Stock Market Reaction to Acquisition Announcements using an Event Study Approach

Isfandiyar Shaheen Department of Economics ECO490 Submitted May 5, 2006, in partial completion of the requirements for departmental honors. Expected date of graduation: May 13, 2006. Abstract This paper uses an event study methodology to empirically examine stock market reaction to acquisition announcements. The results indicate that target firms experience significant positive abnormal returns surrounding an acquisition announcement. In case of hostile transactions, the abnormal returns are maximized one after event day as opposed to event day for target firms. Acquiring firms experience negative abnormal returns on announcement day for stock financed acquisitions. We observed abnormal returns on event day (Day 0) and the following day (Day 1). Based on this observation a linear regression model is developed to use publicly available information in predicting abnormal returns.

1. Introduction Mergers and acquisitions represent a prevalent strategy in expanding distribution channels, or entering new markets across most industries. A popular belief is that mergers and acquisitions strengthen businesses by making their operations more synergetic. Announcements of mergers and acquisitions immediately impact a target companys stock price, as induced reaction in the stock market cause investors to revise expectations about the companys future profitability (Panayides and Gong, 2002). According to the Efficient Markets Hypothesis, prices reflect all publicly available information on an underlying asset (Fama, 1970). Event studies are frequently used to test market efficiency (Brown and Warner, 1980). An event study is a statistical method used to gauge the impact of a corporate event, such as stock splits, earnings announcements and acquisition announcements. The Synergy Trap Hypothesis posits that immediately before and after an acquisition announcement, the acquiring firms stock price is negatively affected and the target firms stock price is positively affected.

This paper utilizes an event study methodology to empirically test the Synergy Trap Hypothesis using daily stock returns; its objective is to establish relationships between abnormal returns, method of financing, deal premium and nature of bid. Abnormal returns are defined as the difference between actual and predicted returns surrounding a corporate event. Cumulative abnormal returns are the sum of abnormal returns in a given time period. Brown and Warner (1980), Davidson, Dutia and Cheng (1989) Mitchell, Pulvino and Stafford (2002) each utilize a similar event study approach to examine stock market reactions to acquisition announcements. This paper extends the

literature by considering acquisition announcements between pairs of publicly traded companies, and proposing a model for predicting abnormal returns.

Section 2 presents a series of literature concerning plausible explanations for observed stock market reactions to acquisition announcements. Section 3 defines the research objectives and describes the sample selection methodology. Section 4 provides an analysis of results revealed by our data set and also compares acquisitions with different specifications. Section 5 proposes a linear regression model, which may be used as a predictor of abnormal returns. Section 6 presents the limitations of this study and guidelines for future research. Section 7 outlines the conclusions of this research.

2. Fundamentals of stock price movements surrounding acquisition announcements This section provides an overview of why companies merge, and of an existing trading strategy called merger arbitrage. The trading patterns of merger arbitrageurs provide valuable insights about fundamentals which affect stock prices surrounding acquisition announcements.

2.1 Why Merge or Acquire?

To develop an understanding of stock market reaction to acquisition announcements, it is essential to understand the rationale behind such transactions. Buyers and sellers expect to benefit as a result of an acquisition. When companies are acquired, the sellers owners are usually attempting to diversify their portfolios or

increase liquidity. Sellers sell because buyers make sufficiently attractive offers (Ravenscraft and Scherer, 1987). Why would an acquiring firm make such an attractive offer? One plausible reason is differing opinions about the target firms future cash flow. When companies are acquired, the sellers owners are usually attempting to diversify their portfolios or increase liquidity. Sellers sell because buyers make sufficiently attractive offers (Ravenscraft and Scherer, 1987).

Economic analysis classifies acquisitions into two categories: disciplinary takeovers and synergistic takeovers (Morck, Shleifer and Vishny, 1988).1 Disciplinary takeovers are designed to replace managers who are not effectively maximizing shareholder value as a result of non-value-maximizing practices. Synergistic takeovers are motivated by possible benefits that would result from combining two firms. The benefits include a possible increase in market share and even distribution channels, or simply an elimination of overlapping functions. Morck, Shleifer and Vishny (1988) conclude that disciplinary takeovers are likely to be hostile transactions, whereas synergistic takeovers are likely to be friendly transactions. Hostile transactions are acquisitions that go against the wishes of the target companys management.

The predicted impact on the acquiring firms varies depending on the method of financing. Acquirers stock price in cash financed mergers is expected to remain unaffected due to acquisition announcement. Managers use cash as a means of financing if they believe their companys stock is fairly valued. Similarly, they will chose equity
1

Mergers and acquisitions are also classified as horizontal, vertical mergers or conglomerates. A horizontal merger is one which takes place between two companies with similar product lines, and a vertical merger is one which takes place between two companies is different industries.

financing if they believe their companys stock is undervalued, therefore acquirers stock price in stock financed transactions is likely to experience negative abnormal returns. Preliminary evidence shows that acquiring firms do not experience significant abnormal returns around the announcement date. Market participants receive no signal on acquisition announcement day regarding the acquiring firm. In case of target firms, information regarding deal premium is available on announcement day, these issues are discussed in detail in Section 2.4. We next verify that acquisition announcements trigger significant trading activity that leads to shifts in the demand for the securities of participating firms (Morck, Shleifer and Vishny, 1988).

2.2 The Impact of Merger Announcements on Stock Trading Volumes We verify that merger announcements are events which frequently cause investors to revise their estimates of the future profitability of participating firms. The methodology adopted shows that there is a spike in volume of shares traded due to an acquisition announcement. The trading volume of a security j is given as Vol j and total volume of shares traded for a particular security on day t is given by Vol jt . The sample total volume, STVol , is given as equation (3) and defined as the sum of volumes across 80 securities (40 target firms and 40 acquiring firms), on day t.2

(3)

STVol = ! Vol jt , where t= [-50,12]

t=[-50,12] is the time period 50 days before event day and 12 days after event day. Our variable of interest is the percentage change in STVol, which is given as equation (4).
2

Sample selection is specified in Section 3.2.2.

(4)

#STVol =

!Vol " !Vol !Vol

jt jt "1

jt "1

Figure 3 shows the percentage change in Sample Total Volume in this sample of 80 securities for a [-50,10] day time window. Figure 3: Percentage Change in Sample Total Volume for a [-50,10] day window

200.00%

150.00%

100.00%

STV
50.00% 0.00%

-8

-5

-2

-4 4

-4 1

-2 9

-2 6

-1 7

-1 4

-3 8

-2 3

-3 5

-5 0

-50.00% Da y STV

A significant spike in volume is found to occur on day 0 across this sample of 80 firms. Based on this sample it is reasonable to assume that merger announcements cause significant trading activity. The analysis which follows deals primarily with an investment strategy called merger arbitrage. By analyzing such trading activities, we can gain insight into why target firms stock prices are positively affected by merger announcements.

-4 7

-3 2

-2 0

-1 1

10

2.3 The Trading Behavior of Merger Arbitrageurs Merger arbitrage, also known as risk arbitrage, requires active trading surrounding an acquisition announcement. Following an acquisition announcement, the target companys stock typically trades at a discount to the price offered by the acquiring firm. The difference between the acquiring firms offer price and the target firms current price is known as the arbitrage spread.3 As the merger approaches its completion date, this spread diminishes (Mitchell, Pulvino and Stafford, 2002), because market participants adjust their expectations by buying the target firms stock till the targets stock price reaches equilibrium. In this case, equilibrium price can be understood as the price offered by the acquiring firm for each share of the target firms stock on announcement date. Thus, if the merger is successful an arbitrageur can captures the arbitrage spread by purchasing the target firms stock - while it is still trading at a discount compared to the price offered the acquiring firm- and liquidate those shares once the merger consummates. However, if a merger fails, then the target firms stock price often falls dramatically (Davidson, Dutia and Cheng, 1989). Merger arbitrageurs are rewarded for bearing the risk of an acquisition transaction not materializing. Acquiring firms may finance their transaction using cash, cash with some equity or only equity. The trading strategies for merger arbitrageurs vary depending on the acquirers financing method. This research focuses on two broad categories:4 1. Merger arbitrage strategies appropriate for cash only transactions 2. Merger arbitrage strategies pertaining to fixed-exchange ratio offers in stock financed transactions.
3 4

