Analyzing the Role of Interest Rate Levels in Value Creation During Mergers and Acquisitions in the U.S. An Empirical Event Study of M&A Transactions in the S&P 500 Between 2000 and 2023

Abstract

This thesis explores short-term value creation for shareholders of acquiring companies involved in mergers and acquisitions (M&A) in the United States, focusing on firms historically listed on the S&P 500 from 2000 to 2023. Most of the literature concludes that targets benefit from M&A and that acquirers rarely experience value creation when engaging in M&A. In practice, however, M&A activity has increasingly become a favored strategy for expansion in the American market, which accounts for more than half of global activity, as opposed to solely relying on organic growth. It has become evident that macroeconomic trends significantly influence the levels of M&A activity. However, very little research has been conducted on federal interest rates, one of the most critical tools influencing macroeconomics and financial markets. Combined with specific deal characteristics, we analyze its effect on value creation within M&A. This thesis aims to bridge this research gap, by exploring the relationship between different interest rates environments and deal specifics in the context of M&A value creation. By applying the event study methodology focusing on the event windows (-10;10), (-5;5), (-3;3), and (-1;1) centered on the announcement day, we conducted a thorough empirical analysis of 2,158 transactions, focusing on acquiring companies. This thesis measures value creation through a calculation of the Cumulative Average Abnormal Return (CAAR) and Average Abnormal Return (AAR), using stock returns measured around the M&A announcement date, as is common in previous quantitative studies. Parametric and non-parametric tests are applied to assess the statistical significance of the abnormal returns, and a multiple linear regression is conducted to further examine how the interest rate environments and deal characteristics influence the value creation. This thesis reveals that lower interest rates generally enhance shareholder value creation in M&A. Positive and significant short-term shareholder value creation is observed across the total sample, although the event day announcement effect is not significant enough to attribute this value creation directly to M&A announcements. Interest rate levels negatively correlate with value creation, with lower rates leading to higher returns, especially in low interest rate environments. Deal characteristics also influence value creation: equity-financed deals generally destroy value, while debt-financed deals do not create nor destroy value. Debt financed deals do however exhibit positive and significant value creation in the low interest rate environment. Surprisingly, synergy-seeking deals do not create significant value, contrasting with prevailing literature. Smaller deals generate positive value, aligning with literature that suggests a negative relationship between deal size and value creation. Experienced acquirors also demonstrate greater value creation compared to their inexperienced counterparts. Conclusively, the interest rate levels play a more decisive role in influencing value creation than specific deal characteristics.