Short-term Value Creation through Merger and Acquisitions in the European Union

Joachim Glad Haaning Høj

Student thesis: Master thesis

Abstract

Merger & Acquisition is a popular growth strategy in many large corporations because of the advantages and synergies that can follow along, such as access to new markets, access to new competencies, increasing its market shares and more. However, M&A is also risky because of the significant capital that firms spend as well as the challenges that come with the realization of synergies in M&A transactions. This thesis studies the short-term value creation from M&A announcements in the European Union from 2015 to 2019. Furthermore, the thesis includes an investigation of potential value drivers and their impact on the abnormal returns to bidders’ and targets’ shareholders. The short-term value creation is examined using the event study methodology. By analyzing the market reaction around the announcement of M&A transactions it is possible to determine and test the abnormal returns that both bidders’ and targets’ shareholders receive. Four different event windows with lengths between ±1 and ±10 days are constructed to test the sensitivity and the market efficiency of the abnormal returns. Furthermore, the investigation of the transaction-specific value drivers is carried out using a cross-sectional regression analysis. The final dataset consists of data from 151 public listed bidders and 110 public listed targets across 158 transactions. All the bidders and targets originate from countries within the European Union. The analysis of the abnormal returns shows that bidders’ shareholders earn zero abnormal return in all four event windows. On the other hand, targets’ shareholders earn 12% to 15%, depending on the length of the event window. This thesis finds no statistically significant difference in the abnormal return when comparing domestic transactions to cross-border transactions. Likewise, no statistically significant difference is found between the abnormal return for focused transactions and diversified transactions. Both results suggest that the capital markets within the European Union are too integrated and efficient, so imperfections between countries and industries are too small to take advantage of. For the payment method, this thesis finds no statistically significant difference for bidders between pure cash compared to pure stock payment as well as pure cash compared to mixed payment. For targets, this thesis finds a significantly larger abnormal return in pure cash-financed transactions than pure stock-financed transactions. This is in line with the signalling effect and the pecking order theory. However, no statistically significant difference is found between pure cash and mixed payment for targets. Finally, this thesis tests the free cash flow hypothesis and finds no significant relationship for bidders’ free cash flow and the abnormal return upon the announcement. Some indications suggest that high free cash flow for targets before the announcement has a positive effect on the abnormal return experienced by targets’ shareholders.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages108