There have been hundreds of M&A studies published over the past 40 years. The articles published in volume 11 of the Journal of Financial Economics (1983) launched a flood of academic papers across many disciplines, resulting in now vast M&A literatures across finance, economics, management, accounting, and beyond. Academics have studied everything from shareholder performance for acquirers and targets to incentives and motivations of managers to the impact of acquisition experience and different accounting treatments.
Although studies of M&A performance tend to focus on acquirer shareholder returns around announcement (measured with different periods of days), some studies measure performance over longer periods of time. Moreover, the measurement of shareholder returns itself has varied from raw returns to market-adjusted returns, mean-adjusted returns, and the common cumulative abnormal returns (CARs) generated from so-called event studies. Scholars have also extensively studied before and after accounting-based returns such as return on assets (ROA) or return on equity (ROE).
It is also important to recognize that different studies examine different periods of time, which is natural because we have lived through several major M&A waves, and there are lots of choices on how many years to cover, which can generate varying results.
For our study, we set out to explore how acquirers’ investors fared around deal announcement, which we measured as the 11-day return of five trading days before and after announcement, and how they fared over the course of one-year post announcement (including the announcement period). Both measures were adjusted by a peer index (i.e., industry adjusted) within the S&P 500, as classified by the Capital IQ platform. We used shareholder returns because companies are often judged by whether they are superior performers based on that measure. We report the mean industry-adjusted returns, often called relative total shareholder returns (RTSRs).
We drew from widely used databases and used straightforward measures that both characterize shareholder returns from M&A and are readily replicable. (Note that our overall announcement return to acquirers of −1.6% is close to Graffin, Haleblian, and Kiley’s 2016 finding of −1.4% in a study that used CARs from 770 deals.)1
We decided to begin where Mark had left off in The Synergy Trap with deals announced from January 1, 1995, through December 31, 2018—a 24-year period. We assembled a preliminary sample of roughly 2,500 deals worth over $100M using Thompson ONE, where we applied the following criteria: Both companies had to be listed on a US stock exchange, the relative size of the seller to the buyer had to be at least 10% based on pre-deal equity market capitalization, and the buyer could not have completed another material deal in the year following, so that the one-year performance measurement period was not affected by other material deals.
These criteria yielded a sample of 1,267 deals representing $5.37 trillion of equity value and $1.13 trillion of premiums paid. Capital IQ was the source for buyer and seller share prices, market capitalizations, and shareholder and industry returns data (adjusted for stock splits and dividends). All data and results are reported at the mean (average value).2
Shareholder Returns to Acquirers: Overall Results
Adding combo deals (mix of cash and stock) to our overall findings table on shareholder returns to acquirers from chapter 1, we find a similar pattern as for all-cash (“cash”) and all-stock (“stock”) deals, as shown in table A-1.
Highlights
Table A-2 offers some illuminating characteristics of the 1,267 deals, adding details behind the overall results.
Highlights
Shareholder Returns to Acquirers over Time
Time period is an important consideration, so we divided the sample into three eight-year periods: 1995–2002, 2003–2010, and 2011–2018. Admittedly, these three periods are arbitrary, but each period contains a wave of M&A activity, and there is a fairly even distribution of deals across the three periods (410, 415, 445, respectively). Table A-3 shows the overall results for the 1,267 deals across the three periods.
Highlights
Table A-4 provides an overview of additional details of the sample of 1,267 deals across the three time periods.
Highlights
Year-by-Year Results for Selected Data
The results overall and across the three periods are informative but looking at some of the data year-by-year offers a more granular view of the variation over time, and offers some additional perspective. Even with year-by-year variations (as should be expected), our major findings are supported.
Figure A-1 indicates that announcement and one-year shareholder returns to acquirers, after an improvement, are both trending lower in the last four years of the study period.
Figure A-2 shows that PNRs and percentages of negative one-year shareholder returns to acquirers have increased significantly from 43.3% and 46.3% in 2014 to 64.6% and 76.9% in 2018, respectively—after some improvement following the 2008 downturn—a negative and disappointing trend.
The results in figure A-3 show that the announcement returns to acquirers on the initially positive and initially negative portfolios (the market reactions) have remained not only remarkably different, but also relatively stable and close to their overall means over time, respectively (+7.7% for the initially positive portfolio and −7.8% for the initially negative portfolio).
Although a positive investor reaction is no guarantee of subsequent returns, if positive news and results are not forthcoming, a negative reaction is very difficult to reverse. The rising persistence of negative reactions, and declining persistence of positive reactions, in the last two years (2017 and 2018) in figure A-4 is a partial explanation of the corresponding decline in overall one-year returns (shown in figure A-1). Combined with increasing PNRs (shown in figure A-2), the increasing PN/IN creates a sobering picture. It is important to note that even with the variations in persistence levels over time, for the initially positive and initially negative portfolios, that the shareholder returns on the respective market reaction portfolios remain indicative of the returns on those portfolios over the course of one year (largely due to the size of the returns on the persistent portfolios), as we reviewed in the previous sections.
Although the persistence spread—the difference between industry-adjusted one-year shareholder returns to acquirers on the persistently positive and persistently negative deal portfolios—has varied (with 1999 having a handful of very positive persistent deals), it’s clear that enormous benefits accrue to being a persistently positive versus a persistently negative performer. Figure A-5 illustrates the persistence spread over time.
