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The Impact of Finance Mergers and Acquisitions on Short-Term Performance of Acquiring Companies

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The Impact of Finance Mergers and Acquisitions on Short-Term Performance of Acquiring Companies The Impact of Finance Mergers and Acquisitions on Short-Term Performance of Acquiring Companies An Event Study Focused on the British Isles MASTER THESIS WITHIN BUSINESS ADMINISTRATION THESIS WITHIN: Finance NUMBER OF CREDITS: 15 ECTS PROGRAMME OF STUDY: International Financial Anaylsis AUTHOR: Kreshnik Elshani Juan José Ramos Nogales TUTOR: Haoyong Zhou JÖNKÖPING May 2020 Acknowledgements We would like to thank those who have contributed to the writing of this paper. Firstly, we acknowledge the help of our thesis tutor Haoyong Zhou, who has helped us with expertise, great ideas and advice along the way. Secondly, the colleagues Tingxuan Li, Zichun Huang, Eric Orianwo, and Oliver Frey from the seminars who have provided us with useful feedback. Finally, we would like to thank Toni Duras for help with using the STATA software and analysing the code, and Albin Blomberg for the input along the way. Thank you all for your support, without you this thesis would not have been the same. ________________________ ________________________ Kreshnik Elshani Juan José Ramos Nogales i Master Thesis in Business Administration Title: The Impact of Finance Mergers and Acquisitions on Acquiring Company’s in the British Isles Authors: Kreshnik Elshani and Juan José Ramos Nogales Tutor: Haoyong Zhou Date: 2020-05-22 Key terms: Event Study, Mergers and Acquisitions, Abnormal Returns, Cumulative Abnormal Returns, Market Model, Finance, British Isles. Abstract Background: Mergers and acquisitions (M&A’s) are common ways for businesses to expand, compete, and maintain in competitive business environments. A strongly debated question in literature is whether or not these M&A’s provide measurable benefits, as factors such as industry, geographic location, and regulations play key roles in the impacts of the M&A’s. In this paper, we investigate the short-term effects of M&A’s based on stock returns of acquiring companies, with a focus on finance industries in the British Isles. Purpose: The purpose is to study whether or not there are significant short-term abnormal returns for acquiring companies when M&As of financial services target enterprises take place. Further, the study examines factors which can affect the impact of M&A’s, such as size of transaction, whether it is domestic or cross-border, whether or not the acquiring company is in a finance industry, and whether there is evidence of merger waves related to finance M&A’s in the British Isles. Method: An event study methodology is applied and focused on calculating the cumulative abnormal returns, as well as verifying whether those are statistically significant. The study analyses 100 M&A’s conducted on target companies from the UK and Ireland between the years 2000 and 2019. The event study is performed using the STATA statistical software, which is used to analyse the stock return performance in comparison to the domestic market index for each acquiring company. Conclusion: The study finds statistically insignificant results, concluding that M&A events do not generate significant abnormal returns for acquiring companies. This is in line with majority of previous research done, showing that M&A deals are not deemed significantly value creating nor value destroying. M&A’s within finance industry where the acquiring companies were domestic, in a finance industry, where the deals were smaller, were all shown to have less negative, albeit still insignificant results. This study also presents evidence for merger waves. Moreover, this thesis adds a clear geographic and industry component which is often missing in previous research, showing that within finance industry in the British Isles the impacts of M&A deals are unlikely to be statistically significant in causing abnormal returns. ii Contents 1. Introduction and Background ............................................................ 1 1.1 Introduction to M&A’s ............................................................................. 1 1.2 Background and Information on M&A’s .................................................. 3 2. Research Problem ............................................................................... 5 3. Thesis Purpose .................................................................................... 5 4. Delimitations ........................................................................................ 6 5. Ethical Considerations ........................................................................ 6 6. Definitions ............................................................................................ 7 7. Literature Review ................................................................................. 8 7.1 Efficient Market Hypothesis.................................................................... 8 7.2 Event Study Methodology and Abnormal Returns ............................... 10 7.3 Previous Research on Short-Term Performance After M&A’s ............. 12 7.4 Acquisitions: Causes ............................................................................ 14 7.5 Acquisitions: Consequences ................................................................ 15 7.6 British Isles M&A’s - Cross Border versus Domestic M&As ................. 16 7.7 Waves in Mergers and Acquisitions ..................................................... 18 7.8 Conclusion literature review ................................................................. 19 8. Methodology ...................................................................................... 20 8.1 Data ..................................................................................................... 20 8.1.1 Data Gathering ..................................................................................... 20 8.1.2 Research Data ........................................................................................ 20 8.1.3 STATA ................................................................................................. 22 8.2 Event Study Methodology .................................................................... 23 8.3 Event Window ...................................................................................... 24 8.4 Estimation Window .............................................................................. 24 8.5 Normal Returns .................................................................................... 25 8.6 Abnormal Returns ................................................................................ 26 8.7 Cumulative Abnormal Returns ............................................................. 27 8.8 Tests of Significance ............................................................................ 27 9. Empirical Results and Discussions ................................................. 28 9.1 Research Question 1 ........................................................................... 28 9.2 Research Question 2 ........................................................................... 31 9.3 Research Question 3 ........................................................................... 32 9.4 Research Question 4 ........................................................................... 34 9.5 Research Question 5 ........................................................................... 35 10. Conclusions and Discussion ............................................................ 36 10.1 Conclusions ......................................................................................... 36 10.2 Discussion............................................................................................ 37 11. Reference list ..................................................................................... 39 12. Appendix ............................................................................................ 47 iii 1. Introduction and Background _____________________________________________________________________________________ In this section we present M&A’s and the current situation M&A activity as well as background. This serves as the introduction to both the thesis topic and thesis focus along with what is aimed to be achieved. ______________________________________________________________________ 1.1 Introduction to M&A’s The worldwide volume of Mergers and Acquisitions (M&A’s) has been increasing lately, and the mergers and acquisitions activity is likely to be driven by companies looking to strengthen their businesses, especially during periods of prolonged uncertainty (Cristerna and Ventresca, 2020). With the multiple benefits possible it is easy to understand why companies seek to combine resources or accumulate as much as they can, but considering the literature there are doubts on whether or not M&As pay off. Depending on different geographic regions and industries, the actual benefits of acquiring other companies can vary significantly (DeYoung, Evanoff and Molyneux, 2009). There has been significant increase in transformation deals in the United States (+45%). However, there has been a significant decrease in the number of deals in Europe (-27%) and Asia (-29%). When uncertainty arises, companies prefer to stick to the businesses they know very well (related businesses or sector) instead of getting into different markets (Cristerna and Ventresca, 2020), 2020). As uncertainty dampens in 2020, not only are companies expected to gain more strength and liquidity which lead to a more aggressive M&A strategy by the end of 2020, but also this will lead to more M&A activity worldwide (2020
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