It's an important question, but like so often in corporate finance, sampling matters. In my 2008 survey "Corporate Takeovers" with S. Betton and K. Thorburn, we do a core dump of about 13,000  M&As on SDC from 1980-2005. The average return to pairs bidders and targets combined is positive and significant, so M&A activity enhances economic efficiency on average. However, check out Table 9 where we summarize bidder announcement returns across eight portfolios sorted on bidder size, target public status, and payment method (cash/stock). There you see that bidder gains are on average negative (-2.21%) and significant when large bidders acquire public targets with stock. This subgroup is largely responsible for the widespread belief (reflected in your question) that bidders lose value from M&A activity. You see in several other places in table 9 that bidder gains are non-negative for the bulk of the takeovers. That leaves a puzzle only for the large bidder/public target/stock payment subsample. Here, the explanation may well be an econometric problem: partial anticipation causing bidder takeover gains to be embedded in the market values of frequent acquirers prior to the acquisition events themselves. 

Dear Professor Eckbo,

Thanks for your detailed explanation. Your opinion is very important given your experience in this area of research.

I agree this is a very important question in Corporate Finance.

Regarding the target-company, it is also a question of sampling. Many studies reports negative control premiums (see, for instance, Barclay and Holderness (1989) - for US, Ødegaard (2007) - for Norwegian companies, Dragota, Lipara and Ciobanu (2013) for Romanian companies).

However, in most of the cases, positive control premium are recorded. Regarding the possible explanations, hubris effect seems to be an interesting explanation, but I think it is difficult to be tested. Informational asymmetries and the private benefits of control can be plausible explanations especially in emerging markets. 

Thanks, Prof Rossi, for asking for my humble opinion about this very important topic. I think Prof. Eckbo gave a detailed scientifically-experienced opinion. Even though my experience is more of a corporate governance, rather than a corporate finance, I would simply say that in addition to the studies that show that bidders lose value in mergers or acquisitions, there are other studies that reveal that mergers or acquisitions generate abnormal returns for bidding firm's shareholders....and the same applies to target firms. It depends on the perspective, tools, data, model, etc. that have been used by the researcher; as well as, and very importantly, the purpose of such merger or acquisition and the negotiating position, especially financial position, of both the target and bidder at the time of merger or acquisition.

@Fabrizio: thank you for your very interesting question. Although i am no expert in mergers, i have seen in my country a number of successful mergers. But others may yield failures because what happen is not a merging but collision between two corporate cultures. 

http://www.deloitte.com/assets/Dcom-Peru/Local%20Assets/Documents/ca_DR_SuccessMergers_Feb2004(1).pdf

I was working with John Kitching in the City when he did this:

Kitching, J. 1967. Why Do Mergers Miscarry? Harvard Business Review, 45(6): 84-101.

The bottom line is the M&A is another mode of taking wealth out of the shareholder and funneling it to the executives involved.  Everyone in merchant banking - what I was doing then - knew this.

So you claim the line of the expropriation of wealth to shareholders.

Why not?  Why else does business exist?

I agree with you that there is often only a "transfer" of wealth. However, this should not be the goal of M&As.

Aha - who is doing the 'should' here?  

The guys who do the real 'should' - in practice - are the execs who put the deals into play - or the 'bankers' and hedge fund managers who wake the execs from their slumbers.  Certainly not the shareholders or even the stakeholders - assuming these people can ever be identified rather than used for rhetorical cover.

An interesting but debatable instance is when several large companies are bidding in order to keep from suffering a loss in market share.  I am familiar with a situation where the fourth largest bank in a country was competing with the top three banks to acquire the fifth largest bank.  Analysis indicated significant synergies, but they were larger for the top three banks.  If the fourth bank won the bidding, its value would surely decline.   However, given that it overbid, its value would decline less than the alternative, which was to remain the fourth largest bank for all time.  Therefore, it offered a price slightly higher than the largest bank.  When it won the bidding, its price fell -- but less than it would have fallen had the fourth largest bank declined to bid.  Of course this story is incomplete unless one mentions that the management of the fourth largest bank was unwilling to support selling itself.

Regards,

Tom Copeland

Thomas' example raises two very important points for the empirical debate over the value of takeovers bidding for bidder firms. The first is that standard abnormal stock return analysis assumes that the alternative to a takeover is status quo - which it might not be if the takeover changes industry competition. The fourth bank essentially said "the house is on fire but we're doing something about it (bidding for the fifth bank)". If the takeover bid goes through, you don't see that the house would have "burnt down" absent the takeover. In this type of situation, negative abnormal returns to the successful bidder may turn to positive abnormal return if correctly measured against the counterfactual ("house burns down"). The second point is that the complex selection process behind  "who buys who", and "who initiates the takeover" also matters for empirical inferences based on stock return analyses. Overall, I tell my students that the evidence on negative average abnormal stock returns to large successful bidder firms buying large public targets is insufficient to conclude in favor of overbidding. That doesn't mean that they are not overbidding - we just can't tell.

Regards

Espen

Perhaps, as Mitchell,  Pulvino and Stafford (2002) said, some hedge funds are adopting long-short strategies on the stock market  during mergers and acquisitions. Buying the acquired firms' stocks and  selling-short the stock of the acquiring firm at the same time may at least explain part of the downward pressure on the the acquiring firm's stock. In fact, hedge funds try to undertake quasi-arbitrages.