Market-Based Estimates of Value Gains from Takeovers: An Intervention Approach
Sanjai Bhagat and David Hirshleifer
An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. We provide estimates of value improvements that avoid the bidder-revelation bias present in previous studies. Our approach, the intervention method, is based on a model of the stock returns of an initial bidder when a competing bid occurs. We find four main results. First, investors perceive value improvements from cash tender offers on average to be large and positive (44.8% of target value). Second, in multiple bidder contests, average profits on bidders’ initial shareholdings in the target are on average modest (1.28% of target value). Third, point estimates indicate that bidders on average pay too much for targets, but that most of the average successful takeover premium can be explained by value improvement. Finally, value improvements seem to be of similar magnitude for friendly and hostile transactions.