Is The Mergerstat Control Premium Overstated?
AbstractThis paper examines a random sample of 100 acquisitions of U.S. target firms acquired between the first quarter of 1999 through the first quarter of 2003 comparing the ``Control Premium" reported by Mergerstat/Shannon Pratt's Control Premium StudyTM to a comparable ``Abnormal Return" calculated using established academic ``event study" methodology. One of the differences between the Mergerstat methodology and the event study methodology is the removal of general market movements from the total stock return to arrive at the abnormal return while no such adjustments are made to the Mergerstat control premium.The ``Control Premium" reported by Mergerstat averaged 49.02% compared to 53.64% calculated using the event study methodology, a difference of -4.62%. During the event periods, the S&P 500 Index experienced a -4.45% average change, accounting for 96% of the difference in average result between the two methods. However, when the sample is split between up and down market periods, anomalies appear.An analysis of the up market periods reveals an average event study abnormal return of 59.97% compared to a 34.95% average Mergerstat Control Premium. This 25% difference is explained by Mergerstat's methodology understating the ``run-up" of target firms' stock prices prior to the acquisition announcement.
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Bibliographic InfoArticle provided by De Gruyter in its journal Journal of Business Valuation and Economic Loss Analysis.
Volume (Year): 3 (2008)
Issue (Month): 1 (March)
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Web page: http://www.degruyter.com
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- Dan Jordan & Donald Wort, 2009. "A test of bear market mergerstat control premiums," Review of Quantitative Finance and Accounting, Springer, vol. 33(1), pages 27-36, July.
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