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.