Krishnaiyer, Dhrubo, Associate, Citigroup Corporate and Investment Bank, Personal Communication Acquisitions may also be debt financed, cash and stock financed or stock financed with a floating exchange ratio offer

2.4 Trading Strategies in Cash Financed Acquisitions

A generic description of a possible trading strategy for cash financed transactions is characterized as follows. Investors purchase shares of target firms stock on the acquisition announcement date if they are trading at a discount compared with the acquiring firms offer and hold the target firms stocks until the merger is completed. At this time investors receive the arbitrage spread (defined earlier) and the transaction is over. A review of the literature reveals that target firms in cash financed transactions experience greater positive abnormal returns on announcement day as opposed to stock financed acquisitions (Andrade, Mitchell and Stafford, 2002; Asquithe, Kim, 1982). The fundamental reason is that cash financed transactions usually consummate quicker than stock financed transactions. Also, stock financed transactions are often large transactions between two major corporations who require approval from several regulatory bodies before the acquisition materializes. For example, Exelon Corporation has to receive approval from 9 regulatory commissions before their acquisition of Public Service Enterprise Group is completed.5 The longer period the acquisition takes to consummate, the greater is the uncertainty about whether it will consummate. The fact that cash financed transactions consummate quicker as opposed to stock financed ones provides a plausible explanation why cash financed acquisitions experience greater abnormal returns on announcement day. Section 2.4.1 tests the hypothesis that the average consummation period of cash financed mergers is less than stock financed mergers.

Hoffman, Andy, Financial Analyst, Exelon Generation, Personal Communication

2.4.1 Average Consummation Period for Cash and Stock Financed Transactions To test the hypothesis that cash financed transactions take a longer period of time to consummate, a sample of all acquisition announcements between 2 publicly traded companies which are tracked against the NASDAQ Composite Index or NYSE Index post-January 1, 1997 with an announced total value in excess of $300 million is considered. In this sample there are a total of 467 announcements, of which 163 were cash financed transactions with a mean consummation period of 84 days and a standard deviation of 47 days. Furthermore, the distribution for the consummation period was approximately normally distributed; the histogram plot of that distribution is presented in Appendix A. There were a total of 404 transactions which used some form of equity as a method of financing.6 The mean consummation period for these transactions was 163 days with a standard deviation of 108 days. The consummation period for stock financed acquisitions also exhibits an approximately normal distribution. A t-test of the hypothesis results in a value of 2.82, indicating that the mean consummation period of cash financed transactions is less than the mean consummation period of stock financed transactions at a =0.05, where is the significance level.

As noted in the previous section, shorter expected consummation periods result in higher abnormal returns. Therefore, we expect larger positive abnormal returns for target firms stock prices in cash financed acquisitions included in our sample. An investors decisions are usually based on several factors, and a longer consummation period is likely
6

We are nit distinguishing between transactions where preferred stock, as opposed to common stock was used as a financing method.

to scare away potential investors, for whom a dollar today is worth more than a dollar tomorrow. The hypothesis of greater abnormal returns of target firms in cash financed transactions is tested extensively in Section 4.2.

2.5 Trading Strategies in Stock Financed Transactions Trading strategies in stock financed transactions depend on the type of stock offer. There are three types of offers: 1) Fixed-exchange ratio offers; 2) Floating-exchange ratio offers; 3) Collar offers.7 Under a fixed-exchange offer the acquirer agrees to exchange a fixed number of the targets shares for its own shares. A floating-exchange offer specifies the value of the acquirers stock to be exchanged for a target firms stock, therefore the number of targets stocks to be exchanged varies depending on the target firms share price on acquisition completion date. A collar offer is a contract between acquirers and targets which determines how the maximum or minimum number of targets stocks that will be exchanged with the acquirers stocks on completion date.8

For a fixed-exchange ratio stock merger, merger arbitrageurs simultaneously short sell a fixed number of acquirer shares for every target share purchased (Mitchell, Pulvino and Stafford, 2002). The short position in the acquirers shares is closed when the shares owned in the target firm are exchanged for acquirer shares (Mitchell, Pulvino and Stafford, 2002). This type of trading activity may cause a spike in volume around an acquisition announcement similar to that observed in our sample of 80 securities (see

7 8

Biswas, Shubhomoy, Analyst, Lehman Brothers, Equity Derivatives Group. Personal Communication Collar offers and floating-exchange offers are well beyond the scope of this paper and will not be elaborated any further.

Figure 3). Investors may view acquisition announcements as signals that the targets stock is undervalued, which results in an increase in demand of the targets stock, resulting in positive abnormal returns around an acquisition announcement. As mentioned earlier, a cash financed merger is also understood as a signal that the acquirers stock is fairly priced, whereas a stock financed, fixed-exchange ratio offer is understood as a signal that the acquirers stock is overvalued. Thus, it is reasonable to expect no abnormal returns for the acquiring firm in cash financed acquisitions and negative abnormal returns in stock financed acquisitions. Tests of hypotheses are discussed in Section 5.

3. Research and Data Selection Methodology This section outlines the research objectives and model specifications. The event study model used tests the null hypothesis of no abnormal returns for target and acquiring firms around an acquisition announcement.

3.1 Research Objectives When an acquisition is announced, a considerable amount of information is revealed about the potential transaction,9 and this information can be used to assess the stock market reaction to an acquisition announcement. We focus on three primary research objectives: 1. Determine whether abnormal returns of target firms are significantly different from abnormal returns of acquiring firms;

This information is readily available on the Bloomberg terminal on announcement day.

10

2. Compare abnormal returns experienced by target versus acquiring firms in cash financed versus stock financed acquisitions; 3. Establish a relationship between abnormal returns, method of financing, nature of bid and the size of deal premium. To address objectives (2) and (3), comparisons between acquiring and target firms are presented separately. For example, to determine whether abnormal returns are affected by the nature of the bid, a comparison between hostile targets and friendly targets will be considered, followed by a comparison between hostile acquirers and friendly acquirers. This method is employed as past studies indicate that abnormal returns between target and acquiring firms are considerably different. Furthermore, we have already established the fundamentals behind why target firms experience relatively greater abnormal returns as opposed to target firms, thus it is logical to treat them as separate populations.

3.2 Research Methodology This section describes the event study approach developed by Brown and Warner (1985). The primary concerns which arise when using daily data when using an event study approach are also discussed in detail. Specifications of the Ordinary Least Squares (OLS) market model, which is a commonly used event study approach, are also specified.

3.2.1 The Event-Study Approach The event study methodology has been found to be consistent and valid when attempting to quantify any corporate event (Wooldridge and Snow, 1990). Capital

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markets views corporate events such as stock splits, earnings announcements and merger announcements as signals describing managements future expectations. We have established in Section 2 that a merger announcement drastically increases the volume of shares traded on a given day. According to Halpern (1983), the first public announcement is the most appropriate event date to gauge an events impact. Abnormal returns set in slightly before the actual event date, which is usually caused by leaks in information or even market anticipation (Keown and Pinkerton, 1981). Despite concerns of possible insider trading activity, as long as the market does not fully anticipate an event, abnormal activity will be observable as a result of that event. The next section outlines the specifications of an event study approach used while examining the impact of acquisition announcements.

3.2.2 Sample Selection and Data Description All data has been gathered using a Bloomberg Terminal and Yahoo! Finance. The Bloomberg Terminal has no data on acquisition announcements prior to January 1, 1997. As a result, only merger announcements after this date between two publicly traded companies are considered. Historical prices were not available on Yahoo! Finance for tickers10 that are not active on one of the major indices, so only merger announcements where the targets ticker is still tracked against one of the indices are considered. The total number of available merger announcements is 467. Of these, 40 announcements were randomly chosen. 40 announcements imply the sample consists of 80 securities, which is large enough to test the null hypothesis of no abnormal returns for target and
10

A ticker is a symbol used by market indices in identifying a security. For example the ticket for Exelon Corporation is EXC.

12

acquiring firms. Of the 40 announcement in our sample, 10 were hostile takeovers and 30 were friendly mergers, 19 announcements were cash financed, 9 used some form of equity along with cash, and 13 were financed entirely by equity.

