PART B: The gains and losses of acquirer’s and target’s shareholder wealth
Assessment objective: This part assesses your understanding of the corporate financial policy implications (pros and cons) and ability to identify, compare and contrast the stock returns using the results of empirical studies (Topic 4 and 5 Learning Outcome).
According to Andrade, Mitchell, and Stafford (2001), between 1973 and 1998, mergers in the USA seem to create shareholder value, with most of the gains accruing to the target company whereas the evidence on value creation for acquiring firm shareholders is not clear cut.
One simple reason why most of the gains accruing to the target is because acquirers pay a sizeable offer premium.
Please explain why acquirers on average pay a sizeable offer premium to the target company. Please explain why on average acquirers’ stock returns are much lower and sometimes even negative.
Please conduct a review of relevant financial academic literature and outline your argument. (Maximum 1200 words for part B)
(10 marks)