Active Investing in Strategic Acquirers Using an EVA Style Analysis

Abstract

Employing an EVA style classification, this article examines whether active investors such as hedge funds can develop an alpha-generating strategy by classifying acquisitions based on the pre-acquisition style quadrant of the acquirers. Over the period 1990–2007, the announcement evidence suggests that acquisitions across all EVA style quadrants generate negative risk-adjusted returns, wherein the potential for economic gains from shorting acquirers is greater for pre-classified wealth destroyers than it is for wealth creators. The article also finds evidence of continuing negative returns following the acquisition announcement for wealth destroyers, while for wealth creators the post-acquisition announcement effects are mixed. Moreover, the potential for longing gains on target firms is significant at the announcement and shows continuing positive gains after the acquisition announcement across EVA styles. These results support the view that investment strategies involving acquisitions should be linked to the fundamentals of wealth creation.

TOPICS: Real assets/alternative investments/private equity, security analysis and valuation, performance measurement