Applied Financial Economics, 2013

Vol. 23, No. 10, 891–900, http://dx.doi.org/10.1080/09603107.2013.778943

Shareholder wealth creation

following M&A: evidence from
European utility sectors
Sanjukta Dattaa,*, Devendra Kodwanib and Howard Vineyc
a
Department of Law Economics Accountancy and Risk, Glasgow Caledonian
University, Glasgow, UK
b
The Open University, Centre for Accounting and Finance, Milton Keynes, UK
c
The Open University, Centre for Strategy and Marketing, Milton Keynes, UK

Mergers and Acquisitions (M&A) of European utility sectors subsequent to

privatization and deregulation triggered widespread concern due to the crucial
role played by utility sectors in a country’s economic and social development.
From the study of a sample of 156 cases of M&A within utility sectors in
Europe between 1990 and 2006, this study provides evidence on the
performance of utility sectors following M&A. On one hand the findings
suggest that lower levels of losses are accrued to the shareholders in the
acquiring companies. On the other hand the fact that acquirer shareholders in
the short run and the shareholders in the combined post-acquisition companies
suffered losses in the long run triggers a negative signal for the investors in
utilities.

Keywords: mergers and acquisition; deregulation; utilities; event studies

JEL Classification: G34; L51; L97

I. Introduction Becker-Blease et al., 2008). However these studies

Extensive empirical literature on effect of Mergers and
Acquisitions (M&A) on firm valuation shows that the
target companies’ shareholders gain in the short run
following the announcement of M&A while the
acquiring companies’ shareholders either incur losses or
earn very small positive gains (Sudarsanam et al., 1996;
Schwert, 2000; Andrade et al., 2001; Doukas et al.,
2002; Fuller et al., 2002; Goergen and Renneboog,
2004; Moeller et al., 2004; Gregory and McCorriston,
2005; Antoniou et al., 2007; Martynova and Renneboog,
2008).
Research on the M&A in the US electricity industry
reports similarly that the target company shareholders
gained and the acquirer company shareholders suffered
losses (Bertunek et al., 1993; Berry, 2000; Leggio and
Lien, 2000;
revealed that the level of target gains and acquirer losses
are both lower than that earned in non-regulated
industries.1
Evidence on long run, most merger performance 3 to 5
years after M&A suggests that the shareholders in the
combined firm earn mostly negative returns (Loughran
and Vijh, 1997; Higson and Elliot, 1998; Rau and
Vermaelen, 1998; Sudarsanam and Mahate, 2003;
Megginson et al., 2004; Conn et al., 2005; Gregory and
McCorriston, 2005; Antoniou et al., 2007; Dutta and Jog,
2009). Becker-Blease et al. (2008) documented that the
post merger buy-and-hold returns of the US electricity
compa- nies are either the same or worse than the control
sample.
The evidence on impact of M&A in regulated sectors
thus shows that the extent of the negative (short run
acquirer and long run combined firms) or positive (short

