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The pattern of findings about market-based returns to buyer firms’ shareholders is more problematical.

 There are 22 studies that report negative returns with 14 of the 22 significantly negative (see Exhibit 3.4). The significantly negative returns vary between 1 and 4 percent.

 There are 32 studies (see Exhibit 3.5) that report positive returns—23 of these report significantly positive returns.

 The studies of returns to buyer firm shareholders around the time of announcement are distributed with a slight positive bias: 26 percent (14) show value destruction (significantly negative returns); 31 percent (17) show value conservation (insignificantly different from zero): and 43 percent (23) show value creation (positively significant returns).EXHIBIT 3.3 Summary of Shareholder Return Studies for M&A: Returns to the Target Firm ShareholdersStudyCumulative Abnormal Returns (% or avg$/acq)Sample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesLangetieg (1978)+10.63%*1491929–1969(–120,0)71.6%Mergers; uses effective date as event date.Bradley, Desai, Kim (1988)+31.77%*2361963–1984(–5,5)95%Tender offers only; subperiod data available for 7/63–6/68, 7/68–12/80, 1/81–12/84; acquirer returns have increased from +19% to +35% over time.Dennis, McConnell (1986)+8.56%*761962–1980(–1,0)70%Jarrell, Poulsen (1989)+28.99%*5261963–1986(–20,10)N/ATender offers only.Lang, Stulz, Walkling (1989)+40.3%*871968–1986(–5,5)N/ATender offers only.Franks, Harris, Titman (1991)+28.04%*3991975–1984(–5,5)N/AMergers and tenders offers; segment data available on means of payment and competition.Servaes (1991)+23.64%*7041972–1987(–1,close)N/AMergers and tender offers; segment data by payment method.Bannerjee, Owers (1992)+$137.1 MM*331978–1987(–1,0)85%White knight bids.Healy, Palepu, Ruback (1992)+45.6%*501979–1984(–5,5)N/ALargest U.S. mergers during period.Kaplan, Weisbach (1992)+26.9%*2091971–1982(–5,5)94.7%Mergers and tender offers.Berkovitch, Narayanan (1993)+$130.1 MM*3301963–1988(–5,5)95.8%Tender offers.Smith, Kim (1994)+30.19%* +15.84%*1771980–1986(–5,5) (–1,0)96.0% 91.3%Successful and unsuccessful tender offers.Schwert (1996)+26.3%*6661975–1991(–42,126)N/AMergers, tenders offers; segment data available for various transaction attributes.Loughran, Vijh (1997)+29.6%* merger +126.9%* tender +47.9* combined419 1351970–1989(–2,1,250)N/AFive-year postacquisition returns; segment data also available on form of payment.Maquieira, Megginson and Nail (1998)+41.65%* conglomerate +38.08% * nonconglomerate47 551963–1996(–60,60)61.8% 83.0%Study of returns for conglomerate and nonconglomerate stock-for-stock mergers.Eckbo, Thorburn (2000)+7.45%*3321964–1983–40,0)N/ACanadian targets only.Leeth, Borg (2000)+13.27%*721919–1930–40,0)N/AMulherin, Boone (2000)+21.2%*3761990–1999(–1,+1)N/AMulherin (2000) DeLong (2001)+10.14%* +16.61%*202 2801962–1997 1988–1995(–1,0) (–10,1)76% 88.6%A sample of incomplete acquisitions. Studied deals where at least one party is a bank.Houston et al. (2001)+15.58% * (1985–90) +24.60%* (1991–96) +20.80%* (all)27 37 641985–1996(–4,1)N/ADeals in which both parties are banks.Beitel et al. (2002)+10.48%*981985–2000(–1,0)53%Sample of European bank mergers.Kuipers, Miller, Patel (2003)+23.07%*1811982–1991(–1,0)N/AU.S. targets of foreign acquirers.Renneboog, Goergen (2003)+9.01%*1361993–2000(–1,0)N/AEuropean transactions.Billett, King, Mauer (2003)+22.15%*2651979–1997(–1,0 month)N/AUnless otherwise noted, event date is announcement date of merger/bid.*Significant at the 0.95 confidence level or better.EXHIBIT 3.4 Studies Reporting Negative Returns to AcquirersStudyCumulative Abnormal ReturnsSample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesLangetieg (1978)–1.61%1491929–1969(–120,0)47.6%Mergers; uses effective date as event date.Dodd (1980)–1.09%*601970–1977(–1,0)N/AMergers only. Daily data.successful–1.24%*unsuccessful66Asquith, Bruner, Mullins (1987)–0.85%*3431973–1983(–1,0)41%Varaiya, Ferris (1987)–2.15%* –3.9%*96 961974–1983 1974–1983(–1,0) (–20,80)N/A 42%Morck, Shleifer, Vishny (1990)–0.70%3261975–1987(–1,1)41.4%Measured return by comparing change in bidder market value to market value of target’s equity.Franks, Harris, Titman (1991)–1.45%3991975–1984(–5,5)N/AMergers and tenders offers; segment data available on means of payment and competition.Servaes (1991)–1.07%*3841972–1987(–1,close)N/AMergers and tender offers; segment data by payment method.Jennings, Mazzeo (1991)–0.8%*3521979–1985(–1,0)37%Bannerjee, Owers (1992)–3.3%*571978–1987(–1,0)21%White knight bids.Byrd, Hickman (1992)–1.2%**1281980–1987(–1,0)33%Healy, Palepu, Ruback (1992)–2.2%501979–1984(–5,5)N/A50 largest U.S. mergers during period.Kaplan, Weisbach (1992)–1.49%*2711971–1982(–5,5)38%Mergers and tender offers.Berkovitch, Narayanan (1993)–$10 MM3301963–1988(–5,5)49.4%Tender offers.Sirower (1994)–2.3%*1681979–1990(–1,1)35%Eckbo, Thorburn (2000)–0.30%3901964–1983(–40,0)N/AU.S. acquirers of Canadian targets.Mulherin, Boone (2000)–0.37%2811990–1999(–1,+1)N/AMitchell, Stafford (2000)–0.14%*† –0.07%366 3661961–1993(–1,0)N/AFama and French three–factor model, applied to monthly returns.Walker (2000)–0.84%*‡ –0.77%278 2781980–1996(–2,+2)41.4% 46.4%DeLong (2001)–1.68%*280(1988–1995)(–10,1)33.6%Deals in which at least one party is a bank.Houston et al. (2001)–4.64%* (1985–1990)27(1985–1996)(–4,1)N/ADeals in which both parties are banks.