Want to Win in Merger Mania? Bet on Losing Bidders, Study Shows

(Bloomberg) -- In a merger contest, it pays to bet on the losing suitor, according to a recent study.

While both winners and losers display similar stock-market performances in the three years leading up to a merger announcement, the North American companies that don’t end up getting their target outperform acquirers by 24 percent in the three years following it, according to a paper in the August edition of the Review of Financial Studies. The difference for international losers was about 14 percent.

In a potential warning to the most aggressive dealmakers, the authors, who include University of California, Berkeley, finance professor Ulrike Malmendier, found that the high price tag paid for the target and an increase in leverage appear to be behind the underperformance of the winning bidders.

“High payments for relatively large deals, especially payments in cash, appear to be the most important indicator of long-term underperformance, rather than other factors related to the productivity of the merged firm,” the authors wrote in a previously published version of the paper.

The results “are also consistent with the behavioral view that managers’ overestimation of future returns are an important factor in explaining value-destroying merger activities,” they said.

Though the study focused on contests between 1985 and 2012, it should have particular relevance today, where merger mania is alive and well. Companies globally announced $2.1 trillion of transactions in the first half of the year, putting 2018 on track to beat 2007’s record $4.1 trillion total, data compiled by Bloomberg show.

Even the biggest firms are not shying away from competing for their targets. For example, both Walt Disney Co. and Comcast Corp. are fighting to acquire the entertainment assets of Rupert Murdoch’s 21st Century Fox Inc. at the moment. Disney holds the edge -- thanks to a $71.3 billion deal that’s already been approved by U.S. regulators.

The study analyzed 112 North American and 72 international mergers with concurrent bids of at least two potential acquirers.

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