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

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Author Info
Goergen, Marc (UMIST, University of Manchester)
Renneboog, Luc () (Center for Economic Research, University of Tilburg)

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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.

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Paper provided by United Nations University, Institute for New Technologies in its series EIFC - Technology and Finance Working Papers with number 20.

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Date of creation: 2003
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Handle: RePEc:dgr:unutaf:eifc03-20

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Keywords: corporate finance; financing; Europe;

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chilosi, Alberto & Damiani, Mirella, 2007. "Stakeholders vs. shareholders in corporate governance," MPRA Paper 2334, University Library of Munich, Germany. [Downloadable!]
  2. Martynova, Marina & Oosting, Sjoerd & Renneboog, L.D.R., 2006. "The long-term operating performance of European mergers and acquisitions," Discussion Paper 111, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  3. Martynova, Marina & Renneboog, L.D.R., 2006. "Mergers and Acquisitions in Europe," Discussion Paper 3, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  4. Bruce Lyons, 2008. "An Economic Assessment of EC Merger Control: 1957–2007," Working Papers 08-17, Centre for Competition Policy, University of East Anglia. [Downloadable!]
  5. Renneboog, L.D.R. & Simons, T., 2005. "Public-to-private transactions : LBOs, MBOs, MBIs and IBOs," Discussion Paper 23, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  6. Dennis C. Mueller & B. Burcin Yurtoglu, 2007. "Corporate governance and the returns to acquiring firms' shareholders: an international comparison," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 879-896. [Downloadable!]
  7. Nenova, Tatiana, 2006. "Takeover laws and financial development," Policy Research Working Paper Series 4029, The World Bank. [Downloadable!]
  8. Jacinto Vidigal da Silva & Miguel Diz, 2005. "Mergers And Acquisitions In The Portuguese Banking Industry: Is It There A Process Of Value Creation?," Finance 0503002, EconWPA. [Downloadable!]
  9. Renneboog, L.D.R. & Szilagyi, Peter G., 2006. "How do mergers and acquisitions affect bondholders in Europe? : evidence on the impact and spillover of governance and legal standards," Discussion Paper 55, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  10. Martynova, Marina & Renneboog, L.D.R., 2006. "The performance of the European market for corporate control : evidence from the 5th takeover wave," Discussion Paper 118, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  11. Utz Weitzel & Killian J McCarthy, 2009. "Theory and Evidence on Mergers and Acquisitions by Small and Medium Enterprises," Working Papers 09-21, Utrecht School of Economics. [Downloadable!]
  12. Jorge Farinha & Francisco Miranda, 2003. "Run-up, toeholds, and agency effects in mergers and acquisitions: evidence from an emerging market," CETE Discussion Papers 0311, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  13. Damiani, Mirella & Pompei, Fabrizio, 2008. "Mergers, acquisitions and technological regimes: the European experience over the period 2002- 2005," MPRA Paper 8226, University Library of Munich, Germany. [Downloadable!]
  14. Gino Loyola, 2008. "Optimal takeover contests with toeholds," Economics Working Papers we083217, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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