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

Listed author(s):
  • Goergen, M.
  • Renneboog, L.D.R.

    (Tilburg University, Center For Economic Research)

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 Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-50.

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Date of creation: 2002
Handle: RePEc:tiu:tiucen:f18ce891-6bb6-4f6c-b012-dc1498c29755
Contact details of provider: Web page: http://center.uvt.nl

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  1. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  2. A. Sinan Cebenoyan & George J. Papaioannou & Nickolaos G. Travlos, 1992. "Foreign Takeover Activity in the U.S. and Wealth Effects for Target Firm Shareholders," Financial Management, Financial Management Association, vol. 21(3), Fall.
  3. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
  4. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October.
  5. Servaes, Henri, 1991. " Tobin's Q and the Gains from Takeovers," Journal of Finance, American Finance Association, vol. 46(1), pages 409-419, March.
  6. C Conn & A Cosh & P Guest & A Hughes, 2001. "Long-Run Share Performance of UK Firms Engaging in Cross-Border Acquisitions," Working Papers wp214, Centre for Business Research, University of Cambridge.
  7. Harris, Robert S & Ravenscraft, David, 1991. " The Role of Acquisitions in Foreign Direct Investment: Evidence from the U.S. Stock Market," Journal of Finance, American Finance Association, vol. 46(3), pages 825-844, July.
  8. Amar Bhide, 1989. "The Causes And Consequences Of Hostile Takeovers," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(2), pages 36-59.
  9. Kenneth A. Froot & Jeremy C. Stein, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1191-1217.
  10. Kang, Jun-Koo, 1993. "The international market for corporate control *1: Mergers and acquisitions of U.S. firms by Japanese firms," Journal of Financial Economics, Elsevier, vol. 34(3), pages 345-371, December.
  11. Mulherin, J. Harold & Boone, Audra L., 2000. "Comparing acquisitions and divestitures," Journal of Corporate Finance, Elsevier, vol. 6(2), pages 117-139, July.
  12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
  13. Shelton, Lois M., 2000. "Merger market dynamics: insights into the behavior of target and bidder firms," Journal of Economic Behavior & Organization, Elsevier, vol. 41(4), pages 363-383, April.
  14. Franks, Julian & Mayer, Colin & Renneboog, Luc, 2001. "Who Disciplines Management in Poorly Performing Companies?," Journal of Financial Intermediation, Elsevier, vol. 10(3-4), pages 209-248, July.
  15. G. William Schwert, 2000. "Hostility in Takeovers: In the Eyes of the Beholder?," Journal of Finance, American Finance Association, vol. 55(6), pages 2599-2640, December.
  16. Franks, Julian & Mayer, Colin & Renneboog, Luc, 2001. "Who Disciplines Management in Poorly Performing Companies?," Journal of Financial Intermediation, Elsevier, vol. 10(3-4), pages 209-248, July.
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