The Effect of Mergers and Acquisitions on the Market Value of Common Stock*

Abstract

THIS STUDY EXAMINES the relation between stock-price changes and the consummation of mergers and acquisitions. Although mergers have been analyzed in depth for possible economic benefits, very little research has centered on accompanying effects on equity values.From a list of business combinations involving New York Stock Exchange firms during the years 1961 through 1965, thirty-five mergers are randomly selected for analysis. In all mergers eligible for selection, the acquired company is at least ten per cent as large as the acquiring company in terms of total market value. In the model each of the thirty-five acquiring and acquired companies is paired with a non-merging firm which possesses similar characteristics in regard to operations performed and investment quality. In this manner two distinct control groups of size thirty-five are established.In each merger the prices of the stocks of the acquiring and acquired companies as well as their respective control groups are recorded at various points in time: specifically, at ten points within a time period of nine months before announcement to six months after consummation. (For acquired companies and their control group, the cutoff point is consummation.) Relative price changes between these designated points are then determined. The relative price changes of the stocks of the acquiring companies are averaged and compared with the mean relative price changes for stocks in their control group. The same procedure is followed for the stocks of the acquired companies and their control group.A parametric test of the significance of differences between two means (here, of relative price changes) is used to determine whether stocks of merging companies behave in a substantially different manner from stocks of non-merging companies. The null hypothesis is that there is no difference between the stocks of the acquiring companies and their control group, or between the stocks of the acquired companies and their control group. This paired test is conducted at a .05 level of significance.The acquiring companies' stocks show no pattern of significant difference from their control group during the ten points in time. In every period except one, the computed value of the normal test statistic z precludes the rejection of the null hypothesis at a .05 level of significance. The one exception is in the time period between nine months and six months before announcement in which the computed z-value is +2.06. This result is not considered important because of the lack of corroborating evidence. If the entire time span between nine months before announcement and six months after consummation is viewed as one time interval, the hypothesis of no difference is accepted (z = +.99). Actually, during this entire span the average relative-price increase is 20.94 per cent for the stocks of the acquiring companies and 17.28 per cent for the stocks of the control group.The stocks of the acquired companies demonstrate quite a different pattern. This, however, is not evident until the time p...

The Analysis of Mergers and Acquisitions

“…Time 0 was operationally defined as a minimum of two months before the first public announcement of the merger n order to exclude possible anticipation effects in the price. Past merger studies [especially [1], [5] and [7] as well as investigations by the author indicated that this measurement period was reasonable.…”

“…A review of the merger literature including studies by Hogarty [5], Reid [12], Weston and Mansinghka [14], Block [1] and Kelly [7] yields the general conclusion that mergers do not increase the returns to shareholders. Examination of these findings in light of equation (1) produces several reasons for questioning them, however.…”

Empirical Evidence on Relationships between Ex Ante Innovation Pursuit and Post-M&A Performance in the Vietnamese M&A Industry, 2005-2012

“…In addition, a larger number of Vietnamese M&A transactions in the 2005-2010 period as reported by Vuong et al (2010), as well as the increasing trend in 2011-12, suggest that banks' motivation to acquire capital assets and brand values in the local market, while empirical evidence appears to have indicated that immediate profits are not always the expectations from acquiring firms (e.g., Block, 1968;Shick, 1972;Focarelli et al, 2002, Pop, 2006. In this sense "business concentration" can be regarded as the "keyword" although Ijiri and Simon (1971) reported empirical results rejecting the hypothesis that M&A is a profound way to reduce competition through increasing domination of M&A players.…”