Mergers: the practicalitiesStock market returns
The results from studies of stock market returns consistently show gains for the target
business shareholders. The benefits to the bidders’ shareholders are less clear.
Franks and Harris (1989), using a large sample of UK mergers, found gains for both
sets of shareholders during the pre-merger and immediate post-merger periods. They
also found, however, post-merger losses by the bidder’s shareholders. Limmack (1991)
came to a similar conclusion to that of Franks and Harris. Post-merger losses to bidder
shareholders were also found by Gregory (1997) in his examination of a number of UK
mergers. He found that, where cash was the consideration, there tended to be neither
gains nor losses. Where, however, the bidder’s equity was used, significant losses of
bidder’s shareholders’ wealth were observed.
Draper and Paudyal (1999) found that shareholders in target businesses benefited
substantially from takeover activity, particularly where they were given the option to
receive either cash or shares in the bidder as the consideration. It seems that the bid-
der’s shareholders did not suffer from the merger. Draper and Paudyal also found that
the benefits to target shareholders have declined in the recent past.
Walker (2000) found that US takeovers between 1980 and 1996 that were diversifica-
tions caused a loss of the bidder’s shareholder value. On the other hand, takeovers that
expanded the bidder’s existing activity led to a gain in shareholder value.
Fuller, Netter and Stegemoller (2002) found that, in the USA, bidder shareholders
gain when buying an unlisted business, but lose when buying a listed one. They also
found that the gains were greater with larger targets and where the consideration was
discharged in shares rather than cash.
Bruner (2004) argued that the approach taken by many of the studies based on US
takeovers were flawed in that the research results were unduly influenced by a relat-
ively small number of failures that involved particularly large businesses. He claimed
that all takeovers benefit target shareholders and the overwhelming majority benefit
bidder shareholders as well.
Moeller, Shlingemann and Stulz (2005) examined a number of takeovers in the US
during the period 1998 to 2001 and found that, generally, there had been a gain in the
bidders’ shareholder value. However, takeovers that had involved particularly large
values had been wealth-destroying from the bidders’ perspective.
KPMG (2006) examined 101 takeovers during 2002 and 2003, worldwide. When the
senior managers of the bidder businesses were interviewed, 93 per cent expressed the
opinion that the takeover had been a success. Interestingly, an analysis of the stock
market returns showed that only 31 per cent of the takeovers had been wealth-
enhancing, while 26 per cent had destroyed wealth (with 43 per cent being neutral).
We might imagine that friendly mergers would be more likely to be successful than
hostile ones. Sudarsanam and Mahate (2006) looked at this point in the context of 519
takeovers involving UK businesses as bidders between 1983 and 1995. When assess-
ing the returns to shareholders over the three-year period following each takeover
they found, counter-intuitively, that hostile takeovers were significantly more suc-
cessful than friendly ones.
Conclusion on the success of mergers
The conclusion is unclear. It can be argued that, in the context of the objective of share-
holder wealth enhancement, the opinions of managers (the subject of the first group of
studies) are not important. It is economic returns that count. There seems to be evid-
ence that takeovers can be economically beneficial to both sets of shareholders, but