Abstract:

Mergers and acquisitions (M&A) are an important economic phenomenon. Much of the prior research on M&A focuses on studying market returns at the time of acquisition announcements, particularly for bidders. In general, event studies of successful mergers report that targets of takeover attempts achieve positive and significant excess returns around the announcement dates of the takeovers. These gains are material and significant, and range between 10 and 30%, despite variations in the observation period, the type of deal or the sample composition.
However, not all M&A are finalized. In fact a large number of announced transactions are subsequently withdrawn. For instance, SDC reports that more than 2000 announced transactions failed between 1985 and 1995. Surprisingly, the literature on these failed bids, and their consequences, remains relatively limited. The objective of the present study is to contribute to our understanding of this particular phenomenon using a sample of failed M&A between 2000 and 2005. Specifically, we look at the targets’ performance from the announcement of the acquisition proposal to the date of withdrawal or termination, and investigate, among other issues, whether the initial excess returns earned by these firms dissipate by the time of the termination. To do so, we examine the determinants of the stock price performance, around both dates, such as the type of the offer, the method of payment, whether the transaction is focused or not, relative size, and other variables related to the transaction itself. We also examine whether the documented effects vary according to the party that terminated the transaction. One main contribution of our study is to control for corporate governance variables that might affect the outcome of M&A transactions, including board independence, compensation and takeover defences in the target firm. We also extend our analysis to assess the determinants of success of M&A, by examining whether and how targets of failed takeover attempts are subsequently, and successfully, acquired.

Keywords:

mergers and acquisitions, cancelled mergers, agency theory.