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Do Long-Term Shareholders Benefit from Corporate Acquisitions?

Loughran and Vijh

Journal of Finance December 1997


Executive Summary:

The answer is it depends. By stratifying the sample and looking over a longer window,
the authors find that firms that do tender offers perform better than those that do
mergers. Moreover, those that pay cash do better than those that pay with stock.
Surprisingly long term returns to shareholders for stock mergers were significantly


Obviously, much has been written on acquisitions. The general findings are that:”

  1. target shareholders earn significantly positive abnormal returns from all acquisitions.
  2. acquiring shareholders earn little or no abnormal returns from tender offers.
  3. acquiring shareholders earn negative abnormal returns from mergers.”

The authors footnote that these findings are from: Dodd and Ruback (1977), Asquith
(1983), Kummer and Hoffmeister (1978), Dodd (1980), Bradley, Desai, and Kim (1983), Jensen
and Ruback (1983), and Malatesta (1983).

Fewer papers and with “mixed results” look at returns after the acquisition.
“Franks, Harris, and Titman (1991) find no evidence of significant abnormal returns
over a thre-year period after the last bid date. However, Aggrawal, Jaffe, and Mandlekar
(1992) find that tender offers are followed by insignificant abnormal returns, but mergers
are followed by significant abnormal returns of -10% over the five year
period….” This paper tries to settle this issue.


Important differences in this paper from others:

Other papers did not “report the overall wealth gains by combining the
preacquisition and post acquisition returns.” “The second difference” is in
the calculation of excess returns. Previous work had used portfolios that were rebalanced
on a monthly basis while this paper considers “abnormal returns by the difference
between five-year holding period returns of sample stocks and matching stocks (chosen to
control size and book-to-market effects).


Data: Using the firms delisted from CRSP, the Capital Adjustments Register, and
the WSJ index, the authors identified the acquirer, the acquired, and the form of payment
of 947 acquisitions from 1970-1989.


Interesting factoids:

  1. Tender offers became common place only after 1976 and were always lower than the number
    of mergers.
  2. Figure 1 shows that the number and dollar amount of acquisitions increased during the
  3. “Martin (1996) reports that stock payments are associated with low book-to-market
    rations (growth firms) while cash payments are associated with high book-to-market firms
    (value firms).”

From table 1 and 2

Mode of Payment

Form of Payment Merger Tender Offer Ambiguous All
Stock 385 8 12 405
Cash 196 111 7 314
Mixed 207 16 5 228
Total 788 135 24 947


Matching procedure

The matching is “in the spirit of Fama and French 1992..[in that it ] adjusts for
size…and book-to-market effects.” Specifically, the authors rank “all firms
according to their yearly required returns on equity (i.e., F=b0 + b1*Size
+ b2*Book to market ratio).” Firms are then ranked on this F-value.
“No look-ahead bias is present” because “if an acquirer delisted from CRSP
prior to the five-year anniversary of the acquisition, both the acquirer and the matching
firm buy-hold returns stop on that date. If the matching firm is delisted” the next
closest match is selected. Overall, 18% of the sample needed a second match.


The main results are listed in Table II.

  1. “Mergers underperform matching firms whereas tender offers outperform matching
    firms. The average 5-year differences equal -15.9% and +43%. Thus, “Mergers are
    usually friendly to target mangers but…on average they are not in the best interests
    of shareholders. Tender offers are typically hostile to target managers, but seem to
    benefit shareholders.”
  2. “Stock acquirers have an average return difference of -24.2% (t-statistic of -2.92)
    compared to 18.5% (t-statistic of 1.27) for cash acquirers.”

This suggests that managers are using stock to pay for acquisitions when their stock is
overvalued and (for some reason) the market does not incorporate this information.

However, this is not the only explanation:

  • “First, the form of payment is partly endogenous to the mode of acquisition, which
    may be the real driving force behind these results.” In other words, it is possible
    that more benefits accrue in a tender offer (example replace management) and since tender
    offers are usually made in cash, this is the real difference.
  • “Second, stock acquirers tend to be growth firms, hence it is possible that both
    mangers and the market were overly optimistic about the firm’s growth potential.”
  • “Third, …the positive excess returns of cash acquirers are confined to tender
    offers and are negative (but insignificant) for cash mergers and ambiguous cases.”

The authors further investigate this by removing from the sample any firm that did more
than one acquisition in a given 5 year period, but the results were quite similar.

“Stock acquisitions can be viewed as a combination of two events:…a stock
issue and…a merger or tender offer.” The authors find no difference in a sample
of acquirers and other issuers. That is, they perform equally poorly.

The authors also investigate leverage changes but find no statistical differences. They
do find however that small firms acquiring large firms do worse.

By examining the returns to a long-term buy and hold strategy (tables VI , VII, and
VIII), Loughran and Vijh have caused us to question the idea that acquisitions are always
good for the target shareholders. If the deal is a stock merger, it appears that a
long-term buy and hold strategy is suboptimal in the absence of taxes.

Advice from this would be to sell once the acquisition is complete.