The goal of an event study is to see whether a particular event influences some outcome1. In other words, it concentrates on the impact upon particular outcome made by specific events. This paper examines the stock market response to the events leading to merge between Wm Morrisons Supermarket Group PLC and Safeway PLC. Background The Morrisons Supermarket Group is the fastest developing supermarket group in retailing chain in United Kindom. In 1967, it became a public company and specializes in supermarket distribution, offering only quality products and increasing diversity.
Morrisons has kept 36 years unbroken track with its excellent performance in trading business. What constrains the further development of Morrisons is the difference of the scale with its rivals such as Tesco, J Sainsbury’s. The directors of Morrisons always keep extension these years and also expect a chance to be more powerful. Following the purchase of its colleague Safeway, Morrisons becomes the owner of more than 500 supermarkets and the forth largest supermarket group in Great-Britain. Research Design
One of the principal ways in which merges are assessed is through the reaction of stock returns. Therefore, this essay aims to analyze how firm-specific events, here referring to the information associated with the merge between Wm Morrisons and Safeway Plc affect the stock returns. The hypothesis of the researcher of this paper is that once Morrisons is involved in the negotiation with Safeway about the acquisition it obtains a negative abnormal return. This study complements the analysis by examining the impact of each event individually with interpretation of the abnormal return the firm achieved.
The cumulative abnormal return is also adopted to discuss the reaction of the market to the announcement relating to the takeover. After the discussion about the abnormal return in each event and the cumulative abnormal return for both particular test window and the aggregate test period, this paper concludes that Morrisons achieves a dramatic negative abnormal return with the proposal to acquire Safeway Plc. Data Source and Methodology Data Source and Selected Events The data applied in this paper is obtained from Thomas DataStream Advance 3.
5, including the share price, dividend payment upon ex-dividend day and FTSE ALL share. The daily share prices range from July 2001 to January 2004. 2The daily returns of Morrsions and index is in accordance with the equation as follows: Rt = ln(Pt+div)/Pt-1, Where Pt is the daily price, Pt-1 is the lagged daily price and the div is dividend payment on ex-dividend day. The selected events which are involved in the merge between Morrisons and Safeway in this study are as follows: 1. Wm Morrisons proposes a friendly takeover to its colleague Safeway Supermarket Plc on 9 January, 2003.
2. Morrisons posed formal offer documentation to Safeway’s shareholders on 31 January, 2003. 3. The proposed acquisition of Safeway by (i) Asda Stores Ltd, (ii) W M Morrison Supermarkets plc, (iii) J Sainsbury plc, (iv) Tesco plc are referred to the Competition Commission under the Fair Trading Act 1973 by Trade and Industry Secretary Patricia Hewitt on 19 March 2003. 4. The DTI has extended the deadline for the Competition Commission to report on the proposed Safeway mergers by six days on 12 August, 2003. 5.
Mrs Hewitt has accepted the CC’s conclusion that the proposed acquisition of Safeway by Morrisons may be expected to operate against the public interest, but that this acquisition should be allowed to proceed provided limited store divestments recommended by the CC are agreed with Morrisons. 3 Methodology In order to focus solely on the impact of merger-specific information on stock returns, this study constructs a market model: Y= + X (Equation1) in which some possible problematic factors is to be controlled.
Since the objective is to obtain the “best” estimates of the population parameters and, the commonly known as ordinary least squares (OLS) is adopted. A simple version of an equation used for such an event study is as follows: ,where is the expected stock return of Wm Morrisons, X is the market return (here FTSE ALL SHARE Index is used as a proxy for the market return, although it does not include dividends) and the is the error term resulted from the least squares regression.
The and are two estimators called the regression coefficients, which represent the intercept with the vertical axis and the slope of regression line respectively. This estimated market model defines the historic relation between the firm’s common stock return and the market return. Accordingly, this model provides the expected or normal return conditional on the realized market return.
Once the forecast model is evaluated as valid, the model can be used to project what the returns from the stock should have been during the event period given that the market returns is known throughout this period. This counterfactual return can be compared with the return actually earned and the difference, referred to as the abnormal return, can be calculated. Further, whether the events announced in test period influence the stock return significantly or not is examined.