Value Creation Through Mergers & Acquisitions

Value Creation Through Mergers & Acquisitions

An Empirical Analysis on the STOXX EUROPE 600 Index



Mergers and Acquisitions (M&A) as a business expansion and growth strategy often comes with inherent risks and benefits to both shareholders and the broader market. Accruing synergistic as well as other benefits such as improved market reach, economies of scale etc. often make up for huge premiums paid to acquire firms. Sometimes, stock price reaction are at variance with expectations leading to losses for acquiring firms and their shareholders as well as declines in the market index. In other cases, there are significant increases in stock prices leading to shareholder rewards and improvements in the market Index. An increase or decrease in stock prices after a merger is now considered a question of value created or destroyed as a result of the merger or acquisition.

Consequently, finance and economics scholars have studied value creation from mergers and acquisitions for decades. Similar studies often examine shorter periods hoping to keep out external noises in order to accurately analyze the effects of the merger. Our study, which employs the classical event study approach, employs a wide period of analysis – 365 days after an announcement of a merger or acquisition. The study focuses on Mergers and Acquisitions that have taken placed as recorded in the STOXX EUROPE 600 Index between 2006 and 2016. The study tries to measure the value added or destroyed in the STOXX EUROPE 600 Index as a result of the merger.

Employing basic statistical tools and the t-test, our study finds that more value was added than was destroyed as a result of the Merger and Acquisition of firms in the STOXX EUROPE 600 Index leaving us to conclude that M&A’s have created value in the market.



Mergers and Acquisitions (M&A’s) play a key role in management’s strategic decision and corporate growth strategy to contribute to revenue growth. Through M&A transactions, the acquiring company can benefit, among others, by an increased market penetration, product diversification or by entering a new market. While revenue might be a determinant of the size of a company, from a valuation perspective, a company’s value is determined by the generated excess risk-adjusted return and thus, revenue alone does not generate shareholder value and might even destroy value if capital costs are not earned with each additional revenue generated.[1] The underlying main consideration in any decision by a company’s management will be eventually directed towards the company’s value enhancement, be it when hiring new staff, launching a R&D project or acquiring another company. What these decisions have in common, is that they always require an initial cash outflow with different levels of inherent risk as their outcome is uncertain. Every investment will therefore require specific assumptions and parameters in order to determine, if it is value contributing or value diminishing. Thus, every thorough pre-merger calculation will carry various risks, such as overestimating synergy-effects or post-merger integration risk, which could affect shareholder value negatively. Consequently, a M&A transaction can be seen as an investment for the acquiring company with various complex parameters that need to be considered and determined, as any other project, and Capital Market participants will usually react shortly after a M&A announcement in case of a publicly listed company.[2] Believing in the efficient markets hypothesis, the stock price of a company reflects the intrinsic value by implicitly taking all available information, including the associated risks, growth rates and cashflows, into

In the field of finance, M&A is one of the most researched areas, however, many empirical research studies have been mainly focusing on event studies with a short-term horizon, comparing the stock price of the acquiring company before, and shortly after the transaction announcement in order to evaluate, whether a transaction has been value enhancing or diminishing.[4] The most common M&A performance measure approaches are:

  1. The Event Study approach, which has been broadly applied in M&A research and provides a measure to calculate abnormal stock price effects that is associated with an unforeseen event, as such as the announcement of a corporate transaction, and
  2. The Accounting Study approach, which uses the firm’s financial statements in order to compare accounting ratios with a benchmark group, of same industry or size, not being involved in a merger. [5]

While the general emphasis of event studies focus on short-term stock price reactions, only a few studies rather look at the long-term performance of acquiring firms. The event window is commonly defined by the researcher to assess the impact of any given event.[6] While some researchers believe that a shorter event window is more precise and provides a better comparison between samples[7], this study focuses on a one year time period (365days) in order to account for the M&A deal’s post-merger integration risk. Studies focusing on a longer time period, such as Asquith[8], Magenheim & Müller[9] and Agarwal & Jaffe[10], found that over a one to three year time period after the M&A announcement, the acquiring and merged firms generated significant negative abnormal returns. In contrast to the prior mentioned findings, Boubaker & Hamza[11] observed significant abnormal positive returns of bidder firms that operate in the financial sector.

In focusing on the longer-term implications of M&A transactions, this research paper assesses whether companies within the STOXX EURO 600 Index, that either acquired another company or merged into a new entity, have risen or declined in value over a one-year period.

1.1       Statement of the Problem

While Mergers and Acquisitions (M&A’s) are sometimes viewed as disciplinary tools[12] for ineffective managers who have failed to maximize shareholder wealth, there is very little doubt that important value could be created from corporate takeovers as newly formed or acquired organisations benefit from synergies, economies of scale, wider markets or have their ineffective managers replaced with better ones. Studies like those by Mikkelson and Patch[13] buttress this point with conclusions that M&A’s have led to turnover increases especially for underperforming targets.

In spite of the general optimism towards M&A deals however, finance analysts also agree that Mergers and Acquisitions as a growth strategy can be risky. Sometimes, as experience has shown, the promise of sizable synergies and additional value that justify vast premiums paid to acquire target companies are left unmet. It therefore comes as no surprise when sometimes, the stock price reaction fails to fall in line with expectations leading to losses in value for both target and acquirer. Academic and empirical evidence are also replete with studies that indicate M&A’s could destroy value. The Boston Consulting Group for example, found that 58.3% of deals between 1992 and 2006 destroyed value for the acquirer’s On average, they found that M&A’s destroyed value for shareholders of bidding companies even th which examined 700 expensive deals during the period between 1996 and 1998, suggested that 17% created value for the combined firm, 30% were value neutral, and 53% destroyed value.

Our brief review above points to the fact that while the issue of M&A in the context of value creation or depletion is a well-researched subject in finance, there is very little unanimity as to its broader effect in terms of value. Researchers agree that factors such as managerial skills, nature of business, market characteristics, the economic environment, the overall business environment, timing of an evaluation, etc. all tend to contribute to the perceived success or failure of a M&A deal. This study therefore sets out to examine whether or not a series of Mergers and Acquisitions that have taken place in European countries within the context of the STOXX EUROPE 600 Index between 2006 and 2016 have actually added value to the market by measuring accruing benefits to shareholders.

While on the one hand, the benefits of M&A transactions can be unclear, there is also the question of how to measure value. In theory, even though there could be a number of strategic motives for embarking on M&A transactions, all may not be beneficial to shareholders. [16] for example, discussed the problem of “management empire building” where acquisitions are done for the reason that management want to control large business empires which are of little or no economic gain to shareholders. While some accounting variables like assets may improve, any positive gains by the target shareholder would be offset by losses for the bidders’ shareholders given the cost of negotiations and inherent problems in controlling larger firms especially for unprepared acquirers. The ability to identify what constitutes actual value is also another identifiable problem within our study. This study is therefore characterized by the objective of assessing stockholder wealth maximization, using appropriate tests of the success of a merger which is the effect of the M&A on stock prices.

