Market Reaction to European Investigation of Acquisitions

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Table of contents

Introduction        3

Literature review        4

Methodology        5

Results        6

Effect on bidder        6

Effect on target        7

Combination of bidders and targets (combined returns)        8

Abnormal returns of bidders, targets and combination of bidder and target when approved by the European Commission        8

Bidders        8

Appendix        9

Introduction

With this paper we try to gain insight into the market reaction and share price evolution after the European Commission announces it will launch an investigation to see if an acquisition breaches it’s antitrust legislation. The Treaty on the Functioning of the European Union gives the European Commission the right to investigate if, according to article 101, a cartel formation with among other things price agreements occur or, according to article 102, if the acquisition gives firms a dominant market position with the power to abuse that position (European Union, 2008).

We focus on the aforementioned article 102 of The Treaty on the Functioning of the European Union which says that acquisitions can be forbidden if it leads to: unfair prices, unfair conditions of sales, the loss/decrease of production, loss in development benefitting consumers or if it leads to unequal contract conditions to the involved parties.

We have been assigned three cases involving acquisitions which sparked investigations by the European Commission, these cases were: Bayer buying Monsanto, BASF buying the nylon facilities of Solvay and the fusion of train activities between Siemens and Alstom. The facts surrounding these cases will be briefly discussed below.

First; Bayer buying Monsanto sparked concern by the European Commission because it suspected the seed- and pesticide market would be heavily dominated by Bayer after the acquisition. The two firm, especially Monsanto, were competitors and market leaders in the seed- and pesticide market which would lead to an increase in prices not because of market forces but because the dominant position of Bayer post-acquisition. So now Bayer not only has to pay an eye-watering amounts for the acquisition of Monsanto and settlements for future Roundup-claims (a product of Monsanto which following the California court verdict causes cancer) it also has to give up much of its seeds and agrichemical business to satisfy competition concerns. (Fitzpatrick, 2018)

Second; in the case of the acquisition of the nylon departments and production facilities of Solvay by BASF European Commissioner for competition Margrethe Vestager ordered a thorough investigation as it feared that it would restrict the nylon market as there are only a few producers who deliver essential  resources for nylon products. Solvay is for now the only company in Europe that produces in all stages of the nylon supply chain. This would mean that the acquisition could possible lead to higher prices, less choice for companies and eventually costumers and less competition in the nylon supply chain. (Belga, 2018)

Finally there is the fusion of train activities between Siemens and Alstom who hoped to become the ‘Airbus of the railroads’. Alstom and Siemens hoped that the fusion would give them the ability to cope with Asian competitors as the Chinese CNNC. The German and French governments helped with the fusion and exerted great pressure on the European commission for a speedy approval of the deal. Nevertheless, Margrethe Vestager, the European Commissioner for competition, ordered an in depth investigation fearing there would be to little competition left after the fusion in the European train and signaling market.  (Vanacker, 2018)

There have been many researches on the effect of the investigations of the European Commission on the return of the involved companies at a merger, acquisition or fusion. The results will be further discussed in the part literature review. After the literature review the research will further explain how abnormal returns are calculated for the targets and bidders. Further we will discuss the results and compare these with the literature review and finally we will write a conclusion.

Literature review

As previously mentioned there have been some researches^[1] concerning market reaction after an investigation is announced by the European Commission to determine the consequences of a certain acquisition. The results of these researches are mostly the same.

For bidders they don’t see a significant cumulative effect on return. There is however a possible significant negative effect for day 5 until day 1 prior to the announcement day however this is corrected by positive returns in the event day and the period following the event day (one day after the event day until 5 days after the announcement). This causes the cumulative average abnormal return (CAAR) to be close to zero. So the consensus is that the announcement of the investigation of the European Commission doesn’t cause a market reaction and so doesn’t affect the returns of the bidders.

On the other side, studies show significant results concerning the targets. Their returns are strongly positive during the whole period (5 days before until 5 days after the event). Which makes the CAAR very positive, a fact that is demonstrated by nearly every possible research. There is however a disagreement concerning the heights the CAAR reaches. Muiherin and Boone find the to be around 20% while Aktes et al. find a CAAR of around 10%. Based on literature we can conclude that an investigation by the European Commission has a great positive effect on the returns of the targets.

For combined returns, these are returns where both the returns of the bidder and the target are added, we find significant positive results. These however aren’t as positive as the CAAR of the targets alone but fluctuate according to research between 1% and 3%. According to research carried out by Aktes et al. (2004) combined returns are positive on the event day itself, the day before and the day after.

We can conclude that an investigation into the consequences of an acquisition by the European Commission makes the returns on the target strongly increase while those of the bidder remain stable. The returns of both firms combined are as a result slightly positive.