Article - Mitchell and Lehn Topic 7

Question 1

What is the main point that Mitchell makes?

Answer 1

That acquisitions that do not add value to acquiring firms shareholders through stock price maximisation, will become takeover targets themselves.

Question 2

Stock prices of acquiring companies that later become targets decline by about 3% over 45 days what does this suggest?

Answer 2

acquisitions financed by acquirers free cash flow result in a lower stock price (and hence shareholder wealth) for these bidders because the NPV of such acquisitions must have been negative

Question 3

what was the average abnormal return of sample firms that became takeover targets on announcement date of acquisition and during other windows?

Answer 3

negative on announcement date

zero in other windows

Question 4

What did non target firms achieve that target firms did not?

Answer 4

an increase in stock prices with in 3yrs following decreases in prices due to acquisitions

Question 5

what indicates a greater likelihood of a subsequent takeover attempt?

Answer 5

The more negative the market’s response to an acquisition the more likely the firm will become a target itself