Survival of the Fittest? An empirical analysis of spillover effects following M&A announcements in the Norwegian stock market
Abstract
This thesis aims to add to the difficult issue of announcement returns in rivals of acquisition
targets. As existing M&A literature has predominantly focused on the acquirer, the target, and
the merged entity, much remains to be known about the competitive effects of merger activity.
Accordingly, our research may help challenge the widespread perception among regulators that
being a merger outsider represents a competitive threat. We aim to add to the ongoing
investigation of rival returns by examining announcement returns in rivals of Norwegian
acquisition targets. Specifically, we investigate if several non-researched deal-specific and firmspecific
variables can help explain sources of rival gains following acquisition announcements.
Using a sample of 163 acquisition announcements and 987 rival firms in Norway between 1995-
2020, we find that, on average, rivals of Norwegian acquisition targets experience positive
announcement returns. We hypothesize that in acquisitions where the acquirer and target are
competitors, rivals will gain less than rivals where they are not. This is because horizontal
transactions are more likely to negatively impact rival firms' future cash flows. Our findings
confirm our hypothesis, as rivals, on average, gain less when the transaction is horizontal.
Moreover, we find that rival returns increase when the acquirer is foreign and when the bid
surprises the market. Both are likely due to positive signalling effects such as increased industry
growth expectations or a greater probability that the rival will become a subsequent target.
Furthermore, we investigate if concerns of increased competition can explain the lower
announcement returns in horizontal acquisitions. Using market share and EBITDA margin as
proxies for the competitive position of rivals, we test if they impact rival returns differently in
horizontal and nonhorizontal acquisitions. We find that a higher market share correlates with
higher announcement returns in horizontal acquisitions but not in the total sample. This
coincides with our theory that investors prefer investing in rivals with solid competitive positions
following intra-industry mergers but smaller targets after nonhorizontal transactions. However,
the EBITDA margin does not impact the subsamples differently. Thus, we cannot conclude that
competitive concerns drive down rival returns in horizontal acquisitions. Finally, the extant
literature neglects the link between rival returns and ownership structure, despite corporate
finance making strong predictions between target returns and ownership structure. We aim to
add to this loophole in the literature by including four proxies capturing the ownership
concentration of rival firms in our analysis. However, we find no evidence that ownership
structure impacts rival announcement returns.