Download The takeover announcement effect on the stock price - UvA-DARE

The takeover announcement effect on the stock
price return of Dutch listed bidders
Bachelor thesis (final version) Jaap Zonjee 6166350
Field: Finance
Supervisor: Shivesh Changoer
Abstract
Martynova and Renneboog (2006) studied the effect of a merger or acquisition announcement
on the stock price return of bidding firms in the Netherlands during the period 1993-2001.
They found an abnormal announcement return for bidding firms that was indistinguishable
from zero. The period 1993-2001 was a time of economic expansion. In this thesis the
abnormal announcement return for Dutch bidding firms over the last 7 years is studied. The
reason this period is studied is that it contains a time of economic downturn. The goal of this
study is to find whether the announcement of a merger or acquisition leads to different
abnormal returns to Dutch listed bidding firms in the period 2005-2012 compared to the
period 1997-2004. This is explored by means of an event study. The results show that Dutch
bidding firms earn a higher cumulative average abnormal return during the period 2005-2012
compared with the period 1997-2004. However, this difference is not significant. A possible
explanation can be that during economic downturn the bidding firms pay a lower premium to
the targets.
Table of contents
I. Literature Review .............................................................................................................1
A. Efficient market theorem .................................................................................................1
B. History of mergers and acquisitions ................................................................................2
C. Influences on the stock return .........................................................................................3
D. Results from recent studies .............................................................................................5
II. Hypotheses .......................................................................................................................6
III. Research Design .............................................................................................................6
A. Data ...............................................................................................................................6
B. Methodology ...................................................................................................................7
IV. Results ...........................................................................................................................11
V. Analysis ..........................................................................................................................14
VI. Conclusion ....................................................................................................................15
References ...........................................................................................................................17
Martynova and Renneboog (2006) studied the effect of a merger or acquisition announcement
on the stock price return of bidding and target firms in Europe. The study of Martynova and
Renneboog (2006) showed that in the period 1993-2001 over a short-term time window round
the announcement date the shareholders of the bidding firm earned abnormal returns not
different from zero. Martynova and Renneboog (2006) argued that this was a time of
economic expansion. In the same paper Martynova and Renneboog (2006) also presented the
results of Dutch bidding firms, however only 21 firms were included.
Most studies performed on this subject are performed during the merger and
acquisition wave of 1993-2001, which was characterized by economic expansion. In this
thesis the effect of a merger or acquisition announcement on the stock price return of Dutch
bidding firms is analyzed for the years 2005-2012. This period contains the economic crisis
started in 2008. The goal is to explore whether the abnormal announcement return of a Dutch
bidding firm during the years 2005-2012 with a period of economic downturn is distinct from
the abnormal announcement return during times of economic expansion. To test this
difference two periods are compared: the period 1997-2004, characterized by economic
expansion and 2005-2012 with economic downturn, including the financial crisis that started
in 2008.
This leads to the following research question: What is the difference in short-term
effect of merger or acquisition announcement on the stock price return of Dutch listed bidding
firms comparing the periods 2005-2012 with 1997-2004? It is hypothesized that during the
period 2005-2012 the abnormal return of Dutch listed bidding firms is positive. It is also
expected that the abnormal return during the period 2005-2012 is higher than during the
period 1997-2004.
The main result of this thesis is that during the period 2005-2012 the cumulative
average abnormal return of Dutch listed bidding firms is higher than during the period 19972004. This CAAR is calculated over the time window of five days before till five days after
the announcement day and the time window of one day prior to the announcement day till one
day after the announcement day. The period 2005-2012 is also tested in two periods; the
period 2005-2007 and the period 2008-2012. The result of these periods is that during the
years 2008-2012 the cumulative average abnormal return is higher than during the years
2005-2007.
This thesis is structured as follows. In the first section the literature on this subject is
presented. In the second section the hypotheses are derived from the literature. In the third
section the sample used for this study is presented and the applied methodology is described.
The fourth section summarizes the results of this study. In the fifth section the results are
analyzed. Finally in the sixth section the conclusions from this study are provided.
I. Literature Review
This section describes the existing literature on topics relevant to this study. First the literature
on the efficient market hypothesis is provided. In the second part, literature on merger and
acquisition waves is presented. As third different influences on the announcement return of
bidding firms are described, such as method of payment and the relative size of the target. At
last the results of former studies on the effect of a merger or acquisition announcement on the
stock price return are provided.