3.2.3 The OLS Market Model To test for the existence of abnormal returns, a benchmark for normal returns in required. A parameter estimation period as suggested by Brown and Warner (1985) is used to calculate a stocks Beta value. The Beta value is the slope coefficient obtained by regressing the indexs returns to the stocks returns, and is also a measure of the stocks volatility as compared with the market (Panayides and Gong, 2002). According to Panayides and Gong (2002), an 11 day event window fully captures the effects of an event of interest. The window begins 5 days prior to the event date and ends 5 days after. According to Brown and Warner (1985) and Dyckman, Philbrick and Stephan (1984), a parameter estimation period of 120 days is adequate since daily returns data for the 120 days prior to the event date are sufficient in formulating a benchmark for normal returns. Additionally, care has been taken to ensure that, during the parameter estimation period, no other corporate event, such as a stock split or an earnings announcement, is taking place which may cause abnormal returns.11 Figure 4 provides a graphical depiction of the event study approach, where the event window is [-5,5] days and the estimation window is [-120,-5] days.

11

This was achieved by analyzing press releases of individual firms and observing that no significant abnormal returns were experienced by individual firms in the parameter estimation period.

13

Figure 4: Illustration of the Event Study Approach

Parameter Estimation Period

Event Period

Post Event Period

In the first step, a regression is estimated using the returns on a given stock j and the returns of a stock market index m. The slope coefficient, ! i , is the Beta value and ! i is the y-intercept. Assuming a constant Beta12 value for a given stock j, we calculate the estimated return of stock j in the event window period as follows. (5)
E it = " i + ! i Rmt
^ ^ ^

where E it is the expected return at time t, ! i and ! i are parameters of the regression equation. ! i is the stocks Beta value and Rmt is the daily return on a stock market index m at time t. The abnormal return is defined as the difference between the actual return on a stock i and its expected return, E it . Therefore, the abnormal return of a stock i at time t is given as equation (6).
^

12

Betas in the parameter estimation period and post event period were constant for all securities in this sample. The OLS market model was employed in the post event period, i.e. [5,120] day time window and a constant Beta value was observed for all securities in the parameter estimation period and post event period.

14

(6)

ARit = Rit ! E it

Once we have obtained the estimated equation, the actual return of a stock i at time t is calculated using equation (7).

(7)

Rit = " i + # i Rmt + eit

Since E it = " i + ! i Rmt , equation (7) simplifies to Rit = E mt + eit , which implies that abnormal return of stock i at time t is simply given as equation (8).

!
(8)
ARit = eit

! The cumulative abnormal return for security i is the sum of abnormal returns in a given

time period [t0,t1].13

t1

t1

(9)

CARi (t 0 ,t1 ) = " ARit = "#it

t= t 0 t= t 0

The sample average abnormal return at time t, AR t , is the arithmetic mean of n stocks
13

It is important to note that that the estimated stock price is determined using the Parameter Estimation Period only, which is from 120 days to 5 days before the event. A common error which results in these types of studies is to regress the returns of the market to that of the stock for the entire period, including the event date, and then calculating the error terms as abnormal returns. This method results in an underestimation of abnormal returns.

15

(10)

ARt =

1 n ! ARit n i =1

The sample average cumulative abnormal average return of CAR from event time t0 to t1, is the sum of AR t from t0 to t1.

(11)

CAR (t 0 , t1 ) = ! AR t
t =t0

t1

To test the null hypothesis of no impact of a merger announcement on stock price, the statistical significance of CAR (t 0 , t1 ) and AR t is calculated according to Brown and Warner (1980) and Panayides and Gong (2002). The test statistic is simply the ratio of day t average abnormal returns to its estimated standard deviation, S ( AR t ) , where (12) t ( ARt ) = ARt / S ( ARt ) (13) t (CAR ) = CAR (t 0 , t1 ) /[ S ( ARt ) * (t1 ! t 0 ) ]
^
^

Where

S ( ARt ) = (

t = !6

t = !119

" ( AR ! AR )

/ 114

and AR =

1 t = "6 ! AR 114 t = "119

The standard deviation is estimated from the time series of average abnormal returns in the parameter estimation period. Time-series of average abnormal returns or portfolio excess returns takes into account cross-sectional dependence in the security-specific excess returns (Brown and Warner, 1980). However, the test statistic ignores any time16

series dependence in abnormal returns. Brown and Warner (1980) and later Panayides and Gong (2002) have shown that benefits from autocorrelation adjustment appear to be limited. Accordingly, no auto-correlation adjustments are made in this model. Several issues that can potentially arise with daily data used in this study are discussed in the following section. An illustration of how this model works is presented in Appendix A.

3.3 Issues Concerning Daily Data

Brown and Warner (1985) outlined several issues that should be taken into consideration when choosing an event study model. These will be discussed very briefly, followed by a brief description of excess return measures that may be used in an event study to calculate abnormal returns. Based on the findings of Brown and Warner (1985) an appropriate Excess Return Measure will be adopted.

To develop an appreciation of abnormal returns, a benchmark for measuring normal performance is required. Brown and Warner (1980) originally used monthly data, and described several techniques to calculate abnormal activity using an event study approach.14 Their subsequent work involved the use of daily data, where they describe problems pertaining to daily data. Brown and Warner (1985) note that daily data may exhibit stock returns that are not normally distributed, and this raises the possibility of daily returns exhibiting serial dependence. However, they conclude that methodologies
14

Brown and Warner (1980) used the Center of Research in Security Prices database to construct 250 samples, containing 50 securities. For each security they generated a hypothetical event month, where events were assumed to occur with equal probability each month. It is important to note that their work was a simulation where abnormal activity was induced, and did not actually occur.

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based on the OLS market model are well specified under a variety of conditions, including the use of daily price data (Brown and Warner, 1985). Several other authors (Panayides and Gong, 2002; Davidson, Dutia and Cheng, 1989) have verified that the OLS market model is well specified and provides the most accurate measure of abnormal performance.

4. Analysis of Results

This section is divided into three parts. The first part involves applying the model to all target firms and acquiring firms to compare abnormal returns of firms in two categories. The second part compares abnormal returns of target firms with varying deal specifications. The third part compares abnormal returns of acquiring firms with different deal specifications.

4.1 Target Firms

There are 40 target firms in this sample. The average abnormal returns for each target firm for the [-5, 5] day window, can be found in Appendix B. Abnormal returns for each security are represented by their ticker symbols. The results for this samples abnormal returns and associated tests of significance are summarized in Appendix C. The evidence supporting the existence of abnormal returns surrounding the event day in this sample of target firms is overwhelming. Average abnormal returns and cumulative average abnormal returns around the event window are statistically significant.

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Furthermore, the cumulative abnormal returns for the entire parameter estimation are insignificant indicating that no major corporate event took place in the estimation period, and that our initial Beta value estimates are accurate.

Target firms in this sample did not experience any abnormal performance during the parameter estimation period, but when the acquisition announcement was made, significant positive abnormal returns. Our data also indicates that abnormal returns are maximized on the day of announcement and remain significant for one day following the announcement. Two days after the announcement, no abnormal returns observed.

Abnormal returns are not statistically significant in the parameter estimation period and post event period. However, on the event date abnormal returns are statistically significant. On the announcement date, the average abnormal return for target firms is 6.35 percent, and on day 1 it is 4.79 percent. Both these values are statistically significant (p<0.0001). Also cumulative average abnormal returns are statistically significant during the event window. Therefore, we conclude that target firms experience positive, significant abnormal returns for a 3 day period around an acquisition announcement. The following section provides an in-depth analysis of target firm abnormal returns based on method of financing and nature of bid.

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4.2 Method of Financing: Abnormal Returns of Target Firms in Cash versus Stock Financed Transactions Acquirers can be classified in to two categories: financial buyers and strategic buyers.15 Strategic buyers are those whose motivations for acquiring another firm are potential synergies that would result from combining two firms. Our sample of 40 acquisition announcements has 13 stock financed, 9 cash and stock financed and 19 cash financed transactions. Financial buyers are private equity funds who typically purchase undervalued companies and later sell them for a profit once they are fairly valued.16

4.2.1 Target Firms Abnormal Returns in Cash Financed Acquisitions

A review of event study literature reveals that target firms in a cash financed acquisition experience greater abnormal returns than in stock financed acquisitions (Travlos and Waegelein, 1992; Myers and Majluf, 1987; Wansley, Lane and Yang, 1983). Most researches suggest that the method of payment provides a valuable signal to the market (Wansley, Lane and Yang, 1983). Target firms are expected to experience positive abnormal returns. Preliminary evidence indicates that all target firms experienced abnormal returns as a result of the acquisition announcement, but acquiring firms did not. These results have been summarized in Table 1. In our sample of 40 acquisition announcements, 19 transactions were cash financed. As expected, the abnormal returns of target firms in cash financed transactions are positive and significant (p<0.0001) on day 0 and day 1. Average abnormal return on
15 16

Singhal, Amit, Analyst, Morgan Stanley, Mergers and Acquisitions Group, Personal Communication Biswas, Shubhomoy, Analyst, Lehman Brothers, Equity Derivatives Group. Personal Communication

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day 0 is 6.54 percent, and on day 1 it is 4.57 percent. Average abnormal returns on day 0 are slightly greater than the average abnormal returns of all target firms on day 0. Cumulative average abnormal returns for the parameter estimation period and post event period are not significant. However, cumulative average abnormal returns in the event period, i.e. in a [-5,5] day window, are positive and significant.