–2.61% (1991–1996)37–3.47%* (all)64Ghosh (2002)–0.96%1,190(1985–1999)(–5,0)N/AKuipers, Miller, Patel (2003)–0.92%*138(1982–1991)(–1,0)N/AForeign acquirers of U.S. targets.Unless otherwise noted, event date is announcement date of merger/bid.*Significant at the 0.95 confidence level or better.†Top return is based on an equal-weighted benchmark portfolio. Bottom return is based on a value-weighted benchmark portfolio.‡Top return is a return adjusted for market average returns. Bottom return is adjusted for return on a matched firm.EXHIBIT 3.5 Studies Reporting Positive Returns to AcquirersStudyCumulative Abnormal ReturnsSample SizeSample PeriodEvent Window (Days)% Positive ReturnsNotesDodd, Ruback (1977)+2.83%* successful1241958–1978(0,0)N/ATender offers only. Monthly data.+0.58% unsuccessful48Kummer, Hoffmeister (1978)+5.20%*successful171956–1970(0,0)N/ATender offers only. Monthly data.Bradley (1980)+4.36%* successful881962–1977(–20,+20)N/ATender offers only. Daily data.–2.96% unsuccessful46Jarrell, Bradley (1980)+6.66%*881962–1977(–40,+20)N/ATender offers only. Daily data.Bradley, Desai, Kim (1982)+2.35* successful1611962–1980(–10,+10)N/ATender offers only. Daily data.Asquith (1983)+0.20% successful1961962–1976(–1,0)N/AMergers only. Daily data.+0.50% unsuccessful89Asquith, Bruner, Mullins (1983)+3.48%* successful1701963–1979(–20,+1)N/AMergers only. Daily data.+0.70% unsuccessful41Eckbo (1983)+0.07% successful1021963–1978(–1,0)N/AMergers only. Daily data.+1.20%* unsuccessful57Malatesta (1983)+0.90% successful2561969–1974(0,0)N/AMergers only. Monthly data.Wier (1983)+3.99% unsuccessful161962–1979(–10, cancellation date)N/AUnsuccessful mergers only. Daily data.Dennis, McConnell (1986)–0.12% (–1,0)901962–1980(–1,0)52%+3.24% (–6,+6)*Jarrell, Brickley, Netter (1987)+1.14%*4401962–1985(–10,5)N/ATender offers only; subperiod data available for 1962–69, 70–79, 80–85; acquirer returns have decreased from +4% to –l%Sicherman, Pettway (1987)+4.026%* related +0.047% unrelated49 981983–1985(–10,+10)N/ACompared returns to buyers of divested assets in related and unrelated industries.Bradley, Desai, Kim (1988)+ 1%*2361963–1984(–5,5)47%Tender offers only; subperiod data available for 7/63–6/68, 7/68–12/80, 1/81–12/84; acquirer returns have decreased from +4% to –3% over time.Jarrell, Poulsen (1989)+0.92%*4611963–1986(–5,5)N/ATender offers only.Lang, Stulz, Walkling (1989)0%871968–1986(–5,5)N/ATender offers only.Loderer, Martin (1990)+1.72%* 1966–1968 +0.57%* 1968–1980970 3,4011966–1984(–5,0)N/AMergers and tenders offers; segment data available on size of acquisition.–0.07% 1981–1984801Smith, Kim (1994)+0.50% –0.23%1771980–1986(–5,5) (–1,0)49.2% 76.2%Successful and unsuccessful tender offers.Schwert (1996)+1.4%6661975–1991(–42,126)N/AMergers, tenders offers; segment data available for various transaction attributes.Maquieira et al. (1998)+6.14%* nonconglomerate deals551963–1996(–60,60)61.8% 36.2%Study of returns in conglomerate and nonconglomerate stock-for-stock deals.–4.79% conglomerate47Lyroudi, Lazardis, Subeniotis (1999)0%501989–1991(–5,5)N/AInternational acquisitions by European and Japanese firms.Eckbo, Thorburn (2000)+1.71%*1,2611964–1983(–40,0)N/ACanadian acquirers of Canadian targets.Leeth, Borg (2000)+3.12%*4661919–1930(–40,0)N/AKohers, Kohers (2000)1.37%* cash deals 1.09%* stock961 6731987–1996(0,1)N/ASample of mergers among high-tech firms.1.26% whole sample1,634Mulherin (2000)+0.85%*1611962–1997(–1,0)49%Sample of incomplete acquisitions.Floreani, Rigamonti (2001)+2.63%*561996–2000(–5,+5)N/ASample of European insurance company mergers.Kohers, Kohers (2001)+0.92%*3041984–1995(–1,0)N/ASample of technology mergers.Beitel et al. (2002)+0.06%981985–2000(–1,0)53%Sample of European bank mergers.Fuller, Netter, Stegemoller (2002)+1.77%* all +2.74%* 1st time bidders3,1351990–2000(–2, +2)N/ABillett, King, Mauer (2003)+0.15%8311979–1997(–1,0 month)N/AMoeller, Schlingemann, Stulz (2003)+ 1.13%* all +1.496%* private –1.020%* public12,0231980–2001(0,36 months)N/ATested the difference in bidder’s returns at acquiring private company, public company, or subsidiary of public company.+2.003%* subsidiaryRenneboog, Goergen (2003)+0.70%*1421993–2000(–1,0)N/AEuropean transactions.Unless otherwise noted, event date is announcement date of merger/bid.*Significant at the 0.95 confidence level or better.