A. Efficient market theorem
In the first part of this literature review the efficient market theorem is explained. This is an
important theorem because it explains the reaction of stock prices to new information.
According to Bodie, Kane, and Marcus (2011) all information that can be applied to
predict stock performance should already be included in the stock price. Therefore, when all
information is present, stock prices only increase or decrease in response to new information.
It is essential that this new information cannot be predicted. Since when it is predictable the
information would already be part of today’s information. Stock prices that change in
response to unpredictable information will move unpredictably. This is the fundamental
argumentation to why stock price changes should be random and unpredictable. Consequently
stock prices should follow a random walk (Bodie, Kane, & Marcus, 2011).
This randomness in price changes is not the same thing as irrational price levels. Only
new information will cause prices to change considering that prices are rationally determined.
As a consequence rational determined prices only change by new information and the random
walk can be considered as the natural result of prices that reflect all available information.
Predictable stock prices are an indication of an inefficient stock market. In the situation where
prices are predictable, this would reflect that not all information is included in the stock price.
On the other hand when stock prices follow a random walk, it indicates that stock prices are
based on all available information, which is called the efficient market hypothesis (Bodie,
Kane, & Marcus, 2011).
In the efficient market hypothesis three different forms can be distinguished (Fama,
1970). The weak-form, the semi strong form and the strong form. In the weak-form efficiency
the price only contains the information on historical prices. Under this condition it is possible
to obtain abnormal returns. These can be achieved with fundamental analysis. The second
form described by Fama (1970) is the semi-strong form efficiency. Here prices reflect all
1
straightforward, publicly available information. The semi-strong form also gives the
opportunity to obtain abnormal returns. These abnormal returns can be achieved by –for
example- having inside information, not publicly available. Finally the strong-form market
efficiency is defined. In this form prices contain all available information. Under these
conditions no abnormal returns can be realized (Fama, 1970).
The efficient market hypothesis and the findings of Fama (1970) are important for this
thesis. The announcement of a merger or acquisition must be considered as a form of new
information. To be able to calculate abnormal returns, the market efficiency should have a
weak-form or semi-strong form. Otherwise no expected return can be calculated and no
abnormal returns can be calculated.
B. History of mergers and acquisitions
To understand this thesis, it is important to explain the historical trends of mergers and
acquisitions and the reasons why firms overtake other firms. First the historical background is
provided and second the reasons for mergers and acquisitions are explained.
According to Berk and Demarzo (2007, p. 874) the merger and acquisition market is
characterized by waves: periods with high takeover activity (economic expansion) are
followed by periods with low activity (economic downturn). This notion is confirmed by
Martynova and Renneboog (2008).Thus it seems that economic activities that accompany the
economic expansions also augment the activity levels in the takeover market (Berk &
Demarzo, 2007).
The periods with the greatest activity of takeovers occurred in the 1960s, 1980s, and
1990s. The merger wave of the 1960s is known as the conglomerate wave because firms
acquired firms in unrelated businesses (Berk & Demarzo, 2007, p.874). By building
conglomerates, companies intended to benefit from the growth opportunities in new markets
that were unrelated to their business. This enhanced value, reduced the earnings volatility, and
overcame imperfections in external capital markets. The 1960s wave collapsed in 1973, when
the oil crisis occurred (Martynova & Renneboog, 2008).
The takeover wave of the 1980s was characterized by hostile takeovers. Acquirers
overtook bad performing, unrelated firms and sold the firms in different parts for more than
the price it was purchased for (Berk & Demarzo, 2007). After the stock market crash of 1987
this wave came to an end (Martynova & Renneboog, 2008). In contrast to this previous wave,
the takeover wave of the 1990s was characterized by friendly deals. The acquirers overtook
firms in related businesses with the goal to enhance their position on the global market. The
2
collapsing equity market in 2000 caused this wave to end (Berk & Demarzo, 2007).
Martynova and Renneboog (2008) found in their study that the abnormal return for
bidding firms was indistinguishable from zero. The reason the acquirer still wants to take over
a firm is that an acquirer might be able to add economic value, as a result of the acquisition.