4.2.2 Target Firm Abnormal Returns in Transactions Employing Some Form of Equity The sample of 40 acquiring firms consists of twenty one transactions in which some form of equity is used as a financing method. Nine transactions were cash and stock financed and twelve transactions were stock financed. Whenever a transaction uses any form of equity as a financing method, investors can expect the consummation period of such transactions to be longer than purely cash financed transactions (See Section 2.4.1). Since investors expect greater uncertainty about merger consummation in stock financed mergers, we would still expect positive abnormal returns for target firms, but they are likely to be lesser than the abnormal returns of target firms in cash financed transactions.

For the sample of 21 acquisition announcements which used some form of equity as a financing method, the average abnormal return on day 0 is 6.12 percent and on day 1 it is 4.98 percent and these are statistically significant (p<0.0001). Cumulative average abnormal returns are not significant in the estimation period and post event period. Although these abnormal returns are slightly less than those observed in cash financed transactions, we do not have enough evidence to conclude that target firms in cash financed acquisitions experience abnormal returns greater than target firms in stock

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financed transactions. At this stage it is becoming increasingly clear that target firms experience abnormal returns irrespective of deal specifications. Thus, a simple trading strategy which involves simply buying a given target firms stocks on day 0 and liquidating them on day 3 could prove to be very profitable.

4.3 Target Firm Abnormal Returns in Hostile Transactions A hostile transaction is defined as one which goes against the managements will. These transactions involve a bid from the acquiring firm which is considerably greater than a bid in a friendly transaction (Acquithe and Kim, 1982). Shareholders invariably opt for the maximum value they can expect to receive in an acquisition. Therefore, it is reasonable to expect that abnormal returns will be greater for target firms in hostile transactions than friendly transactions because in hostile transactions the target firm is likely to trade at a greater discount on acquisition announcement day than in a friendly transaction. A review of the literature reveals varying results regarding this hypothesis. Jensen and Ruback (1983) argue that returns to the targets share holders are greater in hostile transactions because a hostile transaction is one in which the price offered by the acquirer is significantly greater than the existing market price of the target firm.17 Travlos (1987) proposes an explanation for this hypothesis. He argues that since hostile takeovers are usually cash transactions, and the difference in earlier findings between hostile and friendly transactions is because researchers failed to control for the method of payment. In our sample of 40 firms, there are 10 hostile transactions, of which only 3 are cash

17

Market price is determined by market capitalization, which is the total number of shares outstanding multiplied by the shares market price.

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financed. This may be a limitation of the data set, but for now we will not control for the method of payment variable.

We notice that in hostile transactions abnormal returns are greater on day 1 as opposed to day 0 (See Table 1). On day 0 the average abnormal return is 5.96 percent and on day 1 the abnormal return is 8.8 percent; both these figures are statistically significant (p<0.0001). Also, cumulative average abnormal returns are insignificant in the estimation and post event periods. Thus, it is reasonable to conclude that the nature of bid has an impact on abnormal returns; this result has also been verified by Wansley, Lane and Yang (1983). We also noticed a significant difference in abnormal returns with respect to method of payment. The only limitation is that this is a much smaller sample size, 10 hostile acquisition announcements as opposed to 30 friendly acquisition announcements. The following section provides an analysis of abnormal returns experienced by target firms in friendly transactions.

4.4 Target Firm Abnormal Returns in Friendly Transactions A friendly transaction is one for which the target firms management and shareholders are in agreement that the transaction is desirable. Managements agreement indicates that the target firm views the transaction to be beneficial for them. This implies that both parties are equally keen on the acquisition consummating. Therefore, the size of the announced total value of a friendly offer is not likely to be significantly greater than the companys actual worth, where the announced total value is the total amount an acquiring firm is willing to pay. If this is true, then market participants will revise their

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expectation accordingly, and an increase in the targets share price will not be as large as in hostile transactions.

The abnormal returns on day 0 and day 1 for friendly offers are 6.47 percent and 3.45 percent respectively, and are also statistically significant (See Table 1). Again, cumulative average abnormal returns are not significant in the estimation and post event periods. Comparing these abnormal returns to those experienced by target firms in hostile transactions (See Table 1) we can reasonably conclude that the nature of the bid is a determinant of abnormal returns. The most striking observation is that abnormal returns on day 1 for hostile transactions are significantly greater than abnormal returns on day 1 for friendly transactions. Our results provide compelling evidence that abnormal returns are significantly greater in hostile transactions than friendly transactions for target firms.

Our analysis shows that abnormal returns are statistically significant for target firms around an acquisition announcement. The method of financing does not have a significant impact on abnormal returns. Considering the sample of 40 target firms, abnormal returns were maximized on the announcement day; a similar pattern was observed for both cash financed transactions and stock financed transactions. The greatest abnormal returns for hostile transactions were on day 1, i.e. one day after the acquisition announcement. The next section provides an in-depth analysis of acquiring firms stock price movements surrounding an acquisition announcement. These results are summarized in Table 1.

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Table 1: Target Firm Average Abnormal Returns and Cumulative Average Abnormal Returns with Different Deal Specifications
Sample Average Abnormal Returns Sample Size Target Firms 40 Day0 6.3% (17.32) Day1 4.7% (13.07) Day2 0.47% (1.24) Cumulative Average Abnormal Returns CAR CAR CAR [-119,-6] [-5,5] [6,12] -0.0013 0.121 0.0016 (-0.35) (4.14) (0.44)

Target Firms in 6.59% 4.57% -0.53% -0.00074 0.1304 0.0031 Cash Financed 19 (7.38) (5.12) (-0.6) (0.082) (8.28) (0.89) Acquisitions Target Firms in 6.12% 4.98% -0.38% -0.00834 0.1139 0.00356 Stock Financed 21 (7.22) (5.88) (-0.454) (-0.1034) (9.15) (0.56) Transactions Target Firms 5.96% 8.8% -0.83% 0.000045 0.0972 0.089 involved in Hostile 10 (4.84) (7.15) (-0.67) (0.084) (2.45) (1.05) Transactions Target Firms involved in 6.47% 3.45% -0.33% 0.00876 0.129 0.0098 30 Friendly (8.44) (4.49) (-0.428) (0.324) (5.07) (0.678) Transactions ** T-values are reported in parentheses. AAR on Day 0 and Day 1 are statistically significant (p<0.0001)

4.5 Acquiring Firms

There are 40 acquiring firms. Average abnormal returns for acquiring firms in a 10 day period [-5,5] can be found in Appendix B. The results for average abnormal returns and associated tests of significance for acquiring firms are given in Appendix C. The cumulative average abnormal returns for the entire sample of 40 firms were insignificant in the parameter estimation period and post event period. Abnormal returns were significant only on the event day. However, cumulative average abnormal returns were negative in the event window for all acquiring firms and these results were statistically significant.

25

4.6 Acquiring Firms Abnormal Returns in Cash Financed Transactions An acquiring firm will chose cash as the method of financing, when managers believe that their firms shares are fairly valued. If they believe that their companys stock is over valued, then financing a transaction using their companys equity allows managers to conduct a transaction in which they end up paying less than the announced total amount18, by using their already over valued shares as a method of payment. In this scenario market participants will eventually realize the acquiring firms true value, and will adjust their expectations accordingly. By the time this process takes place an acquiring firm would have already signed the contract regarding exchange of stock with the target firm. This case is most obvious in fixed-exchange stock transactions as opposed to floating-exchange transactions or collar transactions.

