Losers [in contested takeover contests] outperform winners over the three years following the merger.
A major obstacle in the evaluation of mergers is obtaining unbiased estimates of the value they create or destroy. In particular, it is difficult to determine how the acquirer would have performed had the merger not taken place. Estimates based on announcement returns may be biased because of price pressure around mergers, information revealed in the merger bid, or market inefficiencies. Estimates based on long-run abnormal returns may be skewed by unobserved differences between the firms that merge and the comparison firms that do not merge. And, because the returns to mergers are revealed only over time, it is hard to measure what portion of the long-run returns may be attributable to the merger rather than to other corporate events or market movements.
In Winning by Losing: Evidence on the Long-Run Effects of Mergers (NBER Working Paper No. 18024), co-authors Ulrike Malmendier, Enrico Moretti, and Florian Peters analyze numerous close bidding contests for public companies. This sample of mergers allows the researchers to use the loser's post-merger performance to construct a counterfactual performance of the winner had that firm not won the contest. They find that bidder returns are closely aligned in the years before the contest, but diverge afterwards. In fact, winners significantly underperform losers over the three years following the merger.
Malmendier, Moretti, and Peters use data from 1985 to 2009 on all U.S. mergers with concurrent bids of at least two potential acquirers. Comparing winners' and losers' performance prior to the merger contest, the authors find that their abnormal returns closely track each other during the 20 months before the merger announcement. The market appears to have similar expectations about the future profitability of winners and losers. Yet losers outperform winners over the three years following the merger. At the same time, winners accumulate significantly higher leverage ratios than losers, which the market may view as potentially harmful to the long-term health of the company.
The researchers caution that their estimates are based on contested mergers only, which are not representative of all mergers. While a certain number of mergers are contested, the size and even the direction of the effect is unlikely to generalize to all mergers.