This thesis investigates the effect of a merger & acquisition announcement on the stock price of the German target company. In the remaining part of the paper ‘M&A’ will be used instead of ‘merger & acquisition’. Germany has the largest national economy in Europe and it has the fourth-largest economy in the world by nominal GDP.
According to the IMF, the contribution to Europe’s total economy was 28% in 2007. The effect on the stock price after a M&A announcement has intensively been researched; however, this has scarcely been done for the German target company. So this thesis gives insight what a German interested investor could do, when he gets information about such an announcement.
M&As are a common strategy for a company to extend their business. Most important reasons for companies to participate in M&As are synergies and the correction of managerial failure, as researched in Martynova and Renneboog (2006). Shareholders of target companies receive large premiums relative to the pre-announcement share price.
However, the abnormal return realized by bidder shareholders around the announcement day is insignificantly different from zero. Empirical literature concludes that the announcement has positive results for the combined firm in the short term. Campa and Hernando (2006) conclude that European target companies have a large positive return around the announcement date of the M&A. It was on average 5.80% from one month prior to the announcement until the day after the announcement.
In this thesis, the effect of a M&A announcement will be measured. This will be done with listed German target companies and the effect on their share prices. The acquiring firm can be German or non-German and the acquirer is not required to be listed. The DAX Performance Index was used as benchmark, since all target companies are listed. The total data sample consist of 100 M&A announcements. After deleting inappropriate data the sample is reduced to 65 announcements. The main research question is:
Does a M&A announcement have a significant effect on the share price of the German target company?
This thesis starts with theory about the effect of a M&A announcement on the share price of the listed target company. Furthermore, there will be an overview of the empirical results of previous studies conducted in the same field. After that, the hypothesis is formulated.
The data sample and research methodology will be discussed in the third section. MacKinley (1997) is used for the methodology of the event study. The last section, section 5, the results and their meaning are discussed and conclusions are presented.
