The Birth Of Event Study Method

This paper is about two companies that went through same type of change (merger and acquisition) with different outcomes. Merger is combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity while Acquisition is the purchase of an asset or an entire company (Sherman, A. J., & Hart, M. A. (2005). Chapter 1: The Basics of Mergers and Acquisitions. In, Mergers & Acquisitions from A to Z. American Management Association International.).

Merging with another organization has downfalls of destroying wealth from the merger. Considering the buying price is important when merging, spending too much on the merger will impound the value after the merger. Some mergers do not create wealth so capital is lost through the merger. There is no guarantee of financial gain and every formula considered with focus, just as with an acquisition. The final decision dictated by the variables. One company merging with another company takes the debt and losses of those companies in the new formed company.

Through the cumulative abnormal returns (CARs) that a company receives from the merger, we were able to see the effects of second requests and complaints on the company’s stock price over time. This methodology of using event studies to gauge the effects of mergers and the antitrust agency involvement was first applied by Eckbo (1983), and most recently by Filson, Olfati, and Radoniqi (2015). The event studies used in both of these journals and the others mentioned within the review of literature give us a good understanding of how accurate event studies are for predicting the effects that second requests or complaints given out by antitrust agencies can have on merging firms and within their

Merger motives that are questionable on economic grounds are diversification, purchase of assets below replacement cost, and control. Managers often state that diversification helps to stabilize a firm's earnings and reduces total risk, hence benefits shareholders. Stabilization of earnings is certainly beneficial to a firm's employees, suppliers, customers, and managers. However, if a stock investor is concerned about earnings variability, he or she can diversify more easily than the firm can. Why should Firm A and Firm B merge to stabilize earnings when stockholders can merely purchase both stocks and accomplish the same thing? Further, we know that well-diversified shareholders are more concerned with a stock's market risk than with its total risk, and higher earnings instability does not necessarily translate into higher market risk.

Theoretically it is assumed that mergers improve the performance of the acquiring firm due to

Mergers and acquisitions occur because directors see benefits that could come from combining two or more businesses, which could improve the

Market price per share: should be bigger or equal after the merger, which often is not the case.

After a merger is announced, Arbs as they are known on Wall Street, typically buy shares of the target company and simultaneously bet against the acquirer’s stock, hoping to profit as the discount narrows. The funds can get stung in several ways. They can wager that an announced deal will close, only to see antitrust officials reject it. They also suffer paper losses when the discount on a deal they are betting on widens. Event-driven funds, which bet on mergers, spinoffs and other corporate shake-ups, fell 1.4% on average through October, putting them on track for their first losing year since 2011.

While some studies show there may be little or no improvements in the post acquisiton operating performance of merged banks, M&As do create value. This is observed by the positive or negative reactions of stock prices during M&A announcements (Isa & Yap, 2004) (Campa, 2004) (Drymbetas & Kyriazopoulos, 2014). Most studies find that cumulative abnormal returns occur in the days following or prior to the announcement date (Andrade et al., 2001).

However, in some cases, consensus may not be reached. Then there are different tactics implemented by acquirer firm. Acquirer can make a tender offer. It means that acquirer goes directly to the shareholders of targeted company and buys their shares in return for some premium over the current market price. Before tender offer, there is asymmetric information between parties. Shareholders require a premium because they are informed. Perception to the targeted company in the market changes as fast as possible. We conclude that it is likely to see an overbidding in a hostile merger rather than a friendly merger. The reason is that the acquiring firm may inevitably pay higher premiums in order to gain at least 51% of target firm’s shares and shareholders can be convinced to sell their shares if the target’s management notified them about not to sell.

It is thought that when firms merge, the price paid by the acquiring firm should be fair value, because that firm is going to invest rationally. Yet, under rational investment, the shareholders of the acquired firm would never sell. For them, the uncertainty of new ownership would reduce the value of the holding. In order to accommodate for cashing out "early", the shareholders of the acquired company must be compensated. The acquiring firm therefore must pay an acquisition premium in order to entice the shareholders of the takeover target. The acquisition premium will depend on the specifics of the deal and the companies involved, where the industry is in the business cycle and whether or not the takeover is hostile (Milano, 2011).

For example the mega merger between Hewlett Packard and Compaq shown stock markets reacting negatively to the announcement with shares in both companies collapsing after just two days. HP showed a decline of 21.5% and Compaq showing a decline of 15.7%.

a) b) c) d) e) Definition of mergers & acquisitions.............................................................................................3 Classification of mergers & acquisitions......................................................................................5 The merger & acquisition process ................................................................................................6 Why do firms engage in merger & acquisition transactions? ...................................................8 The development of mergers & acquisitions.............................................................................10

As we can see on attached charts - Market was not too sure about this merger (“On paper, the deal has much to commend it, many outsiders say”. But thorny issues remain, including how to accommodate the strains between consultants and auditors, potential conflicts of interest involving important clients and even the delicate matter of choosing a new name. If the negotiators are not careful, fallout could haunt the combined firm for years to come.) From the time when merger plans were made public Shares of

“Mergers is the area of corporate finances, management and strategy application when two organizations join forces to become a new business, usually with a new name. Merger is an important business decision and every decision made in a business has financial implications” (Ross, 2013). In other words, adhering to the research, a corporate financial decision on merger involves the use of corporate funds.