Bidders pay a premium for the target, but justify this by the large synergies that occur from
the acquisition (Berk & Demarzo, 2007).
Two of these synergies are economies of scale and scope. A firm can benefit of a
merger or acquisition, because it can produce in larger volume. Another way a firm can
benefit of its larger size is by combining some departments of the previous two firms. This is
called economies of scope (Berk & Demarzo, 2007, p. 877).
Another synergy that occurs from the merger or acquisition is vertical integration. In
this situation two firms of different stages in the production cycle merge. The new firm can
benefit from this situation, because it can control the inputs required to produce the product
(Berk & Demarzo, 2007).
A third justification used by acquirers is efficiency gains. Acquirers often argue they
can run the target firm more efficiently than the existing management could. More
justifications for mergers and acquisitions are monopoly gains, operating losses,
diversification and earnings growth (Berk & Demarzo, 2007, p. 878-880).
C. Influences on the stock return
The value that is created by a merger or acquisition is positive for both the target and the
acquirer. However, most of the value that comes from the merger or acquisition benefits the
target shareholders (Martynova & Renneboog, 2008). This paragraph elucidates the
conditions of value creation for the bidder.
Capron and Pistre (2002) studied the value creation for the acquirer. They questioned
where the value creation for the acquirer comes from: the acquirer’s resources or the target’s
resources. They found that acquirers earned positive abnormal returns when the acquirer has
some unique resources which can be leveraged into the target’s context. This way the target is
more valuable to one bidder than to the other. When the acquirer has unique resources, there
is no room for competitive bidding (Capron & Pistre, 2002).
If the target is equally valuable to at least two bidders, the bidders will compete for the
target and all the synergistic gains will go to the target. In this situation the target has unique
resources and these unique resources are equally valued to the bidders. The bidders will drive
up the target price until the net present value for the successful bidder is zero. In most cases of
3
synergistic acquisitions, the gains are likely to be divided between the acquirer and target. So
the distribution of the gains depends on the bargaining between the two firms (Capron &
Pistre, 2002).
Asquith, Bruner, and Mullins (1983) found that large premiums are paid by bidding
firms. As a result the stockholders earn only a slightly positive or slightly negative amount
from the announcement of the bid. This result does not make a merger or acquisition
attractive to the shareholders of the bidding firm. But when the results are measured over a
longer period round the announcement Asquith, Bruner, and Mullins (1983) found positive
returns for the bidding firm.
Also the relative size of the target firm influences the return of the bidding firm
(Asquith, Bruner, and Mullins, 1983). With relatively large targets, the return of the bidder is
higher. Small sized targets give a lower return. Furthermore, the success of a bid also
influences the return of the bidder. When a bid appears to be successful after the
announcement, the return for the bidder is higher than when the bid is not successful after the
announcement (Asquith, Bruner, & Mullins, 1983).
The results of Asquith, Bruner, and Mullins (1983) indicate that mergers create a
positive value for the bidding firm. This result is achieved because the study on the merger
bid is over a longer time period round the announcement date than other studies.
Also the method of payment plays a role in the stock return for bidding firms. Travlos
(1987) studied the relationship of different methods of payment and returns for bidding firms.
The results of equity financed bids show that their stockholders experience losses at the
announcement of the takeover. On the other hand, the results of cash-financing bidding firms
show that their stockholders earn positive returns at the announcement period (Travlos, 1983).
Faccio and Masulis (2005) studied the methods of payment in Europe. They argued
that a cash bid is chosen when a bidder’s controlling shareholder has an intermediate level of
voting power in the range 20-60%. Bidders prefer a cash financing transaction when the
voting control of their dominant shareholder is threatened. This is the case when the target
shareholders are highly concentrated.
A stock bid is chosen when the bidding firm has limited cash and liquid assets. Cash
bids require debt financing. So the bidding firm faces the choice of debt financing or equity
financing, which involved a tradeoff between corporate control concerns of issuing equity and
rising financial distress costs of issuing debt (Faccio & Masulis, 2005).
4
D. Results from recent studies
In this final part of the literature review the results from recent studies are summarized.
