Rates of Return to Stockholders of Acquired Companies

Robert A. Haugen and Jon G. Udell

Journal of Financial and Quantitative Analysis, 1972, vol. 7, issue 1, 1387-1398

Abstract: This study has addressed itself to that group most immediately affected in corporate acquisition, the stockholders of acquired companies. We find that in the years observed, acquired company stockholders seem to have benefited from the acquisitions. This study differs from other studies of post-merger performance of the common stock of acquirors and not the performance of securities received by acquirees in exchange for their common stock. It should also be noted that most of the financial gain resulting from the acquisitions accrued at the time of merger because of substantial premiums paid by acquirors. While the stockholders of the acquired companies have, on average, benefited, these results tell us little of the effect of mergers on the welfare of society or, for that matter, of their effect on the stockholders of the acquiring firm. If the merger cannot be justified on the basis of some economy of scale or synergistic advantage, the newcomers reap their lucrative returns only at the expense of the old guard. If the acquiring firm pays a premium in acquisition on the basis of justifiably sound expectations of increased profits, social welfare is not necessarily enhanced. Increased profitability may not reflect increased efficiency; it may, for example, be a manifestation of decay in the competitive environment.

Date: 1972
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