An analysis of failed takeover attempts and merger cancellations

Abstract

PurposeThis study seeks to analyze the differences between merger cancellations and three types of takeover failures: failures that are associated with targeted share repurchases (greenmail), failures in which the sole bidder simply withdraws the offer, and failures that are accompanied by a general share repurchase (buyback).Design/methodology/approachThe paper uses event study methods and regression analysis.FindingsThe paper observes negative target stock price reactions around all types of takeover failures and merger cancellations. However, the cumulative effect of takeover attempts is positive, suggesting that even unsuccessful tender offers generate permanent gains to target firm shareholders, while the cumulative effect of canceled mergers is negative. Furthermore, the market reaction to greenmail‐induced takeover failure announcements is no worse than that of voluntary withdrawals, suggesting that greenmail may play an efficient role in mitigating the effects of takeover bid withdrawals. Finally, while bidder wealth is destroyed in takeover failures, the effect of merger cancellations on bidders is considerably more devastating.Originality/valueThe paper provides evidence of negative stock price reactions to all forms of merger failure. The paper also shows that the cumulative effect of all types of takeover failures is still positive: suggesting that being put into play is still beneficial overall but that canceled mergers destroy value for both targets and bidders. The paper shows that the market reaction to greenmail‐induced failure announcements is no worse than other forms of failure. Finally, while there is an immediate downturn in target prices around a failure, the negative outcome is more severe for the bidders. Thus, the market sees that there was something useful about the anticipated change in corporate control, which was lost when it failed to be completed.

The role of geographic distance in completing related acquisitions: Evidence from U.S. chemical manufacturers

“…Negative reactions by acquiring and target firm managers at this stage could, however, cause cancellation (Wong and O'Sullivan, ), which are disruptive (Holl et al ., ; Neuhauser et al ., ). Buyers that fail to complete announced acquisitions often suffer negative market reactions (Bradley et al ., ; Davidson et al ., ; Dodd, ; Neuhauser et al ., ), presumably because investors perceive the recantation of the announced competitive and synergy gains from the proposed acquisitions as a failure (Neuhauser et al ., ).…”

“…Negative reactions by acquiring and target firm managers at this stage could, however, cause cancellation (Wong and O'Sullivan, ), which are disruptive (Holl et al ., ; Neuhauser et al ., ). Buyers that fail to complete announced acquisitions often suffer negative market reactions (Bradley et al ., ; Davidson et al ., ; Dodd, ; Neuhauser et al ., ), presumably because investors perceive the recantation of the announced competitive and synergy gains from the proposed acquisitions as a failure (Neuhauser et al ., ). Cancellations signal that the acquiring firm was not able to overcome the process of combining strategically incompatible organizations (Muehlfeld et al ., ), or was subsequently involved in a process of strategic reversal (Mantere et al ., ) that could, in turn, lower organizational stability (Hannan et al ., ; Mitchell and Lehn, ).…”

Share Repurchases, Signalling Effect and Implications for Corporate Governance: Evidence from India

“…Jensen, 1986), takeover defensive strategy (e.g. Denis, 1990;Dittmar, 2000;Ginglinger & L'her, 2006;Liang et al, 2012;Neuhauser, Davidson & Glascock, 2011), and avoid dividend taxation (Baker et al, 2003). 8 In Dittmar's (2000) view, motive behind repurchases depends upon the firm specific situation.…”

“…In sum, repurchase is a strategic finance choice, which is a strong motivational factor in various long-term business decisions: capital reshuffle (for example, Baker, Powell & Veit, 2003; Benhamouda & Watson, 2010; Dixon, Palmer, Stradling & Woodhead, 2008; Webb, 2008), 6 signalling share undervaluation (for example, Crawford & Wang, 2012; Ikenberry, Lakonishok & Vermaelen, 2000; Ikenberry & Vermaelen, 1996; Wansley, Lane & Sarkar, 1989), 7 distributing surplus cash flows (for example, Li & McNally, 2007), reducing agency costs (for example, Jensen, 1986), takeover defensive strategy (for example, Denis, 1990; Dittmar, 2000; Ginglinger & L’her, 2006; Liang et al, 2012; Neuhauser, Davidson & Glascock, 2011) and avoid dividend taxation (Baker et al, 2003). 8 In Dittmar’s (2000) view, motive behind repurchases depends upon the firm specific situation.…”

Why Do Cross-Border Merger/Acquisition Deals Become Delayed, or Unsuccessful? A Cross-Case Analysis in the Dynamic Industries

“…Interestingly, Neuhauser, Davidson, and Glascock (2011) analyzed stock performance of the target firm involving failed acquisition attempts (merger cancellations and three types of takeover failures: greenmail, simple withdraw and share repurchase) for a sample of 530 transactions during 1978-2004 period. They reported positive abnormal returns on acquisition announcement, while finding negative returns on both 'during the interim period and failure announcement'.…”