MERGER BIDS,

UNCERTAINTY, AND
STOCKHOLDER RETURNS

COMEPAUL ASQUITH HARVARD UNIVERSITY, BOSTON, MA 02163, USA

Anshuli
19DM036
PGDM Finance
Purpose of Study

To examine the entire merger process from 480 trading days before a
merger bid until 240 trading days after a merger bid.

To see if changes in equity values result from the anticipation and

completion of a merger or if they are primarily a function of the bidding
process.

To examine the extent to which probabilistic merger information is

incorporated into security price movements.

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211 target and 196 bidding firms
- Successful mergers

91 target and 89 bidding firms.

- Unsuccesful mergers

July 1962 to December 1976 1962-1963, 1967-1968 & 1974-1975

Successful Merger Bids Unsuccessful Merger Bids

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Methodology

• Trading days accounted for the study – 480 trading days before merger bid until 240 trading days
after merger bid.
• Two merger events used – Announcement date & Outcome date
• Both unsuccessful & successful merger bids are studied.
• The sample of successful merger consist of 211 target firms & 196 bidding firms.
• The sample of unsuccessful merger bids contains 91 target firms & 89 bidding firms.
• Daily excess returns of the firms are calculated using technique developed by Myron Scholes for
the Centre for Research in Security Prices (CRSP)
• Formula for excess return calculation -  XRit = Rit - E(Rit), where the CER is for the period from t =
K until t = L.

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Pre-Press Date Period Pre-press date period from “-480 days” until
“-20 days” before the press date.

Target firm’s returns declined

Bidding firm’s returns increased

CER for successful Target Firm – (-)14.1%

CER for unsuccessful Target Firms –

(-)10.5%

CER for successful bidding firm – (+)14.3%

CER for unsuccessful bidding firms –

(+)2.2%.

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 Press date on which information about a merger bid first appears in
Press Date the financial press.

News about a merger bid is announced on day “-1” and published on

day 0.

Announcement effects are measured over a two-day period: t = “-1”

and t = 0.

It generates large positive excess returns for the target firms and
Bidding firms generates small but insignificant positive excess returns
at the press day

CER for successful Target Firm – (+) 6.2%

CER for unsuccessful Target Firms – (+) 7%

CER for successful bidding firm – (+) 0.2%

CER for unsuccessful bidding firms – (+) 0.5%.

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Period between the
press date and the Demonstrate how the stock market responds to a merger
outcome date bid in progress.

CER rises for successful target firms and falls for

unsuccessful target firms.

• For successful mergers, the average CER during the

interim period is positive and significant with CERs
rising from -0.8% to +7.2%.
• In unsuccessful merger bids, results are opposite with
average CER falling from 1.2% to -6.9%.

For successful acquiring firms, the lack of abnormal

returns continues after the merger bid and average CER
for the interim period is -0.46% . Bidding firm’s excess
returns are strongly negative for unsuccessful bidders.

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Outcome Date The outcome date marks the end of a merger bid.

For successful mergers, it is the merger

consummation date.

For unsuccessful mergers, the outcome date is

defined as the day when the termination of the
last merger bid is announced.

• CER for successful target firms – (+) 15.5%

• CER for unsuccessful target firms – (-)7.5%

For successful bidding firms, there is no

significant stock price change on the merger date

• CER for successful bidding firm – (-) 0.1%.

• CER for unsuccessful bidding firms – (-) 5.5%.

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Post Outcome Period
Post-outcome period is the period from the
day following the outcome date until 240
days after it.

After the merger the consolidated firm has

negative excess returns. CERs for merged
firms declines by 1.4%.

CER’s for unsuccessful target firms display

a pattern which looks similar to the CER’s
for merged firms in the post-outcome period.

CER’s for unsuccessful bidding firms are

significantly negative for the entire post
outcome period.

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Conclusion Stocks whose trading was halted on the press date exhibited much larger
excess returns than other successful target firms.

Entire market reaction to a merger bid does not occur at the time of
announcement.

Excess returns occur throughout the period from the press date to the outcome
date.

The market reverses the initial positive excess returns for both target and
bidding firms in unsuccessful bids

There is an increase in the probability of merger benefit the stockholders of

target firms, and decrease in the probability of merger harm the stockholders of
both target and bidding firms.

There are no significant excess returns for unsuccessful bidding firms at either
the press or outcome day.

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Thanks!

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