistic acquisitions overcome target

resistance.

The sign and significance of the coefficients of our control variables are largely consistent

with findings in Masulis et al. (2007). Specifically we find that: (i) firm size is significantly

negatively related to bidder returns. This suggests that larger firms have lower synergistic

benefits. This may be due to their size and the difficulty of merging their operations and

obtaining substantial large synergistic benefits relative to their size. (ii) Acquirer price run-up

has an insignificant and negligible effect on bidder returns. (iii) Relative Tobin‟s q has a

30

significant negative effect on bidder returns consistent with a revelation bias. (iv) Cross-

border acquisitions have a negative impact on bid announcement returns, but this is

statistically insignificant. (v) US acquirers participating in cross-border acquisitions have a

negative effect on bidder returns, but this is also insignificant. (vi) Diversified and High-Tech

M&A deals have an insignificant negative effect. (vii) By comparison, financial industry

mergers in the short-horizon models have a significant positive effect on bidder returns. (viii)

Relative deal size has a positive relation with bidder returns and in the longer-horizon models

is statistically significant at a 10% level. (ix) Lastly, we find strong positive intercepts of

approximately eight percent and relatively high Adjusted R-squared values in comparison to

previous literature for the short-horizon models.

Table 11 presents announcement date abnormal returns for target firms inclusive of the

bidder‟s reaction. We find similar coefficient signs and significance levels for targets as we

did for the bidder regressions. Unlike the evidence on bidders, we find that the long-horizon

model inclusive of the 60-day run-up period predicts bid failure. Failed bids have

significantly lower returns of -10.3% and -17.1% for the all failed bid and exogenously failed

bid samples respectively, with the exclusion of the bidder reaction.16

However, there are

insignificant failed bid coefficients around immediate announcement date, which is consistent

in our interpretation of the price reactions reflecting the creation and subsequent loss of

synergistic benefits. The significant failed coefficients in the long-horizon study may reflect

poor target choice, lower synergistic gains, or a bidder‟s optimal choice of when to make a

bid, or the possibility that these are badly selected bids and are doomed to failure from the

very start. With the inclusion of the bidder reaction, there is a positive and significant effect

on the target return, indicating a sharing of synergistic benefits. Regardless of controls for

bidder reactions, there are negative and significant coefficients for stock bids for both the

short-period and long-period event windows. These results are supportive of both Shleifer

and Vishny‟s (2003) and Savor and Lu‟s (2009) finding that stock bids release bad news. The

significantly positive relative Tobin‟s q coefficient supports the view that synergies may be

created through, what Grossman and Hart (1981) termed allocational bids. This is where a

more efficient acquirer purchases a relatively less efficient target and improves the economic

value of an asset through a more efficient allocation of resources. This is also termed

corporate control benefits.

<< Insert Table 11 about here>>

16

Not shown.

31

5.b The loss of synergistic benefits

In this section, we examine the returns of acquirers and targets around the date when the

market learns that a bid succeeds or fails. We hypothesize that on the bid failure

announcement there will be a loss of synergistic benefits and a fall in the combined value of

the two firms. While we show an association between bidder and target returns on takeover

announcement in Section 5.a, we cannot definitely conclude that bid announcements create

synergistic benefits. We now employ a methodology similar to that of Savor and Lu (2009).

They utilize a failed sample of acquirers and find that failed acquirers significantly

underperform successful ones. Likewise, we use failed bids to show that on bid failure

announcement, there is a subsequent loss of the bid‟s expected synergies for both bidders and

targets. Hence, we hypothesize that: (i) this subsequent loss is attributable to the loss of

expected synergistic benefits due to deal failure, (ii) acquirers share in these benefits, and (iii)

the loss on exogenously failed bids should be significantly higher than on endogenous failure

as it is an indicator of weak synergistic gain. Moreover, due to potential future competing

offers, targets keep their bid premium for a while after the failure of the initial bid. This last

result is similar to the finding in studies of bid cancellations by Dodd (1980) and Bradley et

al. (1983). Hence, expected synergies associated with the first bid and captured by the

target‟s stock price can remain with the target for an extended time period. We therefore

adjust the standard event study methodology for acquisitions by including an exogenous bid

failure sample and by measuring abnormal returns over a longer time period, specifically for

the 100 day period following the bid outcome announcement.

Table 12 shows that bid failure results that include bidder stock performance over the next

100 days from deal failure announcement [DK +100] are far better in terms of overall fit with

much higher Adjusted R-Squared. Moreover, the stock price fall for exogenously failed

acquirers making stock bids is 55% higher at 16.8% than it is in the All Failed Bids sample,

once again supporting our hypothesis that exogenously failed bids are likely to be far richer

in terms of benefits than endogenously failed bids. Here, the endogeneity problem seems

confined to stock bids only, since failed cash bids do not indicate a sizeable synergistic

benefit, reflected in an insignificant price decline on failure announcement. There is also

evidence of a further 6.7% price decline for the full sample of stock bids relative to cash bids

in the 100 days following news of a deal‟s outcome, irrespective of a bid‟s outcome. This

32

evidence is further support for our conclusion that stock bid announcement is conditional on

sizeable, but not previously revealed bad news about a bidder. Finally, Relative Tobin‟s q has

no effect on the long-term acquirer performance, implying that it is not a predictor of offers

by overvalued bidders.

<<Insert Table 12 about here>>

Table 13 introduces the target‟s reaction as an explanatory variable to better understand

bidder returns around bid outcome announcements. Similar to acquisition bid announcement

returns, we find that target price reactions are statistically significant and economically

positive around the bid outcome announcements. In fact, for the exogenously failed sample

over a long horizon, the returns for acquirers and targets are almost perfectly correlated with

a highly statistically significant coefficient of 0.8. One cannot observe this correlation for

successful acquisitions as it happens by definition due to merger. This is in line with

Hypothesis I which predicts that a fall in the value of a target will generally result in a

complementary fall in the value of the bidder. The key finding in the bidder return

regressions shown in Table 12 is the significant positive coefficients for a target‟s price

reaction to the bid outcome news. This provides further support for the Hypothesis I and II

predictions that expected synergistic benefits exist and that acquirers receive a significant

share of these expected benefits.

<<Insert Table 13 about here>>

Columns (1) and (2) of Table 14 presents target firm returns surrounding the

announcement that a bid has failed based on buy and hold abnormal returns (BHARs) two

days prior to the announcement until 100 days following the announcement. It incorporates

the reaction of the acquirer‟s stock price over the same long-term horizon (Column (2)). The

market-timing theory predicts that a stock acquirer will purchase a target‟s assets at a

discount using their relatively overvalued equity and that a cash acquirer will purchase the

target at a discount to its true long-term value (e.g., Malmendier, Opp, and Saidi (2011)).

Savor and Lu (2009) extend this argument by concluding that on acquisition failures, stock

bidders fail to acquire targets using relatively overvalued equity, thus losing the acquisition

gains of the bid. Therefore, one would assume that as news of a stock bid failure caused by

relative overvaluation of a bidder‟s stock, becomes known to the market, long-term target

33

shareholders would either react positively to news of a bid‟s failure or at least react less

negatively than they would on news of a failed cash bid. However, we find the coefficient on

the stock bid indicator in Columns (1) and (2) of Table 14 has an insignificant association to

target returns on a bid failure announcement. The insignificant coefficient is evidence against

the market-timing theory insofar as it pertains to both stock targets and cash targets. Cash

targets should relatively retain their value according to the undervaluation timing story, but

there is no evidence of this. These results further support our argument that expected

synergistic benefits are a substantial and tangible motive for acquisitions.

