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Given the fact that mergers and acquisitions take place under conditions of uncertainty, it
is not surprising that not all business combinations are successful. The success of a
merger depends on whether the two firms can achieve economies of scale. Past studies show
that diversification for other reasons tends to be less successful, but successful firms that
combine businesses can benefit from scale economies. The event study methodology has been
the predominant method used to measure share price responses to merger or
takeover announcements, and most studies suggest that takeovers create shareholder wealth.
Jensen (2006) suggests that the market for corporate control has generated large benefits of
around $535 bn to event firms' shareholders in approximately 50 largest US takeovers in the
previous four years. Though some prior studies also suggested that takeovers have negative
effects, recent studies have documented primarily positive outcomes. Therefore, the results
are inconclusive. This is perhaps because those studies have not separately focused either
on successful or unsuccessful takeover effects. Thus, the existing evidence still does not
resolve the issue as to whether takeovers benefit shareholders.
Some past studies, e.g., Jensen and Ruback (1983), Jarrell et al. (1988), Datta et al. (1992), Andrade et al. (2001), and Bruner (2002) investigated the takeover activities in the US
stock market and documented that shareholders of the target firms gain significantly
positive abnormal returns despite variations in the time period, type of acquisition (mergers vs.
tender offers) and observation period. Similarly, recent studies provided additional
evidence supporting the previous results; for example,
Santos et al. (2003) found that significant
wealth gains accrue to the shareholders of foreign target firms regardless of the type of
acquisition; Campa and Hernando (2004) suggested that the target firm's shareholders receive a
significant cumulative abnormal return of 9% for mergers. |
