Despite the bloodbath on the investment banking street in the aftermath of the subprime crisis, there has been probably no let up in the merger mania witnessed over the last few years. According to a research firm Thomson Financial, companies globally cut deals worth a record $4.38 tn in 2007, up 21% from 2006, with Europe overtaking the US for the first time in the last five years with a figure of $1.78 tn; the US witnessed deals worth $1.57 tn during the year. One of the major characteristics of the deal frenzy of the year was that it was led by an easy availability of finance while helping private equity players to play a dominant role on the deal street. According to Thomson Financial, private equity buyouts alone accounted for as much as 41% of the total US merger volume as of the first week of July. However, it fell to 15% of the weekly merger volume in the second half of the year in the wake of a subprime crisis. However, the effect of liquidity crisis was felt more in the US where merger activity was halved in the second half of the year, globally the deal activity fell only about a quarter. However, once again expectations of revival in the momentum for big bang M&As are rising. Many market analysts expect 2008 to be a year of major consolidation for the US airline industry, especially the struggling full service carriers. Globally, industries such as financial services, pharmaceuticals, and commodities are seen as set to witness hectic deal-making. However, amidst the deal frenzy, the billion dollar question is: is the deal frenzy serving the cause of the merging firms? In other words, do they lead to the creation of shareholder wealth?

In the paper, “The Effects of the Cross-Correlation of Stock Returns on Post-Merger Stock Performance,” the authors attempt to find an answer to this question. They examine the effects of the cross-correlation of stock returns on the long-run post-merger stock performance of UK acquiring firms over the period 1985-2001. The authors suggest that in general, the widely documented anomaly of long-run underperformance following mergers is not due to various stylized merger effects, but rather due to the cross-correlation of stock returns, which compromises the ‘independence of observations’ assumption, thus yielding overstated test statistics.

In line with most previous studies, the authors find that acquiring firms generally experience significant negative abnormal returns in three years following mergers. After controlling for the cross-sectional dependence of sample returns, however, this underperformance by and large becomes statistically insignificant. Furthermore, they also find that the method of payment, diversification, book-to-market and size effects disappear or become much less convincing after accounting for the cross-correlation of sample returns. The authors conclude that, while the method of payment, diversification, book-to-market, and size effects have long served to explain the acquiring firms’ long-run post-merger underperformance, it is perhaps the failure to control for the cross-correlation of stock returns which may have driven these alleged long-run anomalies to appear in the first place. “Our result therefore lends strong support to the long-run efficiency of capital markets,” the authors observe.

The paper, “Combined in Luxury: M&A Announcement Effects and Capital Market Integration in Europe,” examines the announcement effects of 206 M&A transactions involving at least one luxury company—in 172 events as a bidder and in 34 events as a target. The authors investigate the sample for differences between transactions including luxury conglomerates and non-conglomerate luxury firms and particularly, contrast domestic and cross-border acquisitions. The authors find that M&A accrue value to the target shareholders is in accordance with the widely unanimous findings in M&A literature. However, they say that the findings on transactions creating value for the acquirer firms, actually contradict the suggestion that M&A usually destroy the value for the acquirer which the prior research widely agrees on. The authors say that superior question of this analysis has been to analyze the potential differences between domestic and cross-country transactions. They find that their comparative analysis of domestic and cross-border luxury M&A transactions does not allow the detection of any significant differences. They suggest that non-existence of discrepancies due to the geographical focus of a transaction holds for the comparison of transactions with domestic, EU, non-EU and transcontinental background, respectively. The authors conclude that these results hint at a high degree of capital market integration, especially in Europe, where a majority of luxury firms are headquartered. Their findings are well in line with the assumption of the luxury sector as an internationally operating and globally integrated industry, where company size and market power are decisive success factors, whereas it is of little importance where the target company is located.

The case study in this issue is on UB Group’s acquisition of a Scottish company, W&M Ltd. In May, last year, India’s UB Group, the world’s third-largest maker of spirits, acquired Scotland-based W&M Ltd, a Scotch whisky maker, in a deal worth $1.2 bn. The author discusses the potential synergies from the acquisition and how it can further help the Indian giant expand its footprint abroad. The case study also highlights the national and international market and demand for scotch.

- Amit Singh Sisodiya
Consulting Editor