1.2 Objectives of the Study

The broad objective of this study is to examine if Mergers and Acquisitions have added value to the STOXX EUROPE 600 Index. Specifically, this study aims to achieve the following objectives:

  • Determine if the spate of Mergers and acquisitions that have occurred between 2006 and 2016 have increased or diminished value in the STOXX EUROPE 600 Index
  • Determine if Mergers and Acquisitions that have occurred in the STOXX EUROPE 600 Index between 2006 and 2016 have added value to the Index after a 365 day window.
  • Determine if M&A’s in the STOXX EURO 600 Index between 2006 and 2016 have yielded abnormal returns for shareholders

1.3       Research Hypotheses

This study will test the following hypotheses:

H1 : Mergers and Acquisitions in the STOXX EURO 600 Index have not yielded Abnormal Returns

H2 : Mergers and Acquisition in the STOXX EURO 600 Index have not added value to the Index


1.4       Organization of the Study

This study sets out with a general introductory chapter that introduces the study and highlights the framework of the study. In chapter two, the study lays the theoretical foundation by broadly explaining the subject of M&A. In order to get a comprehensive understanding of the topic, various types of takeovers are outlined and the inherent motives and risks of M&A transactions examined. Since the success of M&A transactions are measured by its value generated, a detailed insight about company valuation is given, allowing us understand the key determinants and parameters that drive value and are commonly applied by capital market participants. Chapter three covers the empirical part, which elaborates further on the methodology, data and model used in the empirical analysis before presenting and analyzing our study data. Chapter four is our concluding chapter which summarizes and concludes on the findings of the empirical part.




The following chapter provides a comprehensive review of the subject of M&A’s. We attempt to not only give a detailed account into the historical development of M&A’s but also provide some technical insight into aspects of a M&A transaction as well as consider current trends which allows us better grasps the key drivers and rationale of strategic corporate decision making.

Globalization and multinational business operations have led to increased interest in firms to conduct cross-border investments. Mergers and Acquisitions have created an avenue for businesses to expand their reach and influence with such deals accounting for a majority of direct investments. Within the last three decades, M&A’s have reached unprecedented levels.[17] In 1985, a total of 2,675 transactions took place globally, totaling a value of USD 374 billion. In 2017, the number of transactions increased to 50,130 and reached a deal value of USD 3,549 billion, a cumulative increase of 850% in value and 1,774% in number of transactions over a 32-year time horizon.

Figure 1: Announced number and value of global M&A transactions.

Source: IMAA-institute (201.

North America is the clear leader in M&A activities with a share of 51% in deal value. Transactions in Asia-Pacific come second and Europe, is the third largest region with shares of 30% and 27%, respectively.[18] Considering that the European M&A market accounted for 36% at its peak in 2007, it has lost significant market share by dropping around 50% in deal value, ten years later. Particularly, the Asian-Pacific M&A market surpassed the European market in 2015 and is considered to be one of the most promising future growth markets.[19]

The history of M&A dates back to 1897 but has undergone various changes throughout decades and can be divided into six major distinct waves, with each wave having unique characteristics, formed and affected by changes in external economic conditions such as political, economic, social and technical changes. Furthermore, competitive factors such as the efficiency gains and size, as well as

Figure 2: Six M&A waves Over the Past Century.

1st Wave: 1897 – 1904

With the industrial revolution, technology has enhanced significantly, allowing production on a much larger scale. However, consumer demand could not keep up simultaneously leading to massive overcapacities, particularly in the manufacturing industry.[21] At the same time, major industry giants, mainly in the oil, mining and steel industries, had evolved and possessed market shares of between 50 to 90 percent. While the Sherman Antitrust Act, passed in 1890, restricted unlawful agreements between companies, it did not restrict quasi-monopolies, and powerful players, such as General Electric, DuPont or U.S. Steel Corporation, were dominating their markets and had sufficient cash in order to conduct friendly takeovers and drive horizontal consolidation, buying their closest competitors. In 1904, more rigorous antitrust laws, such as the Section II of Sherman Antitrust Acts[22], was passed, prohibiting intentional monopolies and leading to an end of the horizontal consolidation wave.[23]

2nd Wave: 1916 – 1929

While the first wave impacted more than 15% of total US assets, the second wave was on much smaller scale and is estimated to have affected below 10% of total US assets and was dominated by vertical integration mergers that aimed to purchase companies of the same supply chain.[24] Furthermore, as monopolistic structures were prohibited by antitrust law the market became rather oligopolistic and M&A activities took place mainly in the energy and transportation sectors.[25] The second wave ended with the world financial crisis in 1929.


3rd Wave: 1965 – 1969

The third wave was characterized by conglomerate mergers with the goal of diversifying risk exposure throughout different industries and products and thus, buy target companies that are not necessarily related to the acquiring companies industry. Conglomerate mergers are based on Harry M. Markowitz portfolio theory, concentrating on the relation between expected return and risk of a portfolio and claiming that risk can be reduced through diversification without sacrificing return.[26] Another driver for conglomerate mergers was the Celler-Kefauver Act in 1950, which banned transactions within the same industry.[27]

4th Wave: 1984 – 1989

The fourth wave can be categorized as disintegration wave as more and more governmental controlled firms were privatized and the prior conglomerates started to spin-off specific divisions as the stock market favored more specified over more diversified companies.[28] Around 20 – 40% of all M&A activity were related to divestures. Moreover, the bids were usually hostile, thus, without the target’s management approval and mostly leverage Buy Outs, due to tax benefits of debt financing. Other observable tendencies were the internationalization strategy by US firms.[29]

5th Wave: 1993 – 2000

The fifth wave was clearly dominated by cross-border M&A transactions and internationalization strategies of acquiring firms, resulting in quadrupling global M&A activity.[30] Economic growth was strong and in order to keep up with global demand, companies were searching for target companies abroad as well as hunting for size, resulting in Mega Deals, where transactions exceed a value of USD 1 billion, and Mergers of Equals, such as the mergers of Daimler and Chrysler or McDonnel Douglas Corporation and Boeing Company.[31] Furthermore, information technology and digitization advanced significantly and the so-called New Economy bubble led to soaring stock markets as well as boosted M&A activity even further.[32] The fifth wave found its ending with the burst of the internet bubble, triggering stock markets to crash and M&A to drop significantly.

6th Wave: 2003 – 2007

The sixth wave started right after the internet bubble burst, with interest environment low and U.S., European and Asian economies started to recover. While researchers believe, that with higher stock valuation levels, M&A’s are more likely to take place[33], both, high firm valuation levels as well as the high availability of liquidity[34] are likely to be the most important determinants for the sixth merger cycle. Again, the merger cycle ended with the crash of global stock markets in 2007, M&A value dropping by 50%.[35]

2.2 Mergers and Acquisitions

2.2.1 Definition

“In its broadest definition, a merger can refer to any takeover of one company by another where the businesses of each company are brought together as one and results in a new legal entity. The stockholders or owners of both pre-merger companies have a share in the ownership of the merges business and the top management positions after the merger. An acquisition, in contrast, is the takeover of the ownership and management control of one company by another. Control is the key test of the distinction between a merger and an acquisition”. In general one can differentiate between two types of takeovers: Friendly takeovers and hostile takeovers. In a friendly takeover of control, the target’s management is receptive to the idea and recommends shareholder approval and also puts itself voluntarily into play.[37] A hostile takeover occurs when the initial approach was unsolicited, the target was not seeking a merger at that time, the approach was contested by the target’s management, and control changed hands. The acquirer may attempt to circumvent management by offering to buy shares directly from the target’s shareholders and by buying shares at a public stock exchange.[38]

