Value Creation in Large European Mergers and Acquisitions

Posted: 12 Jun 2003

See all articles by Marc Goergen

Marc Goergen

IE Business School, IE University; European Corporate Governance Institute (ECGI)

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Abstract

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, but the cumulative abnormal return that includes the price run-up over the two-week period prior to the event rises to 20%. The share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the type of takeover bid has a large impact on the short term-wealth effects of target and bidder shareholders with hostile takeovers triggering substantially larger price reactions than friendly mergers and acquisitions. When a UK target or bidder is involved, the abnormal returns outperform those of Continental European bids. We also find strong evidence that the means of payment in an offer has a large impact on the share price reactions. High market-to-book ratio of the target lead to a higher bid premium combined but trigger a negative price reaction for the bidding firm. Bidding firms should not further diversify by acquiring target firms that do not match the bidder's core business. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. We find a significant positive correlation between target shareholder gains and total gains for the merged entity as well as between target gains and bidder gains. This suggests that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.

Keywords: Mergers and Acquisitions, wealth effects, event study

JEL Classification: G32, G34

Suggested Citation

Goergen, Marc and Renneboog, Luc, Value Creation in Large European Mergers and Acquisitions. Available at SSRN: https://ssrn.com/abstract=415721

Marc Goergen

IE Business School, IE University ( email )

Finance Department
Maria de Molina, 12
Madrid, 28006
Spain

HOME PAGE: http://www.ie.edu/business-school/faculty-and-research/faculty/marc-goergen/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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