<<Insert Table 14 about here>>

Specifically, in examining Columns (1) and (2) of Table 14, we find that: (i) firm size is

significantly positive related to target returns for all models, indicating that larger targets

contain more synergies; (ii) bidder announcement returns in stock bids are statistically

insignificantly different from cash bids, hence rejecting the contention by Savor and Lu

(2009) that stock bids are motivated simply to exploit the acquirer‟s overvalued equity and

thus withdrawal should result either in little change or upward movement in the target‟s stock

return; (iii) Relative Tobin‟s q has an insignificant effect on target returns on the bid failure

announcement and no substantial effect on the size and significance of the remaining

explanatory variables when it is omitted from the models, indicating that this proxy for

overvalued acquirers has no effect on target stock performance; (iv) cross-border bids have

insignificant negative failure announcement effects for targets in both models; (v) US bidders

participating in cross-border deals have no additional significant withdrawal announcement

effect on target returns; (vi) diversified bid failures relative to failure generally have an

insignificant positive effect on targets in both models, which are consistent with the findings

in Morck et al. (1990); (vii) the High Tech indicator has a positive effect on target returns

around deal failure and is significantly positive in Model 3; (viii) financial industry bids have

an insignificant failure announcement effect on target returns relative to all failed bids; (ix)

and we find a significantly large negative intercept for target returns in all the models.

The significant negative intercept on target returns at a bid failure announcement indicates

that targets of failed bids earn significantly negative abnormal returns compared to the

market. Additionally, when we take into account the mean values of a target‟s equity

capitalization (size) and its relative Tobin‟s q provided in Table 7, we find that average target

abnormal returns on bid failure announcements is −25.15%. These losses are similar in

magnitude to the combined target gain from the run-up and bid announcement periods, which

34

yield a combined CAR of 28%, also shown in Table 7. Thus, unlike stock bidders, there is no

evidence of a revelation bias when it comes to target announcement effects and no difference

between cash and stock bids.

Furthermore, we find evidence in favor of Hypothesis I, with a significantly positive

coefficient for the bidder‟s stock reaction to target returns around the bid failure date. This

suggests that target‟s returns will generally move in the same direction as acquirer returns on

bid failure announcements. Therefore, combined with the significant negative intercept, we

have evidence in favor of a loss of synergistic benefits experienced by both bidders and

targets.

5.c The creation and subsequent loss of synergistic benefits

In this section, we examine the capitalization and subsequent loss of expected synergistic

benefits in M&A transactions. The method used in this section avoids the major limitations of

the evidence reported in the prior two sections. We undertake a long-horizon study starting

from the date of the bid announcement through to the date of the bid outcome announcement.

Thus, models in this section allow for the capitalization and subsequent loss of bid related

expected synergistic benefits. Hence, they overcome the issues of: (i) any leakage of bid

information prior to its public announcement; (ii) slow market reactions to the gain or loss of

expected synergistic benefits; and (iii) overcoming the revelation of information about bidder

or target valuation on the initial bid announcement. We expect to see a significant negative

effect of failed bids for acquirers, hence proving that: (i) acquirers lose expected synergies on

a bid failure and (ii) that on the initial bid announcement, acquirers share in a significant

portion of these benefits.

Columns (3) to (6) of Table 14 presents a comparison between successful and failed

targets over the long-period window from 60 days prior to the takeover announcement until

100 days post when the bid outcome is known. All models are benchmarked against an

equally weighted index. The methodology to analyze the gain and subsequent loss of

synergistic benefits attributed to targets differs from that previously. If one assumes that the

target will gain synergistic benefits on announcement of a takeover and subsequently lose

these benefits on the announcement of a failure, the target should eventually return to its

initial level over a period of time. Therefore, the expected abnormal return over this long

horizon event study would be negligible compared to a suitable benchmark. Hence, one

expects many of the coefficients and variables in the DA-DF models to be insignificant and

35

negligible. This assumption is accurate for the majority of the variables. However, we see a

significantly negative coefficient on stock, depicting that over this period targets of stock bids

severely underperform targets of cash bids. The 13.3 percent fall in the value of targets of

successful stock acquirers relative to successful cash acquirers shown in Column (3) seems to

form part of the overall bidder revelation loss that is passed on to targets of successful stock

acquirers during the period between the initial bid announcement but before the success or

failure of the bid is announced. The much larger fall in the price of failed stock targets

relative to failed cash targets in Column (5) of 36 percent most likely represents cash targets

remaining in play for a longer period than the 100 days post deal outcome news modeled

here. To the extent that failed cash targets retain some of their value gain following deal

failure, this reduces both bidder and target synergistic gain as any residual value gain to

targets due to revelation of true value simply represents a transfer to the new entity in the

case of deal success.

36

Additionally in Model (5), we find that target firm size has a positive effect on target

abnormal returns, which is statistically significant at a 10% significance level. When

substituting in the mean value for target firm size and relative Tobin‟s q, whilst turning off all

dummy variables except stock bids, we find an abnormal return over the period of study of

0.36% for Model (5) that is negligible. This result provides evidence that targets of stock bids

return to their prior-bid valuation basis. These results do not hold for cash bids, consistent

with the idea that they remain in play for much longer than do failed stock deals. The strong

positive coefficient for acquirer‟s reaction to target abnormal returns still exists and is

approximately the same in magnitude as those of successful bids. It suggests that there is a

relationship and sharing of synergistic gains between acquiring and target shareholders.

Table 15 reports bidder stock returns, commencing 60 days prior to the initial bid

announcement, until two days following the bid outcome announcement date. We find similar

results to those in Sections 5.a and 5.b. For our control variables, both the magnitude and

statistical significance is quite stable when compared to the estimates in Sections 5.a and 5.b,

indicating robustness across the three different methodologies. Specifically for our control

variables, we observe that both bidder size and stock bid indicator have an insignificant effect

on bidder returns. Hence, the presence of stock, as the method of payment does not play a

significant role in overall bidder returns, neglecting the interaction term between stock

financing and failed bids.

<<Insert Table 15 about here>>

The most important finding in the model is the significantly negative coefficient of the

failed bid indicator, and the failed stock bid interaction term. Both the All Failed Bids and

Exogenously Failed Bids samples show that failed cash bidders earn significantly lower

abnormal returns of −11.0 percent and −10.7 percent respectively compared to successful

cash bidders. Additionally, we find a significantly negative coefficient for the interaction

term between failed bid and stock bids. We find that failed stock bids underperform

successful stock bids by a further 9.4 percent and 11.6 percent for the All Failed Bids and

Exogenously Failed Bids samples respectively. Hence, this suggests stock bids contain more

synergistic bidder gain than do cash bids. These results are consistent with our expectations

and also the Savor and Lu (2009) findings, except that Savor and Lu treat the additional loss

on stock bids as evidence that the bidder can no longer sell overpriced equity to the target.

We treat our findings as significant evidence in favor of Hypotheses I and II, which imply

37

that expected synergistic benefits not only exist, but also acquirers expect to capture a

significant share of these benefits. Therefore, we conclude that bidders lose the expected

synergistic benefits on the bid‟s failure announcement.