From empirical studies was concluded that that mergers and acquisition create value
when the returns of the bidder and the target are combined (Martynova and Renneboog,
2008). However, shareholders of the target mainly benefit from this value. The results from
the studies on the return of the shareholders of the bidder were not consistent: some studies
found a slightly positive and others a slightly negative abnormal return (Martynova &
Renneboog, 2008).
Martynova and Renneboog (2008) examined studies on the abnormal returns of the
shareholders of the bidding firm during the 1960s, 1980s and 1990s merger and acquisition
waves. In the 1960s an abnormal return for the bidding firm of 0.2% was found. The wave of
the 1980s showed an abnormal return between -1.2% and -0.7% whereas the data from the
1990s wave showed an even split between positive and negative returns (Martynova &
Renneboog, 2008).
In another study Martynova and Renneboog (2006) studied the return during the
announcement of a merger or acquisition for the shareholders of the bidding firm in Europe
during the merger and acquisition wave of the 1990s. A cumulative average abnormal return
of 0.8% over a time window of five days prior to the announcement until five days after the
announcement was found.
Considering the methods of payments in the United States a cash bid results in a
higher abnormal return for the bidding firm than an all-equity bid. In Europe all-equity bids
result in a higher abnormal return than cash bids (Martynovan and Renneboog, 2008).
Furthermore, Martynova and Renneboog (2006) studied the takeover announcement
effects on the shareholder’s return of 21 bidding firms in the Netherlands during the merger
and acquisition wave of the 1990s. For the time window of one day prior to the announcement
date until one day after the announcement date a cumulative average abnormal return of
0.19% came forward. The time window of five days prior to the announcement till five days
after the announcement showed a cumulative average abnormal return of 2.22% (Martynova
& Renneboog, 2006).
5
II. Hypotheses
Literature shows that CAAR of the bidding firms is around zero in times of economic growth.
However there is little literature on the behavior of CAAR of bidding firms in times of
economic downturn. This study compares the behavior of CAAR of bidding firms in times of
recession with CAAR in more prosperous economic periods. The period 1997-2004 is
compared to the period 2005-2012. This period contains the 2007-2008 financial crisis.
During the crisis it may be attractive for financially healthy firms to bid on firms in financial
trouble, but are operationally running normal. In this situation the target firm will be
accepting a lower bid, so the firm gets out of trouble. This way a larger part of the value
created will go to the shareholders of the bidding firm. This leads to the following hypothesis:
Hypothesis 1: The cumulative abnormal return of Dutch listed bidding firms on the
announcement of a merger or acquisition is higher in the period 2005-2012 than in the period
1997-2004.
The expectation that the cumulative abnormal announcement return is lower due to the 20072008 financial leads to a second hypothesis:
Hypothesis 2: The cumulative abnormal return of Dutch listed bidding firms on the
announcement of a merger or acquisition is higher in the period 2008-2012 than in the period
1997-2004.
III. Research Design
In this section the design of this study is provided and the criteria for the study sample are
described. Also the sample characteristics and the period are discussed. In the second part the
methodology is described. In this part the formulas that are used are explained in detail.
A. Data
For this study a sample of 120 mergers and acquisitions is used. 60 mergers and acquisitions
with the announcement date during the period 1997-2004 and 60 with the announcement date
during the period 2005-2012 are used. The mergers and acquisitions are selected from the
database Zephyr. Zephyr is a database that provides all information on mergers and
6
acquisitions world-wide. The mergers and acquisition used for the sample are mergers and
acquisitions from a Dutch listed bidding firm. Furthermore, the acquisitions that are used only
100% acquisitions.
From the 120 Dutch listed bidding firms the daily return on the stock price is used.
The daily returns of the 120 bidding firms are retrieved from the database Datastream.
Datastream is a financial database that provides information on stock prices, companies, and
macro-economic information. The daily stock price return is found using the code 477E. The
market return that is used for the benchmark is also retrieved from Datastream. In this
research the market return is the return of the AEX-index. The AEX-index is chosen because
the firms from the sample are all Dutch listed companies.
B. Methodology
In this section the research method is described. The research method that is used is an event
study. An event study enables an observer to assess the impact of a particular event on a
firm’s stock price (Bodie, Kane, & Marcus, 2011, p.381). In this study the impact of a
particular event, is the impact of an announcement of a merger or acquisition on the stock
price of bidding firms.
