Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increaing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

As in previous decades, merger activity clusters by industry during the 1990s. One particular kind of industry shock, deregulation, becomes a dominant factor, accounting for nearly half of the merger activity since the late 1980s. In contrast to the 1980s, mergers in the 1990s are mostly stock swaps, and hostile takeovers virtually disappear. Over our 1973 to 1998 sample period, the announcement-period stock market response to mergers is positive for the combined merging parties, suggesting that mergers create value on behalf of shareholders. Consistent with that, we find evidence of improved operating performance following mergers, relative to industry peers.

Abstract We present a model of mergers and acquisitions based on stock market misvaluations of the combining firms. The key ingredients of the model are the relative valuations of the merging firms and the market's perception of the synergies from the combination. The model explains who acquires whom, the choice of the medium of payment, the valuation consequences of mergers, and merger waves. The model is consistent with available empirical findings about characteristics and returns of merging firms, and yields new predictions as well. JEL classification: G34

Centre de recherche en économie et finance appliquées (CRÉFA) Faculté des sciences de l'administration

We examine whether an increase in focus is an explanation for the stock market gains associated with spino!s. For a sample of 155 spino!s between the years 1975 and 1991, we "nd that the announcement period as well the long-run abnormal returns for the focus-increasing spino!s are signi"cantly larger than the corresponding abnormal returns for the non-focus-increasing spino!s. The results for the change in operating performance are consistent with those for the stock market performance. Cross-sectionally, the stock market performance as well as the operating performance are positively associated with change in focus. An analysis of the non-focus-increasing spino!s shows that the "rms are likely to undertake these spino!s to separate underperforming subsidiaries

In this paper, we analyse the short-term wealth effects of large (intra)European takeover bids. We find large announcement effects of 9 % for target firms and a cumulative abnormal return that includes the price run-up over the two-month period prior to the announcement date of 23%. However, the share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the status of a takeover bid has a large impact on the short-term wealth effects of target’s and bidder’s shareholders, with hostile acquisitions triggering substantially larger price reactions than friendly mergers and acquisitions. When a UK target or bidder is involved, the abnormal returns are almost twice as high as bids involving both a Continental European target and bidder. We also find strong evidence that cash offers trigger much larger share price reactions than all-equity offers or combined bids consisting of cash, equity and loan notes. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. Also, our results suggest that bidding firms should not diversify by acquiring target firms that do not match their core

We explain the empirical puzzle why mergers reduce profits and raise share prices. If it is better to be an “insider ” than an “outsider, ” firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. We also explain why shareholders of targets gain while acquirers typically break even. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared.

In the wake of the largest M&A wave in history, it is appropriate to assess the evidence on the profitability of this activity. One popular view is that merger activity is highly unprofitable. Does research sustain this view? This paper reflects on what it means for M&A to “pay ” and summarizes the evidence from 130 studies from 1971 to 2001. The review comments on various research approaches, and highlights findings for the broad activity as well as niches of special note. The mass of research suggests that target shareholders earn sizable positive marketreturns, that bidders (with interesting exceptions) earn zero adjusted returns, and that bidders and targets combined earn positive adjusted returns. On balance, one should conclude that M&A does pay. But the broad dispersion of findings around a zero return to buyers suggests that executives should approach this activity with caution.

We examine how product similarity and competition influence mergers and acquisitions and the ability of firms to exploit product market synergies through asset complementarities. Using novel text-based analysis of firm 10-K product descriptions, we find three key results. (1) Firms are more likely to enter mergers with firms whose language describing their assets is similar. (2) Transactions in competitive product markets with similar acquirer and target firms experience increased stock returns and real longer-term gains in cash flows and higher growth in their product descriptions. (3) These gains are higher when the target is less similar to the acquirer’s closest rivals, and when firms have the potential for unique products. Our findings are consistent with firms merging and buying assets to exploit asset complementarities and to create new products to increase product differentiation.

Abstract not found