The positive and highly statistically significant reaction of targets to either deal success or

bid failure over the entire period from 60 days prior to bid announcement to 100 days

following deal outcome shows that for every 100 basis point return obtained by the bidder,

there is a corresponding 62 basis point return for the target in the same direction. Thus,

synergies earned by the bidder and by the target move in the same direction, indicating a high

degree of commonality in synergies earned. By contrast, Savor and Lu (2009) explain the

sizeable fall in the price of the bidder on deal failure announcement as being entirely due to

the offsetting gain to the target when no longer burdened by the receipt of overpriced stock in

what they assume are synergy-free mergers involving only wealth transfers from target to

bidder. Hence, they predict a coefficient on the target BHAR of -1 rather than our finding of

+ 0.62. However, since they fail to include target returns in their empirical analysis, we can

safely reject their supposition of a negative relationship in favor of a strongly positive

relationship to conclude that both Hypotheses I and II are satisfied.

6. BIDDER AND TARGET RELATIVE SHARES OF SYNERGISTIC GAINS

Denote the mean equity values of the bidder and target just prior to the initial run-up

period as B and ,T respectively. Additionally, denote by BE , the excess bidder value lost

over the period from pre-run-up until 100 days following the offer outcome news date, when

the market is aware of a bid‟s success or failure, TE represents any permanent valuation

increase to the target following a cash bid, BG represents the synergistic gain accruing to a

bidder, and TG the synergistic gain accruing to a target. Hence, just prior to news of a bid‟s

outcome, a bidder‟s market valuation should equal:

1 ,S B T B S B B S T Bp B E E G p B E B E p E G (7)

where Sp represents the probability of deal success and 1F Sp p the probability of deal

failure. In our sample (and in the majority of empirical studies of M&A), there is negligible

change in bidder value on a bid announcement, given by B S T BB E p E G , relative to its

pre-run-up value given by B . Thus, prior to news of bid success or failure being released to

investors, there is approximate equality between the two, B S T BB E p E G B . Hence,

38

on a bid announcement, a bidder suffers a revelation loss in value, B S T BE p E G , which

is approximately equal to a bid‟s expected synergistic gains plus any revelation gain in value

to an initially underpriced target following a cash bid, factoring in the probability of success.

On news of deal failure, a failed bidder‟s value becomes:

1 ,B

B S T B B S T B DFB E B p E G B E p E G V

so that the synergistic gain is reduced by any permanent revaluation of the target

DF

B

B T

S

B VG E

p

, and ,

DF

B

BE B V where DF

BV is the relative reduction in bidder value

on a deal failure.

Similarly, target valuation on a bid announcement is:

1S T T S T T S Tp T E G p T E T E p G ,

where TE is the permanent valuation increase for the target, as before, and the target

valuation gain on the announcement is T T S T

DA

E p GV

T

. Thus, the estimated synergistic gain

on bid announcement, prior to knowing if a bid is a successful or not, is T

DA TT

S

T V EG

p

.

Note that on a bid announcement, a target‟s stock price rises by less than an offer‟s full value

to a target because the probability of bid success is less than one.

On a stock bid announcement, a target‟s expected value is 1T

Stock T Stock Stock

DA ST V T p G

and 100 days after bid failure, a stock target‟s value reverts (approximately) to its pre-bid

price. Hence, 1T

Stock Stock Stock T

S DFT T p G V . Thus, a stock target‟s estimated synergistic

gain, based on a bid announcement, but prior to the bid outcome being announced and a

target‟s estimated value, based on a price fall over the 100 days post-failure announcement

period must be the same, i.e., Stock Stock

Stock T T

T DF DA

S S

T TG V V

p p and T T

DF DAV V . Our empirical

results for stock funded targets are consistent with this prediction.

For a cash funded bid, our results are similar. The target‟s expected value becomes:

1T

Cash T Cash Cash

DA T ST V T E p G on bid announcement and a 100 days post deal failure

does not yet revert to its pre-bid price with a possibility that for some failed cash target

stocks, 0TE , with post-failure valuation, Cash

TT E , and fall in value, T

Cash

Sp G . Hence,

39

1

Cash CashT S T S T

DF Cash Cash Cash T

T S T DA

p G p GV

T E p G T V

on substituting from the initial deal

announcement effect. Thus, 1Cash T T

DA DFCash

T

S

T V VG

p

and 1Cash T T T

T DF DA DAE T V V V

on eliminating Cash

TG . Hence, if 0T

DFV there are no synergistic gains, and if 1

TT DF

DA T

DF

VV

V

the entire appreciation of the target on bid announcement is synergistic gain. In this latter

case, which we find to be the most likely one, 1

TT DA

DF T

DA

VV

V

, and consequently,

.T

DAT

S

T VG

p

The likelihood of an exogenously failed bid is 10%, hence the probability of bid success is

0.9Sp , and the proportion of exogenously failed stock bids is 52.9%, slightly less than the

overall proportion of stock bids. Based on an average equity value for bidders of $2,983.57

million and for targets of $657.55 million taken from Table 7, and the run-up prior to the

initial announcement (DA) to 100 days post-bid failure announcement (DK) bidder return in

Table 15, then over the [-60 DA, DK+100] period, we obtain a bidder return of -10.7% for

cash bids and -26.2% for stock bids, based on the exogenous failed bid sample. From two

days before failure announcement (DK) to 100 days post, Table 12 shows that no significant

fall occurred for cash bidders. Hence, there seems to have been earlier anticipation of cash

bid failure. The total expected bidder gain is B

S CG $626.6 million, made up of B

SG $459.6

million for stock bids and B

CG $167 million for cash bids. The overall revelation loss to the

bidder on the bid announcement, S CE , is $563.9 million (i.e., return of -18.9% on the initial

equity value) made up of SE $413.6 million for stock bids and CE $150.3 million for cash

bids.

Based on the same descriptive statistics and the average bidder announcement return of

27.1% for targets provided in Table 8 over the period [-60, DA +2], the target‟s overall gain

is $198 million. However, the evidence from Column (3) of Table 14 is that extending the

initial window until 100 days after deal outcome is known, successful stock targets receive

only about half the gain of cash targets. On this long-term basis, targets only receive overall

gains of $145.6 million. The bidder‟s share of the gains for stock bids at 89.8% is far higher

40

than for cash bids at 64.2%. The overall synergistic gain for the bidder-target combination is

$772.2 million, yielding an overall 21.2% return for the combined entity. Looked at from

another perspective, the bidder values the target at a premium of 117.4% of a target‟s pre-bid

negotiation value (prior to any bid induced stock price run-up). The bidder pays an expected

premium of only 22% due to the long-term impost on target shareholders of the bidder‟s

value reduction, leaving the bidder with a huge expected gain of 95.3% on top of the target‟s

pre-bid negotiation value. This calculation contrasts with structural estimation by

Dimopoulos and Sacchetto (2011), who find a slightly smaller takeover premium of 97%. In

their sample, the target receives a higher gain of 51%, which leaves a much smaller bidder

takeover premium of 46%.

