What you can learn from mergers and acquisitions?

What you can learn from mergers and acquisitions? Let’s investigate the wealth creation of acquirers post Mergers and Acquisitions announcements in the retail industry. 

Let’s analyze both short and long-term abnormal returns. And examine the explanatory power of some determinants. Which were considered significant in previous literature.

We use a global sample of 818 transactions announced between 1996 and 2016. 

Furthermore, let’s employ the event study methodology over 5 and 21-day event windows to capture the immediate market reaction of M&A and a Buy and Hold Abnormal Return Methodology to record long-term performance. 

The results we found were that the Cumulative Average Abnormal Returns (CAARs) are significantly positive. With 4.87% and 3.41% respectively. Which implies that firms in the retail industry expect to benefit through M&A in the short-term. 

Our study uses regression analysis and further investigation to find the impact of the deal characteristics. And company characteristics of acquirers on the value creation. Additionally, there are some significant factors that influence the performance of acquirers in the short-term. Such as the status of the target, the relative size of the acquirer. In addition, company characteristics including liquidity, leverage and profitability. While in the long run, the value creation post-M&A attributes generally to higher profitability. Furthermore, the larger size of the acquirer, hostile attitude or transactions announced after the crisis and relatedness to targets.

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According to previous academic studies [Sherman et al. (2011) and Shimizu et al. (2004)], M&A has been an essential activity for firms to accelerate growth and expand the business into new markets. However, there are numerous findings that lead to the opposite conclusion:

Although most M&As expect to create value in the short-term. The long-term negative performance far outweighs the positive (RauandVermaelen, 1998). Since the 1980’s we have witnessed significant merger waves with higher volumes (Gaughan, 2018).

In conclusion, the results illustrate that the acquirer expects to earn AARs of 1.56% on the announcement date at a 1% significance level. Statistically significant AARs are also observed for the second date of the announcement. With AARs of 1.19% at a 5% significance level.

Deal Attitude

These results contradict the most previous studies such as Fowler and Schmidt (1989). They conclude that hostile takeovers are more likely to suffer management operations issues. Compared to friendly takeovers, which destroys the value of the target. Lastly, the underlying reason for this opposite result may because there are only 4 transactions in the sample of 818 that were hostile. As a result, indicates the result might be not representative. 

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What you can learn from mergers and acquisitions?