The impact of the announcement on the stock return is expressed in abnormal return.
The abnormal return is the difference between the realized return on a date with the
benchmark return on the same date. The benchmark return is the return on the stock price if
there would be no announcement of a merger or acquisition. The formula of the abnormal
return is as follows:
(1)
ARi,t = Rit – BRi,t
Where:
- ARi,t denotes the abnormal return of firm i on day t
- Ri,t denotes the return on the stock price of firm i on day t
[Datastream item 477E]
- BRi,t denotes the benchmark return of firm i on day t
The benchmark return for each firm is calculated using the market model. With ordinary least
squares the α and β are estimated. The α and β are estimated over a time window of 250
working days till 50 days prior to the announcement date [-250,-50]. This time period is
7
chosen to exclude rumor effects on the return on the stock price prior to the announcement.
The benchmark formula looks as follows:
(2)
BRi,t =
+ *Rm,t + εt
Where:
- BRi,t denotes the benchmark return of firm i on day t
- α denotes the estimated constant factor
- β is the estimated coefficient of the firm in relation to the market return
- Rm,t denotes the market return which is the return on the AEX-index on day t
[Datastream item 477E]
- εt denotes the error term
With the realized return and the benchmark return, the abnormal return over a time window of
10 days round the announcement for each company is calculated [-5,5]. These abnormal
returns are computed in the cumulative abnormal return:
CARi,T = ∑
(3)
i,t
Where:
- CARi,T denotes the cumulative abnormal return of firm i in period T [-5,5]
- Σ is the sum from 5 days before the announcement till 5 days after the
announcement on t = 0
- ARi,t denotes the abnormal return of firm i on day t
After the CAR is calculated for all of the firms of the sample, the sample is corrected for
outliers. With the cumulative abnormal return of each firm over the time window [-5,5], the
cumulative average abnormal return for each of the two periods is calculated.
(4)
CAARp =
∑
Where:
8
- CAARp denotes the cumulative average abnormal return over period p
- Σ is the sum of firm 1 till n
- CARi denotes the cumulative abnormal return of firm i
- n denotes the number of firms
The cumulative average abnormal return is calculated for the period 1997-2004 and for the
period 2005-2012. To test whether the cumulative average abnormal returns of the two
periods are significantly different, a t-test is performed. There are two types of t-tests
depending on whether the variances of the two periods are different or not. To test the
difference of the variances an F-test is performed:
(5)
F=
Where:
- S12 denotes the variance of the sample of period 1
- S22 denotes the variance of the sample of period 2
When the F-value that derives from the above formula is significant, the variances of the two
samples are different and the following t-test is used:
(6)
t=
Where:
- CAARp1 denotes the cumulative average abnormal return in period 1 and
CAARp2 denotes the cumulative average abnormal return for period 2
- S12 and S22 denote the squared standard deviation of respectively the
cumulative average abnormal return in period 1 and in period 2
- n1 and n2 denote respectively the number of firms in period 1 and the
number of firms in period 2
9
When the F-value of formula (5) is not significant, the variances of two samples are equal.
When these variances are equal, the following t-test is used:
(7)
t=
(
(8)
=
(
)
(
)
(
)
)
Where:
- CAARp1 denotes the cumulative average abnormal return in period 1 and
CAARp2 denotes the cumulative average abnormal return for period 2
- Sp2 denotes the pooled variance estimator. This is the weighted average of the
two sample variances with the number of degrees of freedom in each sample
used as weights
- n1 and n2 denote the number of firms in respectively period 1 and period 2
- S12 and S22 denote the variance of respectively the sample of period 1 and the
sample of period 2
For each period is also tested whether the cumulative average abnormal return is significantly
different from zero. This is also tested using a t-test, but for testing the cumulative average
abnormal return for only one period another t-value formula is used.
(9)
t=
,
/√
Where:
- CAARp,k denotes the cumulative average abnormal return in period k
- Sk denotes the standard deviation in period k
- n denotes the number of firms in period k
The cumulative average abnormal return on the stock price of the Dutch bidding firms is
expected to be positive during the period 2005-2012. Based on results of previous studies
10
(Martynova & Renneboog, 2008), the cumulative average abnormal return of the period 19972004 is expected to be close to zero. Based on these expectations, the cumulative average
abnormal return of the period 2005-2012 is expected to be higher than the cumulative average
abnormal return of 1997-2004.