2.2.2 Types of Mergers and Acquisition

In general one can differentiate between two types of takeovers: Friendly takeovers and hostile takeovers. In a friendly takeover of control, the target’s management is receptive to the idea and recommends shareholder approval and also puts itself voluntarily into play.[39] This allows the acquiring company access to more information to examine and analyze the target company. A hostile takeover occurs when the initial approach was unsolicited, the target was not seeking a merger at that time, the approach was contested by the target’s management, and control changed hands. The acquirer may attempt to circumvent management by offering to buy shares directly from the target’s shareholders and by buying shares at a public stock exchange.[40]

The key principle behind a M&A-transaction is to create shareholder value above that of the sum of the two companies. Therefore, two companies together are supposed to be more valuable than two separate companies.[41] Often, the idea of a M&A is a growth strategy to gain a greater market share or achieve greater efficiency through cost reduction.[42] From the perspective of business structures, there are different types of mergers, which are distinguished by the relationship between the two companies that are merging. As already mentioned in chapter 1 there are three different types of transactions: horizontal mergers, vertical mergers and conglomerate mergers.[43]

Horizontal Merger

In a horizontal merger, two firms belonging to the same industry sector and being at the same stage of industrial process, are merging. Horizontal mergers tend to be anti-competitive and raise industry concentration, which can lead to a higher market-share, cost reduction through synergy-effects in the value-chain or entry into a new cross-border market.[44] Examples for horizontal mergers are Exxon-Mobil, Daimler-Chrysler or Boeing-McDonnel Douglas.

Vertical Merger

In a vertical merger two firms, belonging to the same industry sector but operating at different levels within an industry’s supply chain, are merging. The companies are producing different goods or services for one specific finished product. The expansion can go in the direction of the customer and backwards towards the source of raw materials. The aim behind a vertical merger is the reduction of production costs and dependency level.[45] The aim behind a vertical merger is the reduction of production costs and dependency level. Examples are Reliance Industries-Dhirubhai Ambani or Unilever-Curtis.

Conglomerate Merger

In a conglomerate merger, two firms which are involved in totally unrelated industry sectors, are merging. The companies produce completely different goods or services. The purpose of conglomerate mergers is often the product portfolio diversification to reduce the risk exposure for certain products and enter different markets.[46] Examples are Citicorp-Travelers Group or Ciba-Geigy.

Congeneric Merger

If a company´s intellectual properties, such as their production technology, distribution system or R&D capacities are the target, the deal is called a concentric merger.[47] These resources shall be combined to create new core competencies, or complement existing ones.[48] One example is the merger of Citigroup and Traveler Insurance, both operating in the financial service industry, but different product lines.

2.2.3 Financing

There are various methods on how to finance a M&A-transaction depending on if the deal is friendly or hostile on the capital structure of the merging firms or the strategy of the acquiring firm. Chang considers stock and mixed payments as one and names them stock payment[49], whereas Faccio and Masulis[50] distinguished three categories – cash, stock and hybrids[51], which are introduced below..


Cash payment or cash-only financing refers to the receipt of cash for shares by shareholders in the target company. These transactions often occur rather in combination with acquisitions than mergers, since the acquirer wants to offer a certain stock price to get the control of the target company. Additionally, target firms demand a lower price if payment is in cash since the entire risk is shifted to the acquiring company. A cash deal is more likely in times when the company has a large cash pile, has easy access to liquidity and in times of low interest yields as a corporate acquisition appears more attractive from an investment standpoint.[52]


In a stock-only financing or stock payment, the acquiring firm offers own stocks to the target company’s shareholders. A main factor of every such transaction is the share ratio, which determines how many shares of the acquiring company a shareholder of the target company receives for each share. This form of payment is usually used, when companies are merging and shares of the acquiring firm are overvalued. Furthermore, a stock payment allows to share the risk between the acquired or merged company as the future success of the transaction will affect both parties.[53]


Hybrid-Payment shows a payment scheme with a certain percentage of cash and stocks and is thus a combination of cash financing and stock-financing. Hybrid-transactions have been rising constantly during recent years.[54]

2.2.4 Procedure of a M&A Deal

In every M&A-transaction there is the acquiring company and the target company. The acquirer is on the buy-side due to its intention to purchase a company, whereas the sell-side either examines the bid or is looking for potential buyers.[55] Depending on the size of the company a deal can take months or even years. This paper focuses on the process pattern shown in Figure 2. In the following the different stages of an exemplary buy-side transaction will be explained:

Figure 3: Procedure of a M&A transaction.

Source: PCG AG (2012).


The process of an M&A transaction is based on the decision to acquire another firm at a strategic management level. Depending on the type of merger the first step is doing research on peer companies and their suitability to the acquiring firm and generating a long list of appropriate corporates. Out of those long list, certain companies will be selected, which fit into the concept of the strategy.[56] After an examination and an analysis of the shortlisted companies, the management of the selected target – in case of a friendly takeover – will be contacted directly with a Letter of Intent (LOI). In case the acquisition is hostile, a takeover bid (tender offer) will be offered directly to the shareholders of the target company.[57] In a friendly takeover, the target allows the acquiring firm to use its data room, otherwise the acquirer has to help itself with its own data or use annual reports for the due diligence process, which is one of the most important procedures and covers different fields such as financials, legal, personal, cultural etc. [58] Different parties like investment banks, law firms, auditing firms and tax accountants are involved in such a process. The last step consists of contract negotiations and the signing.

2.2.5 Motives and Benefits

This chapter focuses on theoretical implications regarding M&A and its primary motives, benefits and risks. M&A is always based on a company’s strategy and has various objectives such as the consolidation of an established market, entering a new market or/and gain of market shares. Another strategic objective is the concentration or diversification of an enterprise in order to increase sales, profitability, lower costs due to risk diversification.[59]

There are several approaches of explanation why mergers are done. In the following, the fundamental theoretical approaches of motives and benefits of M&A will be explained. One can distinguish three categories of motives: real motives, speculative motives and management motives. [60] This paper focuses mainly on the real motives of a merger.

Table 1: Motives of M&A

According to: Jansen, S. (2008) Economies of Scale Hypotheses

Economies of Scale refers to an increase in efficiency of production of a single product type through increasing the number of goods being produced and thus lowers the average cost per unit since the fixed costs are shared over an increased number of goods. A common rationale of M&A are economies of scale, when two companies of the same industry are brought together and thus have a higher outcome.[61] Especially, areas of the value-chain, that bind a high level of overhead and fix costs like procurement, human resources, information systems, operations, research and marketing are affected and profit from economies of scale. Economies of Scope refers to lowering the average cost for a firm in producing two or more products, while Economies of Scale is associated with lowering the average costs of a single product. Economies of Scope make product diversification more efficient through using existing platforms or resources like know-how or same product components. Hence, the average cost of the products decreases if they are produced by one company, than producing each product in a separate company.[62] Synergy-Hypothesis

Synergy is one of the prime motivating forces for deciding M&A and refers to the fact that corporate combinations will always create greater shareholder value than corporations operating individually[63]. The technical definition is: “Synergy is the ability of the merged company to generate higher shareholder wealth than the standalone entities”.[64]

Figure 4: Driver of Synergy in M&A

Source: Chakraborty, G. (2008)

Whereas Economies of Scale and Scope, which are part of the Synergy-Hypothesis, refer only to the cost reduction through synergies, the Synergy-Hypothesis is related to all financial and non-financial benefits. Synergies create the following benefits to justify a particular M&A:

  1. Cost reduction: The combined firms can operate more efficiently than the separate firm due to Economies of Scale and Economies of Scope.
  2. Tax benefits: Through depreciation of the Goodwill in the balance sheet of the acquired firm and write-offs of unabsorbed losses of the target company[65].
  3. Debt capacity: If the target firm has a lower debt-equity ratio than that of the bidding firm, the unused debt capacity can lead to incremental tax shields, which accrue to the combined firm[66].
  4. Revenue: A combined entity generates more revenue than its two predecessor stand-alone companies would be able to generate.