7. CONCLUSIONS

In conclusion, we find strong evidence in favor of the existence of synergistic benefits to

takeover bids using evidence from an events study of the gains realized on initial bid

announcement and the subsequent loss of expected synergies on the announcement of a bid‟s

failure. These benefits are large, amounting to 22.7 percent of the combined equity values of

the bidder and target, starting just prior to the 60-day run-up period preceding a bid. On a bid

announcement, bidder stock price declines 18.9% or $563.9 million due to revelation of bad

news, mostly associated with the bid‟s use of stock as the takeover currency, but then is

pushed up to almost its pre-announcement value by the market capitalizing prospective

synergistic gains. We also find strong evidence of expected synergistic benefits realized by

stock and cash bidders, with the former receiving a much larger share of the benefits than the

latter, i.e., 81.44% versus 64.18 %. Contrary to the findings of Savor and Lu (2009), the

typical gain to a stock bidder is not offset by a loss to the target, as they would predict. In

fact, the gain to a typical target is very substantial, representing a 31% premium on the

target‟s price prior to the onset of offer negotiations. We find additional evidence that target

firms facing stock bids, lose these expected synergies in the first 100 days following a bid

withdrawal announcement and their stock prices on average returns to their pre-bid price

levels. In contrast, targets of cash bidders retain a portion of their bid premium for a longer

interval of time. We do not find evidence that failed cash target stocks permanently retain a

substantial proportion of the takeover premium, as suggested by Malmendier, Opp, and Saidi

(2011). They may simply be picking up the fact that these failed targets remain in play for

longer than do failed stock targets. Our proxy for bidder overvaluation and the timing theory

41

of target exploitation in stock bids, namely the relative Tobin‟s q, indicates no evidence to

support the target exploitation theory. Moreover, target shareholders benefit at least as much

in stock bids as they do in cash bids. Our results strongly reaffirm the neo-classical theory of

takeovers and M&A activity in which assets move systematically to their highest value use,

which is driven by the potentially huge synergistic gains accruing to successful bidders.

42

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Financial Economics. Forthcoming.

Ahern, K. R., and Sosyura, D. (2010). Who Writes the News? Corporate Press Releases

During Merger Negotiations, Working Paper, University of Michigan.

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47

Table 1

Sample Construction

Panel A: Merger and Acquisition Deal Sample Construction

Filter Previous use Australia Canada United Kingdom United States Total

Date Announced between 1/1/1985 to

31/12/2009 and Target Nation: AU, CA, UK,

US

374,517

Public Target

80,678

Public Acquirer

51,370

All Merger and Acquisition Deal Sample 3,301 7,744 4,020 36,305 51,370

Deal was either Successful or Failed Savor and Lu (2009) −814

−4097

−932

−17814

−23,657

Date Announced was after 1/1/1985

0

−104

−3

−1928

−2,035

Acquirer was seeking more than 50% of the

target's shares Moeller et al. (2005)

−1,488

−1,617

−1,416

−7,692

-12,213

Deal Size was known and was greater than or

equal to $1M(US) Moeller et al. (2005)

−111

−358

−195

−951

−1,615

The method of payment was known and was

either 100% Cash or 100% Script Savor and Lu (2009) −254

−543

−557

−2,603

−3,957

Merger and Acquisition Deal Sample 634 1,025 917 5,317 7,893

Panel B: Merger and Acquisition Dataset Construction

Filter Previous use Acquirers Targets

AU CA UK US Total AU CA UK US Total

Merger and Acquisition Deal Sample 634 1,025 917 5,317 7,893 634 1,025 917 5,317 7,893

Incomplete Price Data around announcement Moeller et al. (2005) −326 −611 −437 −3,227 −4,601

−266 −581 −404 −1,702 −2,953

Incomplete Price Run-up data Moeller et al. (2005) −8 −8 −81 −43 −140

−11 −2 −105 −14 −132

Incomplete Accounting data Moeller et al. (2005) −10 −51 −30 −98 −189

−7 −41 −28 −126 −202

Merger and Acquisition Dataset Description 290 355 369 1,949 2,963 350 401 380 3,475 4,606

48

Table 2

Sample Distribution of Successful and Failed Bids The sample consists of 2,963 Acquirers, 4,606 Targets and 1,941 Matched Acquirers and Targets; where the

deal originated from Australia, Canada, the United Kingdom or the United States. SDC Platinum is the source of

merger and acquisition data.

Successful Bids Failed Bids

Stock Cash Total Stock Cash Total Total

Panel A: Acquirers

Australia 127 72 199

55 36 91

290

Canada 202 84 286

51 18 69

355

United Kingdom 134 162 296

31 42 73

369

United States 864 692 1,556

224 169 393

1,949

Total 1,327 1,010 2,337

361 265 626

2,963

Panel B: Targets

Australia 136 111 247

59 44 103

350

Canada 219 102 321

57 23 80

401

United Kingdom 122 184 306

35 39 74

380

United States 1,625 1,339 2,964

262 249 511

3,475

Total 2,102 1,736 3,838

413 355 768

4,606

Panel C: Matched Acquirers and Targets

Australia 85 43 128

38 20 58

186

Canada 109 32 141

28 10 38

179

United Kingdom 73 95 168

22 23 45

213

United States 590 514 1,104

127 132 259

1,363

Total 857 684 1,541 215 185 400 1,941

49

Table 3

Exogenous Failed Sample Construction

Construction of the Exogenous Failed Sample

Acquirers Targets Matched

Sample

1,394

1,394

1,394

All Failed Sample

−768

Removing non-acquirers

−626

Removing non-target

−994

Removing unmatched deals

626

768

400

Net Failed Sample

−118

−120

−64

Inability to conclude negotiations/not enough

information.

−81

−99

−51

Target's refusal of the offer.

−38

−46

−25

Deal was withdrawn within 14 days - not enough time

for synergies to be realised.

−20

−29

−13

Days from announcement to date known to be

successful or fail is greater than 1 year.

−12

−16

−11

Disagreement over bid premium and merger terms.

−5

−13

−5

Due diligence revelations about the target.

−3

−6

−3

Changing in macro-economic conditions.

−3

−2

−1

Inability to secure financing.

−1

−1

−1

Reverse Takeover - Bid was withdrawn and target

subsequently acquired the acquirer.

−38

−23

Acquirer withdrew offer unexpectedly to the target.

−7

−5

Change in acquirers stock price, value or operations

−2

0

Acquirer subsequently got an offer to be acquired.

−1

−1

Acquirer participated in a takeover to avoid being

acquired.

−152

−73

Target was bought by someone else and received

synergies from another deal.

−8

−5

Change in targets stock price, value or operations.

297 276 119 Exogenous Failed Sample

50

Table 4

Time-Series Distribution of Successful and Failed Merger Bids This table shows the time series distribution of Successful and Failed merger bids. We sort the table in

five-year increments and have separate panels for Acquirers, Targets and the Matched Sample. The

Successful Sample contains consummated deals. The Failed Sample contains deals that were

unconsummated. The Exogenously Failed Sample contains deals that were unconsummated and failed

for exogenous reasons.

Stock Financed Bids

Cash Financed Bid

Year Successful Failed Exogenous Successful Failed Exogenous

Panel A: Acquirers

1985-1989

109 42 18

212 65 34

1990-1994

167 67 32

116 30 19

1995-1999

451 103 41

261 68 36

2000-2004

301 68 28

198 39 23

2005-2009

299 81 40

223 63 26

Total 1,327 361 159 1,010 265 138

Panel B: Targets

1985-1989

141 51 21

307 100 26

1990-1994

287 74 30

149 34 11

1995-1999

850 107 45

438 78 22

2000-2004

454 81 35

376 59 21

2005-2009

370 100 39

466 84 26

Total 2,102 413 170 1,736 355 106

Panel C: Matched Sample

1985-1989

60 23 10

135 43 11

1990-1994

86 37 13

72 19 2

1995-1999

285 52 11

165 48 12

2000-2004

248 48 18

171 33 11

2005-2009

178 55 19

141 42 12

Total 857 215 71 684 185 48

51

Table 5

Date Announced (DA) Cumulative Abnormal Returns This table provides summary statistics for the cumulative abnormal returns over the M&A bid Date Announced

(DA) (−2, +2) event window. Panel A contains all the Acquirers in our sample, Panel B contains all the Targets

in our sample and Panel C contains the Combined Value of the acquirer and target created from the matched

sample. The All column depicts the entire sample deals. The Successful column contains all the successful bids.

