Mergers and Acquisition Case Study

GROUP Homework 3: M&A Event Study

DUE: November 15th 11:59pm

Questions regarding this homework should go to me, not Jane-Carlton.

Homework 3 is to do an event study for a recent merger or acquisition deal. You may do this with

your group. Choose a M&A deal that has been announced and completed in the last 10 years.

Both the acquirer and target should be publicly traded companies. The deal should be a meaningful

investment for the acquirer; otherwise it will be hard to detect valuation effects. Therefore,

transaction value/acquirer market capitalization 10 days prior to announcement > 5%. I have

created an excel list of potential deals that meet this criteria (you do not have to choose from the

list). I have also posted data for some of the transactions on the list and more. Choose a transaction

you are excited to know more about. You do not need to email me your choice. If you cannot find

the data, send me an email with the acquirer and target tickers and the exact date range you need.

This homework is very similar to the Proctor Gamble + Gillette model – use this as a reference.

1) Compute the abnormal returns to the acquirer shareholders from ten trading days prior to ten

trading days subsequent to the merger announcement date.

a. Use the market model to estimate “expected” returns. Estimate α and β for the 252

trading days prior to the deal announcement (i.e., -273 to -21). Regress acquirer firm

returns on the returns of a broad-based value-weighted market index (use the market

proxy of your choice - SP500, CRSP Value-Weighted Index). If the deal was

announced after market close (check Factiva for the time of the announcement), then

assume day 0 is the day after.

b. Use STEYX to determine whether the daily abnormal returns are statistically different

from zero.

c. Compute the cumulative abnormal returns around multiple event windows. See slide

17 in the Event Study Overview slides for common event windows.

d. Your analysis should include graphs of the daily abnormal returns vs. expected returns

and of the cumulative abnormal returns.

2) Compute the abnormal returns to the target shareholders from ten trading days prior to ten

trading days subsequent to the merger announcement date. Follow all steps described in #1.

3) To estimate the synergies created by the deal, find the cumulative abnormal valuations of both

the target and the acquirer. To do this, use the market valuation of the target and acquirer 10

days prior to the announcement.

a. This analysis should also be supported by graphs.

4) Once you have completed the empirical portion, interpret the results. Include a short discussion

of the results in the excel file. The short discussion (~3 paragraphs) should address the

following. Does the market believe the deal created synergies (as estimated in #3)? How were

the gains from the deal divided between the target (#2) and the acquirer (#1)? Spend some time

researching the deal (e.g., firm press releases, WSJ articles, etc.) by utilizing news stories in

the days surrounding the announcement. What was the rationale for the deal (e.g., revenue

enhancement, cost reduction, tax gains, etc.)? What were journalists/analysts saying about this

deal? Did they think the deal would create synergies? Why do you think the gains were divided

between the target and acquirer as observed above? Competition? Bargaining power? Defense

tactics? Other?

You should also turn in the excel document that contains your analysis via email. All questions

should be directed to me and not to my TA.