Revaluation of targets and the method of payment - evidence from European unsuccessful M&A deals

Abstract

The purpose of this thesis is to investigate the relation between the method of payment and valuation effects for targets in withdrawn European M&A deals. Few studies examine shareholders wealth effects when deal cancellation is announced; however, most of these studies either focus only on bidder shareholders, date back to the 80s or focus exclusively on the US market. This thesis aims to fill in this gap, contributing to the literature on signalling through method of payment and revaluation of targets in unsuccessful M&As. The study follows closely a recent study conducted by Malmendier et al. (2012) in the US market.

The data employed in this thesis is sourced from Securities Data Company (SDC) Mergers and Acquisitions database. The sample consists of unsuccessful M&A deals taken place in 17 European countries over the period of 1990-2011. The final sample consists of 63 unsuccessful deals, including 22 cash- and 21 stock-, 13 hybrid- and 7 other-payment deals. Market reactions at bid announcements and withdrawals are measured by following event study methodology. Also, OLS and logistic regressions are conducted to explore the determinants of target revaluation in unsuccessful merger proposals.

The results provide support for cash bids signalling positive private information about the true value of the target resulting in permanent revaluation of the company's stock. There is insufficient evidence to conclude that the observed cash effect is driven by future merger activity or by party cancelling the bid. Also, no support is found for alternative interpretation of the phenomenon, where the observed positive target revaluation in unsuccessful cash-financed deals is a product of "undermanagement" rather undervaluation, inducing better operational performance of the target triggered by disciplinary pressure of the bid and reflected in target's higher leverage ratio after bid failure.