The short-term impact of M&A deals on the financial performance of European bidders
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STATEMENT ABOUT THE INDEPENDENT CHARACTER OF THE MASTER THESIS 2
ABSTRACT 3
Аннотация 4
INTRODUCTION 8
1. Theoretical aspects of M&As 12
1.1. M&A: general overview 12
1.2. M&A motives and market reaction theory 12
1.3. M&A in European region 15
1.4. Factors affecting stock price after M&A 19
1.4.1. Payment method 19
1.4.2. Cross-border and domestic M&A 20
1.4.3. Deal value 21
1.4.4. Industry relatedness 22
1.4.5. Market capitalization 23
1.4.6. Relative size 23
1.4.7. Legal status of the target company 24
1.4.8. Additional discussion 25
1.5. Approaches to evaluation of M&A performance 25
1.6. M&A consequences 28
1.7. Theoretical aspects conclusion 28
2. Methodology and data description 31
2.1. Methodol ogy 31
2.1.1. Event study 31
2.1.2. Regression analysis 33
2.2. Data sample 35
2.3. Description of the sample 36
3. Results 40
3.1. CAAR T-test results 41
3.2. Multiple regressions results 43
3.2.1. Results for MM and MAM models for 5-day window 44
3.2.2. Results for MM and MAM models for 3-day window 47
Practical implications and limitations 52
Conclusion 54
References 56
Appendix 64
ABSTRACT 3
Аннотация 4
INTRODUCTION 8
1. Theoretical aspects of M&As 12
1.1. M&A: general overview 12
1.2. M&A motives and market reaction theory 12
1.3. M&A in European region 15
1.4. Factors affecting stock price after M&A 19
1.4.1. Payment method 19
1.4.2. Cross-border and domestic M&A 20
1.4.3. Deal value 21
1.4.4. Industry relatedness 22
1.4.5. Market capitalization 23
1.4.6. Relative size 23
1.4.7. Legal status of the target company 24
1.4.8. Additional discussion 25
1.5. Approaches to evaluation of M&A performance 25
1.6. M&A consequences 28
1.7. Theoretical aspects conclusion 28
2. Methodology and data description 31
2.1. Methodol ogy 31
2.1.1. Event study 31
2.1.2. Regression analysis 33
2.2. Data sample 35
2.3. Description of the sample 36
3. Results 40
3.1. CAAR T-test results 41
3.2. Multiple regressions results 43
3.2.1. Results for MM and MAM models for 5-day window 44
3.2.2. Results for MM and MAM models for 3-day window 47
Practical implications and limitations 52
Conclusion 54
References 56
Appendix 64
Over the past 30 years, M&A transactions have been an important component of the corporate environment and strategy. The main rationale behind such corporate behavior has been the desire to directly or indirectly increase acquirers' shareholder wealth by a variety of means ranging from reforming top-management structure (Tuch, O’Sullivan, 2007) to creating effective synergies.
The main expected outcome of the takeovers is consequent corporate efficiency and a corresponding increase in the assets, sales, and market share of a company, and, consequently, maximizing long-term shareholder wealth (Sternberg, 2000). However, it is still widely argued in the academic environment whether the post-M&A of acquirers truly creates value and consistent results have not been shown. McGrath (2011) stated that M&As provide opportunities for growth and risks of failure. Although merger or acquisition can bring economies of scale, and access to new geographic regions and technologies, it can also lead to negative consequences for a company if it fails to attain its objectives. Thus, for managers and shareholders, it is crucial to understand what constitutes a successful merger or acquisition. Therefore, the research is mainly focused on the main question regarding M&A, whether the deals create value or not (Cuypers et al. 2017, Meckl, 2016).
Literature review demonstrates ambiguous results regarding the created value from M&A using different variables and metrics including event study, accounting, subjective assessment, and mixed metrics. Despite the widespread use of these methods, there is still ambiguity in the results, with some studies showing positive outcomes and others showing negative or neutral effects. Moreover, each study has region and industry specificity that leaves a lot of room for interpretation of the results. This highlights the complex nature of M&A transactions and the need for careful analysis and evaluation before embarking on such a strategy.
This Master Thesis will investigate the impact of M&A on the financial performance in the European region. It will analyze the various types of M&A and their effects on financial performance. It will discuss current trends and highlight features of the region. In order to analyze the impact, event study methodology, a statistical technique that measures the effect of a particular event on a company’s stock price with a regression model will be used. The event study approach is able to isolate the effect of an event, such as an M&A, from other influences on financial performance.
