EXHIBIT 3.2 Comparison of Research Approaches Regarding the Profitability of M&A
| Strengths | Weaknesses | |
|---|---|---|
| Market-based returns to shareholders (event studies) | A direct measure of value created for investors.A forward-looking measure of value creation. In theory stock prices are the present value of expected future cash flows. | Requires significant assumptions about the functioning of stock markets: efficiency, rationality, and absence of restrictions on arbitrage. Research suggests that for most stocks these are not unreasonable assumptions, on average and over time.Vulnerable to confounding events, which could skew the returns for specific companies at specific events. Care by the researcher and law of large numbers deal with this. |
| Accounting studies: returns estimated from reported financial statements | Credibility. Statements have been certified. Accounts have been audited.Used by investors in judging corporate performance. An indirect measure of economic value creation. | Possibly noncomparable data for different years. Companies may change their reporting practices. Reporting principles and regulations change over time.Backward-looking.Ignores value of intangible assets.Sensitive to inflation and deflation because of historic cost approach.Possibly inadequate disclosure by companies. Great latitude in reporting financial results.Differences among companies in accounting policies adds noise.Differences in accounting principles from one country to the next make cross-border comparison difficult. |
| Surveys of managers | Yields insights into value creation that may not be known in the stock market.Benefits from the intimate familiarity with the actual success of the acquisition. | Gives the perspectives of managers who may or may not be shareholders, and whose estimates of value creation may or may not be focused on economic value.Recall of historical results can be hazy, or worse, slanted to present results in the best light.Typically surveys have a low rate of participation (2–10%) that makes them vulnerable to criticisms of generalizability. |
| Clinical research (case studies) | Objectivity and depth in reconstructing an actual experience.Inductive research. Ideal for discovering new patterns and behaviors. | Ill-suited to hypothesis testing because the small number of observations limits the researcher’s ability to generalize from the case(s).The research reports can be idiosyncratic making it difficult for the reader to abstract larger implications from one or several reports. |
Source: Author’s analysis.
FINDINGS BASED ON THE ANALYSIS OF MARKET-BASED RETURNS TO SHAREHOLDERS
Event studies yield insights about market-based returns to target firm shareholders, buyers, and a combination of both.
Returns to Target Firms
Target firm shareholders enjoy returns that are significantly and materially positive. Exhibit 3.3 summarizes the findings of 25 studies, which reveal returns that are material and significant, despite variations in time period, type of deal (merger vs. tender offer), and observation period. In short, the M&A transaction delivers a premium return to target firm shareholders.
Returns to Buyer Firms
The pattern of findings about market-based returns to buyer firms’ shareholders is more problematical.
There are 22 studies that report negative returns with 14 of the 22 significantly negative (see Exhibit 3.4). The significantly negative returns vary between 1 and 4 percent.
There are 32 studies (see Exhibit 3.5) that report positive returns—23 of these report significantly positive returns.
The studies of returns to buyer firm shareholders around the time of announcement are distributed with a slight positive bias: 26 percent (14) show value destruction (significantly negative returns); 31 percent (17) show value conservation (insignificantly different from zero): and 43 percent (23) show value creation (positively significant returns).EXHIBIT 3.3 Summary of Shareholder Return Studies for M&A: Returns to the Target Firm ShareholdersStudyCumulative Abnormal Returns (% or avg$/acq)Sample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesLangetieg (1978)+10.63%*1491929–1969(–120,0)71.6%Mergers; uses effective date as event date.Bradley, Desai, Kim (1988)+31.77%*2361963–1984(–5,5)95%Tender offers only; subperiod data available for 7/63–6/68, 7/68–12/80, 1/81–12/84; acquirer returns have increased from +19% to +35% over time.Dennis, McConnell (1986)+8.56%*761962–1980(–1,0)70%Jarrell, Poulsen (1989)+28.99%*5261963–1986(–20,10)N/ATender offers only.Lang, Stulz, Walkling (1989)+40.3%*871968–1986(–5,5)N/ATender offers only.Franks, Harris, Titman (1991)+28.04%*3991975–1984(–5,5)N/AMergers and tenders offers; segment data available on means of payment and competition.Servaes (1991)+23.64%*7041972–1987(–1,close)N/AMergers and tender offers; segment data by payment method.Bannerjee, Owers (1992)+$137.1 MM*331978–1987(–1,0)85%White knight bids.Healy, Palepu, Ruback (1992)+45.6%*501979–1984(–5,5)N/ALargest U.S. mergers during period.Kaplan, Weisbach (1992)+26.9%*2091971–1982(–5,5)94.7%Mergers and tender offers.Berkovitch, Narayanan (1993)+$130.1 MM*3301963–1988(–5,5)95.8%Tender offers.Smith, Kim (1994)+30.19%* +15.84%*1771980–1986(–5,5) (–1,0)96.0% 91.3%Successful and unsuccessful tender offers.Schwert (1996)+26.3%*6661975–1991(–42,126)N/AMergers, tenders offers; segment data available for various transaction attributes.Loughran, Vijh (1997)+29.6%* merger +126.9%* tender +47.9* combined419 1351970–1989(–2,1,250)N/AFive-year postacquisition returns; segment data also available on form of payment.Maquieira, Megginson and Nail (1998)+41.65%* conglomerate +38.08% * nonconglomerate47 551963–1996(–60,60)61.8% 83.0%Study of returns for conglomerate and nonconglomerate stock-for-stock mergers.Eckbo, Thorburn (2000)+7.45%*3321964–1983–40,0)N/ACanadian