Equity Market Reactions for Bidders
The shareholders of acquiring companies are not as fortunate as those of the targets. On average, their shares decline in value around the time the company announces its intention to take over another company. Thus, in the example above, when Morrisons launched its surprise bid for Safeway (at a 30.3% premium to the prior day’s close), its shares declined 14.3%, and when J. Sainsbury entered with its competing bid, its own share price declined on the day by 3.5%. The shareholders of neither bidder benefited, in distinct contrast to Safeway’s shareholders.
Because of the relative consistency over time of stock market movements in response to deal announcements, the market will assume that future deals will do the same, including that only 30-40% of all deals are successful, that mid- and long-term shareholder wealth declines by 10-35%, and that the share prices for acquirers and targets move within certain ranges (on average) around the announcement day. Merger arbitrageurs—whether in hedge funds or investment banks—take large positions knowing that bidders’ share prices tend to drop immediately after a deal announcement and that targets will see share price appreciation. This then becomes a virtuous (or vicious, for the bidder) cycle, where the movement in the share prices is magnified by this arbitrage activity.
In many cases these movements in share price can lead to extreme changes in share ownership. For example, when the Deutsche Börse (the largest stock exchange at the time in mainland Europe) made a bid for the London Stock Exchange in 2004, the Anglo-American arbitrageurs rapidly became the largest group of shareholders, displacing the long-term German shareholders, whose ownership was reduced to only a third. It was these arbitrageurs who forced the Deutsche Börse CEO to drop the bid in March 2005, leading to a 30% price rise in the Deutsche Börse shares as it became less and less likely that the deal would succeed.
As with the Deutsche Börse CEO who didn’t anticipate this change, most managers seem to be oblivious to facts which appear to be obvious to those outside the company. A DLA Piper survey in 2006 showed that 81% of corporate respondents rated their M&A experience as fairly or highly successful, and over 90% of venture capitalists felt the same, yet we know that 60–70% of all deals fail.