In the M&A environment, synergy is also described as a “1+1=3” effect, since synergy is the additional value (∆V) created. Mathematical expressed as follows:


VT                  =     the pre-merger value of the target firm

VA – T       =     value of the post-merger firm

VA          =     value of the pre-merger acquiring firm

For the acquiring company it is of importance to pay less premium on the stock of the target company, than the additional value created through the synergy. Portfolio-Hypothesis

The Portfolio-Theory was introduced by Harry Markowitz and focuses on the relation between expected return and risk of a portfolio and says that risk can be reduced through diversification. This idea of Markowitz was picked up by the Boston Consulting Group (BCG) in the 70’s and applied to the management of a company’s product portfolio. Thus, another motive of M&A is product diversification, which happens through conglomerate mergers to reduce the risk of a single product and spread the risk over multiple product lines. However, empirical studies such as Berger & Ofek found evidence that diversified firms have been worth less than a portfolio of specialized firms.[67] A study by McKinsey adds that the currently existing conglomerates are likely to split up.[68]

2.2.6 Risks

According to a survey of Ernst & Young, more than 50% of M&A transactions fail[69]. Additionally, Angwin and Savill found evidence that cross-border M&A’s carry a higher risk than national transactions and even destroy value.[70] In the following the fundamental theoretical approaches and sources of risks of M&A will be explained:

Table 2: Categorized sources of risks of M&A transactions

Source: Own illustration

One of the most significant risk is the overestimation of synergy-effects and thus, too much premium paid for the acquired company.[71] Synergy-effects are dependent on the successful post-merger-integration of the acquired company. This applies particularly for horizontal mergers, where the post-merger integration of structures are one of the most important success or risk factors.[72] Especially in cross-border M&A’s, the importance of cultural differences have to be emphasized. The integration of different corporate cultures and cultural differences in regard to behavior is a major challenge in organizational integration[73]. Another risk during the pre-M&A-phase is the insufficient due diligence of the target company and its suitability to the acquiring company.[74] Such a merger would rather destroy than create value. This would be also the case when the shareholders of the acquiring company do not believe in the management’s strategy or when the management has shown a bad M&A track record or insufficient experience in mergers, a discount on the company’s value would be the consequence.

2.3       Drivers of Value Creation in Different types of M&A

2.3.1     Horizontal Mergers

Under Horizontal mergers, the most identifiable drivers of value creation[75] are increased

  1. Market Power and
  2. Revenue Growth.

Other means through which Value could be created[76] are through the enhancement of revenue streams, cost savings, and new growth. Acquisitions may also lead to growth in revenue through the acquisition of firms with products that are complementary in nature. Another means through which value could be created as identified by Sudarsanam[77] include through leveraging marketing resources and capabilities of the newly merged firms. Cost savings in horizontally merged firms arise as a result of the merger of key operational areas like Research and Development, marketing and sales. The merger results in same activities being carried out as a cost that is less than either firm could have managed operating as individual entities. This leads to improvements in profit margins and the easing of pressures in pricing. Economies of scale as well as ‘economies of scope’ both lead to cost savings in horizontal mergers. Sudassanam[78] explains economies of scope as existing where the cost of production of two or more goods is significantly less than the cost originally used in production as separate entities.



2.3.2     Vertical Integration

Vertical mergers create value through the improvement of economic efficiency by cutting out intermediaries which curbs overheads and redundant assets. Vertical mergers could also lead to revenue enhancements through the provision of package services and products that enhance firm revenues. In conglomerate mergers, according to Lewellen[79]  there is no relationship between the products and markets of the merging firms. A major benefit of conglomerate mergers is the transfer of scarce resources like managerial abilities between the firms. Other major synergistic benefits in conglomerate mergers include risk reduction which helps reduce the cost of capital.

2.4 Company Valuation

2.4.1 Overview

The objective of valuation is the determination of the current worth of a company or a certain asset. There are various parties such as the company’s management, investment banks or audit firms, which make use of valuation for different purposes. Some motives for evaluating a business are illustrated below:


Table 3: Overview of Valuation Motives.

Source: According Breitenkamp, S., Schöning, S. (2012), p. 4.

In addition to that, valuation is a pre-requisite for decision making in running a project, business unit or making a strategy concept. Furthermore, it serves as a measuring tool to compare the management’s success.[80] Depending on the motive and occasion of the valuation, different valuation methodologies and techniques are applied and can result in different outcomes. One has to differentiate between the value and the price of a company. The value refers to the intrinsic value of an object determined through analytical methods such as qualitative and quantitative techniques, whereas the price is determined by the market through supply and demand.[81] Since information and markets are not always efficient, discrepancies between the value and the price can occur. Even though there are several mathematical models and methods in calculating the fair value, it remains more subjective than objective, since the parameters used are based on future assumptions and estimations, which include uncertainty such as insufficient information about the firm or the macroeconomic environment.[82] Thus, often, several different methodologies are applied to approximate the value of a company within a certain range. In the following section, different valuation methods will be illustrated and a more detailed insight about theoretical foundations of the quantitative and qualitative valuation given. Over the last decades a number of valuation methodologies and techniques have been established. They differ regarding conception, complexity and parameter assumptions. However, a shift from a historical based approach towards a future oriented approach is seen.[83] The different methods can be classified in an individual evaluation procedure, total evaluation procedure and combination of both as shown in the following figure:

Figure 5: Overview of Valuation Methodologies.

Source: According to Prexl, S., et al. (2010), p. 215.

2.4.2 Individual Evaluation Methods

The individual evaluation method is an asset-based approach focusing on the collection of assets stated in the balance sheet, which reflects the sum of the values of the individual assets in place on a particular key date. The net asset value or substance value of a company is determined by deducting all debts from the sum of the assets.[84] The substance value can be calculated under the assumption of reproducing or liquidating the company’s assets. Thus, one can differentiate the individual evaluation method into two approaches: reproduction approach and liquidation approach. The advantage of the individual evaluation method is the transparency, however, it only takes into account the items stated in the balance sheet and neglects intangible assets such as human capital, know-how, economies of scale and scope, image and customer relationship.[85] Those growth assets are the value contributors particularly for small growth companies and service providers. Furthermore, it does not include any growth expectations and future earnings and can be seen as the minimum price for the company, but may also lead to an undervaluation.[86]

2.4.3 Reproduction Value

The reproduction value is based on the going-concern principle of the company. It assumes that the assets are identically reproduced and the amount of expenditures for those assets determines the value of a company’s substance. Thus, the reproduction value equals the replacement value of the company’s assets, which is reduced by the value of debts.[87] The assets mainly include tangible assets and internally created intangible assets, however, the items included in the reproduction value can vary.[88]

2.4.4 Liquidation Value

The liquidation value is based on the assumption that a company is being liquidated and all its assets sold.[89] Thus, the liquidation value equals the sum of each single asset, in case of selling, minus all debts and costs of liquidation. The liquidation value approach is used, when the liquidation value is higher than the value of the ongoing business activities.[90]