Distribution of returns
The view that initial market reactions are a forecast of the future and the effects of positive and negative persistence, and the persistence spread, are illustrated in figure A-6. These two charts illustrate how the announcement returns—investor reactions—appear to be a forecast of the future and that returns fan out over the course of a year as additional information is released and investors reconsider their initial forecast. Not surprisingly, 71% of the most negative one-year returns (those with returns lower than negative 10% in the one-year return chart, representing 42% of the total sample) were initially negative.
Although there is variation in the year-by-year results, our major findings hold across the study period: Announcement returns have improved but one-year returns remain challenged overall, initial market reactions are meaningful forecasts of the future, negative market reactions are very tough to reverse, and the persistence spread has been enormous over the years.
Total Shareholder Value Added
Often, when mergers are debated, the level of analysis of the discussion gets confused. There is a difference between whether M&A is good for buyers or for sellers and whether M&A creates value overall. In other words, mergers may not benefit buyers, on average, but the question is: Does adding the gains or losses to the buyer and gains to the seller result in a positive number at the aggregate level? The answer appears to be yes.
We calculated the TSVA as the sum of the 11-day peer-adjusted dollar return around deal announcement for all buyers and sellers. In effect, TSVA is the sum of the buyer and seller SVAs (their individual dollar announcement returns). We summarize the average dollar returns for the full sample, and by method of payment and portfolio type (initial reactions and subsequent persistence) for the 24-year period of our study in table A-5.
We then used our TSVA dollar values, for the full sample and by method of payment and portfolio type (which we reported in table A-5), and divided by two different denominators for two perspectives: 1) TSVA divided by combined pre-deal market caps of the buyers and sellers for a percentage change in the total combined market cap, and 2) TSVA divided by pre-announcement seller market cap plus the premium paid (or total price paid) for a return on investment (ROI) measure. That yields a TSVA% based on total market capitalization change and a TSVA% as an ROI based on the total price paid for the target, respectively. The results using both measures are shown in table A-6.
TABLE A-5
TSVA for deals by method of payment and portfolio type ($M)
Method of payment |
Acquirer SVA |
Target SVA |
TSVA | |||
---|---|---|---|---|---|---|
All deals |
−285.15 |
468.67 |
183.52 | |||
Cash |
−55.03 |
388.14 |
333.11 | |||
Stock |
−434.51 |
446.63 |
11.12 | |||
Combo |
−270.44 |
524.28 |
253.83 |
Portfolio type |
TSVA | |||||||
---|---|---|---|---|---|---|---|---|
All Deals |
Cash |
Stock |
Combo | |||||
Persistent positive |
1005.33 |
669.88 |
1082.10 |
1214.44 | ||||
Initial positive |
995.49 |
671.06 |
1194.78 |
1072.14 | ||||
Full sample |
183.52 |
333.11 |
11.12 |
253.83 | ||||
Initial negative |
−359.94 |
−111.40 |
−639.69 |
−209.19 | ||||
Persistent negative |
−446.72 |
−35.60 |
−650.96 |
−383.20 |
TABLE A-6
TSVA% for deals from two perspectives by method of payment and portfolio type
Portfolio type |
COMBINED PRE-DEAL MARKET CAPS |
PRE-DEAL SELLER MARKET CAP PLUS PREMIUM | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
All deals |
Cash |
Stock |
Combo |
All deals |
Cash |
Stock |
Combo | |||||||||
Persistent positive |
9.42% |
8.88% |
8.79% |
10.27% |
26.23% |
38.53% |
20.39% |
28.27% | ||||||||
Initial positive |
9.11% |
9.40% |
8.28% |
9.85% |
25.10% |
39.07% |
20.45% |
26.11% | ||||||||
Full sample |
1.45% |
3.73% |
0.07% |
2.05% |
4.32% |
14.66% |
0.21% |
5.86% | ||||||||
Initial negative |
−2.61% |
−0.98% |
−4.17% |
−1.58% |
−8.13% |
−3.71% |
−12.95% |
−4.69% | ||||||||
Persistent negative |
−3.08% |
−0.35% |
−4.29% |
−2.52% |
−9.76% |
−1.34% |
−13.16% |
−7.94% |
TABLE A-7
Equally weighted TSVA% for deals from two perspectives by method of payment and portfolio type
Portfolio type |
COMBINED PRE-DEAL MARKET CAPS |
PRE-DEAL SELLER MARKET CAP PLUS PREMIUM | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
All deals |
Cash |
Stock |
Combo |
All deals |
Cash |
Stock |
Combo | |||||||||
Persistent positive |
11.26% |
11.58% |
9.97% |
12.09% |
38.33% |
44.34% |
32.33% |
38.48% | ||||||||
Initial positive |
10.98% |
11.30% |
10.49% |
11.15% |
36.90% |
41.85% |
33.83% |
35.76% | ||||||||
Full sample |
3.63% |
6.95% |
1.33% |
3.96% |
10.44% |
23.77% |
3.28% |
10.08% | ||||||||
Initial negative |
−1.29% |
1.24% |
−3.71% |
−0.11% |
−7.28% |
−0.02% |
−13.52% |
−4.44% | ||||||||
Persistent negative |
−2.21% |
0.87% |
−4.41% |
−1.10% |
−9.53% |
−0.47% |
−15.68% |
−6.56% |
We also calculated TSVA% on an equally weighted basis—that is, using the TSVA for each deal (the sum of the SVA of the buyer and the SVA of the seller) and dividing by the two denominators (for our two perspectives) for each deal separately, and then taking an average for the full sample and by method of payment and portfolio type. We find a very similar pattern of results, as shown in table A-7.
The major takeaway from this TSVA section is that M&A overall, based on our announcement-return results, creates value in the aggregate, but the initially negative and persistently negative portfolios of deals do not.
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