The Failed column contains all the unconsummated or failed bids. The Exogenous column contains all the bids

that failed for exogenous reasons, as discussed in Section 2. We create CARs for Panel C by taking the

combined market value of the acquirer and target on the close of day +2, divided by the combined market value

of the acquirer and target, taken on the close of three days prior the announcement of the takeover. We base

significance levels on t-tests (means) and Wilcoxon-tests (medians). Respectively, ***, ** and * denote

statistical significance at the 1%, 5% and 10% level.

Variable All

Successful

Failed

Exogenous

Panel A: Acquirers

Mean −0.008*** −0.008*** −0.008* −0.012**

Median −0.009*** −0.008*** −0.010** −0.008

Standard Deviation −0.104 −0.100 −0.119 −0.100

5th percentile −0.158 −0.153 −0.172 −0.170

95th Percentile −0.148 −0.150 −0.142 −0.126

Observations −2,963 −2,337 −626 −297

Panel B: Targets

Mean −0.209*** −0.213*** −0.187*** −0.152***

Median −0.166*** −0.169*** −0.146*** −0.129***

Standard Deviation −0.273 −0.266 −0.306 −0.213

5th percentile −0.091 −0.083 −0.125 −0.139

95th Percentile −0.643 −0.652 −0.602 −0.467

Observations −4,606 −3,838 −768 −275

Panel C: Combined Firm

Mean −0.026*** −0.025*** −0.030*** −0.027***

Median −0.017*** −0.015*** −0.023*** −0.029***

Standard Deviation −0.104 −0.099 −0.121 −0.103

5th percentile −0.109 −0.109 −0.112 −0.145

95th Percentile −0.191 −0.188 −0.200 −0.199

Observations −1,941 −1,541 −400 −119

52

Table 6

Variable Definitions

Variable Definitions

Panel A: Firm Characteristics

Firm Size

Log of book value of total assets.

Market Value of Equity

Number of shares outstanding multiplied by the stock price,

measured 61 days prior to the announcement date.

Tobin's q

Ratio of the market value of to the book value of assets.

Stock price run-up

CARs from 60 days until three days prior to the announcement date.

Country Dummy

A dummy for each country where the deal is undertaken, except for

the United States that is included in the intercept.

Serial Bidder

Dummy variable: 1 if the firm is a serial bidder and 0 otherwise. We

define a firm as a serial bidder if the firm has made another public

bid in the previous three years.

Panel B: Deal Characteristics

Stock deal

Dummy variable: 1 if the deal is 100% stock, 0 if the deal is 100%

cash.

Diversifying acquisition Dummy variable: 1 if the bidder and target are not in the same

industry sector, 0 otherwise.

High-Tech Dummy

Dummy variable: 1 if the firm is from the high tech industry, 0

otherwise. We define High-Tech industry as having a three digit

SIC code of 357 or 737, or a four digit SIC code of 5045 or 5734.

Financial Dummy

Dummy variable: 1 if the firm is in the financial industry, 0

otherwise. We define the financial industry as having a four digit

SIC code starting with a 6.

Resources Dummy

Dummy variable: 1 if the firm is in the resources industry, 0

otherwise. We define a firm being in the resources industry if the

firm's industry is “Mining” or “Oil and Gas; Petroleum Refining".

Cross-Border Dummy

Dummy variable: 1 if the bidder's nation is not the same as the

targets, 0 otherwise.

United States Acquirer

Border Crossing

Dummy variable: 1 if the bidder nation is the United States and the

deal nation is outside of the United States, 0 otherwise.

Relative Tobin's q

The acquirer's Tobin's q divided by the target's Tobin's q.

Relative deal size

Deal value (obtained from SDC) over the bidder market value.

Relative size

The market value of the acquirer divided by the market value of the

target.

Panel C: Other Variable Creations

Aggregate Dollar Return Calculated by taking the market value n+1 days prior announcement

multiplied by CAR during the period (-n, +2).

Synergies

Calculated by adding the aggregated dollar return of both acquirer

and target.

53

Table 7

Descriptive Statistics

This table presents the descriptive statistics for the control variables for a sample of 2,963 acquirers and

4,606 targets between 1985 and 2009 inclusive. We do not winsorise any variables. Therefore, we report

the 5th

and 95th

percentile. Dollar amounts are measured in $US Millions. Variable definitions are in

Table 6.

Variable Mean Median Std Dev 5th

Percentile.

95th

Percentile.

Panel A: Acquirer Characteristics

Firm Size 6,576.48 612.09 35,065.66 21.28 26,334.38

Market Value of Equity 2,983.57 439.91 1,1213.09 14.41 12,757.26

Tobin's q 2.07 1.27 3.99 0.61 5.36

Stock price run-up 0.02 0.01 0.22 −0.29 0.35

Serial Bidder 0.30 0.00 0.46 0.00 1.00

Announcement CAR −0.01 −0.01 0.10 −0.16 0.15

Failed CAR 0.00 0.00 0.13 −0.16 0.17

Announcement Dollar Return −72.78 −1.46 788.89 −431.14 173.10

Failure Dollar Return −6.01 0.06 278.48 −102.90 151.70

Panel B: Target Characteristics

Firm Size 1,831.78 156.96 12,744.71 9.25 4,860.32

Market Value of Equity 657.55 90.10 3083.46 6.50 2,272.63

Tobin's q 1.78 1.18 2.18 0.65 4.55

Stock price run-up 0.07 0.05 0.28 −0.30 0.49

Serial Bidder 0.36 0.00 0.48 0.00 1.00

Announcement CAR 0.21 0.17 0.27 −0.09 0.64

Failed CAR −0.07 −0.02 0.21 −0.42 0.17

Announcement Dollar Return 99.35 13.55 558.16 −9.81 426.64

Failure Dollar Return −12.71 −1.48 274.79 −205.55 107.06

Panel C: Deal Characteristics

Stock deal 0.57 1.00 0.50 0.00 1.00

Failed Dummy 0.21 0.00 0.41 0.00 1.00

Exogenous Dummy 0.10 0.00 0.30 0.00 1.00

Days till Known 117.59 93.00 98.95 25.00 290.00

Diversifying acquisition 0.37 0.00 0.48 0.00 1.00

Cross-Border Dummy 0.16 0.00 0.37 0.00 1.00

High-Tech Dummy 0.13 0.00 0.33 0.00 1.00

Financial Dummy 0.20 0.00 0.40 0.00 1.00

Deal size 896.82 116.85 4,001.69 5.97 3,617.95

Relative deal size 1.03 0.32 5.85 0.03 2.40

Relative size 46.62 4.18 878.56 0.57 50.81

Relative Tobin's q 3.92 1.04 91.39 0.34 3.06

54

Table 8

Announcement Period Returns

This table presents the announcement period abnormal returns and period aggregate dollars for Acquirers,

Targets and the Combined Value of the matched acquirer and target. The sample consists of 1,943

Acquirers and Targets. All values reported are mean values. Date Announced refers the initial

announcement date of the takeover. Date Failed is the date that the bid is known to fail and consists of

only failed acquirers and targets. We calculate the short-horizon abnormal returns using CARs

benchmarked to a value-weighted index. We calculate the long-horizon abnormal returns using BHARs

benchmarked against an equal-weighted index. The Dollar amounts are measured in $US Millions.

