Academic journal article IUP Journal of Applied Finance

Market Reactions to Tender Offers: An Analysis of Target Companies

Academic journal article IUP Journal of Applied Finance

Market Reactions to Tender Offers: An Analysis of Target Companies

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Given the fact that mergers and acquisitions take place under conditions of uncertainty, it is not surprising that not all business combinations are successful. The success of a merger depends on whether the two firms can achieve economies of scale. Past studies show that diversification for other reasons tends to be less successful, but successful firms that combine businesses can benefit from scale economies. The event study methodology has been the predominant method used to measure share price responses to merger or takeover announcements, and most studies suggest that takeovers create shareholder wealth. Jensen (2006) suggests that the market for corporate control has generated large benefits of around $535 bn to event firms' shareholders in approximately 50 largest US takeovers in the previous four years. Though some prior studies also suggested that takeovers have negative effects, recent studies have documented primarily positive outcomes. Therefore, the results are inconclusive. This is perhaps because those studies have not separately focused either on successful or unsuccessful takeover effects. Thus, the existing evidence still does not resolve the issue as to whether takeovers benefit shareholders.

Literature Review

Some past studies, e.g., Jensen and Ruback (1983), Jarrell et al. (1988), Datta et al. (1992), Andrade et al. (2001), and Bruner (2002) investigated the takeover activities in the US stock market and documented that shareholders of the target firms gain significantly positive abnormal returns despite variations in the time period, type of acquisition (mergers vs. tender offers) and observation period. Similarly, recent studies provided additional evidence supporting the previous results; for example, Santos et al. (2003) found that significant wealth gains accrue to the shareholders of foreign target firms regardless of the type of acquisition; Campa and Hernando (2004) suggested that the target firm's shareholders receive a significant cumulative abnormal return of 9% for mergers.

Studies from other stock markets also support a similar view. For example, Da Silva Rosa et al. (2000) in the Australian context, Dumontier and Petitt (2002) in the French context, and King and Padalko (2005) in the Canadian context, all report that the target firms' shareholders significantly benefit from takeover announcements. Goergen and Renneboog (2004) examine large European takeovers and provide evidence which shows that the short-term wealth effects are remarkably similar to those of the US and the UK studies. They also find that the cumulative abnormal returns that include the price run-up over the twoweek period prior to the event are approximately 20%.

These prior studies (Meulbroek, 1992; Jabbour et al., 2000 and Ascioglu et al., 2002; among others) conclude that the merger and acquisition transaction delivers a premium return for the target firm's shareholders, which are on average significant and positive in the range of 20-30%. This finding is consistent with that of a recent study by Burkart and Panunzi (2006).

Conversely, Agrawal and Jaffe (2002) summarize previous studies regarding the pre-acquisition performance of target firms. Almost 8 out of 12 studies show negative abnormal returns (two studies obtain significantly negative abnormal returns), which are consistent with two of the studies, Danbolt (2004) and Karceski et al. (2005), cited in Campa and Hernando (2004) survey, reporting negative abnormal returns (for windows smaller than 10 days prior to the event date); meanwhile, the other studies report insignificantly positive abnormal returns. Thus, the findings are mixed between positive and negative results.

There have been thousands of merger and acquisition studies, but most of these studies have focused on developed stock markets such as the US, the UK or European stock markets and the Australian stock exchange. …

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