Shortterm Performance of Acquiring Firms

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Short-term Performance of Acquiring Firms
Fay Xu Jad Daou Rajesh Prashad Rita
Evdokimova Rami Jurdi
BUSI 4500 April 8, 2005
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Agenda

• Hypothesis
• Data Source
• Methodology
• Findings
• Conclusion

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Research Question and Hypothesis

• Research Question Do acquiring firms exhibit
  abnormal returns at announcement date?
• H1 -- Acquiring firms securities exhibit
  abnormal returns at announcement date.
• H2 -- Acquiring firms using cash as MOP
  experience positive abnormal returns (Bidding
  firms).
• H3 -- Acquiring firms using stock as MOP
  experience negative abnormal returns (Bidding
  firms).
• H4 -- A public firm acquiring a private firm will
  experience positive abnormal return

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Data Source

• Dunton Tower
• CFRMC
• Stock Guide
• National Library of Canada
• MA Directory

• Carleton Library Database
• Factiva
• Mergent
• Other
• Yahoo Finance

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Methodology

• Selected 75 firms listed on TSX
• Firms made a merger announcement in 2001
• Ignored foreign acquisitions and divestitures
• No industry bias
• Returns were calculated from 15 days prior and 15
  days after announcement date
• Compared each firms return to that of TSX

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Methodology Abnormal Returns (Univariate test
for H1)

• Found abnormal returns for each firm from t-15
  to t15
• ARijRij-E(r)
• Calculated the average abnormal returns per day
• Tested for significance (at t0)

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Methodology Cash abnormal Returns (Univariate
test for H2)

• Selected only cash acquisitions
• Calculated the average abnormal returns per day
• ARijRij-E(r)
• Tested for significance

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Methodology Stock Abnormal Returns (Univariate
test for H3)

• Selected stock acquisitions
• Calculated the average abnormal returns
• ARijRij-E(r)
• Tested for significance

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Methodology Cash Stock Abnormal Returns
(Univariate)

• Selected only cash stock acquisitions
  (combinations)
• Calculated the average abnormal returns per day
• ARijRij-E(r)
• Tested for significance

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Methodology Private Firm Abnormal Returns
(Univariate test for H4)

• Selected only private firm acquisitions
• Calculated the average abnormal returns per day
• ARijRij-E(r)
• Tested for significance

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Methodology Public Firms Abnormal Returns
(Univariate)

• Selected only public firm acquisitions
• Calculated the average abnormal returns per day
• ARijRij-E(r)
• Tested for significance

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Methodology Cumulative Abnormal Return (CAR)
Regression

• Why not abnormal return regression?
• Leakages and delays occur in the market
• CAR (-3 to 3)
• Markets are not perfectly efficient
• Controlled for
• Relative size of the deal
• Industry of the acquiring firm
• Size of acquiring firm (Market Capitalization)

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CAR Regression Result

• Cash is insignificant relative to stock and
  combination at all levels
• Stock was found to be significant at 10 and 5
  levels
• Target firm being Private was found to be
  insignificant at all levels

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Findings

• H1 Univariate corroborated
• bidding firms did exhibit positive abnormal
  returns at t0 (10 significance)
• H2 CAR inconsistent
• Cash MoP was not found to be significant relative
  to Stock and Combination
• H3 CAR corroborated
• Stock MoP was found to be significant relative to
  Cash and Combination
• H4 CAR inconsistent
• Acquiring a Private/Public firm did not
  significantly affect abnormal returns of the
  acquiring organization

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Conclusion

• Cash was insignificant which was contradictory to
  the majority of the literature (Wansley et al,
  1983)
• Stock was negatively significant which
  corroborates the literature (Travlos, 1991)
• Private target was insignificant which was
  contradictory to the literature (Travlos et al,
  1991)