Abnormal acquirer returns in the Nordic Markets: Target size, Payment method & Ownership structure

Abstract

The subject of mergers and acquisitions (M&A) is present in the day-to-day life for most people around the world, and there are so many ongoing M&A deals in the world that it is extremely hard to avoid hearing about them from the news. Due to the volume and the economic impact of M&As, it should not come as a surprise that the subject is widely researched, particularly in the field of finance.

This thesis focuses on gaining insight into the subject of abnormal returns associated with mergers and acquisitions inside the target markets of Northern Europe. In this thesis, the subject of abnormal returns is discussed mainly from the acquirer’s point of view. Furthermore, the effects of deal characteristics such as the payment method, size of the target, and ownership structure of the target on acquirers’ returns are examined.

The purpose of this thesis is to conclude a conducted event study to determine if abnormal returns are found during and near the announcement of an M&A transaction. In this thesis, acquisition and daily stock price data are gathered from the Thomson Reuters database. The original data consisted of a total of 3,332 M&A transactions, and after employing a data screening process a total of 217 transactions remained. The empirical analysis of the data is conducted using the event study methodology which has remained a dominant method in the field of finance. In the calculation of abnormal returns, three different models were used: The market model, The Capital Asset Pricing – Model, and The Three-Factor – Model.

The empirical analysis found evidence of the existence of abnormal acquirer returns inside the three-day event window chosen for the study, the cumulative abnormal returns found were in general to be positive. Additionally, evidence was found of higher abnormal returns in private target transactions and in transactions where equity was present. Public target acquisitions and acquisitions financed with only cash resulted in smaller abnormal returns. In general acquisitions of smaller and medium-sized targets outperformed the acquisitions of large targets. The results show that in general acquisitions generate mainly positive abnormal returns but the characteristics of the transaction impact the magnitude and nature of the returns.