Shareholder wealth effects of European takeovers : 1997-2004 : a thesis presented in partial fulfilment of the requirements for the degree of Masters of Business Studies in Finance at Massey University

Abstract

This study provides an empirical analysis of the returns to acquirers and targets in European mergers and acquisitions. An event study has been carried out to test the announcement effect of a merger on the bidding and target company stock prices over the period. January 1, 1997 to December 31, 2004. for twenty-three markets in Europe. This is the first comprehensive study, the author is aware of, to complete such that includes transactions throughout all of Europe, including Eastern Europe and countries from the former Soviet Union. This thesis tests the hypothesis that the incentive mechanisms created by investor protection rights, along with the strength of legal enforcement across countries, affects the value created and destroyed by managers in domestic and cross-border acquisitions within Europe. Thus, the relative difference in corporate governance rules between nations is a source of value for merged firms in and of itself. Prior studies have found significant variation in the gains to acquiring and bidding firms as a function of the nationality of the bidder, but the ultimate source of this international variation in returns has not been satisfactorily addressed. It is argued that a firm's legal and corporate governance environment provides a partial explanation for the observed variation in returns for domestic and cross-border acquisitions and it is tested across all European countries, something that has not been done before. The results suggest that countries with stronger investor protection rules generate larger returns to target shareholders. The better accounting standards increase disclosure, helping acquirers identify potential targets. This reduces the cost of capital and thus increases the competition among bidders and the premium paid by the winning bid. Similarly, target shareholders in strong investor protection and disclosure regimes also experience a price drift in 30 days leading up to a takeover announcement. The sophistication of legal rules requires substantial legal and financial consultation resulting in leakages in the market. The analysis also looks at the difference between domestic and cross-border transactions, and confirms that targets in cross-border deals generate higher returns, implying that targets benefit from expanding into foreign marketplaces. However, acquirers receive lower benefits in cross-border deals than in national transactions, signalling that acquiring firms are to some extent penalized for engaging in a cross-border merger.