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Burcin Yurtoglu
University of Vienna
Department of Economics
Profitability
Major Studies
Ravenscraft and Scherer (1987) analyze 6000
mergers between 1950 and 1977.
Meeks (1977) 1000 mergers after WW II in the UK.
Gugler, Mueller, Yurtoglu, and Zulehner (2003)
analyze 2753 mergers from around the world.
S G t 1
S Ct n S G t 1
S IG t n
S IG t 1
S IG t n
S IG t 1
S Dt
S Dt
S ID t n
S ID t
S ID t n
S ID t
S Dt 2
S ID t n
S ID t 2
S S t 3
S IS t n
S IS t 3
IG t n
K IG t n
C t n G t 1
C t n G t 1
D t 2
K IG t n
K IG t 1
K IG t n
K IG t 1
K ID t n
K ID t 2
IG t 1
K IG t 1
K G t 1 IG t 1, t n D t
K G t 1 IG t 1, t n D t
K ID t n
K ID t
K ID t n
K ID t
K D t 2 ID t 2, t n S t 3
K D t ID t , t n
K D t ID t , t n
K IS t n
K IS t 3
K S t 3 IS t 3, t n
Number
of
Mergers
Difference
in Mn $
t+1
2,704
t+2
Sales
p-value
%
Positive
Difference
in Mn $
pvalue
%
Positive
5.91
0.062
57.0%
-214.16
0.000
51.5%
2,274
11.11
0.009
57.2%
-382.81
0.000
49.5%
t+3
1,827
10.79
0.056
54.8%
-549.59
0.000
46.4%
t+4
1,517
19.68
0.007
57.8%
-633.46
0.000
46.3%
t+5
1,250
17.81
0.046
57.6%
-714.04
0.000
44.6%
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Profits
Difference in Mn $
t-value
Sales
Difference in Mn $
t-value
Average
17.8
2.00
-714.0
6.63
USA
-0.4
0.33
-16.2
0.70
UK
6.3
0.38
168.3
1.13
Continental Europe
24.5
0.37
47.6
0.55
Japan
-59.4
0.85
-1615.0
1.83
Aus/NZ/Can
-51.4
1.32
-91.4
0.45
98.1
1.26
432.5
0.63
Adjusted R
-0.0006
0.0003
Number of Observations
1,250
1,250
Profits
Difference
in Mn $
t-value
Sales
Difference
in Mn $
t-value
Average
3.1
0.27
-660.0
5.19
Horizontal
38.7
2.07
464.1
2.25
Vertical
-91.4
1.82
-329.1
0.59
Conglomerate
-9.0
1.13
-164.7
1.87
Adjusted R
Number of
Observations
0.0066
0.0045
702
702
10
S 0
S 0
1
Efficiency
Increase
3
Market Power
Reduction (?)
2
Market Power
Increase
4
Efficiency
Decline
11
S > 0
S < 0
> 0
< 0
Small
34.7
17.5
Large
23.4*
12.7*
All
29.1
15.1
Small
20.4
27.4
Large
34.8*
29.1
All
27.6
28.2
12
Baldwin (1981)
similar results for Canada
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16
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19
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Problems:
when does the share price change occur?
How does one separate it from other events?
select a control group and assume that the acquiring
firms share price would have performed over the
chosen period exactly as the control group
relative to the control group (start earlier)
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23
24
25
Alternatives
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CAPM
Estimates of
High
+ High
Lower
Low
Low or normal
Higher
e it R it R it
29
Benchmark
- 36 to - 3 months pre-merger
period
-11.3%
(significant)
post-merger benchmark
-3.2% (insignificant)
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Long-Horizon Studies:
Agrawal, Jaffe and Mandelker (1992):
Conclusion:
The evidence compiled so far is consistent with the idea that
stock market run-ups lead to unsuccessful mergers.
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Additional Findings
Managerial discretion and the gains to
acquirers
Hubbard and Palia (1995): Managers with small
stakes tend to overpay
Diversification:
Diversification mergers produce losses to acquirer
shareholders at the announcement date.
Diversification is negatively related to returns, Tobins
q, and market value of a company. Discount for
diversification is quite large (13%-15%).
Spin-offs that increased focus produce positive ARs
and improvements in operating performance.
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