Anticipation of Takeover Transactions by Shifts in the Correlations

Abstract

This paper provides a new solution for the bidder unpredictability dilemma in takeover acquisitions. The sample encompasses 125 successful acquisitions between non-financial exchange-listed U.S. companies from 2003 to 2006. A break in the mean of correlations between the target and the acquirer daily stock returns is detected on average 54 trading days before the announcement in 84% of the sample, which suggests that the market anticipates the pair-firms in bid offers. Another break is observed on average 19 days after the announcement in 77% of the sample. This indicates that the market not only reacts to the public bid announcements but also increases the likelihood that the bidders will successfully acquire the target firms. There is no evidence that the market is able to anticipate the payment form. The empirical evidence is furthermore provided for the predictors of the likelihood of observing the anticipation and the reaction breaks and for the determinants of the number of breaks per deal. Among those predictors, pair-firms from a similar industry and Cash offers are the most economically significant regressors in predicting the bid offers (and the number of breaks per deal) and the reaction to the bid announcements, respectively.