Synergy and market effect of subsidiary merging
Authors: Chin-Jen Huang, Yi-Haw Wen
Journal: Chiao Da Management Review. Jun. 2008, 28(1): 105-130.
Keywords: Merger; Parent; Subsidiary; Synergy; Market effect
Abstract:
Previous studies on merger and acquisitions (M&A) have been mostly focused on horizontal-, vertical-, or multi-M&A between unrelated
enterprises.This is the first study to focus on the events of subsidiary merging by examining the merger synergy and the market response. The
main findings are: First, by comparing consolidated financial statements, we find no clear merger synergy, and investors predict that poor
synergy will be reflected by the parent company’s stock prices. Second, we find negative abnormal returns on parent stocks from the
announcements (-2.763% average CAR on event period (-7,-1) and -3.334% on period (0,14)), indicating that investors consider subsidiary merging
to be a strategy pursued by the parent company to write off equity. This conclusion about merger synergy and announcement effects is in
opposite to the results obtained from the related study concerning divesture. Third, more negative price impacts occur in events under the
following conditions: a) when a parent company has poor previous performance, b) when the parent and subsidiary are in un-related industries,
c) when the parent company is in a non-electronic industry, and d) when announcements of a merger action denote an improvement in financial
transparency. Finally, we find no evidence of significant abnormal returns over a one-year period after the announcement.