2.5 Total Evaluation Methods

The total evaluation method is based on the value of the future cash flows and therefore also covers off-balance sheet items and intangible assets, which are not considered in the individual evaluation method but are of relevance for the firm’s performance. Hence, the value of the company may exceed or fall below the sum of the net asset value.[91] According to the Institute of Public Auditors in Germany (IDW), which has introduced standards for corporate valuation[92], the value of a company is determined only through the net present value (NPV) of the cash flows to the equity holders, which derives from the stand-alone value of a company and its ability to generate those cash flows. The liquidation value is only applied if it exceeds the present value of the cash flows.[93] One can take different reference values instead of the cash flow such as dividends or net income, depending on the occasion of valuation and business structure of the firm. The total evaluation methods comprises the discounted cash flow (DCF) model, the relative valuation model with multiples and real options. This paper focuses on the DCF model and multiples as they are the most used and well known market-oriented valuation methods, which are not only of significance to this thesis but also applied in practice.[94]

2.4.1 Discounted Cash Flow

The DCF model assumes that the equity and firm value is based on the company’s future free cash flows (FCF). The concept of the DCF model is predicated on the time value of money and on the discount of the estimated future cash flows to their present values.[95] The FCF is used since it reflects the real cash that a firm generates from operating activities, while the net income for example is influenced by accounting policies with no cash effects.[96] A general DCF approach is illustrated in Figure 14:

Figure 6: Basic Concept of the DCF Method.

Source: According to Bühner (1994), p. 12.


The principle variables are the estimation of future cash flows and the discount rate. The estimation of the future cash flows requires the determination of the forecast period, which is based on an analysis of the competitive quality in order to get a clear picture of the company’s growth and investment plans, and the terminal value which describes the expected stable growth rate at a future point in time.[97] The discount rate is the risk adequate return for the capital distributors. A more detailed explanation about the estimation of future cash flows and the formula of the discount rate is given in the next chapters. There are three different DCF approaches in order to calculate the value:

  • Equity Value approach, using the FCFE and cost of equity as discount rate,
  • Entity Value approach, using the FCFF and the WACC as discount rate,
  • Adjusted Present Value approach, using the FCFF and the cost of capital as discount rate.[98]

Depending on the approach, different forms of the FCF and discount rates are used, which will be exemplified in the following. Equity Value Approach

The equity value approach considers only cash flows to the equity holders and is called free cash flow to the equity (FCFE) and represents the amount of cash that is available, after payments to all other claim holders, to be returned to the shareholders either in form of dividends or stock buybacks.[99] It is calculated as follows:

Table 4: Free Cash Flow to Equity.

Source: According to Baetge, J. (2009), p. 358f.


In order to evaluate the FCFE, the interest and tax expenses are deducted from the EBIT, because the interest expenses go to the debt contributors and the tax is paid to government. However, the tax expenses are reduced by the tax shield, which is a tax benefit contributed by the borrowing interests. Then, the depreciation, amortization and changes in provision are added up to the net income, as they are not cash effective and only deducted in the financial statement given by accounting standards. After that, the CAPEX and increase of the net working capital is subtracted as it represents a cash outflow. As the final step, the changes in the levels of debt are considered by netting the new debt issued with the debt repayments.[100] After having calculated the FCFE for each year, the sum needs to be discounted in order to get the NPV or time value of money. The discount rate is influenced by different factors such as the risk level associated with the company and its market. The discount rate is expressed as capital cost of equity and reflects the risk adequate return for the equity holders. It is used to discount the FCFE, which eventually will be added up. The result is the market value (MV) of the equity.[101] Entity Value Approach

The entity value approach considers all claimholders, consisting of shareholders, debt holders and preferred stockholders, and thus uses the free cash flow to the firm (FCFF). The FCFF not only includes the ability to pay out dividends and stock buybacks but also the ability to pay debts. The FCFF is calculated as follows:



Table 5: Free Cash Flow to Firm.

Source: According to Baetge, J. (2009), p. 358f.


In order to get the FCFF, the NOPLAT is first calculated by subtracting the national tax rate from the EBIT. After that, the non-cash effective items such as Depreciation, Amortization and increase in provisions are added back. Since the CAPEX and increase in working capital is a cash outflow, they will be subtracted. The FCFF is then discounted with the cost of capital, which is expressed as weighted average cost of capital (WACC). The WACC considers the debt ratio of the capital and the tax benefit through borrowing interest.[102] The discounted FCFF is the Enterprise Value (EV). To get from the EV to the MV of the equity, the net debt and minority stakes need to be subtracted from the EV. The following figure illustrates the relationship between the FCFF and FCFE, EV and MV and the different discount rates:

Figure 7: Illustration of the Relationship between DCF components.

Source: According to WHU-Daxe e.V. (2003), p. 13.


Thus, the difference between the FCFF and the FCFE is that the FCFF is after tax expenses and after debt, so-called unlevered free cash flow, while the FCFE is after tax and before debt and is called levered free cash flow. Furthermore, the FCFF is discounted with the entire cost of capital, so-called WACC, while the FCFE is discounted with the cost of equity. Adjusted Present Value Approach

The adjusted present value (APV) approach uses the FCFF, which is calculated in the same way already illustrated in the entity value approach. However, the APV approach assumes that the company is completely self-financed without any debt.[103] Thus, the NPV of the firm is discounted with the cost of equity. In a second step, in order to include the finance and tax effects such as the tax shield, the NPV of those effects are valued separately by taking the cost of debt.[104] The value of debt plus the value of the unlevered company equals the EV. The isolated valuation of the operating activities and financing effects allows a more transparent view on the value contributor of the company.[105] In addition and contrary to the entity approach, it allows for modelling and implementation of significant changes in the financial and capital structure of the company. The APV approach is not commonly used in practice but is particularly of relevance for leveraged buy-out (LBO) transactions, in which the tax shield and finance effects are highly significant. Discount Rate

In the previous chapters the discount rate was mentioned several times and it was emphasized that the discount rate is one of the principal variables in the DCF valuation. Thus, a detailed exemplification about the composition of the different forms of cost of capital are given and its link to the FCF. The discount factor represents the cost of capital and is used to discount the sum of FCFs of a company in order to get the NPV as shown in the following:


i           = discount rate

t           = year

N          = Number of Periods

FCF     = Free Cash Flow

NPV     = Net Present Value

Equation 1: Calculation of the Net Present Value.

Depending on the valuation approach either the cost of equity or the WACC is used as the discount rate.[106] In general, the discount factor is supposed to reflect the risk adequate return for a certain investment made by the shareholders or debt holders.



Capital Asset Pricing Model

The cost of equity reflects the risk of adequate return for the equity holders, which is calculated using the formula of the Capital Asset Pricing Model (CAPM).[107] The CAPM describes the relationship between the risk of an investment and its adequate return. The CAPM is composed as follows:



= Cost of Equity

= Risk Free Rate of Return

= Market Return

= Volatility Measure

Equation 2: Calculation of the Cost of Equity using the CAPM.


