This bachelor thesis sets out to investigate whether the observed past and present effects of M&A deal announcements on target and acquirer cumulative abnormal returns (CARs) to shareholders, also occur on an industry-specific level in the U.S. Technology, Media & Telecommunications (TMT) industry, and over time by reviewing three distinct time frames between 2000 and the end of 2019. This thesis emphasizes “mega-deals”, which are M&A transactions with values greater than or equal to USD 500m.
The recentness of the data and the emphasis on deal-value and industry-specific M&A deals make these findings unique. The event study method is applied to examine the concrete effects that an event, an M&A deal announcement, exerts on acquiring and target firm stock returns. Hereby, the difference between the actual stock returns–which occur due to the event–and the expected stock returns is analyzed and subsequently tested for significance. The main and null hypothesis of this thesis is that M&A deal announcements have no effect on the average of the stock returns of acquiring and target firms.
A frequently studied area and old research question of corporate finance, ever since its initial inception in the 1960s, is the effect of mergers and acquisitions (M&As) on the wealth of shareholders of the acquiring and target companies. As recently as the early 2010s, a near-universal consensus amongst research and business press has existed, that M&As tend to generate little to no shareholder value for acquiring firms, while target shareholders incur significant returns. These findings draw on the theory of market efficiency and rational expectations to assume that such changes to the stock prices, abnormal returns (ARs), reflect the discounted value of expected future profits, i.e. cash-flows and rapidly price-in new publicly disclosed information, such as a merger announcement.
Since 2012, however, a novel strand of research has emerged which has observed these previously low ARs for acquiring shareholders becoming on average significantly positive for the first time in history on a global scale following the Great Financial Crisis (GFC). This is attributable to an ensuing overall improvement to corporate governance frameworks and M&A dealmaking. Markedly, this trend was later found to start reversing back to previous pre-GFC levels.
Table of Contents
1 Introduction
2 Literature Review
3 Data & Methodologies
3.1 Data
3.2 Methodology
3.2.1 General Setup
3.2.2 Estimation of Expected Returns
3.2.3 Estimation of Abnormal Returns
3.2.4 Testing of Hypotheses
4 Empirical Results
5 Discussion and Interpretation
5.1 Setup
5.2 Acquiring Shareholders
5.3 Target Shareholders
6 Conclusion
Research Objectives and Topics
This thesis investigates the impact of merger and acquisition (M&A) deal announcements on the wealth of shareholders in the U.S. Technology, Media & Telecommunications (TMT) sector. By conducting an event study across three distinct time frames between 2000 and 2019, the research aims to determine whether observed market-wide trends in cumulative abnormal returns (CARs) are present within this specific industry and how they have evolved over time, particularly for "mega-deals".
- Analysis of shareholder wealth effects (CARs) for acquiring and target companies in the U.S. TMT sector.
- Evaluation of "mega-deals" (transaction values USD 500m+) and their influence on stock returns.
- Application of the event study methodology to compare pre-GFC, post-GFC, and post-post-GFC periods.
- Investigation into the influence of regulatory changes, corporate governance, and synergy expectations on M&A performance.
Excerpt from the Book
3.2.4 Testing of Hypotheses
Having now estimated the ARs, CARs, and aggregate CARs over time and across all firm stocks, the testing of hypotheses can be conducted. Four distinct hypotheses are tested, of which the third and fourth are the main hypotheses of this thesis, at a significance level of 5%.
Hypothesis 1 (H0): CARi(τ1, τ2) = 0: Deal announcement has no effect on the average of the returns for each single firm stock during the event period L2.
Hypothesis 2 (H1): ARit = 0: Deal announcement has no effect on the returns for every firm stock on any single day during the event period L2.
Hypothesis 3 (H2): CARacq(τ1, τ2) = 0: Deal announcement does not affect the average of the returns for acquiring firms.
Hypothesis 4 (H3): CARtar(τ1, τ2) = 0: Deal announcement does not affect the average of the returns for target firms.
For the first hypothesis H0, the standardized cumulative abnormal returns (SCARs) are used as a test statistic (cf. Campbell et al., 1997, p.160.). This test statistic is illustrated in Equation 3.12.
Summary of Chapters
1 Introduction: Introduces the research question regarding the wealth effects of M&As on shareholders and outlines the thesis's focus on the U.S. TMT sector across three time periods.
2 Literature Review: Provides a comprehensive overview of historical and contemporary corporate finance literature concerning the impact of M&A announcements on stock returns.
3 Data & Methodologies: Details the criteria for the selected deal sample and explains the event study methodology, including the market model and hypothesis testing framework.
4 Empirical Results: Presents the calculated CARs and the statistical significance of the findings for acquiring and target firms across the analyzed time frames.
5 Discussion and Interpretation: Analyzes the empirical results, exploring potential explanations such as synergy expectations, competition, and corporate governance reforms.
6 Conclusion: Summarizes the key findings and contributions of the thesis, noting that post-GFC trends in the TMT sector partially diverge from broader market observations.
Keywords
Mergers and Acquisitions, M&A, TMT Sector, Corporate Finance, Stock Returns, Abnormal Returns, AR, Cumulative Abnormal Returns, CAR, Event Study, Mega-deals, Great Financial Crisis, GFC, Market Efficiency, Shareholder Wealth.
Frequently Asked Questions
What is the primary subject of this academic work?
The work examines the impact of M&A deal announcements on the stock returns of acquiring and target firms within the U.S. Technology, Media & Telecommunications (TMT) sector.
What are the core thematic fields covered?
The research focuses on corporate finance, specifically shareholder value creation, market efficiency, the impact of M&A mega-deals, and the influence of governance reforms.
What is the central research goal or question?
The goal is to investigate whether observed trends in cumulative abnormal returns (CARs) following M&A announcements, seen in the broader market post-GFC, are also applicable to the U.S. TMT industry over three distinct time periods.
Which scientific methodology is utilized?
The research employs an event study methodology as defined by MacKinlay (1997), using the market model to calculate abnormal returns and testing significance via standardized abnormal returns and CARs.
What topics are discussed in the main body?
The main body covers the selection of data, the methodological setup for calculating abnormal returns, empirical results for three time frames, and a detailed discussion interpreting these results through the lens of synergy expectations and regulatory impacts.
Which keywords best describe this study?
Key terms include M&A, TMT sector, event study, CARs, mega-deals, corporate governance, and shareholder wealth.
How does the TMT sector differ from the broader market in terms of M&A returns?
The findings suggest that the U.S. TMT sector shows unique characteristics where acquiring shareholders experience positive CARs in the post-post-GFC period, contradicting broader research that indicates a return to negative levels.
What role does the "mega-deal" classification play in the analysis?
Mega-deals (USD 500m+) are the primary focus because they historically represent a significant portion of M&A activity and have been shown in prior research to exhibit the most pronounced CAR shifts.
- Quote paper
- Simon Gaess (Author), 2021, Mergers & Acquisitions and Stock Returns in the US Technology, Media & Telecommunications Sector. How the Impact Has Changed Over Time, Munich, GRIN Verlag, https://www.grin.com/document/1127964
