Acquirer and target firm gains in mergers and acquisitions

Abstract

Mergers and acquisitions serve to fulfil corporate goals by consolidating assets and liabilities of multiple entities under one single entity. Their main benefits arise from wealth creation to acquirer and target shareholders, by means of synergies, however, post-merger shareholder wealth may also be affected negatively as found in the literature. This study aims to identify the extent of wealth creation or destruction accruing to acquirer and target firms, and the proportion by which they share such gains or losses. An event study methodology was employed in doing so, in line with most of the preceding literature on the topic. This methodology was used in conjunction with the Capital Asset Pricing Model (CAPM) and a market model (MM) whereby Average Abnormal Returns (AAR) and Cumulative Average Abnormal Returns (CAARs) are used. The results obtained will be useful to investors with positions in European firms, based on the sample selected, and the appropriate time for them to trade in the midst of a merger or acquisition.