Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVIII. Topics in Corporate
Finance- Mergers and
Acquisitions
(^888) © The McGraw−Hill
Companies, 2002
SOME EVIDENCE ON ACQUISITIONS
One of the most controversial issues surrounding our subject is whether mergers and ac-
quisitions benefit shareholders. Several studies have attempted to estimate the effect of
mergers and takeovers on stock prices of the bidding and target firms. These studies
have examined the gains and losses in stock value around the time of merger announce-
ments. Table 25.4 summarizes the results of numerous such studies that have looked at
the effects of merger and tender offers on stock prices.
Table 25.4 shows that the shareholders of target companies in successful takeovers
gain substantially. When the takeover is accomplished by merger, the gains are 20 per-
cent, and, when the takeover is via tender offer, the gains are 30 percent. These gains are
a reflection of the merger premium that is typically paid by the acquiring firm. These
gains are excess returns, that is, the returns over and above what the shareholders would
normally have earned.
The shareholders of bidding firms do not fare nearly so well. According to the stud-
ies summarized in Table 25.4, bidders experience gains of 4 percent in tender offers, but
this gain is about zero in mergers. These numbers are sufficiently small so as to leave
doubt about the precise effect on bidders.
What conclusions can be drawn from Table 25.4? First, the evidence strongly sug-
gests that the shareholders of successful target firms achieve substantial gains as a result
of takeovers. The gains appear to be larger in tender offers than in mergers. This may re-
flect the fact that takeovers sometimes start with a friendly merger proposal from the
bidder to the management of the target firm. If management rejects the offer, the bidding
firm may take the matter directly to the shareholders with a tender offer. As a conse-
quence, tender offers are frequently unfriendly.
Also, the target firm’s management may actively oppose the offer with defensive tac-
tics. This often has the result of raising the tender offer from the bidding firm, and, on av-
erage, friendly mergers may be arranged at lower premiums than unfriendly tender offers.
The second conclusion we can draw is that the shareholders of bidding firms earn
comparatively little from takeovers. They earn an average of only 4 percent from tender
offers; they appear to break even on mergers. In fact, studies have found that the ac-
quiring firms actually lose value in many mergers. These findings are a puzzle, and there
are a variety of explanations:
864 PART EIGHT Topics in Corporate Finance
25.8
TABLE 25.4
Stock Price Changes in
Successful Corporate
TakeoversStock Price Change
Takeover
Technique Target Bidders
Tender offer 30% 4%
Merger 20 0
Proxy contest 8 n/a
n/a Not applicable.
Source: Modified from Michael C. Jensen and
Richard S. Ruback, “The Market for Corporate
Control: The Scientific Evidence,” Journal of
Financial Economics11 (April 1983), pp. 7–8. © 1983
Elsevier Science Publishers B.V. (North-Holland).