Academic journal article Canadian Journal of Administrative Sciences

Effects of Private and Public Canadian Mergers

Academic journal article Canadian Journal of Administrative Sciences

Effects of Private and Public Canadian Mergers

Article excerpt

Abstract

This paper examines the merger announcements of Canadian companies between 1994 and 2000 during an exceptional merger boom. The results show that both the target companies and the acquirer companies obtain significant positive abnormal returns during this time period. Companies that acquire private targets with stock have positive returns; however, acquirers of private firms have significantly higher risk compared with those that acquire public targets, despite nonsignificant differences in returns. Acquirers pay significantly less to acquire private firms than public firms, especially with stock. Overall, the findings suggest there is support for a liquidity discount for private firms, and the market is efficient in valuing firms in asymmetric conditions.

JEL Classification: G340

Key words: Mergers; acquisition; private acquirers; shareholder wealth; return

Résumé

Dans cet article, nous examinons les annonces de fusions des compagnies canadiennes entre 1994 et 2000, période de grand boom de fusion. Les résultats montrent qu'au cours de cette période, les compagnies cibles et les compagnies acquéreuses obtiennent des rendements anormaux positifs. Les entreprises qui achètent des cibles privées avec des actions ont des rendements positifs; cependant, ces entreprises ont des risques considérablement plus élevés par rapport aux entreprises qui achètent des cibles publiques nonobstant des différences négligeables dans les rendements. Par ailleurs, les acquéreurs paient nettement moins pour acheter les entreprises privées que pour acheter les entreprises publiques, en particulier celles qui ont des actions. Dans l'ensemble, les résultats de l'étude révèlent qu'il est nécessaire d'escompter la liquidité pour les entreprises privées et que le marché permet de valoriser les entreprises dans les conditions asymétriques.

Mots clés : Fusions; acquisition; acquéreurs privés; valeur pour actionnaire; rendement

In the 1990s, we witnessed some spectacular merger activities, including the frenetic initial public offerings and acquisitions of dot.com companies, the prominence of global business and transnational mergers, and unprecedented mega-merger deals such as the $165 billion AOL-Time Warner deal. Pryor (2001) estimates that between 1992 and 1999, the total recorded value of merger deals grew at an annual rate of 35.7%, and from 1985 to 1999, the total volume of mergers rose at 20.8% annually.

Canadian managers were very active in mergers and acquisitions between 1994 and 2000. We examined the impact of mergers on Canadian shareholder returns and found that, in contrast to U.S. studies of shareholder returns, earlier Canadian studies appear to consistently show positive and significant returns to acquiring firm shareholders. Differences in Canadian industry, capital markets, and regulations appear to justify the difference in the Canadian experience. Yet the Canadian studies are few and more evidence is needed; this paper provides the most current evidence from the recent worldwide merger boom of the 1990s.

Little is known about the Canadian experience on the acquisition of private firms. Yet they are understated in their importance because they represent by far the most common target for acquisition. Acquiring a private firm raises the interesting question of whether the market can value an acquisition under asymmetric information conditions. The asymmetric information condition occurs where there is scarce public information about a private target, and where the acquirer likely knows more about the target's value than the public does.

We are motivated to examine the impact of mergers and acquisitions on Canadian acquiring and target companies for several reasons. First, the three early studies in Canada report positive and significant gains to acquiring companies. This seems to be at odds with most merger studies done on U.S. companies, which report significant negative or nonsignificant returns to acquiring companies. …

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