Shareholder Wealth Effects of European Domestic and Cross-Border Takeover Bids

Abstract

In this paper, we analyse the short-term wealth effects of large (intra)European takeover bids.We find large announcement effects of 9% for target firms and a cumulative abnormal return that includes the price run-up over the two-month period prior to the announcement date of 23%.However, the share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%.We also show that the status of a takeover bid has a large impact on the short-term wealth effects of target's and bidder's shareholders, with hostile acquisitions triggering substantially larger price reactions than friendly mergers and acquisitions.When a UK target or bidder is involved, the abnormal returns are almost twice as high as bids involving both a Continental European target and bidder.We also find strong evidence that cash offers trigger much larger share price reactions than all-equity offers or combined bids consisting of cash, equity and loan notes.A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm.Also, our results suggest that bidding firms should not diversify by acquiring target firms that do not match their core business.Surprisingly, domestic bids create larger short-term wealth effects than cross-border mergers and acquisitions.This results remains valid after controlling for the characteristics of the bid and the target firm.We also find that the premiums paid depend on the location of the target.The country dummies we use proxy for institutional differences, such as different corporate governance regimes (ownership concentration, takeover regulation, protection of shareholder rights, and informational transparency). After controlling for the status of the bid (i.e. the higher frequency of hostile acquisitions in the UK), for means of payment, and financial characteristics of the target, we find substantially higher wealth effects for UK targets.This is also the case (but to a much smaller extent) for German, Austrian and Swiss firms but not for targets in France, the Benelux countries and Southern Europe.In addition, we investigate whether the predominant reason for mergers and acquisitions is synergies, agency problems or managerial hubris. We find a significant positive correlation between the gains for the target shareholder and the total gains from the merger as well as between the gains for the target and those for the bidder.This suggests that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.mergers;corporate control;wealth