The risk free rate of return reflects a return on an investment with no risk. Since there is no security, which is completely risk free, the yield of a 10-years treasury bill is used as a reference yield as it has almost no default risk.[108] The CAPM’s market return is based on the portfolio theory of Markowitz, who classified the risk into a systematic risk and an unsystematic risk. Markowitz states that the unsystematic risk can be eliminated through a wide diversification of an asset portfolio, while the systematic market risk cannot be diversified away and thus, is rewarded through a risk premium. A perfect diversified portfolio is called market portfolio and represents the maximum excess return in relation to the risk.[109] The risk premium is calculated by deducting the risk free rate from the return of the market portfolio. As a reference return, the DAX-30 or MSCI World yield is used as closest proxy for a market portfolio. In order to measure the individual non-diversifiable risk of a security, it is set in relationship to the risk of the market portfolio. The systematic risk is determined by the standard deviation of its volatility and is expressed as Beta as shown in Figure 8:

Figure 8: Basic Concept of the CAPM.

Source: According to Harvey, C., Gray, S. (2001).

The Beta measures the sensitivity of a security’s risk relative to the sensitivity of the market portfolio. The systematic risk varies proportionally with the accepted risk the investor is willing to take. Thus, a share with a Beta of 1 has the same systematic risk and return as the market portfolio. A share with a Beta between 0 and 1 is less risky than the market portfolio, while a share above 1 has a greater risk.[110] By multiplying the Beta factor with the risk premium and adding the risk free rate, the cost of equity is determined.


Weighted Average Cost of Capital

The WACC is used as a discount factor for the FCFF and is calculated as follows:



= Cost of Equity

= Cost of Debt

= Enterprise Value

= Corporate Tax Rate

Equation 3: Calculation of the WACC.


Since the WACC is used for the entire cash flow of a firm, it includes the cost of equity and the cost of debt. The cost of debt is composed of the interest rate paid to the debt holders. By discounting the FCFE with the cost of equity and discounting the debt repayments with the cost of debt, the equity value and the debt value are determined. The EV is the sum of the equity and debt value. Given the fact, that the costs of debt reduces the taxable profits, the tax shield is considered as well. The WACC assumes a constant capital structure of the firm. Estimating Growth and Terminal Value

The DCF model is based on the future cash flows, which are discounted to their present value. Since future cash flows can only be estimated and certain parameters and assumptions depend on the future perspectives of a company, it requires a thorough qualitative and financial analysis to forecast such numbers. The forecast is related to certain figures such as sales, EBIT, EBT, Depreciation, CAPEX, change in Working Capital, corporate tax rate and eventually the FCFF.[111]

2.6       Qualitative Analysis

A Qualitative analysis is mainly based on non-quantifiable information, such as expertise or strength of creativity. These qualities of a company cannot be measured and are mainly subjective but still represent key factors for decision making. The competitive quality analysis is a deductive analysis instrument, which implies the external and internal analysis. It combines the competitive analysis, the comparative analysis and the competitive advantage analysis in order to get an impression of the company’s market position and competitive standing[112], and its internal structures, such as organization, business activities, processes and the firm’s qualities. The first step is to understand the company’s business model and to ask how the company makes money. This step is of significance in order to get a profile of the company and its segments and products. The second step comprises the comparative analysis to get an insight about the sector and industry the company operates in and its sectorial standing. The comparative analysis focuses on the company’s success factors and where it lacks. In addition it compares the business models of different companies within the sector. The third step consists of identifying the key value driver and destroyer by analyzing the company’s value chain. This step is of importance to estimate the growth opportunities. Other important factors have to be taken into account, such as the historical development of the market, the current trend and the future perspectives. Last but not least, the strategy of a company and its overlap with the current market trend and market structure.

2.6.1     Procedure

The first step requires the determination of the forecast period, which consist of a detailed forecast period, a transitional period and the stable horizon period. The detailed forecast period has the time horizon of three years. It requires a solid analysis of the competitive quality in order to get a clear picture of the company’s growth and investment plans. The transitional planning is a rough planning and approximation for a time period of ten years due to the unpredictability of long-term figures. The last step of determining the forecast encompasses the terminal value (TV), which describes the expected stable growth rate at a future point in time.[113] It is discounted separately from the FCF of the forecast and transitional period. The TV assumes a CAPEX and non-cash charges of 0 and is based on the Gordon Growth Method or also called Perpetuity Growth Method, which assumes a perpetual growth rate. The perpetual growth rate is used to calculate the steady growth of the FCFF and determine the TV as showed in the following:


= Free Cash Flow of Firm

= Weighted Average Cost of Capital

= Perpetual Growth Rate

Equation 4: Calculation of the Terminal Value.


The TV equals the NPV of the sum of all FCF from the first year after the transitional period to perpetuity. Eventually, the two NPV, consisting of the NPV of the forecast and transitional period and the NPV of the TV are added up to determine the enterprise value.

2.6.2 Multiples

Multiples are a significant market-oriented relative valuation method and are often used complementary to the DCF method. In some cases, particularly when the company does not generate positive cash flows yet or is an early stage company, relative valuation is mainly used.[114] Multiples are categorized into trading multiples and merger multiples. Trading multiples are used to compare the evaluated company with a stock listed company to identify the price the stock is currently traded at. Merger multiples, however, are multiples paid for recent M&A transactions, which comprises public and private companies as well as individual divisions and minority stakes. Since M&A transactions usually include a premium paid by the acquirer, which reflects the individual expected benefit from synergy-effects, merger multiples are usually higher than trading multiples.[115] This paper focuses on trading multiples since those are resulting from the broad market with all its participants. Multiples are based on the assumption that similar companies also have a similar value.[116] Since the absolute prices are not meaningful due to different sizes, ratios are used in order to create standardized values. The most commonly used trading multiples are EV/Sales, EV/EBITDA, EV/EBIT and Price/Earnings ratios. Other multiples could be EV/Book Value of Assets or Price/FCFEE. Sales, EBITDA and EBIT yield an Enterprise Value since it includes all claimholders, whereas earnings produce an Equity Value as it only includes the equity holders as shown in the following figure:

Figure 9: Allocation of Enterprise Value and Equity Value.

Source: According to Kuhner, C. (2003), p. 29.


In order to determine the value of a company it is key to identify a comparable peer group of companies and control for any differences, which might cause and affect the price. Thus, the quality of the relative valuation goes hand in hand with the reference companies. After having collected similar companies a sectorial average of the different multiples are created. The sectorial average is an indicator for the fair price of a company in this certain sector. Comparing the individual company with the sectorial average shows whether the company is overvalued or undervalued. One could also compare the current multiples of the individual company with the historical multiples of that individual company.[117]



2.5.3 Combined Methods

The combined method is an advancement of the individual evaluation method and takes also into account the ability of a company to generate future earnings. Either the average method is used or the additional profit method. In the average method, the arithmetical mean of the substance value and the future earnings. However, it requires that the discounted earnings have to be higher than the substance value since it is assumed that the substance is only of value, when it is able to generate earnings. Depending on the company, one can vary and rank the future earnings as more important as the substance value or vise versa. The additional profit method determines the value created above the required cost of capital such as the Economic Valued Added or comparing the return on equity with the cost of equity.

2.6 Event Studies in Finance and Economics

Within the fields of economics and finance, it is often said that any article “cited ten or more times a year for ten years is a classic[118]”. Fama, Fisher, Jensen and Roll’s[119] (1969), paper which introduced the event study methodology, stands out in the academic profession even by these standards. In 1987 and 1988 for example, 14 event studies were published in the Journal of Finance and another 26 in the Journal of Financial Economics. From the study publication date to 1994, the article was, cited a total of 516 times[120].  By virtue of these overwhelming statistics, the event study is acknowledged to be one of the most popular statistical designs in finance. FFJR are today widely acknowledged to have started a methodological revolution in accounting, finance and economics.

