Wealth Creation in Mergers and Acquisitions in the United States

Abstract

During the last two decades, mergers and acquisitions (M&As) grew to become an attractive business strategy for companies to engage in, aiming to benefit from revenue enhancement, cost reduction, tax gains or reduced capital requirements. With such transactions gaining popularity, many economists decided to assess the pre-transaction and actual post-transaction gains for both parties’ shareholders. While most authors focused on short term value creation, fewer also considered to research several years long post-transaction periods. According to existing literature, described in section 2, there is a general consensus that M&A activity does not provide same payoffs for the involved parties. More specifically, authors agree that target shareholders are in most cases rewarded with increase in their stock price in the period around the announcement date, while acquirers encounter wealth destruction through negative returns in both short- and long-term period. Nevertheless, this might not necessarily be a general rule for all acquirers and could rather be dependent on specific industry, deal or bidder characteristic. Therefore, the primary objective of this research is to analyze, understand and explain the effects of different scenario M&A deals on target and bidder’s shareholders, which we measure in abnormal returns. Our focus lies in the less researched acquirer’s post event performance and its possible industry effect, since according to results of Schiereck’s study (2008), this might contradict the general theory. In general, we aim to reach a conclusion weather there is, on average, wealth created during M&A transactions, weather the benefits are only one sided, and if the wealth is created only in the short-run. We conduct our research on a sample of merger and acquisition transactions, which were realized in the United States between years 1997 and 2012. The remainder of the paper is organized as follows: Section 2 presents the theory framework and literature review, Section 3 lays out the data and methodology employed in the analysis, Section 4 describes results and provides a discussion, and lastly, section 5 concludes the research with a summary and final thoughts.