Strategic implications of merger bids

Abstract

As the success of merger offer is getting difficult recently, the management has to think much of the pre-merger process, the bidding process so this research focuses on the bidding process of merger. Using data from 1991 to 2005, abnormal stock returns for both successful and unsuccessful merger offers are examined at the announcement date and the outcome date and, also, the differences between successful and unsuccessful mergers are compared. This paper contributes to the literature on several aspects. First, this study confirms that the stock market favors related, horizontal, and relatively small target mergers over diversifying, vertical, and relatively large target mergers, respectively. Second, this research finds that the stock market distinguishes between a merger bid’s potential success and failure at the announcement date. Then, this research finds that the stock market evaluates more rigorously value-creating mergers than value-destroying mergers. That is, the stock market responses more favorably to the successful value-creating merger bids than successful value-destroying merger bids because of expected benefits of mergers. On the other hand, the stock market reacts more unfavorably to the unsuccessful value-creating merger bids than even unsuccessful value-destroying merger bids as the punishment or disappointment to the managements. This result shows that increasing the success probability of merger offers is important and the previous studies have underestimated the success possibility of merger offer. Also, this paper finds many evidence that same merger offer bring the opposite result to the bidders and targets. This is because the stock market has different perspective to merger offers between bidders and targets. For bidders, the agency problem dominates the stock response but, for targets, the signal effect does matter.