Empirical corporate finance research analyzes the link between major corporate decisions and the shareholder value development of the respective companies.
Enhancing the welfare of shareholders is a fundamental and common objective of all firms and corporate managers are required to implement policies consistent with shareholder welfare. However, the financial literature shows that major corporate decisions are not associated with stock market gains to the respective companies. Especially, the mergers and acquisitions related literature shows that the returns to bidding firm shareholders are essentially zero when they pursue an acquisition. Due to these empirical results, there is an ongoing debate why so many value decreasing decisions occur and how the success of corporate actions is related to company specific internal characteristics and the firms’ external environment. Timo Gebken’s dissertation contributes to this debate.
Timo links the time series behavior of industry specific M&A activity to the shareholder wealth effects of the transactions. The majority of deals within an industry occur in very short time periods, so called industry merger waves. These industry merger waves are characterized by a fast consolidation process, which drastically changes the competitive environment for all firms within the industry. Timo analyzes how and why this rapidly changing environment influences the shareholder wealth effects of M&A activity. His results show that the gains associated with transactions change dramatically during an industry merger wave. At the beginning of an industryspecific consolidation process, mergers and acquisitions are accompanied by significantly positive returns to the merging firms and by positive intra-industry effects. In contrast, at the end of an industry merger wave, the shareholder wealth effects are significantly negative. To explore the reason for these results, Timo links the gains to the merging firms to the respective intra-industry effects and to key target characteristics. He shows that targets often possess very scarce resources towards the end of an industry merger wave. The corresponding increased competition for the “last”
targets leads to increasing competitive effects at the intra-industry level and to higher premiums paid by bidding firm shareholders. Due to these mechanisms, the gains associated with M&A activity decrease significantly as an industry-specific consolidation process continues.