The event study methodology has over the years, become the standard method of gauging the reaction of prices of security to an irregular event. Event studies have been known to be used for two primary reasons[121] i.e.

1) To test the null hypothesis that the market efficiently incorporates information and

2) To examine the impact of some event on the wealth of the firm’s security holders.


2.6.2     Types of event studies

Two main types of event studies are easily identified. These are the

  1. Market efficiency studies: These kind of event studies assess how quickly and correctly the market reacts to a particular type of new information.
  2. Information usefulness studies: These studies are geared towards assessing the degree to which company returns react to the release of a particular bit of news. Overall, Henderson, Jr. identified three types of event studies which are the aforementioned market efficiency and information value studies, as well as the metric explanation.

Event studies may comprise one or more of the above listed types.


2.6.3     Statistical Power of Event Studies

The performance and reliability of Event studies have over the years been a subject of intense research (Binder, 1998). With a number of studies examining the performance of event studies under conditions, two major questions have been answered which are:

  1. How frequently do the various tests reject the null hypothesis of zero abnormal return when it is true and
  2. How frequently is the null rejected when it is false?

2.6.4.    Known event dates

In the case of known events, an overwhelming number of studies agreed that different abnormal return measures perform similarly with daily return data. In other words, when the null hypothesis is correct, the actual size of the tests are equal to the nominal size. Researchers result also indicate that the “different event study methods are equally powerful when the null hypothesis of zero abnormal returns is false”.[122]



2.6.5     Unknown event dates

In the case of unknown or simulated events, researchers agree that event studies that examine the date of the formal announcement (or a period up to and including that date) will capture the majority of the effect on stock prices”[123].

Given the test study’s overall statistical tests performance, it is no surprise that the methodology continues to be embraced by researchers all over the world.

2.7       The Event Study Design

The classic event study approach which has stayed popular over the years comprises five basic steps. The steps are listed as below:

  1. Define the date upon which the market would have received the news.
  2. Characterize the returns of the individual companies in the absence of this news.
  3. Measure the difference between observed returns and “no-news” returns for each firm the abnormal returns.
  4. Aggregate the abnormal returns across firms and across time.
  5. Statistically test the aggregated returns to determine whether the abnormal returns are significant and, if so, for how long.

Our study adopts this study design for its simplicity.

2.8 Résumé

2.9       Empirical Literature Review

Our first set of studies under review examined the effects of both horizontal and Vertical Mergers and Acquisitions on firms. Edward Fee and Thomas[124] investigated the effects of a large sample of horizontal Mergers both in the upstream and downstream product markets between 1980 and 1997. Their study found evidence that M&A’s had led to improved productive efficiency and significantly improved buying power in merged firms. Haugen and Udell[125] also investigating the effects of horizontal mergers found some evidence that acquisitions led to increased rates of returns between 1962 and 1971.

On the other hand, a study conducted by Joseph and Goyal[126] on vertical mergers that took place between 1962 and 1996 reached the conclusion that vertical mergers generate positive wealth effects at a level that were significantly larger than firms that chose to follow the path of a diversifying merger. Also on vertical mergers, Chen[127] found that vertical integration changed pricing incentives of downstream producers as well as competitor incentives especially when it came to choosing input suppliers. Chen’s study also discovered that competitive effects vertical mergers depended on not just the cost of switching suppliers, but also on the degree of downstream product differentiation. Also, Haugen and Udell[128] while investigating vertical mergers in the 1970’s discovered that they (vertical mergers) mostly led to increased rates of returns especially in the 10-year period between 1962 and 1971.

While investigating the presence of abnormal returns in firms involved in Mergers and Acquisitions, Singh and Montgomery[129] controlled for the type and degree of strategic relatedness between the acquiring and target firms but discovered that such acquisitions at the end, did not generate abnormal returns for the shareholders of the acquiring firms. Their study also concluded that while shareholders of related target firms obtained a relatively high abnormal profits, shareholders of unrelated firms only obtained relatively low returns as a result of the merger before concluding that “strategically related acquisitions create more economic value than unrelated acquisitions”.[130]




This chapter deals with an event study of mergers and acquisitions. In subsection 3.1 the sample selection and source of data employed are discussed, in subsection 3.2 the methodology adopted for the study is described while in subsection 3.3 we present and briefly analyze the results of our empirical research.


3.1 Sample Selection and Data Sources

This empirical research focuses on mergers and acquisitions that took place in the Eurozone as reflected in the EUROSTOXX 600 index between 2006 and 2016. The EURO STOXX 600 is a stock index of European stocks designed by STOXX Ltd. The index has a fixed number of 600 components, which includes large capitalized firms among 17 European countries. The index covers approximately 90% of the entire free-float market capitalization of European stock markets (which is not limited to the Eurozone). The index is made up of 17 participating European countries which are Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. All the firms have a listing on the stock exchange of the located country and are thus public firms.


Our data were collected from the databases of Bloomberg news as well as websites of the firms involved in the Mergers and Acquisitions. The EUROSTOXX 600 forms an adequate benchmark for this empirical study chiefly because the results from observed Mergers and Acquisitions are easily comparable across the geographical region and are collected for same period.


3.2       Methodology

Event Studies

Event studies have been employed to assess how specific economic events impact stock markets and firms through stock prices since 1933. According to MacKinlay[131] stock markets are so efficient that economic events are almost immediately reflected in stock prices. In the words of Henderson[132] “The sheer volume of event study literature can be imposing to researchers’ first considering use of the paradigm. Yet, an examination of the process reveals that the similarities between various event studies are greater than the differences.” Henderson points out that event studies have a classic design. “Classic designs are simple and elegant, and, above all else, functional”. A major reason for adopting event studies is highlighted by Henderson[133] where he explains that the main reason event studies are referred to as a “classic” is because they work and could be used under less than perfect conditions and still produce reliable results. The most consistent lesson Event study methodology research provides which makes it suitable for this study is that “even the simplest versions of the event study design works”. MacKinlay [134] argues thatwhile more specialized designs may be necessary for troublesome situations, for most applications the simpler versions do nicely”. This study adopts one of the simpler methodologies to analyze our target Index. Other attributes that has made the event study methodology suitable for our purpose are highlighted by Henderson[135]  where he points out that event studies are of a very serviceable design, are easy to learn to use, reliable, and easy to interpret.

This study follows the Empirical review process established by MacKinlay[136] and breaks down the methodology into several steps:


STEP 1 – Event Definition

The objective of our study is to measure the effect of the Merger and Acquisition on the EUROSTOXX Index by measuring the cumulative impact of the M&A’s on acquiring firms. We follow Brown and Warner[137], Ekholm and Svensson[138] as well as a vast majority of researcher to define the event day as the day of the announcement of the merger.

Secondly, we define the event window which Ekholm and Svensson[139] describes as the days surrounding the event day that could be used to not only capture changes within the period but also measure their impact. This is so because when markets are assumed to be rational (efficient), the effects of an event such as an M&A would be felt almost immediately as investors respond to such events.