*Corresponding author. E-mail: sanjukta.datta@gcu.ac.uk

1
All companies are subjected to some form of regulation. Here non-regulated industries refer to those industries that are not subjected
to
any economic regulation like price-cap regulation in the UK and rate of return regulation in the US in the context of utility sectors.
© 2013 Taylor & Francis 891
892
run target) returns experienced in the utility sectors is
smaller compared to other sectors. This raises the
question of why this might be so.
Economic regulation of utilities is offered as one of
the explanations (Leggio and Lien, 2000). The argument
is that the acquirers of these utilities are reluctant to pay
a higher target premium fearing regulatory recapture of
any gains implied by the target premiums in the form of
revised rate base.2 Apprehension about prevention of
mergers by antitrust regulators, small savings associated
with these mergers and lack of prior experience of
utilities in acquiring and integrating the merged
companies are offered as other possible explanations for
lower premiums offered in case of utilities (Ray and
Thompson, 1990; Bertunek et al., 1993). A remarkable
surge in M&A among the European utilities after the
privatization and opening up of the energy,
telecommunications and other utilities led by the British
provides an opportunity to investigate whether the
difference in the impact of M&A on shareholder wealth
creation is explained by the pre- sence of regulation.
In this context it is important to mention that the
differ- ence in M&A share price performance of US
utilities that has been found empirically and share price
performance of European utilities that this study aims to
examine might also be due to the difference in the nature
of regulation like the price-cap regulation in the UK and
rate of return regulation in the US. Under the price-cap
regulation a cap is set on the price that the utility
company can charge. This cap is based on retail price
index (RPI) minus X (RPI-
X) where RPI is the proxy for inflation and the factor X
captures the efficiency savings earned by that utility pro-
vider. X not only captures the past performance of the
utility provider but also the performance of other firms
in the industry. Price-cap regulation has been criticized
because of its lack of fairness in the distribution of rent
between consumers, shareholders and managers
(Newbery, 1998). On the other hand under the rate of
return regulation government determines the fair price
that the utility provider can charge and it is often
criticized because it gives little incentive to the utility
companies to reduce cost (Newbery, 2001, 2002). Since
the form of utility regulation is different between the US
and Europe, the empirical evidence on US utilities M&A
cannot be extended to European M&A. This calls for a
separate examination of European utilities M&A. The
objective of this study is to address this gap.
Utility sectors are indispensable and bear significant
social welfare characteristics, so it is vital to examine
whether the market’s perception of M&A within such
sectors is any different from that in non-regulated indus-
tries. Moreover utility sectors are characterized by
natural monopoly with significant economies of scale
and scope.
S. Datta et al.
Marques and Witte (2011) stated that economies of scale
“arise from the large fixed costs, the major technical
efficiency, the market power in inputs (e.g.
procurement) and investment in innovation”. Economies
of scope in utilities like water sector can emanate from
three sources: horizontal integration of two or more
services, vertical integration of the elements in supply
chain (e.g. water production and water distribution) and
horizontal integra- tion of particular elements in supply
chain (e.g. water treatment and waste water treatment)
(Marques and Witte, 2011). Furthermore these M&A
also have signifi- cant economic importance – the value
of some of these M&A deals in utility sectors has been
substantial. For instance, the data from my sample reveal
that in 1999, UK’s Vodafone acquired Germany’s
Mannesmann for
$200bn. This is so far the largest M&A deal in Europe
not only in utility sectors but also taking all other sectors
into consideration (Sudarsanam, 2003, p. 1). Some other
prominent M&A in European utility sectors in terms of
deal size as evidenced in my sample are the merger
between Vodafone of the UK and Airtouch
Communications of the US for $67 billion; merger
between Viag and Veba of Germany in 1999 to form
Eon (deal value $14 billion) and the acquisition of
Scottish Power of the UK by Iberdrola of Spain in 2006
(deal value
$26 billion). Given the size of some of these M&A deals
in utilities, one issue that arises is whether this M&A
will lead to an increase in shareholder value. In addition,
there was a surge of M&A in utilities across Europe
which started in the mid 1990s (following the removal
of golden shares). This is the first time when utility
sectors in Europe, as a response to deregulation,
embarked in M&A on such a significant scale. So the
availability of data also makes it timely to examine
shareholder wealth creation and the determinants of this
shareholder wealth in these regulated utility sectors.
Our study makes a number of important contributions
to the existing literature. First, this study has looked into
M&A in an under investigated setting – the utility
sectors, particularly European utility sectors. The
analysis of these regulated sectors provides an
opportunity for a new test of existing theories regarding
the impact of M&A on the shareholder wealth creation.
Second, our study also pro- vides a methodological
contribution in the computation of short run abnormal