Table of Contents
1 Introduction
1.1 Background and objective
1.2 Organization of the dissertation
2 Literature review
2.1 Motives of M&A transactions
2.1.1 Value-increasing motives
2.1.1.1 The productive efficiency hypothesis
2.1.1.2 The collusion hypothesis
2.1.1.3 The buying power hypothesis
2.1.2 Value-decreasing motives
2.1.2.1 The hubris hypothesis
2.1.2.2 Agency theories
2.1.2.3 Overvaluation theory
2.1.2.4 Competitive advantage theory
2.1.3 Summary
2.2 Aggregate and industry-specific merger waves
2.2.1 The time-series behaviour of M&A activity
2.2.2 Reasons of the wave pattern
2.2.2.1 Potential explanations of merger waves
2.2.2.1.1 Neoclassical explanations of merger waves
2.2.2.1.2 Behavioural explanations of merger waves
2.2.2.2 Neoclassical versus behavioural explanations of merger waves
2.2.3 Summary
2.3 The success of M&A transactions
2.3.1 The event study methodology
2.3.1.1 Outline of an event study
2.3.1.2 Estimation of abnormal returns
2.3.1.3 Hypotheses testing
2.3.1.3.1 Single hypotheses tests of means
2.3.1.3.2 Single hypotheses tests of medians
2.3.1.3.3 Tests of equality
2.3.2 Empirical results for the transaction success of the merging firms
2.3.3 Summary
2.4 The determinants of the transaction success
2.4.1 Relative size of the target
2.4.2 Absolute size of the bidder
2.4.3 Excess cash of the bidder
2.4.4 Financial leverage of the bidder
2.4.5 Diversification of the transaction
2.4.6 Method of payment
2.4.7 Valuation of the bidder
2.4.8 Organizational form of the target
2.4.9 Summary
2.5 Intra-industry effects of mergers and acquisitions
2.5.1 Sources of intra-industry effects
2.5.1.1 The influence of the acquisition motive on the returns to rivals
2.5.1.2 The acquisition probability hypothesis
2.5.2 Empirical results for the intra-industry effects of M&A transactions
2.5.3 Determinants of rival returns
2.5.3.1 Relatedness of the acquisition
2.5.3.2 Type of target
2.5.3.3 Method of financing
2.5.3.4 Size of the transaction and the bidder
2.5.3.5 Industry concentration
2.5.3.6 Summary
2.6 Summary
3 Abnormal returns within merger waves
3.1 Data
3.1.1 Data sources
3.1.2 Transaction data
3.1.3 Industry merger waves
3.1.3.1 Industry assignment
3.1.3.2 Wave identification process
3.1.3.3 Sample of deals within industry merger waves
3.2 Abnormal returns to bidders and rivals within merger waves
3.2.1 Methodology
3.2.2 Abnormal returns to bidders within different stages of merger waves
3.2.3 Abnormal returns to rivals within different stages of merger waves
3.3 Summary
4 The robustness of the wave effect
4.1 Bidding firm and deal characteristics in merger waves
4.1.1 Operationalization of deal and bidding firm characteristics
4.1.2 Comparison of bidding firm and deal characteristics
4.2 The robustness of the wave effect to bidding firms
4.2.1 The wave effect to bidders across subsamples of bids
4.2.2 Multivariate regressions of abnormal returns to bidders
4.3 The robustness of the wave effect to rivals
4.3.1 The wave effect to rivals across subsamples of bids
4.3.2 Multivariate regressions of abnormal returns to rivals
4.4 Summary
5 The explanation for the returns within merger waves
5.1 Transaction motives at different stages of merger waves
5.1.1 The changing importance of motives within merger waves
5.1.2 Conditions for an adequate research design
5.2 The competitive advantage theory and the wave effect
5.2.1 Course of investigation
5.2.2 Do only late wave bidders overpay?
5.2.2.1 Theoretical predictions of the competitive advantage theory
5.2.2.2 Empirical results
5.2.2.3 Summary
5.2.3 Why do only late wave bidders overpay?
5.2.3.1 Scarcity of assets and the valuation ratio
5.2.3.2 Methodological approach
5.2.3.3 Empirical results
5.2.3.4 Summary
5.3 Other merger-related theories and the wave effect
5.3.1 The hubris hypothesis and the wave effect to bidders
5.3.2 Agency-related problems at early and late wave stages
5.4 Summary
6 Conclusion
Research Objective and Core Themes
The dissertation investigates the dynamics of industry-specific merger waves, specifically focusing on how the timing of a deal within such a wave influences both the transaction success for the bidding firms and the response of industry competitors (rivals). The central research question examines how and why gains associated with M&A transactions change as an industry consolidation process progresses.
- Analysis of time-series determinants of M&A transaction success
- Evaluation of abnormal returns to bidders and rivals across different stages of merger waves
- Empirical testing of the competitive advantage theory within merger wave dynamics
- Investigation of the scarcity of target assets and its impact on bidder overpayment
- Comparison of bidding firm characteristics and deal motivations across early and late wave stages
Excerpt from the Book
2.1.1.1 The productive efficiency hypothesis
Managers of firms undertaking horizontal mergers and acquisitions often cite the existence of synergies as the main argument to justify a transaction. In the context of mergers and acquisitions, the term synergies refers to the ability to create a combination that is more profitable than the individual parts of the original firms.4
Gaughan (2002) states that the main types of synergies are cost-reducing operating synergies, revenue-enhancing operating synergies, and financial synergies. Cost-reducing operating synergies can be either a result of economies of scale or can be due to economies of scope. The term economies of scale refers to the decreases in per-unit costs that are due to an increase in the size of a company’s operations. It is reasonable that mergers and acquisitions of manufacturing firms are often motivated by the pursuit of scale economies. These firms often have high per-unit costs for low levels of output due to the high fixed costs of operating the manufacturing facilities. The term economies of scope refers to the reduction in total costs due to the ability of a firm to utilize one set of inputs to provide a broader range of products or services. An example is the use of the same equipment for various products.5
The merging firms may achieve revenue-enhancing operating synergies by the fusion of distinct attributes of the merger partners to generate a significant revenue growth. An example where revenue-enhancing operating synergies can be achieved is the merger between a “company with a strong distribution network merging with a firm that has products of great potential, but questionable ability to get them to the market.”6
Summary of Chapters
1 Introduction: This chapter provides the background and objectives, establishing the focus on the dynamics within industry-specific merger waves and outlining the dissertation's structure.
2 Literature review: This section reviews existing financial literature regarding M&A transaction motives, aggregate and industry-specific merger waves, and event study methodologies for measuring success.
3 Abnormal returns within merger waves: This chapter details the empirical methodology, including data sources and the wave identification process, and presents initial findings on abnormal returns to bidders and rivals across wave stages.
4 The robustness of the wave effect: This section analyzes whether changing deal and bidder characteristics explain the observed wave effects through subsample testing and multivariate regressions.
5 The explanation for the returns within merger waves: This chapter investigates theoretical explanations, specifically focusing on the competitive advantage theory, to explain why the timing of a deal determines shareholder wealth effects.
6 Conclusion: This final chapter synthesizes the main empirical findings and discusses implications for future research in capital markets and mergers and acquisitions.
Keywords
Merger waves, M&A transactions, Shareholder wealth, Abnormal returns, Competitive advantage theory, Event study, Industry consolidation, Transaction motives, Bidding firms, Rival firms, Asset scarcity, Corporate finance, Market timing, Valuation, Synergy.
Frequently Asked Questions
What is the primary focus of this dissertation?
The dissertation investigates how the timing of a merger announcement within an industry-specific consolidation process (a "merger wave") affects the financial success of the deal for both the bidding firm and its competitors.
What are the central themes of the work?
Key themes include the determinants of transaction success, the intra-industry effects of acquisitions, the validity of the competitive advantage theory, and the role of asset scarcity in explaining why bidders overpay late in a wave.
What is the core research objective?
The primary objective is to document a new determinant of M&A success—the time-series dimension of the merger wave—and to provide empirical evidence that timing is just as crucial as the cross-sectional characteristics of the firms involved.
What methodology does the author use?
The author employs standard event study methodology to measure abnormal returns and performs multivariate regression analysis to control for various deal and firm-specific characteristics, validating results across 17 identified industry merger waves.
What does the main body of the work cover?
The main body covers a comprehensive literature review, the identification and characterization of 17 industry merger waves in the 1990s, and an empirical analysis comparing shareholder returns at the beginning versus the end of these waves.
Which keywords define this research?
The research is characterized by terms such as merger waves, abnormal returns, competitive advantage theory, transaction motives, and industry consolidation.
Why do bidders often overpay towards the end of a merger wave?
The author argues that as an industry consolidates, potential targets with high-quality, scarce resources become rare. Bidders are often willing to pay a premium to acquire these targets to prevent rivals from gaining a competitive advantage.
What is the "wave effect" defined in this thesis?
The "wave effect" is the documented difference in abnormal returns observed at the beginning of a merger wave compared to those at the end of the wave, where gains significantly decline or turn negative as the consolidation process matures.
- Quote paper
- Dr Timo Gebken (Author), 2008, The Dynamics within Merger Waves, Munich, GRIN Verlag, https://www.grin.com/document/122448