While there is little unanimity as to what constitutes an appropriate event window, Andre[140] observes that a decision on an appropriate event window should be based on theoretical rather than empirical arguments. Our study adopts a 5-day (-5) window before the announcement of the M&A as well as 365days after the announcement (-5, +365) in order to measure abnormal returns in the EUROSTOXX Index where the announcement date is given as day zero (0). Our choice of a relatively wide window is to enable us measure the long term impact of the M&A on the EUROSTOXX Index.


It is important to note that most researchers avoid using a wide window to measure abnormal returns as observed by Campbell[141] and MacKinlay[142]. The researchers argue that long windows risk mixing up other firm events along with the actual M&A event that is intended to be measured. In other words, shorter windows helps avoid distortions in results by other noises Tuch and O’Sullivan[143]. Our study tries to mitigate this risk by adopting a wide pool of M&A data across various years and industries.


STEP 2 – Selection Criteria

In our next step, a selection criteria for picking firms into our sample is specified. We have chosen to include announcements of M&A’s made between January 2006 and December 2016 covering firms listed in the EUROSTOXX 600 index. The following restrictions are placed on our samples:


  1. The deal status must be “completed”
  2. The Acquirer must be listed in the EUROSTOXX 600 Index
  • Deal must have had a 365 day assessment window
  1. Acquirer must have acquired 100% of the old firm.


A total of 127 firms qualified to be included in our sample with three further dropped for incomplete information bringing our sample to a total of 124.


STEP 3 – Normal and Abnormal Returns

Here, normal and abnormal returns are calculated for stocks listed in our sample. Normal returns are defined as returns that would have accrued if the event (M&A) had not taken place. Calculating the abnormal returns enables us determine the effect of the event on the value of the EUROSTOXX Index 600. We calculate the impact of an M&A on a market by measuring any abnormal returns by weighing the actual with the expected returns. We start by calculating the actual returns in our stock through the event window (Sum of Column F in our original EUROSTOXX600 dataset)


To define abnormal returns, we estimate the normal returns a market would have generated without a Merger and Acquisition. MacKinlay[144] list several statistical estimation methods to model normal returns among which is the Market Adjusted Return Model which assumes that the mean of a specific stock is constant through time. Our study adopts this model (the Market Adjusted Return Model) to measure returns in the EUROSTOXX 600 Index.

the time period is the abnormal return 5 days before the announcement date and the end of the period is the abnormal return 365 days after the announcement date.

To calculate this, first the return of the individual acquiring firm is calculated (Column G in our original Dataset) for every single trading day. After that, the return of the index, in this case the EUROSTOXX 600, are also calculated and aggregated for every single trading day throughout the trading period. With these data the abnormal returns of every single trading day can be calculated with the return of the firm for the period minus the return of the index. By summing up all the abnormal returns, the Cumulative Abnormal Return (CAR) for each of the firms can be calculated. With the result from the CAR, the performance of stocks can be analyzed over a longer interval period.

 STEP 4 – Testing Procedure

To conclude and measure the presence of abnormal returns and its effect on the Index, we employ the t-test of significance to test the Cumulative Abnormal Returns. Hence, we can draw conclusions as to the impact of the event on the Entire Stock Index for the period under consideration.

We calculate the CAR for the period [-5, +365] around the announcement date. The average abnormal rates are aggregated over time for the event window.

We then formulate the Null and Alternative Hypotheses to be tested as:

H0 : CAR = 0

H1 : CAR ≠ 0


3.3 Empirical results

The sample of the empirical research is based on 124 companies involved in mergers and acquisitions between 2006 1nd 2016. The Abnormal Returns (AR) and the Cumulative Abnormal Returns (CAR) are calculated with the help of the market adjusted returns. To test for significance, we employ a t-test for the Cumulative Abnormal Returns. Table 3.1 presents the AR’s of the acquiring firms and table 3.2 presents the CAR of the acquiring firms.

Table 6 Abnormal Returns Table

AR 79 44

Source: Author’s Computation

The table 3.1 presents the Abnormal Returns for the 124 firms represented in our dataset involved in Mergers and Acquisitions in the EUROSTOXX 600 for the period 2006 – 2016. The result shows that 79 acquiring firms involved in M & A’s recorded Positive Abnormal Returns while 44 acquiring firms recorded negative returns 365 days after the Merger and Acquisition.

This result implies that 64% of the acquiring companies in the stock market for the period under consideration, recorded positive returns after a Merger and Acquisition process in the period considered while 36 recorded negative returns.

Table 7 t-test Result for Cumulative Abnormal Returns

  Result t-value Probability
CAR 11.799% 1.94053 0.027758

Source: Authors computation

Table 3.2 above shows the t-test result of the Cumulative Abnormal Return for the Market Adjusted Model in the EUROSTOXX 600 Index for Mergers and Acquisitions in the period. The CAR value of 11.80% with a t-value of 1.94 was significant at the 5% level as observed from the probability value of 0.02. Since our model was statistically significant, our result is adjudged to be valid and hence we do not reject the Hypothesis that Mergers and Acquisitions have created value in the EUROSTOXX 600 Index between 2006 and 2016. Our result indicates that M & A’s have significantly improved returns for investors/acquirers in the period considered.



Our conclusion from employing an event study approach to examine the effects of Mergers and Acquisitions in the EUROSTOXX 600 Index between 2006 and 2016 is that M&A’s have added value to the market by enhancing shareholder returns. Our study examined returns that accrued to shareholders 5 days before the announcement of an M&A and 365 days after the announcement. The length of our study (365 days) was to enable us measure the long term effects of the M&A not just euphoric effects as mostly captured by short event windows.

The results of the value for shareholders of the target firms were mostly positive in line with studies by Sørheim and Lerkerød[145], Rewinkel[146], Martin and McConnell[147] and Mikkelson and Partch[148]. The value of the combined firm after a Merger and Acquisition is also positive with on average a positive return for the shareholders. According to our findings, while a total of 79 firms had recorded positive abnormal returns within 365 days from the date of announcement, 44 had recorded negative abnormal returns leading us to conclude that acquiring firms have gained significantly from engaging in a Mergers or acquisitions and therefore, contributed to value creation in the EUROSTOXX 600 Index between 2006 and 2016.

4.4 Recommendations for further research

While there exists a substantial amount of studies on value creation as a result of M&A’s, there are still lots of interesting research questions left unanswered.

Firstly, it would be interesting to have a study that transcends regional borders in order to understand the overall effects of M&A’s in different kind of markets especially in regions without strict rules and well-regulated markets. Also, our study considered the market as a whole without specific focus on any industry. It would be interesting to find out the effects of Mergers and acquisitions in specific kinds of industries as M&A’s may suit certain kinds of industries more than others. This would of course require a large pool of data across different countries and regions.

Also. While our study overwhelmingly concludes that M&A’s add value to markets, there was also a large number of deals that yielded negative outcomes (44 in our study). It would be interesting to study more in-depth as to the characteristics of these M&A’s in order to determine if there’s a predictable that would ultimately lead to a loss.


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t-Test: Two-Sample Assuming Equal Variances
  Variable 1 Variable 2
Mean 0.284343 0.187661
Variance 0.087655 0.024047
Observations 45 45
Pooled Variance 0.055851
Hypothesized Mean Difference 0
df 88
t Stat 1.94053
P(T<=t) one-tail 0.027758
t Critical one-tail 1.662354
P(T<=t) two-tail 0.055517
t Critical two-tail 1.98729  


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