IV. Results
In this section the results for the 120 Dutch bidding firms are discussed. So the results for the
short-term effect on the stock price of Dutch bidding firms are explained. First the results of
the research for the period of five working days before the announcement date till five days
after the announcement date are provided. Second the results of the period of one day before
till one day after the announcement date are discussed. And third the average abnormal
returns on the announcement date are discussed.
When looking at the results of the time window of five days before the announcement
until five days after the announcement, a cumulative average abnormal return (CAAR) of 0.13% is found for the period 1997-2004 (table I). The cumulative average abnormal return
for the period 2005-2012 is higher: 0.80% (table I). Both results are not significantly different
from zero. When the two periods are compared, the t-test shows a t-value of 0.71 (table II).
This shows that the CAAR of the period 2005-2012 is not significantly higher than the CAAR
of the period 1997-2004.
Table I
Short-term effect of M&A announcement on stock price return
This table presents the short-term effect of a M&A announcement on the stock price return.
The CAR% is the cumulative abnormal return. The mean is the average CAR% over a period;
this is called the cumulative average abnormal return (CAAR). The (t) is the t-value from the
t-test on significant difference from zero. The a says whether that t-value is significant with α
is 0.1. The n stands for the number of bidding firms studied, St. Dev is the standard deviation.
Q1 and Q3 split respectively the lowest 25% of the observations and the highest 25% of the
observations. The median is the numerical value separating the higher half from the lower
half of the sample. The [-5,5], [-1,1] and [0] are the different event windows round the
announcement date, counted in days.
Mean (t)
n
St. Dev
Q1
Median
Q3
1997-2004 CAR%
-0.13 (-0.13)
60
7.57
-3.67
0.92
3.65
2005-2012 CAR%
0.80 (0.91)
59
6.74
-1.69
0.73
3.27
[-5,5]
11
2005-2007 CAR%
-0.70 (-0.63)
30
6.09
-2.02
1.35
2.80
2008-2012 CAR%
2.27 (1.72a)
29
7.11
-1.45
0.53
4.62
1997-2004 CAR%
0.24 (0.36)
60
5.32
-1.60
0.88
2.76
2005-2012 CAR%
0.63 (1.03)
59
4.72
-1.27
0.36
2.08
2005-2007 CAR%
-0.17 (-0.26)
30
3.67
-2.07
1.01
2.05
2008-2012 CAR%
1.46 (1.42a)
29
5.55
-0.80
0.31
2.05
1997-2004 CAR%
0.24 (0.58)
60
3.19
-1.00
0.49
1.72
2005-2012 CAR%
0.31 (0.66)
60
3.68
-1.23
0.29
1.22
2005-2007 CAR%
-0.17 (-0.29)
30
3.14
-1.23
0.50
1.40
2008-2012 CAR%
0.79 (1.04)
30
4.15
-1.17
-0.05
0.81
[-1,1]
[0]
Furthermore, the time period of 2005-2012 is divided into two periods. One period is
before the financial crisis (2005-2007) and one period is during the financial crisis (20082012). When looking at the results of these two periods, the period 2005-2007 has a CAAR of
-0.70% and the period 2008-2012 has a CAAR of 2.27% (table I). Only the result of the
period of 2008-2012 is significantly different from zero using an α of 0.1. The CAARs of the
two periods compared with a t-test give a t-value of 1.36 (table II). This number is significant,
meaning that the CAAR of the period 2008-2012 is higher than the CAAR of the period 20052007.
Table II
The comparison of the different time periods
This table provides the results of the t-test on whether the different time periods significantly
differ from each other or not. CAAR 2005-2012 > CAAR 1997-2004 stands for the test
whether the CAAR from 2005-2012 is significantly higher than the CAAR from 1997-2004.
[-5,5], [-1,1], [0] are the time windows, where [-5,5] is the time window from five days before
till five days after the announcement day and [0] is only the announcement day. The numbers
are the t-values from the t-test. The a says that the t-value is significant with α is 0.1, so the
periods significantly differ.