As indicated in Appendix C, the abnormal returns in cash financed transactions for acquiring firms are -0.7 percent and -0.82 percent on day 0 and day 1 respectively. Cumulative average abnormal returns in the event window, [-5,5] days, are not statistically significant, therefore it is reasonable to conclude that acquiring firms experience no abnormal performance in cash financed transactions in the period surrounding an acquisition announcement.

18

The announced total amount for a purely stock financed fixed-exchange transaction would be the number of shares committed to financing the transaction multiplied by the current market price. In the scenario described, this market price is greater than the acquiring firms fair value. Thus, managers will end up paying a lesser amount than the announced total value.

26

4.7 Acquiring Firms Abnormal Returns in transactions employing some form of Equity The sample of 40 acquiring firms includes 21 transactions where some form of equity was used to finance the acquisition. Average abnormal returns on Day 0 are negative and significant, but on Day 1 they are insignificant. Cumulative average abnormal returns in the event window were negative and statistically significant (See Figure C-8 in Appendix C). Furthermore, cumulative average abnormal returns were insignificant in the estimation and post event periods. These results indicate that when some form of equity is used as a financing method, market participants treat it as a signal that the acquiring firms stock is over valued. They accordingly adjust their expectations, resulting in a negative impact on the acquiring firms stock price.

4.8 Acquiring Firms Abnormal Returns in Hostile versus Friendly Transactions

An acquiring firm may initiate a hostile transaction if it values a given target firm at a price higher than the target firms existing market price. The acquirer will make a hostile bid only if it feels that potential synergies outweigh the premium which the acquirer is currently willing to pay (Travlos, 1987). Market participants, however, may view a hostile bid as a desperate attempt on the acquirers part to buy a target firm to improve the acquirers business outlook. This sends a negative signal to participants, who may speculate that the acquirers stock is over valued (Wanseley, Lane and Yang, 1983), based on that it is reasonable to expect negative abnormal returns for acquiring firms involved in hostile transactions.

27

As summarized in Table 2, the average abnormal returns on day 0 and day 1 are 0.37 percent and -2.05 percent, although only average abnormal returns on Day 1 are significant. Thus, we notice that acquiring firms experience negative abnormal returns in hostile transactions immediately after the acquisition announcement, but not on the announcement date. Cumulative average abnormal returns in the event window are statistically significant and negative (p<0.005). Cumulative average abnormal returns were greater than those observed in friendly transactions. It remains unclear why acquiring firms in hostile transactions experience negative abnormal returns on Day 1 and not on Day 0. We have already observed that abnormal returns for target firms were maximized on Day 1 and not Day 0. One possible explanation is that hostile transactions are less likely to consummate than friendly transactions, because there is a greater risk profile associated with them.

The sample of 30 acquiring firms involved in friendly transactions experienced no abnormal returns in the period surrounding the acquisition announcement. As proposed by our preliminary hypothesis, no abnormal returns are observed for acquiring firms engaged in friendly transactions, cumulative average abnormal returns are also insignificant in the event window. Average abnormal returns and cumulative average abnormal returns for acquiring firms are summarized in Table 2.

28

Table 2: Acquiring Firm Average Abnormal Returns and Cumulative Average Abnormal Returns with Different Deal Specifications
Sample Average Abnormal Returns Sample Size Acquiring Firms 40 Day0 -0.95% (-2.59) Day1 -0.44% (-1.18) Day2 -0.48% (-1.31) Cumulative Average Abnormal Returns CAR[-119,-6] 0.0025 (0.070) CAR[-5,5] -0.0289 (-2.42) CAR[6,12] -0.0061 (0.76)

Acquiring Firms in -0.7% -1.2% -0.42% -0.000021 -0.0216 0.0012 Cash Financed 19 (-1.04) (-2.33) (-1.15) (0.00032) (-1.89) (0.16) Acquisitions Acquiring Firms in -0.77% -1.09% -0.04% -0.0000834 -0.03 0.000256 Stock Financed 21 ((-1.94) (-0.06) (-0.0001034) (-2.65) (0.026) Transactions 0.981) Acquiring Firms -0.37% -2.05 -0.75% 0.0000007 -0.064 0.0124 involved in Hostile 10 (-0.611) (-3.42) (-1.25) (0.0012) (-3.37) (-1.034) Transactions Acquiring Firms -0.33% involved in -0.25% -0.58% 0.00000048 0.0209 0.0032 30 (Friendly (-0.418) (-0.98) (0.000074) (1.1) (-0.266) 0.558) Transactions ** Associated t-values are reported in parentheses. P-values can be calculated using statistical tables

5. A proposed model for predicting abnormal performance

As summarized in Table 1 and 2 abnormal returns for target firms are significant on Day 0 or Day 1. In some instances abnormal performance is also observed on Day -1, which may result from leakages in information. This section describes a model for predicting abnormal performance. The model uses information about the pending acquisition transaction which is made available on announcement date. The dependent variable in this model is cumulative abnormal return in a [0,1] day time window. Cumulative abnormal return for a security j, CAR j [0,1] , is defined as the sum of abnormal returns observed on Day 0 and Day 1. Equation (12) illustrates.

(12)

CAR j [0,1] = AR j 0 + AR j1

29

The Bloomberg terminal provides substantial information regarding deal specification on the announcement day, which will serve as independent variables in this linear regression model. We have already established that acquiring firms and target firms are separate populations, the model will be applied to target firms and acquiring firms separately.

1. Deal Premium: The total value paid by the acquirer in excess of a target firms pre-announcement date market capitalization. Our preliminary hypothesis predicts a positive relationship between the absolute value of CAR j [0,1] and Deal Premium.19 Data for this variable has been obtained from the Bloomberg terminal; both the market capitalization and deal premium were publicly available on the announcement day. In the proposed model we will consider the natural log of this variable.20 Using natural logs makes it easier to interpret regression results, since CAR j is the sum of two percentages, and is therefore a percentage as well. 2. Nature of Bid: The dependent variables, nature of bid can be either hostile or friendly. Our linear regression model will make use of dummy variables when accounting for its impact on CAR j [0,1] , using 1 for hostile transactions and 0 for friendly transactions. 3. Method of Financing: The dependent variable, method of financing, uses a value of 1 for cash only transactions and a value of 0 for transactions employing some form of equity. This model intends to isolate the impact of each variable. The proposed linear regression model is given in (13) as Specification I: (13)
CAR j [0,1] = " 0 + !1 ( NATURE OF BID) + ! 2 ( METHOD OF FINANCING )

+ 3(DEAL PREMIUM) + 4(METHOD OF FINANCING * NATURE OF BID) + j

19 20

A negative deal premium is defined as deal discount. For deal discounts, (i.e. negative deal premiums) natural log of the inverse of the absolute value is considered. For example, a deal premium of -2 is calculated as ln(1/2).

30

A robust regression was carried out to account for heteroscedasticity consistent standard errors. Results for target firms and acquiring firms are reported in Table 3 and Table 5 respectively.

Table 3: OLS Regression Estimation Results for Target Firms

Explanatory Variables: Nature of Bid Method of Financing Nature of Bid x Method of Financing Ln(Deal Premium) Constant Number of observations F-statistic (joint significance) Prob > F R-squared Coefficients -0.037 -0.034 0.14 0.053 -0.028 40 4.25 0.0066 0.2785 t-statistics -0.62 -0.78 1.97 3.49 -0.49 P-value 0.537 0.442 0.048 0.001 0.625

Two variables are significant at =0.05, Nature of Bid x Method of Financing and Deal Premium. Our results indicate that hostile transactions which are cash financed are significant determinants of abnormal returns for target firms. Also, we observe that the size of deal premium is positively correlated with the size of abnormal returns. Results also indicate that there is a 5.3% increase in deal premium corresponds to a percentage increase in cumulative abnormal returns in a [0,1] day window for target firms. Minimal multi co-linearity was observed in this regression; the results are shown in Table 4.