 There are 16 studies that consider returns well after the consummation of the transaction (see Exhibit 3.6). Eleven of these studies report negative and significant returns. Caves (1989) infers that these findings are due to “second thoughts” by bidders’ shareholders, and/or the release of new information about the deal. But interpretation of longer-run returns following the transaction is complicated by possibly confounding events that have nothing to do with the transaction. Consistent with this, two streams of recent research suggest plausible explanations for the postmerger declines. The first is overvaluation of the buyer’s shares; Shleifer and Vishny (2001) suggest that buying firms tend to acquire with stock when they believe their shares are overvalued. Thus, the postmerger decline is not a reflection of the success of the merger, but rather a correction in the market’s valuation of the buyer. The second is the effect of industry shocks. Mitchell and Mulherin (1996) argue that the poor performance following acquisition is often the signal of economic turbulence in the industry rather than the acquisition itself. More is said about both theories in Chapters 4 and 20.

 When the welfare of creditors and stockholders in the buyer firm are considered, three studies suggest that the value of the buyer firm increases by a statistically significant amount.⁷ This suggests that the gains from acquisition are not isolated to stockholders.

A reasonable conclusion from these studies is that in the aggregate, abnormal (or market-adjusted) returns to buyer shareholders from M&A activity are essentially zero. Buyers basically break even (i.e., acquisitions tend to offer zero net present values, or, equivalently, investors earn their required return).

Any inferences about the typical returns to buyers based on returns must grapple with the difficult issue of the size difference between buyers and targets. Buyers are typically much larger than targets. Thus, even if the dollar gains from merger were divided equally between the two sides, the percentage gain to the buyer’s shareholders would be smaller than to the target’s. Asquith, Bruner, and Mullins (1983) reported results consistent with the size effect. For instance, in mergers where the target’s market value was equal to 10 percent or more of the buyer’s market value, the return to the buyer was 4.1 percent (t = 4.42). But where the target’s value was less than 10 percent, the return to the buyer was only 1.7 percent. Numerous other studies have confirmed the significance of the relative size of the target in explaining variations in returns. The practical implication of this is that the impact of smaller deals (which constitute the bulk of M&A activity) gets lost in the noise. In other words, what we know about M&A profitability is a blend of noise and large deals.