The third column shows that abnormal percentage returns for bidders have been positive for the entire sample period and for each of the individual subperiods—a result similar to that for bidders and targets combined. The fourth column indicates aggregate dollar losses, suggesting that large mergers did worse than small ones. The time pattern for these aggregate dollar losses to bidders is presented in Figure 29.3 . Again, the large losses occurred from 1998 to 2001, with the greatest loss in 2000. Figure 29.3 Yearly Aggregate Dollar Gain or Loss for the Shareholders of Acquiring Firms
Let’s fast-forward a few decades and imagine that you are the CEO of a company. In that position you will certainly be faced with potential acquisitions. Does the evidence in Table 29.5 and Figure 29.3 encourage you to make acquisitions or not? Again, the evidence is ambiguous. On the one hand, you could focus on the averages in column 3 of the table, likely increasing your appetite for acquisitions. On the other hand, column 4 of the table, as well as the figure, might give you pause. Although the evidence just presented for both the combined entity and the bidder alone is ambiguous, the evidence for targets is crystal clear. Acquisitions benefit the target’s stockholders. Consider the following chart, which shows the median merger over different periods in the United States: 19 The premium is the difference between the acquisition price per share and the target’s pre-acquisition share price, divided by the target’s pre-acquisition share price. The average premium is quite high for the entire sample period and for the various subsamples. For example, a target stock selling at $100 per share before the acquisition that is later acquired for $142.1 per share generates a premium of 42.1 percent. Clearly, stockholders of any firm trading at $100 would love to be able to sell their holdings for $142.1 per share. Though other studies may provide different estimates of the average premium, all studies show positive premiums. Thus, we can conclude that mergers benefit the target stockholders. This conclusion leads to at least two implications. First, we should be somewhat skeptical of target managers who resist takeovers. These managers may claim that the target’s stock price does not reflect the true value of the
company. Or they may say that resistance will induce the bidder to raise its offer. These arguments could be true in certain situations, but they may also provide cover for managers who are simply scared of losing their jobs after acquisition. Second, the premium creates a hurdle for the acquiring company. Even in a merger with true synergies, the acquiring stockholders will lose if the premium exceeds the dollar value of these synergies. Managers of Bidding Firms The preceding discussion was presented from the stockholders’ point of view. Because, in theory, stockholders pay the salaries of managers, we might think that managers would look at things from the stockholders’ point of view. However, it is important to realize that individual stockholders have little clout with managers. For example, the typical stockholder is simply not in a position to pick up the phone
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