returns for the shareholders of target and acquirer firms.
The vast majority of studies on M&A have applied OLS
market model to determine short run abnormal returns of
the target and acquirer firms. This study has applied
both OLS market model as well as world market model
to determine the abnormal returns. Park (2004) argued
that event study in a multi-country setting should
incorporate movements in global market index and
changes in exchange rate. We recognize this as a
2
This is specific to US utilities where utility sectors are subjected
to rate of return regulation.
Shareholder wealth creation following M&A: evidence from European utility sectors
necessary extension to
do a robust analysis
given the cross border
M&A in our sample and
hence have constructed a
world market portfolio
to estimate abnormal
returns fol- lowing Park
(2004).
The results show
mixed evidence for
shareholder wealth
creation following M&A
of the utility sectors.
Consistent with studies
in non-regulated
industries, this study
finds that the target
shareholders have
gained while the
acquirer shareholders
have suffered losses.
However we find that
the level of target gains
and acquirer losses were
both lower compared to
non-regulated sectors.
Taken together this study
contributes both in the
area of research on
utility sectors as well as
finance literature on
M&A.
The rest of the article
is structured as follows.
Section II presents the
data and methodology.
Section III presents the
empirical findings and
finally Section IV
concludes by discussing
the implications of the
findings.
II. Data and
Methodology
M&A data has been
obtained from securities
data corpora- tion3 (SDC
database) for 17-year
period from 1990 to
2006. The reason for
choosing this time
period is that the
European utilities
witnessed M&A activity
from the early nineties
after the structural
changes of privatization,
liber- alization and
deregulation (Armstrong
et al., 1994). The sample
consists of completed
deals and only publicly
listed target (European
and non-European) and
acquirer (European)
companies. Another
criterion that is included
in the sample is that in
the post merger period,
combined entity should
be listed on one of the
European stock
exchanges. The target
and the acquirer belonged
to one of the four utilities
industry namely;
electricity, gas, water and
telecommunications. The
reason behind this
sample
target firms from the
DataStream database.
The distribu- tion of
M&A of European
utilities shows that the
bulk of M&A activity
has taken place in the
electricity sector which
accounts for 49% of the
total M&A of European
utilities in the sample.
Telecom, water and gas
account for 35, 12 and
4%, respectively. More
than half of the deals
involved the UK,
Spanish and German
companies in that order.
Classification of the
spread of the acquirer
and target firms
respectively across their
country in three
different time periods of
their M&A 1991–1995,
1996–2000 and 2001–
2006 showed that the
bulk of the M&A
activity took place
between 1996 and 2000
when the restrictions (in
the form of ‘golden
shares’) on the M&A
were removed.
Measurement of short
run stock price
performance
In this study, average
abnormal returns
selection is to examine
whether4the operational
synergy
that is likely to emanate
from these within
industry mer-
gers has actually taken
place. Finally, only those
deals were selected where
the percentage of shares
owned after transaction
by the acquirers was
more than 50%.
Data on market value
of the companies, market
indices, share prices and
exchange rates are
obtained from the
DataStream database.
The market values of
different European
893
(AARs) and cumu- lative
average abnormal
returns (CAARs) have
been cal- culated by
using the OLS market
model and the world
market model. OLS
market model is
‘relatively powerful’ and
well ‘specified’ under a
variety of conditions
(Brown and Warner,
1985).
OLS market model
The OLS market model
benchmark assumes that
return of security i at
time t is a function of
market return at time t.
This is expressed as
follows:
Ri;t ¼ αi þ
βiRm;t þ εi;t
where Ri;t, Rm;t are the
rate of return for security
i on day t and rate of
return for equally
weighted market
portfolio on day t,
respectively. Since the
sample of firms comes
from different European
countries, so for each
country their respective
market indices have
been used as a proxy for
the
m . Alpha and beta
market ;t are estimated
return from
R
utilities are converted into
the British pound sterling
by multiplying with the
exchange rate (pound
equivalent of the
European currencies) on
that respective date.
Based on the above
criteria a sample of 156
M&A deals in the
European utility sectors
was obtained. The share
price data were available
for 126 acquirer firms
and 96
894 S. Datta et al.
244 to 6 days prior to β2;iRWmt þ β3;iERj;t þ εi;t Y that has been analysed
BHARi;T ¼ ½1 þ
the event. The event Y following the event
period has been taken Ri;t ] — ½1 þ completion month. This
from ‒5 to +5 days study has analysed 1, 2
Following Park (2004), EðRi;t Þ]
surrounding the event and 3 years holding
this study has regressed
announce- ment date. t¼1 period BHARs following
security return Ri;t with
t¼1 the event comple- tion
respect to local market
World market model month.
index RLmt, world In Equation 3, Ri;t is the
market index RWmt and The average BHAR
The world market model return
ð of security i at
is expressed as follows: change in foreign (ABHAR) for the sample
month t and E Ri;t is the of N firms for a
currency exchange rate expected or normal
Ri;t ¼ αi þ β1;iRLmt þ ERj;t. The parameters αi, particular holding period
monthly return based on T (1, 2 or 3 years post