Variable definitions are in Table 6.

Variable Acquirer Target_ Combined Value

Panel A: Announcement Abnormal Returns

Date Announced

[−2, +2] −1.05% 19.22% 2.67%

[−60, +2] −0.44% 27.01% 3.28%

Date Failed

[−2, +2] 0.31% −5.45% −1.82%

[−2, +100] −9.34% −17.60% −13.39%

Panel B: Announcement Aggregate Dollar Returns

Date Announced

[−2, +2] −92.64 106.95 14.30

[−60, +2] −66.09 146.53 75.89

Date Failed

[−2, +2] −4.28 −4.98 −9.73

[−2, +100] −68.66 −313.09 −300.46

55

Table 9

Pairwise Correlation Matrix This table presents the pairwise correlations for a select number of dependent and independent variables presented in this section. Panel A reports the correlations for

Acquirers and Panel B reports the correlations for Targets. DA refers to Date Announced and DK to Date Known (acquisition to have failed). DA-DK refers to the period

between DA and DK. We outline variable definitions in Section 2, in addition to the variable definitions presented in Table 6. We denote significance at the 5% level by *.

Variable DA CAR DK CAR DA-DK

CAR Failed Stock Cross-Border Serial Bidder Log(A) Diversified Run-up

Panel A: Acquirers Failed −0.001 −0.089*

Stock Deal −0.145* −0.035 −0.103* −0.007

Cross-Border −0.006 −0.001 −0.011 −0.015 −0.226*

Serial Bidder −0.040* −0.014 −0.012 −0.005 −0.032 −0.001

Log (Assets) −0.097* −0.036 −0.000 −0.124* −0.236* −0.147* −0.289*

Diversified −0.004 −0.041 −0.020 −0.032 −0.125* −0.017 −0.032 −0.027

Run-up −0.063* −0.022 −0.039* −0.049* −0.051* −0.004 −0.034 −0.038* −0.031

Tobin‟s q −0.085* −0.099* −0.153* −0.030 −0.083* −0.016 −0.020 −0.182* −0.007 −0.128*

Relative Tobin‟s q −0.022 −0.169* −0.027 −0.013 −0.025 −0.012 −0.019 −0.025 −0.009 −0.015

Relative DS −0.012 −0.025 −0.019 −0.014 −0.001 −0.084* −0.011 −0.035 −0.013 −0.052*

Relative Size −0.001 −0.005 −0.016 −0.022 −0.012 −0.007 −0.008 −0.011 −0.033 −0.025

Target DA CAR −0.128* −0.051* −0.023 −0.036* −0.194* −0.057* −0.046* −0.071* −0.023 −0.068*

Target DK CAR −0.010 −0.225* −0.094* −0.034 −0.008 −0.019 −0.087* −0.042 −0.057

Target DA-DK CAR −0.010* −0.023* −0.368 −0.019 −0.108* −0.038* −0.012 −0.027 −0.046* −0.055*

Panel B: Targets Failed −0.036* −0.019

Stock Deal −0.194* −0.034 −0.108* −0.007

Cross-Border −0.057* −0.008 −0.038* −0.003 −0.283*

Serial Bidder −0.046* −0.019 −0.012 −0.060* −0.038* −0.051*

Log (Assets) −0.071* −0.087* −0.027 −0.029 −0.030* −0.009 −0.208*

Diversified −0.023 −0.042 −0.046* −0.015 −0.120* −0.003 −0.056* −0.074*

Run-up −0.068* −0.057 −0.055* −0.037* −0.050* −0.042* −0.002 −0.028 −0.036*

Tobin‟s q −0.047* −0.061 −0.050* −0.016 −0.076* −0.041* −0.012 −0.219* −0.010 −0.166*

Relative Tobin‟s q −0.016 −0.064 −0.000 −0.013 −0.025 −0.012 −0.019 −0.027 −0.009 −0.008

Relative DS −0.005 −0.006 −0.006 −0.003 −0.006 −0.031* −0.016 −0.015 −0.005 −0.046*

Relative Size −0.025 −0.091 −0.004 −0.022 −0.012 −0.007 −0.008 −0.029 −0.033 −0.035

Acquirer DA CAR −0.128* −0.010 −0.010* −0.001 −0.145 −0.006 −0.040* −0.097* −0.004 −0.063*

Acquirer DK CAR −0.051* −0.225* −0.023* −0.035 −0.001 −0.014 −0.036 −0.041 −0.022

Acquirer DA-DK CAR −0.023 −0.094* 0.368 −0.089 −0.103 −0.011 −0.012 −0.000 −0.020 −0.039*

56

Table 10

Bidder Abnormal Returns on Bid Announcement and the Target’s Reaction This table presents acquirer firm abnormal returns upon announcement of a merger and acquisition. The sample

presented below includes the matched target sample. The dependent variables in Model (1) and (3) are the five-

day CARs and in Model (2) and (4) the BHARs [−60, +2]. We index all models against an equal-weighted

index. The All Failed subsample included all completed bids and failed bids. The Exogenous subsample

includes all completed bids and bids that failed for exogenous reasons. Variable definitions are in Table 6. In

parentheses are t-statistics (absolute values) based on standard errors adjusted for heteroskedasticity and target

firm clustering. Respectively ***, **, and * denote statistical significance based on two sides tests at the 1%,

5% and 10% level. All regressions control for year fixed effects, where we suppress coefficients estimates.

All Failed Exogenous Failed

DA DA + Run-up

DA DA + Run-up

(1) (2) (3) (4)

Failed and Exogenous Variables

Failed −0.014* 0.005 −0.012 0.008

(1.94) (0.19) (1.24) (0.22)

Failed × Stock

0.017 −0.037

0.012 −0.034

(1.64) (1.12)

(0.86) (0.73)

Failed × Run-up −0.040 −0.040

(1.02) (0.76)

Target Reaction

Target CAR

[−2, +2]

0.053*** 0.050***

(4.20) (3.86)

Target BHAR

[−60,+2]

0.269*** 0.273***

(7.04) (6.72)

Bidder and Characteristics

Log (Assets) −0.007*** −0.014*** −0.007*** −0.014***

(5.61) (3.17) (5.27) (3.02)

Run-up 0.002 0.001

(0.12) (0.05)

Stock −0.045*** 0.057*** −0.046*** 0.054***

(8.71) (3.00) (8.79) (2.82)

Relative Tobin's

q

−0.006** −0.037** −0.006** −0.028

(2.35) (2.32) (2.22) (1.63)

Cross-Border −0.005 −0.019 −0.005 −0.014

(0.77) (0.62) (0.75) (0.44)

US Acquirer

Border Crossing

−0.010 −0.018 −0.012 −0.016

(0.92) (0.43) (1.01) (0.39)

Diversified −0.004 −0.016 −0.005 −0.017

(1.05) (1.19) (1.09) (1.17)

High-Tech −0.013 −0.000 −0.012 −0.004

(1.57) (0.00) (1.41) (0.14)

Financial

Services

0.019*** 0.006 0.019*** 0.011

(3.59) (0.35) (3.35) (0.60)

Relative Deal

Size

0.000 0.008* 0.001 0.009*

(0.17) (1.66) (0.50) (1.67)

Intercept 0.076*** 0.076 0.077*** 0.072

(4.57) (1.50) (4.37) (1.36)

Number of Obs. 1,941 1,380 1,738 1,232

Adjusted R2 7.86% 15.05% 8.15% 15.38%

57

Table 11

Target Abnormal Returns on Bidder Takeover Announcement, Inclusive of Run-Up

and Bidder Reaction This table presents target firm abnormal returns upon announcement of a merger and acquisition and the bidder

reaction. The sample presented below includes the matched target sample. The dependent variable in Model (1)

and (3) are the five-day CARs and Model (2) and (4) are the BHARs [−60,+ 2]. We index all models against an

equal-weighted index. The All Failed subsample includes all completed bids and failed bids. The Exogenous

subsample includes all completed bids and bids that failed for exogenous reasons. Variable definitions are in

Table 6. In parentheses are t-statistics based on standard errors adjusted for heteroskedasticity and target firm

clustering. Respectively ***, **, and * denote statistical significance based on two sides tests at the 1%, 5% and

10% level. All regressions control for year fixed effects, where we suppress coefficient estimates.

