DOES M&A ACTIVITY ADD VALUE? A LITERATURE REVIEW AND CASE STUDY Abstract
In this paper we explore the motivations for corporate acquisitions and critically evaluate whether acquisitions add to shareholder wealth – both from an acquirer and target perspective. We find that the time period over which shareholder wealth is measured, the payment form and the nature of the bid all have an effect on the findings. A case study of the ABN AMRO acquisition by RBS is examined to validate the findings from the literature review. Introduction
The aim of this paper is to analyse whether or not M&A (Merger & Acquisition) activity generates shareholder wealth. The paper will also focus on a case study of M&A activity within the financial sector. The starting point is to define the term ‘shareholder wealth’. Shareholder wealth is the wealth created for shareholders either through increases in the value of the shares that they hold or through the payment of dividends, or both. In finance theory, wealth maximisation is the main goal of the managers of a firm. This is when the present value of the expected cash flows from a project exceeds the initial outlay on the project. From the view point of an acquirer, the equivalent logic is that shareholder wealth is maximised when the value added as a result of the acquisition of the target exceeds the cost of that acquisition. Therefore, the aim of this paper is to critically analyse and evaluate whether shareholder wealth is created as a result of the merger and acquisitions process. Central to this discussion will be the following: Effect of M&A on target shareholder wealth Effect of M&A on acquirer shareholder wealth Time period over which changes in shareholder wealth occur (short term versus long term), and how they are measured Do different payment forms (shares, cash or a combination) result in statistically different returns to target and acquirer shareholders? Differences in returns to shareholder wealth based on whether the bid is hostile or friendly A case study of the RBS – ABN AMRO acquisition will be used to explore the main issues discusses in the paper
A lot of research has been conducted into the value creation arising from merger and acquisition activity. Most of this research is leads to the conclusion that while there seem to be significant gains
to the shareholders of the target firm, returns to shareholders of acquiring firms are marginal, and insignificant in many cases over the short and long term. While it is meaningful to calculate returns for target shareholders only in the short term, returns to acquiring holders need to be studied in the short and long term. Several short term studies have proved that on average target shareholders gain substantially from M&A. Goergen and Renneboog (2003) analyse the short-term wealth effects of large intra-European takeover bids. Specifically, they find that, on average, investors owning a target company for a period of 3 months prior to the event date and selling at the end of event day would earn a return of 24%. Their findings are consistent with other studies on short term wealth effects of M&A activity – that the returns to target shareholders are much higher than the returns to the shareholders of acquiring firms. This is consistent with the findings of Jarrell and Poulsen (1989), Servaes (1991) and Kaplan & Weisbach (1992). Thus, it is clear that returns to the shareholders of target firms are very often in the mid to high teens, and the size of this premium might help explain why returns to acquiring shareholders are often so low or even negative over the same time period. For the shareholders of the acquiring firm, the more meaningful analysis is to assess how an acquisition adds to shareholder wealth over the longer term. The reason for this is that it invariably takes some time for the synergies from an acquisition to have an effect in terms of return on equity, return on assets and...
Bibliography: Goergen, M. and Renneboog,L., 2003. Shareholder wealth effects of European domestic and crossborder takeover bids. European Corporate Governance Institute Finance Working Paper Roll, R., 1986. The hubris hypothesis of Corporate Takeovers, Journal of Business 59, 197-216 Servaes,H., 1991. Tobin’s Q and the gains from takeovers. Journal of Finance 46, 409-419 Kaplan,S and Weisbach,M.,1992. The Success of Acquisitions: Evidence from Divestitures, Journal of Finance 47, 107-138. Jensen, MC., 1986. Agency costs of free cash flow, corporate finance and takeovers. American Economic Review 76, 323-329 Asquith, P; Bruner, R; and Mullins,F., 1987. Merger returns and the form of financing. Working Paper, Cambridge, Mass., Harvard Business School Bruner, R., 2001. Does M&A Pay? A Survey of Evidence for the Decision-Maker. Batten Institute Working Paper, Darden Graduate School of Business Caves, R., 1989. Mergers, Takeovers and Economic Efficiency. International Journal of Industrial Organization, 7 151-174 Meeks,G., 1977. Disappointing Marriage: A Study of Gains from Merger. Cambridge University Press Huang,Y and Walkling,R., 1989. Target Abnormal Returns Associated with Acquisition Announcements: Payment, Acquisition Form and Managerial Resistance, Journal of Financial Economics Yook, K.C., 2000. Larger Return to Cash Acquisitions: Signalling effect or Leverage effect? Working Paper, Johns Hopkins Gregory, A., 1997. An Examination of the Long Run Performance of UK Acquiring Firms. Journal of Business Finance & Accounting 971-1002 Loughran,T and Vijh,A., 1997. Do long term shareholders benefit from corporate acquisitions? Journal of Finance, 52 1765-1790 Lang,L; Stulz,R; and Walkling,R.,1989. Managerial Performance, Tobin’s Q and Gains from Successful Tender Offers. Journal of Financial Economics 24 137 - 154 Lewellen,W; Rosenfeld,A., 1985. Merger Decisions and Executive Stock Ownership in Acquiring Firms. Journal of Accounting and Economics 7 209-231 Berger,P.G and Ofek, E.,1995. Diversification’s Effect on Firm Value. Journal of Financial Economics 37 39-65 Bloomberg for accounting and financial data
Please join StudyMode to read the full document