The Performance of the European Market for Corporate Control: Evidence from the 5th Takeover Wave

Abstract: For the 5th takeover wave, European M&As were expected to create significant takeover value: the announcement reactions were strongly positive for target shareholders (more than 8%) and the bidding shareholders also expected to gain a small though significant increase in market value of 0.5%. While most of the expected takeover synergies are captured by the target firm shareholders, the combined value creation is significantly positive. However, the expected value strongly depends on the wave pattern, with optimistic expectations at the climax of the wave and a more pessimistic outlook at the decline. We establish that the characteristics of the target and bidding firms and of the bid itself have a significant impact on takeover returns. While some of our results have been documented for other markets of corporate control (e.g., US), a comparison of the UK and Continental European M&A markets reveals that the corporate environment is an important factor affecting the market reaction to takeovers: (i) In case a UK firm is taken over, the abnormal returns exceed those in bids involving a Continental European target. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on the takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure environment in Continental Europe enable bidding firms to invent takeover strategies that allow them to act opportunistically towards target firm's incumbent shareholders; more specifically, partial acquisitions and acquisitions with undisclosed terms of transaction. Keywords: takeovers, mergers and acquisitions, diversification, hostile takeovers, means of payment, cross-border JEL Code: G34