All Failed Exogenous Failed

DA DA + Run-up

DA DA + Run-up

(1) (2) (3) (4)

Failed and Exogenous Variables

Failed −0.000 −0.091*** −0.030 −0.131*

(−0.02) (−2.66) (−1.09) (−1.85)

Failed × Stock

−0.022 −0.081*

−0.035 −0.062

(−1.08) (−1.80)

(−1.11) (−0.75)

Failed × Run-up −0.116** 0.100*

(−2.27) (1.70)

Acquirer Reaction

Acquirer CAR

[−2, +2]

0.198*** 0.206***

(4.20) (4.06)

Acquirer BHAR

[−60,+2]

0.533*** 0.552***

(8.39) (8.05)

Target and Deal Characteristics

Log (Assets) −0.003 0.007 −0.002 0.005

(−0.95) (1.05) (−0.78) (0.66)

Run-up −0.133*** −0.133***

(−5.26) (−5.55)

Stock −0.077*** −0.157*** −0.075*** −0.155***

(−7.61) (−6.42) (−7.24) (−6.23)

Relative Tobin's q 0.023*** 0.084*** 0.022*** 0.086***

(4.93) (4.61) (4.98) (4.45)

Cross-Border 0.013 0.098** 0.017 0.116**

(0.97) (2.22) (1.13) (2.45)

US Acquirer

Border Crossing

−0.036 −0.111* −0.036 −0.134*

(−1.44) (−1.67) (−1.32) (−1.95)

Diversified 0.008 0.014 0.011 0.019

(0.90) (0.66) (1.22) (0.84)

High Tech 0.035** −0.017 0.031** −0.022

(2.41) (−0.51) (2.12) (−0.65)

Financial Services −0.042*** −0.035 −0.044*** −0.032

(−3.65) (−1.44) (−3.58) (−1.23)

Intercept 0.224*** 0.315*** 0.218*** 0.297***

(7.56) (4.28) (7.25) (4.01)

Number of Obs. 1941 1380 1688 1194

Adjusted R2 12.04% 22.43% 11.62% 22.19%

58

Table 12

Bidder Abnormal Returns on Bid Outcome News This table presents the results for acquiring firm abnormal returns upon news either that a takeover was

successful or it failed (Date Known - DK). The sample presented below includes the matched acquirer sample.

The dependent variable in Model (1) and (3) are 5-day CARs and in Model (2) and (4), the BHARs [−2, +100].

We index all models against an equal weighted index. The All Failed subsample included all completed bids and

failed bids. The Exogenous subsample includes all completed bids and bids that failed for exogenous reasons.

Variable definitions are in Table 6. In parentheses are t-statistics (absolute values) based on standard errors

adjusted for heteroskedasticity and acquirer clustering. Respectively ***, **, and * denote statistical

significance based on two sides tests at the 1%, 5% and 10% level. All regressions control for year fixed effects,

where we suppress coefficients estimates.

All Failed Exogenous Failed

DK DK + 100

DK DK + 100

(1) (2) (3) (4)

Failed and Exogenous Variables

Failed 0.005 0.012 0.014* 0.057

(0.82) (0.29) (1.72) (1.00)

Failed × Stock

−0.006 −0.108**

−0.006 −0.168**

(0.59) (2.19)

(0.43) (2.31)

Bidder Characteristics

Log (Assets) −0.001 −0.006 −0.002* −0.010*

(0.85) (1.21) (1.74) (1.82)

Stock 0.003 −0.067*** 0.004 −0.065***

(0.86) (3.62) (0.96) (3.52)

Relative Tobin's q −0.006** −0.014 −0.006** −0.009

(2.55) (1.28) (2.31) (0.73)

Cross-Border −0.005 −0.023 −0.004 −0.007

(0.75) (0.62) (0.74) (0.18)

US Acquirer Border

Crossing

0.014 0.041 0.029*** 0.022

(1.33) (0.69) (2.90) (0.38)

Diversified −0.001 −0.005 0.000 0.007

(0.21) (0.27) (0.11) (0.40)

High Tech 0.007 0.040 0.002 0.029

(1.04) (1.33) (0.32) (0.96)

Financial Services 0.001 0.062*** 0.001 0.065***

(0.16) (3.44) (0.25) (3.41)

Relative Deal Size −0.001 0.003 0.001 0.006

(0.41) (0.67) (0.44) (1.23)

Intercept 0.007 0.130** 0.010 0.135**

(0.64) (2.33) (0.81) (2.31)

Number of Obs. 1,875 1,334 1,677 1,200

Adjusted R2 0.36% 5.83% 1.12% 4.77%

59

Table 13

Failed Bidder Abnormal Returns on Failure Announcement and the Target’s Reaction This table presents results of failed acquiring firm abnormal returns and the reaction of their matched target

upon announcement of the bid failure (DF). The sample presented below includes the matched acquirer sample.

The dependent variable in Model (1) and (3) are the five-day CARs and Model (2) and (4) are the BHARs [−2,

+100]. We index all models against an equal-weighted index. The All Failed subsample includes all failed bids.

The Exogenous subsample includes bids that failed for exogenous reasons. Variable definitions are in Table 6.

In parentheses are t-statistics (absolute values) based on standard errors adjusted for heteroskedasticity and

acquirer clustering. Respectively ***, **, and * denote statistical significance based on two-sided tests at the

1%, 5% and 10% level. All regressions control for year fixed effects, where we suppress coefficients estimates.