β1;i, β2;i and β3;i a benchmark model. T merger) is calculated as
3 is the number of months follows:
SDC provides detailed quantitative information about M&A
worldwide. It is the most comprehensive source of M&A
in the holding period
N
worldwide and a sectional dependence
major source of data for acquisition related empirical studies among sample
This problem firms.
AB 1X (4
HA
R
¼ )
(Rau and Vermaelan, 1998; Sudarsanam, 2003; Conn et al.,
2005; Antoniou BH
AR
et al., 2007).
4
Source of operational synergy for this within industry merger T i;T
has been taken into
is through economies of scale and scope (Sudarsanam et al.,
1996). account in the
N
CTAR approach i
¼
are estimated over the where the average 1
estimation period (‒6 to buying all firms abnormal return is
‒244 days prior to the involved with an event obtained for each
event date). This study and selling at the end of calendar
has used FTSE all- a pre-specified holding month for all event firms are analysed using some
world index returns as a period versus a within the prior pre- benchmark (normal)
proxy for the world comparable strategy specified investment returns. The null
market return RWmt and investing otherwise periods (such as 1, 2 and hypothesize pertaining to
the relative change of similar non-event firms 3 years). So following long run shareholder
local currency in terms (Mitchell and Stafford, Lyon et al. (1999), this wealth creation is as
of US dollars as ERj;t. 2000). The BHAR of study has applied both follows:
Following Collins and security i for the the BHAR and the CTAR Hypothesis 2: Mean
Dent (1984) and holding period T is methods to determine the abnormal performance is
Brown and calculated as follow: long run post merger equal to zero for the
Warner
standard(1985), this study has used the time series
T
shareholder wealth sample European utilities.
run abnormal returns
deviation test as the test creation.
both the buy-and-hold
significance of AARt and In both the BHAR and Buy-and-hold abnormal
abnormal returns (BHAR)
CAAR the CTAR approaches, a return
t1;t2. to examine
statistic and calendar time
3-year event window is
abnormal returns (CTAR) The buy-and-hold
the statistical taken to calculate the
methods should be used abnormal return, or
monthly abnormal returns.
in order to ensure BHAR, approach
Hypothesis 1: The The rationale behind
robustness of the results. measures the average
using a 3-year window is
The BHAR approach is multi-year return from a
mean abnormal that acquisitions have a
preferred by many strategy of
strong and extended
studies because it is more
performance is zero impact on firm profile
consistent with the true
in the short run following and this can be reflected
investor experi- ence
the announcement of in multi-year firm perfor-
(Barber and Lyon, 1997;
M&A. mance (Barber and Lyon,
Lyon et al., 1999).
1997; Rau and
However
the
Measurement of long not BHAR approach
take into
cross- accountdoes
the Vermaelen, 1998;
run stock price Sudarsanam and Mahate,
performance 2003; Conn et al., 2005).
Similar to the
Lyon et al. (1999)
measurement of short run
recommended that in a
abnormal returns, the long
particular study of long
run BHARs and CTARs
Shareholder wealth creation following M&A: evidence from European utility sectors 895
Benchmark model used portfolios are further
5
to calculate BHAR grouped into 5 Fama et al. (1993) have selected June of each year so as to
portfolios based on their ensure that the book value of each stock becomes available.
Several studies (e.g. Following Fama
MV/ BV ratio. This led
Fama and French, et al. (1993) this study has used June of year t to rank the
to the construction of
1992; Gregory et al., stocks in the market index in terms of size and book to market
25 size and MV/BV
1994) highlighted the ratio. These portfolios are again rebalanced in June of year t +
control portfolios. The 1 to drop those stocks which have delisted and include those
importance of
control portfolios are that have been newly listed. Most of the extant studies that
controlling for size and
constructed at June5 of have used the reference portfolio approach have used June to
market to book value construct the portfolio.
each year and the 6
ratio when calculat- If the event completion month for a sample firm falls between
returns are calculated
ing abnormal returns January and June of year t then the control portfolio for each year
from July of each year. has been
over a long run post
Out of these 25 size and determined by rebalancing the portfolios at June of year t1, t
event win- dow. So
MV/BV control and t + 1 (since 3 year BHARs has been analysed). If the event
following Fama and month falls between July to December of year t then the
portfolios, the portfolio
French (1992), in this control portfolio for each year has been determined by
whose size and
study we use a rebalancing the portfolios at June of year t, t + 1 and t + 2.
MV/BV matches
reference (control)
closely to a sample Calendar
portfolio based on size Table 1. Average
firm’s size and MV/BV time
(market capitalization) abnormal return (AAR)
CTARmarket
approach on advocated
whichtois strongly the by Fama
M&A abnormal of the acquirer and
and value
(1998)value
and Mitchell completion month
and Stafford (2000) is specified as is returns N
Day AAR target firms based
t-Statistic on
% (+)
book (MV/BV)
follows: selected. The equally (CTAR) the OLS market model
ratio as benchmarks. Panel A: AAR based on OLSbenchmark
market model
weighted average return Acquirer
First, the sample is −0.0015 −0.75 48
of the control portfolio −5 106
grouped into 5 106 0.0002 0.09 54
is the expected normal
portfolios based on −3 106 0.0003 0.15 63
benchmark return −2
size
Following Mitchell (market
