The merger mania of the late 1990s destroyed billions in shareholder value according to a new working paper prepared for the National Bureau of Economic Research.

Shareholders of firms making acquisitions lost US12¢ at the announcement of the deals for every US$1 spent on acquisitions. This resulted in a total loss of US$240 billion from 1998 through 2001. Shareholders of acquiring firms lost US$7 billion in all of the 1980s, or US1.6¢ per dollar spent.

The findings come in a paper titled Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave by Sara Moeller, Frederik Schlingemann, Rene Stulz.

The paper goes on to say that in the 1980s, the losses to acquiring-firm shareholders were more than offset by gains to acquired-firm shareholders. The losses of bidders exceed the gains of targets from 1998 through 2001 by US$134 billion. “The 1998-2001 aggregate dollar loss of acquiring-firm shareholders is so large because of a small number of acquisition announcements by firms with extremely high valuations. Without these announcements, the wealth of acquiring-firm shareholders would have increased,” it suggests.

“The large losses are consistent with the existence of negative synergies from the acquisitions, but the size of the losses in relation to the consideration paid for the acquisitions is large enough that part of the losses most likely results from investors reassessing the standalone value of the bidders,” the paper finds.

http://papers.nber.org/papers/W10200