Table 4: Multi Co-linearity Matrix of Independent Variables

Deal Premium Nature of Bid Method of Financing Deal Premium 1 0.1713 -0.086 Nature of Bid 1 -0.2366 Method of Financing

31

Table 5: OLS Regression Estimation Results for Acquiring Firms

Explanatory Variables: Nature of Bid Method of Financing Nature of Bid x Method of Financing Ln(Deal Premium) Constant Number of observations F-statistic (joint significance) Prob > F R-squared Coefficients -0.003 -0.0084 -0.04 -0.00415 0.0072 40 0.57 0.0.6868 0.1161 t-statistics -0.13 -0.78 -0.83 0.97 0.57 P-value 0.895 0.442 0.414 0.001 0.571

Our results indicate that none of the explanatory variables are significant, and that acquiring firms do not experience significant abnormal returns. In the case of target firms, deal premium indicates that a major market participant is valuing a given target firm at a price higher than the current market price. In case of the acquiring firm, no new information is revealed which can directly contribute to an increase share price. Also, a target firm is likely to get acquired by any other acquirer, whereas it is less likely that the acquirer announcing the acquisition will successfully purchase that particular target firm. Therefore, based on our results we can conclude that an acquisition announcement causes a revision of expectations by market participants about the target firms, but not necessarily about the acquiring firms.

6. Limitations of this Study and Recommendations for further Research

Numerous studies (Asquithe and Kim, 1982; Mitchell, Pulvino and Stafford, 2002) have established that target firms share price experience positive abnormal returns because of an acquisition announcement, and acquiring firms share price remains unaffected. Even 32

though acquiring firms share experience no abnormal returns, there is a considerable spike in volume. Further research on this issue can be conducted for stock financed transactions with varying share- exchange agreements. For example Market participants are likely to respond differently to floating exchange-ratio offers as compared with fixedexchange ratio offers (Mitchell, Pulvino and Stafford, 2002). Similarly, collar offers may provide further insights in gauging the relationship between acquisition announcement and share-exchange specifications.

As is the case with most event studies, it is difficult to use larger samples because a securitys abnormal returns have to be calculated individually. Using larger samples, however, can allow us more robust tests of hypotheses. Another approach would be to use a different event study models to test the same hypothesis. For example instead of using the market index, an industries index may be used. Finally, further research can be conducted by using a sample of similar size, but performing more extensive analysis and controlling for several variables when analyzing the impact of a single variable. For example, to gauge the impact of hostile transactions on acquiring firms more fully, we should control for method of financing variables.

7. Conclusion

This study had three primary objectives. First, we sought to determine whether abnormal returns of target firms are significantly different from abnormal returns of acquiring firms. Second, we compared abnormal returns experienced by target versus acquiring

33

firms in cash financed versus stock financed acquisitions. Third, we examined a potential relationship between abnormal returns and nature of bid. This researchs major result is the linear regression model proposed in Section 5. The proposed model works very well in predicting abnormal performance, but can be further improved by adding more explanatory variables.

The research found, as hypothesized, that abnormal returns of target firms are significantly different from acquiring firms. In the sample of 40 acquisitions announcements, target firms experienced positive abnormal returns irrespective of deal specifications. Acquiring firms experienced negative, significant abnormal returns in stock financed transactions on event day. Acquiring firms in hostile transactions experienced negative, significant abnormal returns on Day 1 as opposed to event day, and acquiring firms in friendly transactions experienced no abnormal returns. By analyzing publicly available information, this research has analyzed the stock market reaction to acquisition announcements and identified the deal premium as an important determinant of abnormal returns.

34

Bibliography Andrade, E. M. Mitchell. and E. Stafford. New Evidence and Perspectives on Mergers The Journal of Economic Perspectives, Vol. 15, No. 2. (2002). Asquith, P and E.H. Kim. The Impact of Merger Bids on the Participating Firms Security Holders. The Journal of Finance, Vol. 37, No. 5. (1982) Brown, S.J. and J.B. Warner. Measuring Security Price Performance. Journal of Financial Economics 8.(1980) Brown, S.J. and J.B. Warner. Using Daily Stock Returns: The Case of Event Studies. Journal of Financial Economics. Volume 14.(1985). Coakley, J. and H.M. Thomas. Hot Markets, Momentum and Investor Sentiment in UK Acquisitions. Essex Finance Center. Discussion paper No. 04-09. (2004) Davidson, W.N. D. Dutia. and L. Cheng. A Re-Examination of the Market Reaction to Failed Mergers, The Journal of Finance, Vol. 44 No. (1989) Dyckman, T.R. D. Philbrick. and J. Stephan. A Comparison of Event Study Methodologies Using Daily Stock Returns: A Simulation Approach. Journal of Accounting Research, Vol. 22. (1984). Fama, E. Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, Vol. 25, No. 20 (1970) Halpern, P. Corporate Acquisitions: A Theory of Special Cases: A Review of Event Studies Applied to Acquisitions, Journal of Finance, Vol. 38 (1983) Hull, J, C. Options, Futures and Other Financial Derivatives (5th edition), Prentice Hall International Editions (2003). Jensen, M.C and R.S Ruback, 1983. `The Market for Corporate Control', Journal of Financial Economics,Vol 11, 5-50. Keown, A and J.M. Pinkerton. Merger Announcements and Insider Trading Activity: An Empirical Investigation. The Journal of Finance, Vol. 36, No. 4. (1981) Leeth, J.D. and J.R. Borg. The Impact of Takeovers on Shareholder Wealth during the 1920s Merger Wave. Journal of Financial and Quantitative Analysis, Vol.35, No.2. (2000) Morck, Shleifer and Vishny, "Characteristics of Targets of Hostile and Friendly Takeovers". In Alan J. Auerbach, editor, Corporate Takeovers: Causes and Consequences. Chicago: University of Chicago Press, 1988.

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Mitchell, M. T. Pulvino and E. Stafford, Limited Arbitrage in Equity Markets, The Journal of Finance, Vol. 57, No. 2 (2002) Myers, S.C., and N.S. Majluf, Corporate Financing and Investment Decisions when firms have information investors do not have, Journal of Financial Economics, Vol 13, (1984) Panayides, M. and X. Gong. The Stock Market Reaction to Merger and Acquisition Announcements in Liner Shipping International Journal of Maritime Economics, Vol. 4. (2002) Ravenscraft, D. J. and F. Scherer. Mergers, Sell-offs and Economic Efficiency. Washington, DC: The Brookings Institution (1987) Salinger, M. Value Event Studies. The Review of Economics and Statistics, Vol. 74, No. 4. (1992). Travlos, N. Corporate Takeover Bids, Method of Payment, and Bidding Firms Stock Returns. The Journal of Finance, Vol. 42, No.4. (1987) Travlos, N. and J. Waegelein, Executive compensation, method of payment and abnormal returns to bidding firms at takeover announcements Journal of Financial Economics Vol. 13. (1992) Woolridge, J. and C. Snow. Stock Market Reaction to Strategic Investment Decisions. Strategic Management Journal, Vol. 11, No.5. (1990) Wansley, J. W. Lane and H. Yang, Abnormal Returns to Acquired Firms by Type of Acquisition and the Method of Payment, Financial Management, Volume 12, pp 16-22 (1983)

36

Appendix A Figure A-1: Histogram Plots for Consummation Periods of Cash and Stock Financed Acquisitions Cash Financed Transactions
.01

Equity Financed Transactions

.008 Density

.008

Density

.006

.004

.002

50

100 150 ConsummationPeriod

200

250

.002

.004

.006

200

400 ConsummationPeriod1

600

800

Figure A-2: An Illustration of the OLS Market Model used in Calculating Abnormal Returns

The shaded area represents cumulative abnormal returns.

