A Statistical Event Study of Acquires Value Creation through Mergers and Acquisitions in The United States

Abstract

This thesis investigates the value creation and key value drivers associated with mergers and acquisitions (M&A) in the United States. The thesis will use the event study methodology to examine if M&A announcements result in significant abnormal returns. The investigated sample includes all transactions made by S&P500 companies in the time period 2000-2018, that exceed 2 billion USD. The focus of the study concerns both short-term and long-term value creation using the Cumulative Average Abnormal Return (CAAR) and Buy-and-Hold Average Abnormal Return (𝐵𝐻𝐴𝑅 ̅̅̅̅̅̅̅̅) as analysis methodology, respectively. The American M&A market has experienced a significant increase in the number and value of transactions since the 1980-90s. Consequently, this has resulted in an increasing number of theories and studies that endeavor to explain the motives behind M&A activity, and any associated value creation. Existing literature agrees that shareholders of target companies' experience positive abnormal returns from M&A transactions, however, differs in findings with respect to value creation for the acquiring company’s shareholders. The Neoclassic theory depicts that acquirers only pursue M&As if it results in positive abnormal returns. On the contrary, the behavioristic theory argues that M&As results in negative abnormal return for acquirers, as a result of the principalagent theory, the hubris hypothesis, and other reasons. The inconsistency in the literature is the primary motive and focus behind this thesis. Six main conclusions have been drawn from the study, including: 1) The acquiring company’s shareholders experience significant negative abnormal returns on a short-term horizon, and significant positive abnormal returns on a long-term horizon. 2) There is no statistical evidence that substantiates that M&As performed under merger waves entail higher abnormal returns. 3) There is no statistical difference in the performance between cross-border and domestic M&As. 4) Private targets result in significantly higher abnormal returns than listed targets on a shot-term horizon. 5) The target EV/EBITDA has no significant influence on the acquirers' value creation. 6) The thesis provides evidence that targets with lower EV/Sales multiples generate significantly higher abnormal returns on a long term-horizon. There is no statistical evidence for this being true on a short-term horizon.