Identifying the sources of gains from takeovers

In the research literature on UK take-overs there seems to be an apparent conundrum. First, it appears that, in general, the market anticipates overall equity cash flow gains from a take-over in the sense that the share price of the acquiree firm typically increases relative to some appropriately market-adjusted benchmark over the period of time from the announcement of the take-over to the date when the take-over offer is declared unconditional while the share price of the acquirer firm does not decrease over the same period of time1, again relative to some appropriately market-adjusted benchmark (Franks and Harris, 1989). Thus, in the view of the market the take-over adds value to the acquiree and acquirer relative to a scenario whereby the take-over did not take place. Naturally, if the market is rational in its pricing of the benefits of take-overs, it must be anticipating cash flow gains of one type or another.