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Do Wealth Creating M&As Really Hurt Acquirer Shareholders?

This discussion paper examines whether wealth creating Mergers and Acquisitions (M&As) negatively impact shareholders of acquiring companies. The study analyzes market value before and after bids, signaling and revelation biases, market efficiency, and the role of exogenous transaction failures. The research aims to disentangle market timing and synergies in value creation.

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Do Wealth Creating M&As Really Hurt Acquirer Shareholders?

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  1. Discussion of Masulis-Swan-Tobiansky:Do Wealth Creating Mergers and Acquisitions Really Hurt Acquirer Shareholders?Wuhan, July 2011Moqi XuINSEAD/LSE

  2. Do acquisitions create value for acquirers? Acquirer market value (USD millions) 3046 63 2984 • Previous literature: • Acquirer returns are insignificant or negative • (Betton-Eckbo-Thorburn 2008) • Why? • Roll 1986: Hybris • Cai-Song-Walkling 2011: anticipation • Savor-Lu 2009: Identify synergies with withdrawals Value prior to bid Market reaction Value after announcement

  3. This paper: Signaling & revelation bias Acquirer market value (USD millions) + 3046 - 2984 Value prior to bid Signalling & revelation Value creation Value after announcement How to disentagle?

  4. Exogenous transaction failure Acquirer market value (USD millions) Exogenous failure 627 3046 627 2984 -564 2420 Value prior to bid Signalling & revelation Value creation Value after announcement Value after failure

  5. Value creation: Market timing or synergies? Target market value (USD millions) Exogenous failure Acquirer captures most of synergies in USD terms (627) 198 856 658 Evidence for value creation: Value should rise if premium was driven by market timing Value prior to bid Premium Value after announce-ment Value creation Value after failure

  6. Value creation: Market timing or synergies? Target market value (USD millions) Exogenous failure 856 198 658 Evidence for value creation: larger drop for failed stock bids Value should rise if premium was driven by market timing Value prior to bid Premium Value after announcement Value after failure Market efficiency? Numbers?

  7. Signaling and revelation Ahern & Sosyura: acquirers try to release good news • „Deliberately timing good news of the bid announcement to coincide with the release of bad news“ (Bhagat et al.) • „Bid itself typically releases bad news about an acquirer: • ...empire-building tendencies... • ...run-out of profitable internal growth opportunities... • ...stock is relatively overvalued“ • „Long history of generally successful bids..., ...announcement is no surprise“ • „stock financed acquisitions represent new equity issues... stock may be preferred... when it is overvalued“ • „“initial bidder announcement returns could be downward-biased because of the likelihood of failure... subsequent entry of competing bidders“ That applies to this acquisition too: value destruction, not a signal If the bidder makes many acquisitions, isn‘t all information already revealed? (30% of sample) In Myers-Majluf, the market is aware of this and demands a discount – in the context of M&A a premium? How to disentangle from deal failure?

  8. Exogeneity of failure • „“initial bidder announcement returns could be downward-biased because of the likelihood of failure... subsequent entry of competing bidders“ • „market appears able to predict deal failure for targets, but not for bidders“ Are these reasons really exogenous? Regulations, competing offers Why separate criteria for exogeneity? These are the same transactions

  9. Balance • Long introduction with detailed argumentation • Literature review with results • Very short hypothesis development section • Equations and notation after the empirical results • Short and not very prominent discussion on target returns • Numbers were not clear to me • Short introduction with main idea and clear discussion of contribution • Detailed argumentation to motivate • Introduce notation and equations early to benefit in hypothesis development and results section • Derive hypothesis directly from arguments • Cut literature review • Expand discussion on target returns and emphasize contribution

  10. Sample Does the origin make a difference? (Especially vs. Malmendier et al) • International sample: targets from Australia, Canada, UK and the US • Public acquirers (no restriction on origin?) • Sample of 4,606 transactions • Excludes mixed payment transactions Where are the acquirers from? Seems very small, maybe because of the mixed payment exclusion, maybe other reasons?

  11. Technical • CAR with CRSP index, but returns from Datastream? • „due to the diversity of firms... do not use an equal-weighted matching portfolio.. instead, use an equal-weighted index obtained from CRSP“ • Why are the control variables not consistent across specifications? Why separate bidder and target characteristics? This is information available to everybody • Some control variables seem to be missing, such as hostility, lock-up agreements etc. • Not all quoted papers are in the list of references

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