This thesis contributes to the well-researched field of mergers and acquisitions. The aim is to make previous research and existing methods more applicable by sampling data in a different setting and with different market environments, specifically European and UK M&A announcements. The new setting sheds light on both emerging and developed markets, which have been less researched in the literature due to the increasing popularity of emerging markets. Selecting European and UK markets for in-sample analysis can also provide additional insights, according to the literature they significantly differ from the markets of the US and Canada in terms of corporate governance and market conditions.
By selecting European and UK markets, the study can investigate inner features in relation to stock market reactions to M&A announcements.
Finally, by duplicating, merging, and investigating partial perspectives from other research and expanding them to a different environment, this work adds to and sheds new light on the papers of Mateev (2018), Ellis et al. (2017), Tao et al. (2017), Dutta et al. (2013), and Starks and Wei (2013).
Moreover, some authors suggest that the European market is unique compared to other regions, as it is composed of many different countries with their own regulations and cultural differences. This can lead to greater complexity and uncertainty in M&A deals, which can in turn affect stock market reactions. Different corporate governance systems are also considered to be a cause of smaller activity in Continental Europe comparing to the US. Nevertheless, activity of M&A has increased in the European region after the crisis of 2008, attracting more researchers nowadays. (Bessler et al. 2020)
Despite the fact that M&A activity is a widely researched topic, M&A impact is still underdeveloped in the context of different regions of the world. Furthermore, the effect of M&A activity in the second decade of the 21st century, in general, is a research field with a small number of scientific articles on the topic. Thus, the aim of the research is to investigate the level and nature of the impact of M&A activities on acquirers.
Thus, despite the fact that mergers and acquisitions are a deeply studied subject, there is a research gap regarding the impact of M&A in recent years in Europe. The topic of mergers in Europe remains underdeveloped, especially in the last 10 years.
...
The main expected outcome of the takeovers is consequent corporate efficiency and a corresponding increase in the assets, sales, and market share of a company, and, consequently, maximizing long-term shareholder wealth (Sternberg, 2000). However, it is still widely argued in the academic environment whether the post-M&A of acquirers truly creates value and consistent results have not been shown. McGrath (2011) stated that M&As provide opportunities for growth and risks of failure. Although merger or acquisition can bring economies of scale, and access to new geographic regions and technologies, it can also lead to negative consequences for a company if it fails to attain its objectives. Thus, for managers and shareholders, it is crucial to understand what constitutes a successful merger or acquisition. Therefore, the research is mainly focused on the main question regarding M&A, whether the deals create value or not (Cuypers et al. 2017, Meckl, 2016).
Literature review demonstrates ambiguous results regarding the created value from M&A using different variables and metrics including event study, accounting, subjective assessment, and mixed metrics. Despite the widespread use of these methods, there is still ambiguity in the results, with some studies showing positive outcomes and others showing negative or neutral effects. Moreover, each study has region and industry specificity that leaves a lot of room for interpretation of the results. This highlights the complex nature of M&A transactions and the need for careful analysis and evaluation before embarking on such a strategy.
This Master Thesis will investigate the impact of M&A on the financial performance in the European region. It will analyze the various types of M&A and their effects on financial performance. It will discuss current trends and highlight features of the region. In order to analyze the impact, event study methodology, a statistical technique that measures the effect of a particular event on a company’s stock price with a regression model will be used. The event study approach is able to isolate the effect of an event, such as an M&A, from other influences on financial performance.
This thesis contributes to the well-researched field of mergers and acquisitions. The aim is to make previous research and existing methods more applicable by sampling data in a different setting and with different market environments, specifically European and UK M&A announcements. The new setting sheds light on both emerging and developed markets, which have been less researched in the literature due to the increasing popularity of emerging markets. Selecting European and UK markets for in-sample analysis can also provide additional insights, according to the literature they significantly differ from the markets of the US and Canada in terms of corporate governance and market conditions.
By selecting European and UK markets, the study can investigate inner features in relation to stock market reactions to M&A announcements.
Finally, by duplicating, merging, and investigating partial perspectives from other research and expanding them to a different environment, this work adds to and sheds new light on the papers of Mateev (2018), Ellis et al. (2017), Tao et al. (2017), Dutta et al. (2013), and Starks and Wei (2013).
