Mergers are among the largest and most disruptive events in a corporation’s lifetime. The proper assessment of their value implications has been of foremost interest to policy-makers and academic researchers alike. Much of the research on mergers and acquisitions aims to assess which transactions create, or destroy, how much shareholder value, including a recent debate about “massive wealth destruction” through mergers (Moeller et al. (2005)).
Empirically, the measurement of the causal effect of mergers is challenging. The standard approach in the literature is to use stock-market reactions to merger announcements and to interpret the combined change in target and acquirer values as the expected total value created. This approach builds on a number of assumptions, including the assumptions that markets are efficient, that mergers are unanticipated and unlikely to fail, and that merger bids reveal little about the stand-alone values of the merging entities. Various studies document a small positive combined announcement return of targets and bidders, and interpret this finding as evidence in favor of value creation.
In our recent NBER working paper, Cash Is King — Revaluation after Merger Bids, my co-authors (Marcus Opp of UC Berkeley and Farzad Saidi of New York University) and I argue that a large portion of the announcement effect reflects target revaluation rather than value created through mergers, and that this portion varies with the type of payment: Targets of cash offers are revalued by +15%, but there is no revaluation of stock targets. We also find significant negative revaluation effects for stock bidders, but no effect for cash bidders. Our results imply that the widespread use of announcement effects significantly distorts the assessment of mergers.