and Stafford (2000) in each calendar 106 −0.0006 −0.30 53
EðR i;tÞ for theby −1
month t, a portfolio
capitalization) from the sample firms is formed
and then 0 106 0.0009
CTAR 0.46
i;t ¼ Ri;t — EðRi;tÞ
59 (5)
including respective sample
firms which have
each of all these
stocks from
5 the sample 106 −0.0039 −1.92 53 −4
firm.6 1 106 0.0016 0.76 60
completed M&A in the past 12, 24 or 36 months. The 2 106 −0.0005 −0.26 55
average CTAR for the portfolio of firms in a calendar 3 106 −0.0007 −0.35 57
month t is denoted by CTARt. This is shown in Equation 6. 4 106 −0.0008 −0.40 55
5
In the next calendar month t + 1 the portfolio is reba- 106 −0.0016 −0.77 52
lanced to include new event firms that executed an M&A Panel B: Target AAR based on OLS market model
in the previous month and disregard those that have com- −5 94 −0.0010 −0.38 37
−4
pleted 1 to 3 years of their M&A. For each security in the −3 94 0.0009 0.34 60
sample, their market capitalization data and MV/BV ratio 94 0.0071** 2.65 56
−2 94 0.0086** 3.22 55
are collected on their respective event completion month. −1 94 0.0112** 4.19 59
For each calendar month t a mean CTARt is calculated 0 94 0.0539** 20.17 66
across the firms. 1 94 0.0120** 4.67 37
2
3 94 0.0019 0.70 40
Nt 94 0.0029 1.07 48
94 0.0016 0.61 45
t i;t 5 94 −0.0040 −1.51 38
Nt
X 4
CTAR ¼ (6)
1
CTAR
i¼1
Not
es:
This
tabl
e
repo
rts
the
aver
age
abn
orm
al
896 S. Datta et al.
return day in the 11 days event window.
s
(AAR 7
In this study Fama French three-factor model and Carhart four-
Nt is the number of for the entire sample of
completed mergers and factor model have not been used because they wrongly assume
sample firms in the that factor
acquisitions (M&A) of the
calendar month t. The European utilities from loadings are constant over a relatively long period.
monthly CTARt are 1990 to 2006. Panels A Assumption of constant factor loading can lead to biased
standardized by and B reports the 11 days estimation results under the Fama French three-factor and
acquirer AARs and target Carhart four-factor asset pricing models. This study has
estimates of portfolio
AARs surrounding the therefore used reference portfolio approach based on size and
standard deviation σCTAR event date, respectively. MV/BV as the benchmark expected return to determine the
following Mitchell and The AARs are cal- culated CTAR.
Stafford (2000) and is for 106 acquirer firms and (Panel B) for different event
94 target firms whose Table 2. Cumulative windows. The CAAR
denoted by SCTARt.
stock prices were average abnormal returns represents the entire sample
The total number of available. The OLS market (CAAR) of the acquirer of completed M&A of the
calendar months is model is expressed as and target firms based on European utility compa- nies
denoted by T. So there follows: Ri;t αi βiRm;t the OLS market model from 1990 to 2006. The
are T numbers of σCTAR εi;t where Rm;t is the benchmark M&A announcements are
return on the equally identified from SDC Mergers
each for a particular weighted market Interval CAAR ¼ þ and Acquisitions
þ Database.
calendar portfolio on day Statistic The CAAR for an
month. A grand mean of t and Ri;t is the return
P for t2
the monthly standardized security i on day t. In the Panel A: Acquirer event window (t1, t2) is given
CTARt OLS market model the CAAR based on as follows: CAARt1;t2 ¼
is thereby calculated as expected return for each OLS market model
follows: security for both the (−5, +5) −0.007005**
target and acquirer −11.35
T (−2, +2)
portfolios are obtained by
X estimating
¼ αi and βi. This is done by −0.00270** −2.95
MSC (7) regressingt security (−1, +1)
TAR returns Ri;t on the market
return Rm;t for the
SCT −0.00173 −1.46
estimation period. The
estima- tion period is 239 (0, +1)
AR
T days from day 6 to day
244 relative to the M&A −0.00249 −1.72
7 announcement date. The (−1, 0)
expected return EðRi;tÞ
under −0.00360** −2.49
In this study the control the OLS market model is 0
portfolio approach has given by EðRi;t Þ ¼ α^ þ
been used β^ Rm;t. The −0.00436* −2.13
as benchmark to abnormal returns for each
security are calculated as Panel B: Target
determine the abnormal
follows: ARi;t Ri;t E Ri;t . CAAR based on
returns under CTAR The abnormal returns for OLS market
method. As in BHAR n securities whose event model (−5, +5) 0.0954**
approach similar steps period coincided on day 118.51
¼ — ð
have been used to t is calculated as (−2, +2) Þ
n
construct the control follows: ARp;t 1
ARi;t. P
0.0880** ¼ n 73.68
portfolio approach. The AARs for the N
(−1, +1)
portfolios
i1 ¼
for 10 days surrounding the 0.0775** 50.28
III. Findings and event date is calculated as (0, +1) P
N
Discussion A
R 0.0663** 35.14
p (−1, 0)
Results on short run ;
t
p¼1
stock price performance follows: AARt . 0.0651** ¼ N 34.45
The significance of the 0
Table 1 reports the AARs AAR is tested by t-
in the 11 days event statistic. 0.0539** 20.17
window under the OLS **indicates significance at
market model. Panel A the 1% level. The fifth Notes: This table reports the
shows the AAR for column cumulative average
shows the percentage of abnormal returns (CAAR) of
abnormal returns that the portfolio of acquirer
were positive on each (Panel A) and target firms
Shareholder wealth creation following M&A: evidence from European utility sectors 897
2 105 −0.0008 based on the world market n
1
Table 3. Average 3 105 −0.0013 model benchmark. Panel A n
i1
¼
abnormal return (AAR) 4 105 −0.0014 reports the 11 days event AARs for the N portfolios for
of the acquirer and 5 105 −0.0035 window AARs for the P 10 days surrounding the event
target firms based on portfolio of acquirers date
the world market model Panel B: Target AAR based while Panel B reports the N