[5,5] [-1,1] [0]
CAAR 2005-2012 > CAAR 1997-2004 0.71 1.27 0.19
CAAR 2008-2012 > CAAR 2005-2007 1.36a 2.28a 1.06
The results of the time window of one day prior to the announcement till one day after
12
the announcement [-1,1] are close to the results of the time window of [-5,5]. The CAAR of
the period 1997-2004 is slightly positive: 0.24% (table I). This result is not significantly
different form zero. The period 2005-2012 shows a positive CAAR of 0.63% (table I). This
result is also not significantly different from zero. So the shareholders of the bidding firms
during the period 2005-2012 earn on average a higher cumulative abnormal return over the
time window [-1,1] than shareholders of the bidding firms during the period 1997-2004, but
the results are not significantly different from zero. When comparing the two periods to see if
the results are significantly different from each other, a t-value of 1.27 is found from the t-test
(table II). This means the CAARs of the two periods do not significantly differ from each
other.
When looking at the results of the period 2005-2012 divided in two periods, the period
2005-2007 shows a non-significant CAAR of -0.17% (table I). The CAAR of the period
2008-2012 is 1.46% and significantly different form zero (table I). So the shareholders of the
bidding firms in the period 2008-2012 earn on average positive cumulative abnormal returns,
where the shareholders of the bidding firms during the period 2005-2007 earn cumulative
abnormal returns indistinguishable from zero. When testing the results of the two periods on
significant difference, a t-value of 2.28 comes forward from the t-test (table II). This means
that the CAAR of the period 2008-2012 is significantly higher than the CAAR of the period
2005-2007 (with α is 0.1).
The third period tested is the average abnormal return on the announcement date. The
average abnormal return of the bidding firms of the period 1997-2004 is 0.24%, this result is
not significantly different from zero (table I). The average abnormal return of the period
2005-2012 is 0.31% and is not significantly different from zero (table I). When comparing the
two periods, a t-value of 0.19 comes forward from the t-test (table II). This means the average
abnormal returns of the two periods are not significantly different from each other.
For the announcement date the periods 2005-2007 and 2008-2012 are also tested. The
average abnormal return of the period 2005-2007 is -0.17% and the average abnormal return
of the period 2008-2012 is 0.79% (table I). Both results are not significant. The t-test to
compare the two periods shows a t-value of 1.06 (table II). This number is not significant, so
the abnormal returns on the stock price of the two periods are not significantly different.
13
V. Analysis
In this section the results of this research are analyzed. This is done by comparing the findings
of this study to the hypotheses and comparing the results to the literature review. Also the
results from former research are compared to the results of this study.
The results of this study appear to confirm the hypotheses, however not all results are
significant. For the time window of [-5,5] round the announcement date the CAAR of the
period 2005-2012 (0.80%) is higher than the CAAR of the period 1997-2004 (-0.13%), but
not significantly. The results for the periods 2005-2007 and 2008-2012 confirm the
hypothesis. The CAAR of the period 2008-2012 is significantly higher than the CAAR of the
period 2005-2007 (2.27% and -0.70% respectively).
The results for the time window of [-1,1] also seem to confirm the hypotheses,
however not all results are significant. The CAAR of the period 2005-2012 (0.63%) is higher
than the CAAR of the period 1997-2004 (0.24%), but not significantly. The CAAR of the
period 2008-2012 (1.46%) is significantly higher than the CAAR of the period 2005-2007 (0.17%), confirming the second hypothesis.
The hypotheses seem not to hold for the abnormal returns on the announcement dates
[0], the differences are very small and not significant. The average abnormal return of the
period 2005-2012 (0.31%) is only slightly higher than the average abnormal return of the
period 1997-2004 (0.24%). And the average abnormal return of the period 2008-2012
(0.79%) is higher than the average abnormal return of the period 2005-2007 (-0.17%).
Apparently the cumulative abnormal return of shareholders of the Dutch bidding firm
seem to be higher during a period of financial distress than during times of economic
expansion, but the results are not significant. A reason for this result can be found in the study
of Capron and Pistre (2002). They argue that high premiums occur when two or more bidding
firms compete to overtake the same target (Capron & Pistre, 2002). This competition drives
up the price that will be paid for the target. In the period 2005-2012, containing the 20072008 financial crisis, the competition between bidding firms might be lower since due to the
economic downturn less firms are able to compete and pay a high price. As a consequence the
final price paid by the highest bidder is relatively low, which may lead to a positive abnormal
return for the bidding firm. This is a positive development for the shareholders of the bidding
firm.
