eThesis - Kauppakorkeakoulun sähköiset gradut

The purpose of this thesis is to examine factors affecting target stock price runups prior to acquisition announcements, which are widely believed to be attributable to leakage of insider information before the bids. Moreover, my aim is to further investigate whether the runups affect takeover premiums paid for the target companies. Finally, my objective is to study the effect of toehold purchases on takeover premiums and test whether they are harmful for the acquirers in terms of increased takeover premiums.

The data used in this study covers 1182 M&A announcements from U.K. between January 1990 and December 2013. The data is obtained from SDC Platinum (M&A announcements, deal characteristics), Datastream (stock prices) and Worldscope (financial data). I use standard event study methodology in conducting the research and calculate cumulative abnormal returns for the runup calculation (-42,-1 trading days relative to the initial control bid) and markup calculation (0, delisting/126 trading days). Target runup is the dependent variable in the runup determinant regressions and target markup is the dependent variable in most regressions regarding the relation between target stock price runups and takeover premiums. The effect of toehold purchases is examined along with the multiple regressions measuring the relation between target runups and takeover premiums.

The results suggest that the targets earn on average 14.3% positive abnormal return during the pre-bid runup period, which is higher compared to results from earlier studies. Several factors have statistically and economically significant effect on the magnitude of the runup, e.g. for all- cash deals the runup is on average 10.0 percentage points higher than for all-stock deals and multiple bidders increase the runup 14.2-17.8 percentage points depending on the regression model used. Furthermore, significant proportion of the runup increase is increasing the markup, which increments the premium paid for the target. The results indicate that the target runups and bidder markups are essentially independent implying the runup phenomenon is a costly feature for the bidding companies. Finally, I do not find evidence for my last hypothesis regarding toehold purchases.