benchmark on world market model AARs for the portfolio of ARp;t

−5 83 target firms. The world ¼ Nis calculated as follows: AARt
Day N AAR −0.00042 market model is expressed p¼1
. The s
Statistic % (+) 39 as follows: Here the AAR is tested by t-statistic.
−4 83 parameters αi, β1;i, β2;i and * and ** indicate
Panel A: Acquirer AAR 0.00085 0.31 β3;i are estimated over the significance at 5% and 1%
based on world market −3 83 estimation period (6 to 244 levels, respectively. The
model 0.0054* 1.96 days prior to the event fifth column shows the
−5 105 −2 83 date) by regressing percentage of abnormal
−0.0015** 0.0067* 2.43 security return Ri;t on the returns that were positive
42 −1 83 return of local market on each day in the 11 days
−4 105 0.012** 4.30 index RLmt, return on event window.
−0.012** 0.11 0 83 FTSE all-
−3 105 0.001 0.048** 17.40 world index as RWmt and
0.56 53 68 relative change of the local
−2 105 −0.001 1 83 currency in terms of ðUS Þ shareholders following
ð Þ¼
−0.59 48 0.013** 4.56 dollars as ERt. Under the the announcement of
−1 105 0.005 2 83 0.003 world market model the M&A that has been
0.28 47 1.17 47 expected return E Ri;t is
3 83 0.003 given by: E Ri;t reviewed in Section II.
0 105
−0.0056** 1.07 41 α^þ ^
β 1;i RþLmt ^ þRWmt
β 2;i The announcement
45 4 83 0.0014 β^3;i ERt . The abnormal period AAR based on the
1 105 0.51 50 returns for world mar- ket model is
5 83 −0.0046 each security are ¼ —8 From
ð
0.0024 1.13 −1.67 39 given in Table 3.
51 evaluated as follows: Þ
P
ARi;t Ri;t E Ri;t . The panel A of Table 3 it is
The significance t1 cided on day t is calculated as follows:
evident ARthat¼ similar to
abnormal returns for n
of CAAR is Notes: This table the OLS market model
reports the AARs of securities
AR . Thewhosep;t event i;t
tested by t-test. the acquirer and period coin- the acquirer
target firms
* and ** indicate the particular dates within
significance at 5% and 1% the event window the 8
The discrepancy in the number of target and acquirer firms
levels, respectively. between OLS market model and world market models is due to
overall inference of the
event is determined by lack of availability of data on some of the explanatory variables
for some acquirer and target firms under the world market
the CAARs. Panel A of model.
the portfolio of acquirer
Table 2 shows the (−1, +1)
firms and panel B shows Table 4. Cumulative
CAARs for the portfolio
the AAR for the portfolio average abnormal returns
of acquirer firms while 0.061** 45.47
of target firms. From (CAAR) of the acquirer (0, +1)
panel B shows the and target firms based on
Table 1 it is evident that
CAARs for the portfolio the world market model
the AARs are mostly 0.073** 31.04
of target firms. benchmark
negative and not (−1, 0)
It is evident from
statistically significant Interval CAAR
panel A of the table that
for the sample of 0.082** 30.69
the acquirer CAARs are t-Statistic Panel A: 0
acquirers except for−0.0109**
day
(−5, +5) negative in all the event
−17.17
0. On+2)the other hand the
−0.0046**
(−2, windows. −4.94However not Acquirer CAAR 0.088** 17.40
AARs
(−1, +1) for the −0.0025*
target
all of −2.14them are
(0, +1)
sample are −0.0032*
mostly −2.15 based on world Notes: This table reports the
−0.005**
(−1, 0) and statistically statistically significant.
−3.35
positive cumulative average abnormal
0 −0.006** The target −2.65
CAARs on the market model returns (CAAR) of the
significant. This result is
other hand are positive in portfolio of acquirer and
consistent with the
all the event windows. target firms engaged in
empirical evidence on M&A. Panel A reports the
Moreover target CAARs
M&A in non- regulated CAARs for the acquirer firm
are statistically signifi-
sectors which reported across different event
cant at 1% level. This windows while panel B
that target firms gained
result is consistent with reports the CAARs of the
while the acquirer firms Panel B: Target
target firms across different
the empiri- cal evidence CAAR based on
either earned zero or on short run stock price event windows. The CAAR
negative returns. world market
represents the entire sample
performance of the model (−5, +5) 0.048**
While the AAR reports of completed M&A of the
105.71
the AARs of the target European utility companies
(−2, +2)
from 1990 to 2006. The
and acquirer M&A announcements are
shareholders on 0.059** 66.75 identified from SDC Mergers
898
and Acquisitions Database.
The CAAR for an event
window (t1, t2)
is given as follows:
CAARt1;t2AARt. The
significance of
CAAR is tested by t-test.
* and ** indicate the
significance at 5% and 1%
levels, respectively.
AAR for the 11 days
surrounding the event
date are mostly negative.
The targets AAR as
shown in panel B of
Table 3 are all positive.
But only the 3-day AAR
surrounding the event
dates is statistically
significant.
Table 4 reports the
CAAR for the portfolio
of target and acquirer
firms based on the world
market model. The
results are again
consistent with those
obtained in the OLS
market model. The
target CAARs are
positive in all the event
windows and the
acquirer CAARs are
negative in most of the
event windows and most
of them are statisti- cally
significant at 1% or at
5% level.
Implications of the short
run stock price
performance
Extant studies on the
short run stock price
performance showed
that the target gains
range from 20 to 30%.
But in this study, the
short run stock price
performance follow- ing
the announcement of
M&A of European
utility sec- tors suggests
that the target
shareholders have
earned significant
positive returns while
the acquirer share-
holders have suffered
losses across the two
benchmark models. The
size of target CAAR in
the (‒1, +1) event
P window for the OLS
¼
market model and world
market model are 7% and
6%, respectively.
Clearly, the size of target
gain is quite small when
compared to the target
S. Datta et al.
gains reported in the consistent with the
empirical studies of returns accrued to the
M&A in non- regulated target shareholders in the
industries. context of M&A of the
The size of acquirer US electricity sector as
CAAR for the OLS reported by Leggio and
market model and world Lien (2000) and Becker-
market model are ‒ Blease et al. (2008).
0.1% and ‒0.2%, However in the context
respec- tively for the of M&A of the US
event window (‒1, +1) electricity sector, Leggio
and these are also and Lien (2000) found
statistically significant. that the acquirers of the
However the empirical electricity companies
evidence on short run have earned more
stock price performance negative returns
revealed that acquirer compared to those in
CAAR lay between the non-regulated industries.
range of ‒3.47% This difference in result
reported by Houston et between the European
al. (2001) to 1.77% utility sectors and the
reported by Fuller et al. US electricity sector
(2002). So from the may be attrib- uted to the
short run announcement difference in nature of
period returns of the utilities regulation in
acquirer shareholders, it these two regions.
is apparent that
although the acquirers
Long run stock price
have earned negative
performance
returns but the extent of
these negative returns is To complement the
not very high. analysis of short run
One explanation of impact on the
the lower abnormal shareholder wealth, here
returns earned by the we report the findings
target shareholders and from the analysis of
lower negative returns longer holding period.
experienced by the The results show that the
acquirer shareholders is long run BHARs over all
due to the regulated the three different
nature of these sectors. intervals are negative
Being public utilities (Table 5). The mean
and in many cases, local long run BHARs are
monopolies M&A in ‒6.6% (t = ‒1.88), ‒
these sec- tors remain 3.9% (t = 0.80) and ‒
on the regulatory and 4.8%
political radar in most (t = ‒1.22) in the 1, 2
countries. On the other and 3 years post merger
hand regulation also period. However only
ensures a stable revenue the 1 year mean BHAR is
stream reducing the statistically significant at
risk. These factors, 5% level.
therefore, mean while The median BHAR
target shareholders do figures are similar to the
not get high premiums mean BHAR. The
in M&A deals the significance of the
acquiring shareholders median BHARs are
do not lose as heavily as tested by Wilcoxon z-
in non-regulated M&A statistic. The median
deals. This result is also BHAR for the 1, 2 and 3
Shareholder wealth creation following M&A: evidence from European utility sectors 899
years are ‒4.6% (z = ‒
1.3), ‒6.5% (z = ‒0.78)
and ‒4.5%
(z = ‒1.15),
respectively. However
none of the median
BHARs are statistically
significant. Table 5
also shows that in the 1
year post merger
period 44% of the
utility firms had a
positive BHAR, in the
2 years post merger
period
Table 5. Long-run buy-and-hold abnormal returns (BHARs) of the post merger combined firms following M&A of European
utilities with control portfolio approach as benchmark