All Failed Exogenous Failed

DF DF + 100

DF DF + 100

(1) (2) (3) (4)

Target Reaction

Target CAR

[−2, +2]

0.155*** 0.190***

(3.94) (3.51)

Target BHAR

[−2,+100]

0.508*** 0.795***

(4.52) (5.43)

Bidder Characteristics

Log (Assets) −0.001 0.002 −0.003 −0.001

(0.66) (0.17) (1.13) (0.06)

Stock 0.016** −0.128** 0.020** −0.023

(1.97) (2.21) (2.15) (0.17)

Relative Tobin's q −0.007** −0.048 −0.006* −0.189**

(2.09) (0.91) (1.80) (2.37)

Cross-Border 0.010 −0.009 0.018 0.275**

(0.84) (0.05) (1.35) (2.12)

US Acquirer Border

Crossing

−0.007 0.123 0.023 −0.257

(0.37) (0.53) (1.14) (1.22)

Diversified 0.004 0.028 0.005 0.060

(0.59) (0.48) (0.59) (0.47)

High-Tech −0.013 0.039 −0.045** 0.056

(0.66) (0.39) (2.14) (0.37)

Financial Services 0.007 0.085 0.008 0.079

(0.92) (1.17) (0.81) (0.55)

Relative Deal Size −0.000 −0.005 0.005** 0.011

(0.07) (0.45) (2.13) (0.32)

Intercept 0.010 0.196 0.005 0.139

(0.38) (1.08) (0.19) (0.55)

Number of Obs. 620 199 436 97

Adjusted R2 5.28% 25.20% 11.04% 36.80%

60

Table 14

Target Share Abnormal Returns on a Failed Bid Announcement Over Different

Horizons and Bidder Reaction This table presents results of target firm abnormal returns on announcement of the failure of the takeover (DF)

in columns (1) and (2). The dependent variable is the BHARs [−2, DF +100]. This table also presents results for

target firm abnormal return BHARs on announcement of bid outcome (DF) measured 60 days prior to the

takeover Announcement Date (DA) until 100 days after market knows it to be successful or have failed (DK), [-

60 DA, DK + 100], for successful acquisitions in columns (3) and (4), and for failed bids in columns (5) and (6).

The sample presented below includes the matched target sample and all targets of failed bids. We index all

models against an equal-weighted index. Variable definitions are in Table 6. In parentheses are t-statistics

(absolute values) based on standard errors adjusted for heteroskedasticity and target firm clustering.

Respectively ***, **, and * denote statistical significance based on two-sided tests at the 1%, 5% and 10%

level. All regressions control for year fixed effects, where we suppress coefficients estimates.

Failed Successful Failed

DK + 100 DA-DK DA-DK

(1) (2) (3) (4) (5) (6)

Bidder Reaction

Acq. BHAR

0.211***

DK [−2, +100]

(3.46)

Acq. BHAR

0.574***

[−60 DA, DK+100]

(7.79)

Acq. BHAR

0.515***

DA [−60,+2]

(5.17)

Target and Deal

Characteristics

Log (Assets)

0.051*** 0.045** −0.006 0.003 0.052* 0.034

(2.75) (2.33) (0.7) (0.39) (1.81) (1.25)

Stock

−0.046 −0.016 −0.133*** −0.154*** −0.360*** −0.307***

(0.91) (0.3) (4.83) (6.18) (4.89) (4.39)

Relative Tobin's q

−0.042 −0.020 0.067*** 0.092*** −0.010 0.009

(1.03) (0.43) (4.08) (5.21) (0.21) (0.17)

Cross-Border

−0.126 −0.060 0.058 0.115** −0.039 −0.005

(1.45) (0.44) (1.43) (2.31) (0.4) (0.03)

Diversified

0.051 −0.018 −0.101 −0.127* 0.036 0.086

(0.35) (0.1) (1.43) (1.7) (0.17) (0.41)

High Tech

0.044 0.035 −0.006 0.019 0.049 0.033

(0.91) -0.72 -0.25 -0.8 -0.66 -0.5

Financial Services

0.204** 0.138 −0.032 −0.024 0.159 0.109

(2.17) (1.36 (0.86) (0.69) (1.23) (0.87)

Relative Deal Size

0.008 −0.003 −0.048 −0.026 0.169 0.115

(0.12) (0.05) (1.64) (0.97) (1.45) (1.05)

Intercept

−0.470*** −0.450** 0.410*** 0.303*** 0.005 0.022

(2.92 (2.6) (5.45) (3.97) (0.02) (0.09)

Number of Obs. 186 173 1,189 1,104 185 172

Adjusted R2 6.55% 8.37% 5.13% 20.40% 21.26% 39.25%

61

Table 15

Bidder Returns over 60 Days Prior to Bid Announcement until 100 Days Post-Bid

Outcome News and Target Reaction This table presents results of bidding firm abnormal returns upon announcement of a takeover until the market

knows it to be successful or have failed (DA-DK). The sample presented below includes the matched acquirer

sample. The dependent variable in the models is the BHARs measured 60 days prior to the takeover

Announcement Date (DA) and thus includes the initial run-up period until 100 days after market knows it to be

successful or have failed (DK). We index all models against an equal-weighted index. The All Failed subsample

included all completed bids and failed bids. The Exogenous subsample includes all completed bids and bids that

failed for exogenous reasons. Variable definitions are in Table 6. In parentheses are t-statistics (absolute values)

based on standard errors adjusted for heteroskedasticity and acquirer clustering. Respectively ***, **, and *

denote statistical significance based on two-sided tests at the 1%, 5% and 10% level. All regressions control for

year fixed effects, where we suppress coefficients estimates.

All Failed Exogenous Failed

DA-DK DA-DK

DA-DK DA-DK

(1) (2) (3) (4)

Failed and Exogenous Variables

Failed −0.110** −0.107**

(2.37) (2.14)

Failed × Stock

−0.133**

−0.155**

(2.07)

(2.09)

Target Reaction

Target BHAR

[−60 DA, DK+100]

0.618*** 0.634***

(8.38) (5.04)

Bidder Characteristics

Log (Assets) −0.008 −0.028 −0.011 −0.029

(0.80) (1.46) (1.01) (0.97)

Stock −0.039 0.038 −0.039 0.091

(1.02) (0.55) (1.01) (0.68)

Relative Tobin's q −0.031* −0.046 −0.028 −0.159*

(1.68) (0.75) (1.38) (1.78)

Cross-Border −0.013 −0.094 0.009 −0.142

(0.22) (0.61) (0.13) (−1.04)

US Acquirer Border

Crossing

0.001 −0.064 −0.012 0.143

(0.01) (0.27) (0.13) (0.56)

Diversified −0.005 −0.051 0.004 −0.072

(0.16) (0.77) (0.12) (0.61)

High-Tech 0.000 −0.006 −0.006 0.029

(0.00) (0.05) (0.10) (0.18)

Financial Services 0.019 0.083 0.021 0.143

(0.47) (1.22) (0.50) (1.11)

Relative Deal Size 0.010 0.000 0.012 −0.025

(0.86) (0.01) (0.98) (0.76)

Intercept 0.289*** 0.209 0.272** 0.158

(2.61) (0.81) (2.32) (0.48)

Number of Obs. 1,329 197 1,196 96

Adjusted R2 5.45% 44.77% 3.93% 43.93%

62

Figure 1

Mergers and Acquisition Sample by Method of Payment The graph shows the time-series distribution of the sample. There are three columns in each year; the first

column is the number of acquirers, the second column is the number of targets and the third column is the

number of matched deals (i.e., where an acquirer and target exists for the same deal). The upper bar plots the

number of stock-financed merger bids over time and the lower bar plots the number of cash−financed bids over

time.

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Figure 2: Bidder CARs 100 Days Prior and Post Date Bid Announced

The Figure shows the mean bidder CARs 100 days prior and post announcement of the

acquisition. The subsamples present include All, Successful, Failed, and Exogenous sample.

Figure 3: Target CARs 100 Days Prior and Post Date Bid Announced

The Figure shows the mean target CARs 100 days prior and post announcement of the

acquisition. The subsamples present include All, Successful, Failed and Exogenous sample.

Figure 4: Bidder CARs 100 Days Prior and Post Date Success/Failure Known

The Figure shows the mean acquirer CARs 100 days prior and post the date known whether the

acquisition was successful or a failure.

Figure 5: Target CARs 100 Days Prior and Post Date Success/Failure Known

The Figure shows the mean target CARs 100 days prior and post the date known whether the

acquisition was successful or a failure.

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