Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence

Abstract

We study the effect of different acquirer types, defined by financial status and their payment methods, on their short and long-term performance, in terms of abnormal returns using a variety of benchmark models. For a sample of 519 UK acquirers during 1983-95, we examine the abnormal return performance of acquirers based on their pre-bid financial status as either glamour or value acquirers using both the price to earnings (PE) ratio and market to book value ratio (MTBV). Value acquirers outperform glamour acquirers in the three-year post-acquisition period. One interpretation is that glamour firms have overvalued equity and tend to exploit their status and use it more often than cash to finance their acquisitions. As we move from glamour to value acquirers, there is a greater use of cash. Our results are broadly consistent with those for the US reported by Rau and Vermaelen (1998). However, in contrast to their study, we find stronger support for the method of payment hypothesis than for extrapolation hypothesis. Cash acquirers generate higher returns than equity acquirers, irrespective of their glamour/ value status. Our conclusions, based on four benchmark models for abnormal returns, suggest that stock markets in both the US and the UK may share a similar proclivity for over-extrapolation of past performance, at least in the bid period. They also tend to reassess acquirer performance in the post-acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries. Copyright Blackwell Publishers Ltd, 2002.

The Long-Run Performance of U.S. Bidding Firms in the Post M&A Period: The Impact of Bid Type, Payment Method and Industry Specialisation

“…These findings are consistent with the predictions of our third hypothesis. In addition these results are consistent with the findings of Loughran and Vijh (1997) and Sudarsanam and Mahate (2003).…”

“…Such findings confirm our first hypothesis. In addition these findings are inline to those found by Agrawal et al (1992), Rau and Vermaelen (1998), Loughran and Vijh (1997), and Sudarsanam and Mahate (2003), which suggest that shareholders of bidding firms suffer losses in the long-run. While the results of this study largely confirm the findings of prior studies, they also call into question the findings of other studies, such as Eckbo (1986), who found that bidders in Canadian M&As earned significant positive BHAR in the long-run post-M&A period.…”

“…They found that during the five year period after the acquisition, firms that completed stock mergers on average earned negative excess returns of -25% whilst those firms that completed cash tender offers earned on average positive excess returns of 61.7%. Sudarsanam and Mahate (2003) found similar results over a different time period, for different sample size and in a different country. In particular, using 519 UK M&As during 1983-1995, they found that during a three year window after the M&A announcement, bidding firms on average earned negative buy and hold abnormal returns of -8.7%.…”

“…However, studies about the long-term effects of M&As on the shareholder returns of bidding firms suggest that the majority of M&As generate negative abnormal returns (Agrawal et al, 1992;Sudarsanam & Mahate, 2003;Loughran & Vijh, 1997, among others). This raises the question as to why firms earn negative abnormal returns in the long-run after having earned positive abnormal returns in the short run (Loderer & Martin, 1992;Dutta & Jog, 2009).…”

The Impact of Single and Multiple Mergers and Acquisitions on Shareholders’ Wealth of UK Bidder Firms

“…Conversely a more recent study by Hodgkinson and Partington (2008) finds long standing acquirer shareholders gained wealth, by securing their shares six months prior to takeover and held onto the share for twenty-four months after takeover completion. However Sudarsanam and Mahate (2003) sampled 519 UK listed acquirers from 1983 to 1995 and found acquirer shareholders experienced wealth loss over a longer event from announcement to three years post acquisition. They also found losses to acquirers were common for much smaller event windows, (-1,+1) which is the three days surrounding the acquisition announcement.Also bidders earned abnormal returns between -1.39% to -1.47% (all significant) using various benchmarks.…”