Interval No. Mean t-Statistic Min Max Median z-Statistic % Positive

BHARs for post merger combined firms under the control portfolio approach
(0, +1 year) 108 −0.066 −1.88* −2.140 0.622 −0.046 −1.361 44
(0, +2 years) 102 −0.039 −0.80 −1.300 1.092 −0.065 −0.786 43
(0, +3 years) 95 −0.048 −1.22 −1.46 1.930 −0.045 −1.154 44
Notes: This table reports the long run BHARs of the post merger combined firms following their M&A. The BHARs are reported
over the 1, 2 and 3 years horizons following the merger completion date. The second column reports the number of post merger
combined firms. The BHARs are calculated using the control portfolio approach with size and market to book value ratio as the
benchmark. To determine the size and market to book (MV/BV) matching control portfolios first all the stocks listed in each sample
countrys market index have been grouped into 5 portfolios based on their size (market value). Each size (market values) quintiles is
further divided into five subgroups based on their MV/BV ratio. Out of these 25 size and MV/BV control portfolios the control
portfolio whose size and MV/BV matches closely to a sample firms size and MV/BV on the M&A completion month is selected.
This control portfolio return is the T T
Q Q
expected return for the respective sample firm. The BHAR is calculated as follows: BHARi;T ¼ ½1
t
þ Ri;t ] — ½1
t
þ EðRi;t Þ]. The
¼ ¼
average BHAR (ABHAR) for the sample of fi
N rms in the holding period T (which is 12, 24 and 26 1months) is calculated
1
as follows
1
P
ABHART ¼ N BHARi;T .The significance of the mean ABHAR is tested by t-statistic and the significance of the median ABHAR is
¼

tested
i1
by Wilcoxon z-statistic. The final column reports the percentage of BHARs that were positive.
*denotes significance at the 5% level.

