Value creation through mergers & acquisitions in the Nordics: An empirical investigation of short-term value creation and its value drivers

Daniel Sørheim & Magnus Lerkerød

Student thesis: Master thesis


Mergers and acquisitions (M&A) as a growth strategy is risky, and often comes with the promise of sizable synergies that justify the vast premiums paid to target’s shareholders. However, the stock price reaction is often not in line with the expectations. Consequently, finance and economics scholars have studied value creation from mergers and acquisitions for decades. As similar research in the Nordics is limited, we want to extend the body of research by investigating the abnormal returns achieved from mergers and acquisitions and the firm-specific drivers. We carry out an extensive investigation to measure the short-term value effect of M&A announcements for bidder’s and target’s shareholders. For this purpose, we apply the event study methodology and track the abnormal return upon announcement. Next, to address possible firm-specific value drivers, we conduct cross-sectional regression analyses. Our data set include M&A announcements from publicly listed companies on either of the Nordic stock exchanges from 1995-2014. The final sample consists of 111 bidder and 73 target announcements, in which we study value creation. When we exclude financial institutions to analyze value drivers, the sample includes 85 bidder and 55 target events. Our results are summarized as following: (1) Acquirer’s shareholders earn no significant return upon announcement of a transaction. However, target’s shareholders benefit extensively from being acquired. Both of these findings are in line with previous research. (2) We cannot find evidence of abnormal return’s sensitivity to payment method for bidders, not even when we control for high and low valuation. For target’s shareholders, weak evidence suggest that cash offers are associated with higher announcement returns. (3) Consistent with the free cash flow hypothesis found in other papers, we find that low valued bidders, measured by Tobin’s Q, with excessive free cash flow prior to an announcement experience negative returns. Furthermore, free cash flow is positively related to abnormal return for targets, implying that this is an attractive target attribute. (4) Diversifying acquisitions generate a higher bidder abnormal return compared to focused transactions, contrary to previous findings. This is, however, not true for targets. (5) We cannot find evidence that cross-border acquisitions yield any different announcement returns in comparison to domestic deals. (6) Finally, we find no significant evidence that acquiring growth companies negatively affect the announcement return of bidder’s shareholders . Our findings suggest that the Nordic stock markets only to some degree react similar as more global markets

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages140