Glamour, Value and the Post-Acquisition Performance of Acquiring Firms

Abstract

Extant literature on the post acquisition performance of bidders in mergers and tender offers is divided as to whether or not the bidders underperform in the long-term after the acquisition. In addition, standard long-horizon tests used for testing this underperformance have been shown to be biased. We use a methodology robust to these criticisms to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. We also show that the underperformance is not uniform - glamour firms, characterized by low book-to-market ratios, significantly underperform, while value firms significantly outperform control portfolios with the same size and book-to-market ratio. We find that this difference in performance is partly due to hubris on the part of the glamour bidders and partly due to timing - glamour bidders especially in mergers, systematically pay for their acquisitions using their own overvalued shares. We also investigate whether a fixation on EPS maximization on the part of the bidders can lead to subsequent underperformance, but find no evidence consistent with EPS myopia.