Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study shows how takeover bids change stock prices of firms

17.11.2004


While stock prices of firms almost always go up immediately after an announcement of a takeover bid by another company, a new study shows that there’s a lot of variation in just how far the stock prices may change.



In fact, the study showed that about one-quarter of stock prices actually go higher than the initial bid price announced by the acquiring firm. Overall, investors seem to be savvy about pricing stocks of target firms, said Ralph Walkling, co-author of the study and professor of finance at Ohio State University’s Fisher College of Business. "We found that the market is very good at determining whether a proposed acquisition deal is going to go through, how long it is going to take, and the final price," he said. Walkling conducted the study with Jan Jindra from Cornerstone Research in Menlo Park, Calif. Their study was published in a recent issue of the Journal of Corporate Finance.

The researchers studied 362 cash tender offers between 1981 and 1995 in the United States in which the bidding firm was attempting to own 100 percent of the target firm. These were all cases in which the target firm was listed on the NYSE, AMEX or NASDAQ exchanges, and the total value of the transaction exceeded $10 million. Walkling said he and Jindra were interested in the "speculation spread" – the difference between how much the acquiring firm bid on the target firm’s stock, and the price of that stock at the end of the first trading day after the announcement. For example, if the acquiring firm bid $40 a share for the target firm’s stock, and that stock rose to $38 the day after the announcement, the speculation spread is $2.


The average speculation spread is just about 2 percent, the findings revealed. "This shows the typical stock price of a target firm on the day after the acquisition announcement increases to an amount just below the initial bid price," Walkling said. "But there’s really a big range." In fact, the speculation spreads ranged from 42 percent below the initial bid price to 30 percent over that price. Results showed 23 percent of the speculation spreads were over the initial bid price. "This means that in about a quarter of the cases, the market thinks the bid price was too low and will probably go up," Walkling said.

And the results showed that, on average, when the market priced the stock above the initial offer, the final offer did, in fact, increase. While the speculation spread reflects whether the market believes the acquisition will go through at all, the study also showed the spread reflects how long the market thinks the acquisition will take, Walkling said.

The speculation spread is larger if the market thinks the deal will take a relatively long time to go through. That’s because investors are often reluctant to see their money tied up for long periods of time while a deal is negotiated. And results showed the market is often right – larger speculation spreads did foreshadow longer times to finalize a deal. "That was an interesting finding," Walkling said. "It isn’t surprising that some of the fundamental aspects of the offer are built into the market price. But it is more surprising that the duration of the offer is built into the price – that is a more subtle characteristic."

Overall, of the 362 offers studied, 207 of them did not change when the deals were completed, 140 offers were revised upward, and 15 offers actually declined from the original proposal.

One other interesting finding was that $1 invested in 1981 grows to $7.06 in 1995 when invested into each cash tender offer one day after the announcement and holding these stocks until the deals were finalized – much better than the return from investing in broad stock market indices over the same period. But Walkling cautioned against using this as an investment strategy. "Based on these results, investing in acquisitions appears to be highly profitable, but there are large inherent risks in such a strategy," he said. "You certainly couldn’t always expect to get that rate of return, and in some periods you could lose money."

Walkling said the findings show that the market does a very good job of evaluating acquisition attempts and determining whether they will be successful, how long the deals will take to complete, and the final price of the deal. "There’s quite a bit of information that’s contained in market prices after an acquisition bid," he said. "The market is pretty efficient in factoring all the relevant information into the prices investors are willing to pay."

Ralph Walkling | EurekAlert!
Further information:
http://www.osu.edu

More articles from Studies and Analyses:

nachricht Multi-year study finds 'hotspots' of ammonia over world's major agricultural areas
17.03.2017 | University of Maryland

nachricht Diabetes Drug May Improve Bone Fat-induced Defects of Fracture Healing
17.03.2017 | Deutsches Institut für Ernährungsforschung Potsdam-Rehbrücke

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

Im Focus: Researchers Imitate Molecular Crowding in Cells

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to simulate these confined natural conditions in artificial vesicles for the first time. As reported in the academic journal Small, the results are offering better insight into the development of nanoreactors and artificial organelles.

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

Argon is not the 'dope' for metallic hydrogen

24.03.2017 | Materials Sciences

Astronomers find unexpected, dust-obscured star formation in distant galaxy

24.03.2017 | Physics and Astronomy

Gravitational wave kicks monster black hole out of galactic core

24.03.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>