Cass Finance Blog

A tale of two cities: Who trades in takeovers?


One of the major puzzles in corporate finance is the asymmetric reaction of the market to takeover announcements. For long, stock prices of the target firms tend to increase significantly on the announcement date, while those of the bidders tend to decrease. On average, previous empirical studies show that, while target shareholders see their excess returns amount to about 30%, depending on the timing of the base price relative to the price on the announcement date, those of the bidder are relatively zero if not slightly negative. This raises a question of whether such decisions are value creating or destroying, and whether all the synergies tend to accrue to only the target shareholders. In this blog, I assess whether this is the case of the recent takeover bid by Pfizer of AstraZeneca, and I also address the question of whether this asymmetric reaction is limited to the announcement date or extends to the pre- and post-event period. I use the daily excess returns, computed as the log returns on each stock less the market return computed as the FTS100 index for AstraZeneca and S&P500 index for Pfizer. I refer to these as the excess or abnormal returns. I then cumulate these excess returns from 21 May 2013 to 12 June 2014 to obtain roughly one year cumulative abnormal returns. The following graph illustrates the results:

Surprisingly, the cut-off in the performance of two firms is on the beginning of the third week of November when apparently the talks have started. The most striking results are obtained by comparing the average excess of the two firms and the correlation across different sample periods. The findings can be summarised as follows:

  1. The first is from 21 May to 20 November 2013, where no evidence of merger talks is apparent. During this period, the behaviour of the stock prices of AstraZeneca and Pfizer is relatively random. They generate daily excess returns of 0.01% and 0.04%, resulting in cumulative excess returns during this period of 1.06% and 5.43%, respectively. The correlation in the daily returns is also positive and amount to 11.58, suggesting that investors would not be able to diversify their holdings if they hold the two stocks.
  2. The second is from 21 November to Friday 25 April 2014, just before the weekend press report of the possible takeover. This the most interesting period. First the correlation across the daily excess returns of the two firms is -0.006, an ideal dream of fund managers. While Pfizer generated negative daily excess returns of -0.07%, amounting to a total of -7.41% during the period, AstraZeneca’s daily excess returns are +0.22%, cumulating to +23.79%. This indicates that an informed investor could short Pfizer and go long on AstraZeneca and generate excess returns of +31.20%.
  3. The third is the announcement day of 28 April. In this period, both prices increased, but while AstraZeneca shareholder saw their wealth increasing abnormally by 13.2%, Pfizer’s excess returns are only +3.79%. While these excess returns indicate that the takeover is perceived to be beneficial for both the bidder and the target shareholders, probably because of the synergies that will accrue if the takeover went through, an informed investor could have bought the shares on Friday 25 April in both companies (or at least in AstraZeneca) and generate excess returns of 17%. If this investor knew about (or predicted correctly) this takeover since November 2013, the total excess returns she would have accumulated would be a stunning 48.28%.
  4. Finally, the fourth period will cover 29 April to 12 June 2014. This period has seen a significant volatility in the prices of the two companies as the outcome of the bid was uncertain. On the 19 May, when AstraZeneca rejected the offer of $55, its share price decline abnormally by 11.6%, while Pfizer’s excess returns are +0.16%. Nevertheless, over the whole period, the behaviour of share prices of the two companies appears to have returned to normal. Both firms have generated negative excess returns of -7.58% (AstraZeneca) and -11.53 (Pfizer). The correlation of the daily returns of the two firms is +11.70, similar to that of the first period. This is a period probably suitable for risk lovers.

What can this case teach us? First, when the news is announced, shareholders cannot beat the market. It seems that the UK market is efficient as, in the post announcement period from 28 April to 11 June 2014, share prices appear to reflect more the probability of the bid going through and the potential synergies the bid is going to generate. Similarly, one might conclude that the market is also efficient in the period of no news, i.e., from May 2013 to 21 November 2013.  However, the efficient market hypothesis does not seem to hold in the second period, i.e., when the talks started in third week of November to Friday 25 April. The relative large excess returns generated by AstraZeneca during this period have contributed significantly to its outperformance relative to Pfizer, even excluding the 13% announcement date excess returns. Thus even though the UK market is relatively efficient, some informed investors appear to be able to beat it and realise some transfer of wealth from the uninformed investors. Overall, the only way of beating the market is to have information that others do not have. As in anything in life, information is the name of the game.

Author: Meziane Lasfer

Meziane is Professor of Finance at Cass Business School, City University London. His research interests include Corporate Finance, Governance and Capital Markets. He has published widely in top international academic journals such as Journal of Finance, Journal of Finance and Quantitative Analysis, Journal of Banking and Finance, Journal of Corporate Finance, Financial Management, European Financial Management, and National Tax Journal. His research was widely reported in the press and was sponsored by the National Association of Pension Funds (NAPF), the Finance Lease Association (FLA), Morley Asset Management, ICAEW, Donaldsons and Land Securities-Trillium. He is ranked among the top 20 top researchers in Europe*. He is on the editorial board of a number of journals. His outstanding teaching performance led him to win the First Dean’s Prize for Teaching Excellence in 1998, and in 2003, 2006 and 2008. He was nominated for Economist Intelligence Unit Business Professor of the Year award in 2012**. He was an external consultant at the Financial Services Authority (FSA), and external examiner at London Business School, London School of Economics, Birmingham Business School and Cranfield School of Management. His previous and current visiting professor positions include HEC Paris, University Paris Dauphine, EDHEC Business School in Nice, and Catolica University in Lisbon. * Chan et al (2011) Financial Research in the European Region: a Long-Term Assessment (1990–2008), European Financial Management, , Vol 17 (2), pages 391–411, March 2011. ** See

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