To Merge or Not to Merge: The Shareholder Perspective on M&As

Abstract: This study examines if abnormal return occurs in conjunction with merger announcements in the short-term and compares it with the compounded one-year buy-and-hold abnormal return in the long-interval for European manufacturing firms. In the final sample, the short-term study consisted of 209 firms, while the long-term incorporated 207, both during a sample period of 20 years. In addition, a set of deal traits were introduced to ensure that the transaction itself had an impact on the acquirer’s performance. Further, four different regressions are performed, each with twelve explanatory variables, to determine the variations in abnormal returns, and to establish deal characteristics which may determine the success of the transaction. The results from the short-term event study establish abnormal return five days prior to the announcement, the event day itself, and the subsequent trading day, while in the long-term, the average buy-and-hold abnormal return is negative 14.93%, all on statistically significant levels. As for the explanatory regressions, the empirical results indicate that acquirer’s abnormal return is negatively correlated with cash-only transactions and the financial ratio, research and development spendings over sales, while private target firms are positively correlated with the dependent variable. This holds true for the short-term regressions, while in the long-term, focused transactions are positively correlated with abnormal return, however, this is the only variable which is significant. This is most probably a consequence of the noisy individual buy-and-hold abnormal return over the holding period. Thus, the findings suggest that the market reacts favorably to the announcement of a transaction, however, over the subsequent year the perception reverse, and shareholder value diminishes.