The 2007-2008 financial crisis could also in another way influence the CAR of the
Dutch bidding firms. The study of Martynova and Renneboog (2008) was during times of
14
economic expansions, just like the studied period 1997-2004. The studied period of 20052012 contains the financial crisis. So a reason for the higher CAAR in this period can be that
during financial distress it can be beneficial for financial healthy firms to bid on firms that are
in financial trouble, but are operationally running normal. The target in financial trouble will
accept a bid sooner to get out of trouble. This way a larger part of the value created goes to
the bidding firm. This leads to higher abnormal returns for the shareholders of the bidding
firm.
VI. Conclusion
In this section the conclusion of this study is provided. Also the limitations of this performed
study are discussed. At last some suggestions for further studies are provided.
Most of the research on the announcement effect of a merger or acquisition on the
shareholder’s return of the bidding firm was during the merger and acquisition wave of 19932001. This was a time of economic expansion (Martynova and Renneboog, 2008). In this
study this effect is tested for the period 2005-2012 on Dutch bidding firms. This is a period
containing the financial crisis that started in 2008. This period is compared to the period
1997-2004. The main result of this study is that the CAAR 2005-2012 seems higher than the
CAAR 1997-2004, but the result does not reach significance.
The period 2005-2012 is further studied by dividing the period into two periods. The
first period is the period 2005-2007, this period is without the financial crisis. The second
period is the period 2008-2012; this is the period during the financial crisis. The result is that
the cumulative average abnormal return is significantly higher for the period 2008-2012. This
result is the same for the time window of five days before the announcement day till five days
after the announcement day and the time window of one day prior to the announcement day
till one day after the announcement day.
So based on the results of this research, the cumulative abnormal return for the
shareholders of Dutch bidding firms seem to be higher during times of economic downturn
than during economic expansion. A reason for this result can be that during economic
downturn the bidding firm pays a lower premium to the target than during economic
expansion.
This study is performed using 120 Dutch listed bidding firms, 60 for the period 19972004 and 60 for the period 2005-2012. This number of bidding firms for each period is a little
15
low. A bidding firm that earns a very high or very low cumulative abnormal return has a
relatively high influence on the cumulative average abnormal return. Furthermore, the method
of payment is not taken into account. Faccio and Masulis (2005) found in Europe significantly
higher abnormal returns for takeovers paid with equity than takeovers paid with cash.
So for further research a much larger sample should be used. For example at least 200
observations per period should be used. However, there are not always this many Dutch
bidders for a period. This way the results will be more reliable, because the influence of a
bidding firm with a very high or low cumulative abnormal return is lower. Also the method of
payment should be taken into account. For better comparison of the two periods, the
benchmark return should also be corrected for method of payment. This way the cumulative
average abnormal returns are compared more equally.
16
References
Asquith, P., Bruner, R., & Mullins, D. (1983). The gains to bidding firms from merger.
Journal of Finance, 11, p. 121-139
Berk J., & Demarzo, P. (2007). Corporate Finance. Boston: Pearson Education. p.
873-897
Bodie, Z., Kane, A., & Marcus, A. (2011). Investment and portfolio management. New York:
McGraw-Hill/Irwin. p. 371-381
Capron, L., & Pistre, N. (2002). When do acquirers earn abnormal returns? Strategic
Management Journal, 23, p. 781-794
Faccio, M., & Masulis, R. (2005). The choice of payment method in European mergers and
acquisitions. The Journal of Finance, 60, p. 1345-1388
Fama, E. (1970). Efficient capital markets: a review of theory and empirical work. The
Journal of Finance, 25, p. 383-417
Martynova, M., & Renneboog, L. (2006). Mergers and acquisitions in Europe. ECGI Working
Paper Series in Finance, p. 1-83
Martynova, M., & Renneboog, L. (2008). A century of corporate takeovers: what have we
learned and where do we stand? Journal of Banking & Finance, 32, p. 2148-2177
Travlos, N. (1987). Corporate takeover bids, methods of payment, and bidding firm’s stock
returns. The Journal of Finance, 42, p. 943-963
17
18
19