sEvalEffect(25p) - Assessing M&A effectiveness Lecture...

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Assessing M&A effectiveness
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Lecture outline Do M&As add value? Ways to measure effectiveness Statistical evidence
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Is M&A good for the economy? We’ve already discussed several perspectives on whether M&As add value The Chicago School argument Markets are efficient Whenever markets aren’t efficient, some mechanism arises to combat inefficienty M&A are one such mechanism The Alternative M&As are games for managers to occupy their time But none of these give us a way to balance the costs and benefits of M&A activity
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Ways to measure effectiveness Do M&As add value? Empirically, we can measure the effect on shareholder wealth Event Study Methodology Compare stock price the day before the announcement with the price the day after Problem 1 - information leakage Solution: Look at a window around the announcement date Problem 2 - market effect Solution: Compare performance to the market
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Stock Prices Stock Prices vs TSE 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 12/31/97 1/15/98 1/29/98 2/12/98 2/26/98 3/12/98 3/26/98 4/9/98 4/24/98 5/8/98 5/25/98 6/8/98 Date Price 0 1000 2000 3000 4000 5000 6000 7000 8000 AEC Amber TSE
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Market model method Estimate the return compared to the market This is the most widely used method because it takes account of both risk of the market and the mean returns jt mt t j jt R R ε β α + + = mt t j jt jt R R CAR β α ˆ ˆ - - =
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Example Cumulative Abnormal Returns: Target
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Example Cumulative Abnormal Returns: Bidder
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CAR example: Amber Cumlative abnormal returns (market model method) -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 -40 -30 -20 -10 0 10 20 30 40 AMB AEC
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