Moreover, some authors suggest that the European market is unique compared to other regions, as it is composed of many different countries with their own regulations and cultural differences. This can lead to greater complexity and uncertainty in M&A deals, which can in turn affect stock market reactions. Different corporate governance systems are also considered to be a cause of smaller activity in Continental Europe comparing to the US. Nevertheless, activity of M&A has increased in the European region after the crisis of 2008, attracting more researchers nowadays. (Bessler et al. 2020)
Despite the fact that M&A activity is a widely researched topic, M&A impact is still underdeveloped in the context of different regions of the world. Furthermore, the effect of M&A activity in the second decade of the 21st century, in general, is a research field with a small number of scientific articles on the topic. Thus, the aim of the research is to investigate the level and nature of the impact of M&A activities on acquirers.
Thus, despite the fact that mergers and acquisitions are a deeply studied subject, there is a research gap regarding the impact of M&A in recent years in Europe. The topic of mergers in Europe remains underdeveloped, especially in the last 10 years.
...
In conclusion, this study aimed to examine the extent to which mergers and acquisitions (M&A) impact the short-term financial performance of acquirers in Europe. By utilizing event study methodology and analyzing M&A announcements in European and UK markets over the past decade, the study has made significant contributions to the existing literature and provided valuable insights for stakeholders involved in M&A.
The findings of the study indicate that M&A deals have a discernible impact on the short-term financial performance of acquirers. Through the analysis of cumulative abnormal returns, the study isolated the effects of M&A events on stock prices, thus providing a clear understanding of the market's reaction to these deals. This approach allowed for the identification of key factors that influence the financial performance of companies involved in M&A transactions in Europe.
The study answers the research question stating that mergers and acquisitions have yet small but significant positive short-term impact on financial performance. Moreover, such factors as cross-border status of the deal, legal status of the target, and payment methods have significant impact on short-term returns in the European market. In particular, it has been found that there is a positive correlation between returns and domestic deals when it is paid in stocks for Continental Europe and the European market in general. Moreover, results have demonstrated the negative correlation between legal status of the firm and returns of the bidder, which proves the significance of such factors as legal status of the target, cross-border type of deal and the method of payment for short-term financial performance of the bidder.
For companies planning to engage in M&A activity, the study's findings offer valuable guidance in making informed decisions. By identifying the factors that positively or negatively impact short-term financial performance, companies can better structure their deals to maximize benefits and mitigate risks. This insight is particularly important for both developed and emerging markets in Europe, as these regions have been relatively underexplored in prior research.
In summary, this study contributes to the existing body of knowledge on M&A in Europe by focusing on short-term financial performance and utilizing event study methodology. The findings have practical implications for companies, investors, and regulators, assisting them in making informed decisions, identifying investment opportunities. By shedding light on the impact of M&A on acquirers' financial performance, this study adds to the understanding of the dynamics of M&A transactions in Europe and their implications for stakeholders in the market.
The findings of the study indicate that M&A deals have a discernible impact on the short-term financial performance of acquirers. Through the analysis of cumulative abnormal returns, the study isolated the effects of M&A events on stock prices, thus providing a clear understanding of the market's reaction to these deals. This approach allowed for the identification of key factors that influence the financial performance of companies involved in M&A transactions in Europe.
The study answers the research question stating that mergers and acquisitions have yet small but significant positive short-term impact on financial performance. Moreover, such factors as cross-border status of the deal, legal status of the target, and payment methods have significant impact on short-term returns in the European market. In particular, it has been found that there is a positive correlation between returns and domestic deals when it is paid in stocks for Continental Europe and the European market in general. Moreover, results have demonstrated the negative correlation between legal status of the firm and returns of the bidder, which proves the significance of such factors as legal status of the target, cross-border type of deal and the method of payment for short-term financial performance of the bidder.
For companies planning to engage in M&A activity, the study's findings offer valuable guidance in making informed decisions. By identifying the factors that positively or negatively impact short-term financial performance, companies can better structure their deals to maximize benefits and mitigate risks. This insight is particularly important for both developed and emerging markets in Europe, as these regions have been relatively underexplored in prior research.
In summary, this study contributes to the existing body of knowledge on M&A in Europe by focusing on short-term financial performance and utilizing event study methodology. The findings have practical implications for companies, investors, and regulators, assisting them in making informed decisions, identifying investment opportunities. By shedding light on the impact of M&A on acquirers' financial performance, this study adds to the understanding of the dynamics of M&A transactions in Europe and their implications for stakeholders in the market.
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