37

Appendix B Figure B-1: Target Firms Exhibiting Positive Abnormal Returns Surrounding Event Day
Target Firm Abnormal Returns [-5,5] day time window
0.25
0.3 0.25 0.2 0.15 0.1 0.05

Target Firm Abnormal Returns [-5,5] day time window

0.2

0.15
AR(%) AR(%)

0.1

0.05

0 -5 -0.05 Da y azrAR footAR nfbAR scAR ivilAR -4 -3 -2 -1 0 1 2 3 4 5

0 -5 -0.05 Da y kriAR icbsAR jillAR lexrAR msbkAR -4 -3 -2 -1 0 1 2 3 4 5

Target Firms Abnormal Returns for [-5,5] day time window

0.25 0.25

Target Firm Abnormal Returns in a [-5,5] day time window

0.2

0.2

0.15
AR(%) AR(%)

0.15

0.1

0.1

0.05

0.05

0 -5 -0.05 Da y adrxAR psegAR adexAR xltcAR jmdtAR -4 -3 -2 -1 0 1 2 3 4 5

0 -5 -0.05 Da y prvdAR gdtAR nwecAR cscAR atsn1AR -4 -3 -2 -1 0 1 2 3 4 5

Target Firm Abnormal Returns for [-5,5] day time window

0.25 0.3 0.25 0.2
AR(%)

Target Firm Abnormal Returns in a [-5,5] day time window

0.2 0.15 0.1 0.05

0.15 0.1 0.05 0 -5 -0.05 Da y idnxAR remAR atsnAR sfaAR pumpAR -4 -3 -2 -1 0 1 2 3 4 5

AR(%)

0 -0.05 -0.1 -0.15 -0.2 -0.25 Da y gdt1AR mygAR cdrAR mrxAR shuAR -5 -4 -3 -2 -1 0 1 2 3 4 5

Target Firm Abnormal Returns in a [-5,5] day time window

0.25

Target Firm Abnormal Returns in a [-5,5] day time window

0.3 0.25

0.2

0.2
0.15
AR(%) AR(%)

0.15 0.1 0.05

0.1

0.05

0
0 -5 -0.05 Day wsbAR ariAR antAR absAR -4 -3 -2 -1 0 1 2 3 4 5

-5 -0.05 -0.1

-4

-3

-2

-1

Day pixrAR bsxAR museAR coaAR

38

Figure B-2: Acquiring Firms Abnormal Returns Surrounding Event Day

Acquiring Firm Abnormal Returns for [-5,5] day time window
0.25 0.2 0.15 0.1 0.05 0 -5 -0.05 -0.1 Da y ahAR geAR mniAR sovAR tlbAR stxAR impqAR -4 -3 -2 -1 0 1 2 3 4 5 -0.05 -0.1 Da y pnkAR fcbpAR cofAR 0.25 0.2 0.15 0.1 0.05 0 -5 -4 -3 -2 -1 0 1 2 3 4 5

Acquiring Firms Abnormal Returns in a [5,5] day time window

AR(%)

Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.2 0.15 0.1 0.05 0 -5 -0.05 -0.1 Da y muacAR bbtAR wpiAR excAR klacAR -4 -3 -2 -1 0 1 2 3 4 5 -0.05 -0.1 0.25 0.2 0.15 0.1 0.05 0

AR(%)

Acquiring Firms Abnormal Returns in a [-5,5] day time window

AR(%)

AR(%)

-5

-4

-3

-2

-1

Da y ge1AR gdAR cohAR wisAR helxAR

Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.2 0.15 0.1 0.05 0 -5 -0.05 -0.1 Da y svuAR disAR abtAR emrAR cscoAR -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.1 0.25 0.2 0.15 0.1 0.05 0

Acquiring Firms Abnormal Returns in a [-5,5] day time window

AR(%)

AR(%)

-5

-4

-3

-2

-1

Da y jnjAR ertAR ibmAR lAR jnj1AR

Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.2 0.15 0.1
AR(%) AR(%)

Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.2 0.15 0.1 0.05 0

0.05 0 -5 -0.05 -0.1 -0.15 Day lizAR bkhAR caAR thoAR belfAR -4 -3 -2 -1 0 1 2 3 4 5

-5 -0.05 -0.1 -0.15

-4

-3

-2

-1

Day bsxAR whrAR eqyAR mntAR psaAR

39

Appendix C Figure C-1: Average Abnormal Returns for the Sample of 40 Target Firms Day 10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 AR(%) 0.22% 0.76% 0.06% -0.42% 0.28% 0.05% 0.33% -0.14% 0.15% 0.70% 6.35% 4.79% -0.45% 0.39% -0.03% 0.04% -0.14% -0.22% -0.43% 0.48% t(AR) 0.6 2.07 0.17 -1.15 0.77 0.15 0.91 -0.37 0.42 1.9 17.33 13.07 -1.24 1.06 -0.09 0.11 -0.38 -0.6 -1.16 1.31
Average Abnormal Returns
7.00% 6.00% 5.00% 4.00%
AR(%)

3.00% 2.00% 1.00% 0.00% -1.00% 10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 Day AR(%)

Cumulative Abnormal Average Returns for Target Firms

Cumulative Abnormal Returns
0.14 0.12 0.1 0.08

CAR

0.06 0.04 0.02 0

-87

-71

-47

-79

-63

-39

-31

-95

-55

-23

-119

-111

-0.02 -0.04

-103

Day CAR

40

-15

-7

Figure C-2: Target Firm Average Abnormal Returns in Cash Financed Transactions Day -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 AR(%) 0.56% 0.74% 0.59% -0.09% 0.74% -0.34% 0.39% -0.34% 0.33% 1.33% 6.59% 4.57% -0.53% 1.58% -0.22% -0.32% -0.27% -0.38% -0.91% -0.20% 0.25% t(AR) 0.63 0.83 0.67 -0.10 0.83 -0.38 0.44 -0.38 0.37 1.49 7.38 5.12 -0.60 1.77 -0.25 -0.36 -0.30 -0.42 -1.02 -0.23 0.28

Average Abnormal Returns

7.00% 6.00% 5.00% 4.00%
AR(%)

3.00% 2.00% 1.00% 0.00%

0 2 4 6 8
2

-1.00% -2.00%

-1 0

Day AR(%)

Target Firm Cumulative Average Abnormal Returns in Cash Transactions

Cumulative Abnormal Returns
0.16 0.14 0.12 0.1 0.08

CAR

0.06 0.04 0.02 0

-9 4

-2 2

-5 2

-4 6

-2 8

-1 6

-7 6

-6 4

-8 8

-8 2

-7 0

-5 8

-4 0

-3 4

-1 0

-1 18 -1 12

-0.04 -0.06

-1 06 -1 00

Da y CAR

Figure C-3: Target Firm Average Abnormal Returns in Stock Financed Transactions Day AR(%) t(AR) 41

-4

-0.02

10

-6

-8

-4

-2

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

-0.09% 0.77% -0.42% -0.72% -0.13% 0.41% 0.28% 0.05% -0.01% 0.12% 6.12% 4.98% -0.38% -0.69% 0.14% 0.37% -0.03% -0.08% 0.02% 1.10% 1.16%

-0.10361 0.910797 -0.49814 -0.85434 -0.15869 0.480075 0.333445 0.060445 -0.01122 0.140627 7.229016 5.88143 -0.45453 -0.81149 0.163418 0.436244 -0.03285 -0.0931 0.019706 1.300695 1.374686

Average Abnormal Returns

7.00% 6.00% 5.00% 4.00%
AR(%)

3.00% 2.00% 1.00% 0.00%

0 2 4 6 8
-3

-1.00% -2.00%

-10

Day AR(%)

Target Firm Cumulative Average Abnormal Returns in Stock Financed Transactions

Cumulative Abnormal Returns
0.16 0.14 0.12 0.1 0.08

CAR

0.06 0.04 0.02 0

-1 17 -1 11

-1 05

-0.02 -0.04

-9

10
3 9

-6

-9 3

-8 7

-6 3

-5 7

-8

-4

-3 9

-2

-8 1

-3 3

-7 5

-5 1

-4 5

-2 7

-2 1

-9 9

-6 9

Da y

42

-1 5

Figure C-4: Target Firm Average Abnormal Returns for Hostile Transactions Day AR(%) t(AR) Average Abnormal Returns -10 0.03% 0.023426 -9 0.59% 0.479797 8.50% -8 -0.61% -0.49904 -7 -1.09% -0.88859 6.50% -6 -0.09% -0.06955 -5 -0.19% -0.15462 4.50% -4 -0.40% -0.32586 -3 -1.14% -0.92937 2.50% -2 0.16% 0.127825 -1 -1.18% -0.95748 0 5.96% 4.843802 0.50% 1 8.80% 7.152197 2 -0.83% -0.67641 -1.50% 3 -1.80% -1.46153 4 0.25% 0.20622 -3.50% 5 0.10% 0.07727 Day 6 0.18% 0.148956 7 -0.36% -0.29387 AR(%) 8 -0.29% -0.23979 9 2.70% 2.193256 10 2.08% 1.689571 Target Firm Cumulative Average Abnormal Returns in Hostile Transactions
AR(%)

