Capital Market Reaction to M&A: Effect of Deal Strategy on Market Returns

Using a classification of bidders’ strategies based on their pre-event performance, I examine whether M&A motives affect market reaction to deal announcement. This study categorizes motives of M&A deals into three groups (strategic, restructuring and acquisition of assets) and specifies the concept of synergy by separating the theory of profitable growth into a single group. I find that various strategic intents of bidders, indeed, provide deal participants (acquirers) with different returns in short-term period. I also reveal that strategic acquisitions are the most appreciated by the market, leading to the highest returns and a more sustainable valuation effect on acquirers. This fact, which is tested in the paper, supports the idea that external strategy for growth aimed at strategic goals (expanding presence in new markets, offering new products and services etc.) creates or at least does not destroy value in M&As. Thus, stock market values transactions of bidders with potentially better growth opportunities and sustainable profitability more than other deals with different motivation while reacting to deal announcement.