Mergers and Acquisitions: Shareholder Wealth Effects of Domestic, Cross-Border, and Cross-Continental Mergers and Acquisitions

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Master Thesis in Finance Mergers and Acquisitions

Shareholder wealth effects of domestic, cross-border, and cross-continental mergers and acquisitions

26 November 2009

Abstract
This study analyses the differences in short-term shareholder wealth effects of domestic, cross-border and cross-continental mergers and acquisitions (M&As). Differences between wealth effects of domestic and cross-border M&As are expected since companies in crossborder M&As face differences in the economic environment. Furthermore, larger differences are expected in cross-continental M&As due to larger differences in the economic environment.

In order to analyse differences in shareholder wealth effects an even study was conducted to measure the abnormal returns of bidders and targets around and before the M&A announcement. Hence, at the announcement the M&A plans become public and the wealth effects should be reflected in share prices. First, 637 bidders and 702 targets were selected out of a sample of 861 M&A announcements. Second, the Cumulative Average Abnormal Return (CAAR) was calculated to express the wealth effects. Last, the CAARs of domestic, cross-border, and cross-continental M&A announcements were compared.

For bidders this study did not found significant differences in wealth effects of domestic, cross-border, and cross-continental M&As. The wealth effect in domestic bids, however, was slightly higher than cross-continental and cross-border bids, possibly due to the complexity of cross-border deals. In contrast, this study has found interesting differences for targets. On the announcement day targets in cross-continental deals earned 17.27% abnormal returns, whereas targets in domestic and cross-border deals earned 8.84% and 9.14%, respectively. So, targets in cross-border deals get substantial larger wealth gains than targets in both domestic and cross-border deals. The results might support the theory that targets can create wealth by improving their corporate governance through M&As. The results also might indicate that bidders tend to pay high premiums in cross-continental deals.

Important to note, however, is that almost all cross-continental deals targeted US companies, which might have driven the results. Future research, therefore, should focus on targets of cross-continental deals outside the US in order to verify if the results of this study apply to all cross-continental targets or only to US targets.

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Table of Contents
Abstract ...................................................................................................................................... 1 Table of Contents ....................................................................................................................... 2 1. 2. Introduction ......................................................................................................................... 3 Literature Review................................................................................................................ 7 2.1 2.2 2.3 2.4 2.5 3. Motives ........................................................................................................................ 7 Wealth Effects: Bidders and Targets ........................................................................... 8 Wealth Effects: Domestic or Cross-Border ................................................................. 9 Profit Driver: Friendly or Hostile .............................................................................. 10 Profit Driver: Means of Payment............................................................................... 11

Data and Methodology ...................................................................................................... 12 3.1 3.2 Sample Selection and Data Sources .......................................................................... 12...
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