8
2

Cumulative Abnormal Returns

0.16 0.14 0.12 0.1 0.08

CAR

0.06 0.04 0.02 0

-1 18 -1 12

-1 06 -1 00

-9 4

-4 6

-7 0

-4 0

-3 4

-6 4

-5 8

-2 8

-2 2

-8 8

-8 2

-0.04 Da y CAR

-7 6

43

-5 2

-1 6

-1 0

-0.02

-1 0

-4

10

-6

-8

-4

-2

Figure C-5: Target Firm Average Abnormal Returns for Friendly Transactions Day -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 AR(%) 0.28% 0.81% 0.29% -0.20% 0.41% 0.13% 0.58% 0.20% 0.15% 1.32% 6.47% 3.45% -0.33% 1.12% -0.13% 0.02% -0.25% -0.17% -0.47% -0.26% 0.28% t(AR) 0.370774 1.058395 0.372738 -0.26023 0.52878 0.175537 0.755276 0.261154 0.199146 1.720806 8.441379 4.49917 -0.42883 1.459144 -0.16893 0.03003 -0.32442 -0.22546 -0.61117 -0.33612 0.366817
Average Abnormal Returns
7.00% 6.00% 5.00% 4.00%
AR(%)

3.00% 2.00% 1.00% 0.00%

2 4 0 6 8
2

-1.00%

-1 0

Day AR(%)

Target Firm Cumulative Average Abnormal Returns in Friendly Transactions

Cumulative Abnormal Returns
0.14 0.12 0.1 0.08 0.06

CAR

0.04 0.02 0

-1 18 -1 12

-0.04 -0.06 Da y

-1 06 -1 00

-0.02

-5 8

-2 2

-8 8

-8 2

-5 2

-4 6

-2 8

-1 6

-7 6

-7 0

-9 4

-6 4

-4 0

-3 4

-1 0

44

-4

10

-8

-4

-6

-2

Figure C-6: Average Abnormal Returns for the Sample of 40 Acquiring Firms Day -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 AR(%) -0.20% 0.05% -0.21% 0.24% 0.08% -0.32% 0.08% -0.02% -0.17% -0.28% -0.95% -0.44% -0.48% 0.20% -0.44% -0.08% -0.23% -0.20% -0.17% 0.12% -0.15% t(AR) -0.55696 0.134156 -0.56267 0.667394 0.220335 -0.86127 0.220131 -0.05133 -0.47351 -0.75524 -2.59134 -1.18775 -1.3141 0.537012 -1.19715 -0.2168 -0.62524 -0.5317 -0.45867 0.324196 -0.39615

Average Abnormal Returns

7.00% 6.00% 5.00% 4.00%
AR(%)

3.00% 2.00% 1.00% 0.00%

2 4 0 6 8

-1.00%

-10

Day AR(%)

Acquiring Firms Cumulative Average Abnormal Returns

Cumulative Abnormal Returns
0.14 0.12 0.1 0.08 0.06

CAR

0.04 0.02 0

-47

-87

-79

-63

-39

-23

-95

-71

-55

-31

-119

-111

-0.02 -0.04 -0.06

-103

Day CAR

45

-15

-7

10

-8

-4

-6

-2

Figure C-7: Acquiring Firm Average Abnormal Returns for Cash Transactions Day -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 AR(%) 0.37% -0.10% -0.27% -0.27% 0.24% 0.20% -0.59% -0.29% 0.63% 0.21% -0.70% -0.82% -0.42% -0.26% 0.25% 0.02% 0.32% 0.07% 0.01% -0.03% -0.25% t(AR) 1.014396 -0.27479 -0.74926 -0.75003 0.66267 0.543338 -1.65195 -0.81795 1.744371 0.592471 -1.94382 -2.33391 -1.15589 -0.7329 0.705675 0.042301 0.888434 0.206151 0.014307 -0.08584 -0.68445
Average Abnormal Returns
7.00% 6.00% 5.00% 4.00%
AR(%)

3.00% 2.00% 1.00% 0.00%

0 2 4 6 8
3 9

-1.00% -2.00%

-1 0

Day AR(%)

Acquiring Firm Cumulative Average Abnormal Returns in Cash Transactions

Cumulative Abnormal Returns
0.14 0.12 0.1 0.08 0.06

CAR

0.04 0.02 0

-1 17 -1 11

-1 05

-9 9

-9 3

-6 3

-5 7

-8 1

-7 5

-5 1

-4 5

-3 3

-2 7

-2 1

-6 9

-0.02 -0.04

-8 7

Da y

46

-3 9

-1 5

-9

-3

10

-6

-8

-4

-2

Figure C-8: Acquiring Firm Average Abnormal Returns for Stock Transactions Day AR(%) t(AR) -10 -0.21% 0.626707 Average Abnormal Returns -9 0.45% 0.561695 -8 -0.34% -0.48902 7.00% -7 0.22% 0.234565 6.00% -6 0.01% 0.122259 -5 0.23% 0.280042 5.00% -4 -0.04% -0.10428 4.00% -3 0.02% -0.0342 -2 0.30% 0.364627 3.00% -1 -0.70% -0.91037 2.00% 0 -1.09% -1.94273 1 -0.04% -0.06285 1.00% 2 -0.77% -0.9817 0.00% 3 -0.45% -0.55584 4 -0.60% -0.652 -1.00% 5 0.09% 0.097343 -2.00% 6 -0.76% -1.0809 7 -0.66% -0.73482 Day 8 -0.18% -0.47493 AR(%) 9 -0.53% -0.65159 10 -0.28% -0.43428 Acquiring Firm Cumulative Average Abnormal Returns in Stock Transactions
AR(%)

8
4

Cumulative Abnormal Returns

0.14

0.09

0.04

CAR

-0.01

-10

-5 0

-3 8

-2 6

-8 6

-6 2

-5 6

-8 0

-9 8

-9 2

-7 4

-6 8

-4 4

-3 2

-2 0

-1 4

-8

-2

-1 16 -1 10

-0.06

-0.11 Da y CAR

-1 04

47

10

10

-6

-8

-4

-2

Figure C-9: Acquiring Firm Average Abnormal Returns for Hostile Transactions Day AR(%) t(AR) Average Abnormal Returns -10 0.93% 1.552245 -9 0.18% 0.292676 7.00% -8 0.49% 0.825516 6.00% -7 -0.78% -1.29647 -6 0.56% 0.92805 5.00% -5 0.09% 0.158252 4.00% -4 -0.34% -0.56564 3.00% -3 -0.21% -0.35085 -2 0.30% 0.497481 2.00% -1 -0.01% -0.00937 1.00% 0 -0.37% -0.61109 0.00% 1 -2.05% -3.42774 -1.00% 2 -0.75% -1.25403 3 -1.37% -2.28252 -2.00% 4 0.33% 0.544746 -3.00% 5 -0.27% -0.45221 Day 6 -0.26% -0.43474 7 -0.28% -0.46985 AR(%) 8 -0.19% -0.32188 9 -0.76% -1.26262 10 0.25% 0.421381 Acquiring Firm Cumulative Average Abnormal Returns in Hostile Transactions
AR(%)

Cumuative Abnormal Returns

0.13

0.08

CAR

0.03

-10

-95

-87

-63

-55

-47

-39

-31

-23

-79

-71

-119

-0.02

-0.07 Day CAR

-111

-103

48

-15

-7

10

-6

-8

-4

-2

Figure C-10: Acquiring Firm Average Abnormal Returns for Friendly Transactions Day AR(%) t(AR) Average Abnormal Returns -10 0.22% 0.370953 -9 -0.33% -0.55995 7.00% -8 -0.10% -0.16835 -7 -0.02% -0.02689 6.00% -6 0.14% 0.238228 5.00% -5 0.08% 0.128781 -4 -0.31% -0.52131 4.00% -3 0.18% 0.300903 3.00% -2 -0.12% -0.21083 -1 -0.23% -0.38868 2.00% 0 -0.25% -0.41819 1 -0.58% -0.98443 1.00% 2 -0.33% -0.55853 0.00% 3 -0.19% -0.31502 4 0.15% 0.260049 -1.00% 5 -0.49% -0.83765 Day 6 -0.02% -0.03229 7 -0.21% -0.35841 AR(%) 8 -0.20% -0.33108 9 0.03% 0.047726 10 0.07% 0.125683 Acquiring Firm Cumulative Average Abnormal Returns in Friendly Transactions
AR(%)

Cumulative Abnormal Returns

0.1

0.05

CAR

-1 0

-95

-87

-63

-39

-79

-71

-55

-47

-31

-23

-119

-111

-0.05

-0.1 Day CAR

-103

49

-15

-7

10

-8

-4

-6

-2