2) ASSESSING MERGERS AND ACQUISITIONS Flashcards
(40 cards)
3 tests of M&A profitability based on market efficiency
1) Weak form (Pafter > Pbefore)
2) Semi-strong form (RofM&A>Rbenchmark)
3) Strong form
(RofM&A>RnoM&A)
Why is weak form test of M&A profitability unreliable
susceptible to confounding events
Effectiveness of semi-strong form test of M&A profitability
not perfect but better than weak form (benchmark selection an important consideration)
Effectivness of Strong form test of M&A profitability
Perfect test but unobservable!
4 research approaches to M&A outcomes
1) market based (event study)
2) accounting based
3) manager surveys
4) case studies
Application of market based (event study) approach to M&A outcomes
- assesses market impact of particular event
- in semi-strong market we look at shareholder wealth – if there’s a form of efficiency, the investors are looking forward & that they’re impounding their views into the current prices.
strengths of market based (event study) approach to M&A outcomes
- Direct measure of shareholder wealth
* Forward looking
Weaknesses of market based (event study) approach to M&A outcomes
Weaknesses
• Relies on assumptions of market efficiency, unrestricted markets
• Benchmark choice can influence results confounding results
Returns to target firm shareholders
always winners, and get +ve outcomes from transactions (as they’ll only sell firm it’s above the market value of it – otherwise no incentive to sell!)
Returns to acquirer firm shareholders
Mixed results - at announcement no clear and consistent research evidence,
longer term studies indicate more -ve outcomes (but note exposed to more confounding events so need to interpret such results carefully)
long-term performance for targets and bidders
- target shareholders win
- bidders –> short term no big dif. in long term starts to destroy wealth
what needs to be considered about the fact targets appear to be winners and not acquirers?
net economic gain!!
- size of acquirer usually way larger,
- A large % gain to target may be wiped out if acquirer experiences even a small % loss
Event studies
measure security price reaction of some economic disturbances (aka abnormal returns)
what does measuring abnormal returns do?
measures extent to which realised security returns vary from the expected return
basic formula for measuring abnormal returns (AR)
AR = Ri,t - E(Ri,t | Xt)
company i, event date t
Ri,t = actual return over event period
E(Ri,t | Xt) = is the expected return where Xt denotes the clean period
Structure of an event study
- define event period
- measure expected performance (using benchmarks)
(• Need to determine clean period, benchmark return and abnormal return_
types of benchmarks to use for step 2 for event study (measuring expected performance)
- Mean adjusted return
- Market adjusted return - most desirable but less used
- Market-model return - most commonly used but least desirable
Outcomes from academic research - event study findings - TARGET FIRMS
• Returns to target (target of acquisition/merger) shareholders usually significant & materially positive - studies show significant regardless of time period
Outcomes from academic research - event study findings - BIDDER FIRMS
- Not very great findings compared to target firm shareholders.
- Some research shows bidders earn positive results on announcement date, however other findings indicate evidence of negative/insignificant average returns for acquiring firms even on announcement date losses or 0 change has been shown
Event studies measure
abnormal return to estimate the effect of M&A while controlling for other influences on the share price.
The event study approach involves identification of
the event and event window, a clean period, and a benchmark return.
for event studies, the abnormal return is calculated as the
difference between the observed event return and the benchmark expected return.
in event studies what does the abnormal return do?
isolates the effect of the event while the benchmark reflects the return that would be expected in the absence of the event.
The primary limitation in event studies is
estimation of the benchmark
analyst must choose between alternative benchmark measures (mean-adjusted, market-adjusted, market models etc), and the choice of clean period data used as an input to this estimation.