Table 6. Long run calendar time abnormal returns of the

post merger combined firms following M&A of European
utilities with size and market to book adjusted control
portfolios as benchmark
Interval CTAR t-Statistic
(0, +1 year) −0.019 −0.022
(0, +2 years) −0.105 −0.197
(0, +3 years) −0.083 −0.135
Notes: This table reports the long run calendar time abnormal
returns (CTAR) of the post merger combined firms. The CTARs
are calculated in the intervals of 1, 2 and 3 years post merger
period following the merger completion date. The CTARs are
calculated each month as the difference between the event-
portfolio return and the expected return on the control
portfolio, standardized by the portfolio residual standard
deviation. To determine the size and market to book (MV/BV)
matching control portfolios first all the stocks listed in each
sample countrys market index have been grouped into 5
portfolios based on their size (market value). Each size (market
values) quintiles is further divided into five subgroups based
on their MV/BV ratio. Out of these 25 size and MV/BV control
portfolios the control portfolio whose size and MV/BV
matches closely to a sample firms size and MV/BVon the
M&A completion month is selected. This control portfolio
return is the expected return for the respective sample firm. For
each calendar month t a mean CTARt is calculated across the
firms as
P Nt
follows: CTAR ¼t N1t CTAR i;t. N is the number of sample firms
i¼1
in the calendar month t. tThe monthly CTARt are standardized
by estimates of portfolio standard deviation. The standardized
CTARt t context of M&A of the US electricity companies. The
CTARt
is calculated as follows:
¼SCTAR . A grand mean of the
σCTAR
t
43% of the firms had positive BHAR and in the 3 years
post merger period 44% of the firms experienced
positive BHAR. The sample size decreases as the
analysis moves from 1 year holding period to 3 years
holding period. This might be due to the fact that some
firms might have got delisted in the 2‒3 years post
merger period or some firms might themselves been
taken over by other firms. From the statistically
significant negative 1 year BHAR result, it is apparent
that in the 1 year post-acquisition period the
shareholders of the combined entity suffered significant
losses.
Table 6 shows the long run CTARs over the interval of
1, 2 and 3 years. Similar to the BHARs in the 3 years
horizon the long run CTARs are also negative in the
entire 3 years interval. But none of these results are
statistically signifi- cant, so no interpretation could be
drawn from them on the long run post merger
performance.
Extant studies on the long run post merger period
showed that the shareholders have earned negative
returns (Sudarsanam and Mahate, 2003; Conn et al.,
2005; Gregory and McCorriston, 2005; Antoniou et al.,
2007). Since the 1 year post merger BHAR is negative
and statis- tically significant, the result is consistent with
the existing empirical studies. Moreover the long run
BHAR and CTAR results are also consistent with the long
run results reported in Becker-Blease et al. (2008) in the
negative and statistically significant BHAR in the 1 year

monthly standardized CTARt is thereby calculated as follows: post merger period suggests that M&A of utilities in
PT Europe is not a good strategy for utility firms to survive
MSCTAR ¼ T1 SCTARt. T is the total number of calendar
t¼
1 and flourish in the post-deregulation period. Another
months. The significance of the CTARs are tested by means of a reason for these nega- tive returns could be attributed to
t-test. the lack of prior experi- ence of the European utilities in
acquiring and integrating
the merged companies. Moreover the regulatory and
safety requirements that the utility acquirers need to
maintain also keep them away from more profitable tar-
gets. These two points have also been raised by
Bertunek et al. (1993) and Ray and Thompson (1990) in
the context of M&A of the US electricity companies.
IV. Conclusion
This article provides evidence on shareholder wealth
creation following M&A of European utility sectors.
This study examines whether M&A in regulated utility
sectors generate different shareholder returns compared
to M&A in non-regulated industries as reported by
earlier extant studies. The findings suggest that similar
to M&A in non-regulated industries the target
shareholders of European utility sectors have gained and
the acquirer shareholders have suffered losses. However
the level of target gains and acquirer losses are both
lower than reported by empirical studies on non-
regulated indus- tries. This result is attributed to the
regulatory nature of the utility sectors. Particularly since
utility sectors pro- vide essential service so the role of
the regulators is to ensure that these sectors do not suffer
from market fail- ure, which will have serious social and
economic con- sequences. As mentioned in the
introduction, the utility sectors are characterized by
natural monopoly with sig- nificant economies of scale
and scope. Due to these characteristics of utility sectors,
it is unlikely for these sectors to earn considerable losses
even with major change in ownership structure say
through M&A. This has been reflected in our results as
we find that the market has reacted less adversely for the
acquirers of utility sectors compared to empirical
evidences on acquirer returns in non-regulated
industries. The lower target gains are attributed to the
regulatory nature of the utility sectors. Due to economic
regulation the acquirers of utilities might be sceptical
that the regulators of utilities will not allow them to
realise higher premiums after the mergers.9 Hence the
acquirers of utilities will pay lower target premiums
resulting in lower target gains.
The long run results indicate that shareholders of the
combined entity suffered losses in the long run post mer-
ger period. These long run negative returns suggest that
M&A of utilities in Europe is not a good strategy to
survive and flourish in the long run. The long run
negative returns could also be attributed to the lack of
prior experi- ence of the European utilities in acquiring
and integrating the merged companies. The long run
negative returns also reinstates that post merger anomaly
holds true in the con- text of M&A of European utility
sectors.
9
This point has also been raised by Leggio and Lien (2000) in the context of M&A of the US electricity sector.
The fact that acquirer shareholder in the short run and
the combined shareholders in the long run have suffered
losses triggers a negative signal for the investors in utili-
ties. From a strategic perspective one can argue about
the efficacy of realising any synergy benefits for
investors through M&A.
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