Glamour Acquirers, Method of Payment and Post-acquisition Performance: The UK Evidence

Authors

  • Sudi Sudarsanam,

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  • Ashraf A. Mahate

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       The authors are respectively, Professor of Finance & Corporate Control, Cranfield School of Management; and Senior Lecturer at University of Wollongong Dubai Campus, Dubai, UAE. They would like to thank Ayo Salami for his help and advice with this paper and would also like to thank Robin Limmack, Andrew Stark, Ken Peasnell, John O’Hanlon, Peter Pope, Alan Gregory and other participants at the ACCA/CBP/JBFA Capital Markets Conference May 2002 for their comments on an earlier version of this paper. They are also grateful to Alan Freeman for help with some of the econometric analysis.


Sudi Sudarsanam, Professor of Finance & Corporate Control, Cranfield School of Management, Cranfield MK43 0AL, UK.
e-mail: P.S.Sudarsanam@cranfield.ac.uk

Abstract

We study the effect of different acquirer types, defined by financial status and their payment methods, on their short and long-term performance, in terms of abnormal returns using a variety of benchmark models. For a sample of 519 UK acquirers during 1983–95, we examine the abnormal return performance of acquirers based on their pre-bid financial status as either glamour or value acquirers using both the price to earnings (PE) ratio and market to book value ratio (MTBV). Value acquirers outperform glamour acquirers in the three-year post-acquisition period. One interpretation is that glamour firms have overvalued equity and tend to exploit their status and use it more often than cash to finance their acquisitions. As we move from glamour to value acquirers, there is a greater use of cash. Our results are broadly consistent with those for the US reported by Rau and Vermaelen (1998). However, in contrast to their study, we find stronger support for the method of payment hypothesis than for extrapolation hypothesis. Cash acquirers generate higher returns than equity acquirers, irrespective of their glamour/ value status. Our conclusions, based on four benchmark models for abnormal returns, suggest that stock markets in both the US and the UK may share a similar proclivity for over-extrapolation of past performance, at least in the bid period. They also tend to reassess acquirer performance in the post-acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries.

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