EXECUTIVE SUMMARY

I conduct a NuVasive-focused mergers and acquisitions (M&A) event study analysis between May 13, 2004 and Dec. 31, 2016 using the Thomson-Reuters SDC Platinum M&A database, security and index returns from the Center for Research in Security Prices (CRSP), and Fama-French empirical asset pricing factor returns. I show that NuVasive as a whole outperforms its industry (Standard Industry Classification code 3841 - Surgical and Medical Instruments and Apparatus) and the market based on a 5-day Cumulative Abnormal Return (CAR) around the acquisition announcement date. A portfolio of all acquiring firms (excluding financial services and real estate) underperforms NuVasive in the short-run and outperforms NuVasive in the long-run based on a 36-month Buy-and-Hold Abnormal Return (BHAR).

METHODOLOGY & THEORY

Mergers and acquisitions event studies are based on identifying abnormal security returns for acquiring and target firms around the acquisition announcement date, where abnormal returns are the difference between actual and predicted returns at date t:

\[ AR_{it} = R_{it} - \hat{R_{it}} \]

Significance of the abnormal return is then calculated based on a test statistic:

\[ z_{it} = \frac{AR_{it}}{\sigma_{AR_{it}}} \]

Cumulative Abnormal Returns (CARs): I use an estimation period of [-242, -42] days prior to the acquisition announcement date to generate the counterfactual predicted returns for both acquiring and target firms if the acquisition did not take place. I then calculate abnormal returns against a benchmark portfolio during the event window of [-2, 2] days around the acquisition announcement date. CARs identify information leakage prior to the public announcement, as well as immediate and delayed market reaction to the event.

\[ CAR_{it} = \sum_{t=-2}^{t=2}AR_{it} \]

Buy-and-Hold Abnormal Returns (BHARs): I use an event period of 36 months following the acquisition announcement date to generate long-term abnormal security returns against a benchmark. BHARs are meant to replicate the experience of an actual investor, and reflect long-term firm performance following an event.

\[ BHAR_{it} = \prod_{t=0}^{t=36}(1+R_{it}) - \prod_{t=0}^{t=36}(1+R_{mt}) \]

In practice, BHARs are calculated as:

\[ BHAR_{it} = e^\sum{log(1+R_{it})} - e^\sum{log(1+R_{mt})} \]

where \(R_{mt}\) is the benchmark portfolio return.

Benchmarks: Empirical asset pricing models used to generate expected returns.

\[ (\hat{R_{it}} - rf) = \hat{\alpha} + \hat{\beta_{i}}(R_{mt} - rf) + \epsilon \]

\[ (\hat{R_{it}}- rf) = \hat{\alpha}+\hat{\beta_{1}}(R_{mt} - rf) + \hat{\beta_{2}}(SMB) + \hat{\beta_{3}}(HML) + \hat{\beta_{4}}(MOM) + \epsilon \]

ANALYSIS

All Firms (excluding Financial Services and Real Estate, SIC 60-67)

I begin with an analysis of all firms, excluding financial services and real estate based on SIC 60-67. Acquiring firms have slightly negative CARs around the acquisition announcement period while Target firms have highly positive CARs. Over a 36-month period, however, acquiring firms have significant BHARs.

All Firms
Abnormal Return Metric Obs Mean Std. Err. 95% Conf. Interval t.stat p.val
Acquiror CARs [-2, 2] 1,455 -0.0058 0.0020 -0.0100 -0.0020 -2.88 0.004***
Target CARs [-2, 2] 2,000 0.2900 0.0070 0.2770 0.3030 41.97 0***
Acquiror BHARs [0, 36] 1,444 0.6010 0.1370 0.3320 0.8700 4.38 0***
Equal-weighted Port. FF 4-Fac 138 -0.0009 0.0013 -0.0040 0.0017 -0.67 0.5
Value-weighted Port. FF 4-Fac 138 -0.0005 0.0024 -0.0052 0.0040 -0.23 0.817

Triple asterisk indicates significance at the 1% confidence level

All Companies operating under any SIC code 3841 (Surgical and Medical Instruments and Apparatus)

I restrict the analysis to all companies operating under any SIC code 3841 (primary, secondary, etc.) while excluding NuVasive in order to isolate its individual performance. This general group includes NuVasive’s industry, as well as unrelated acquisitions by firms operating in multiple business segments that include SIC 3841. Acquirer CARs and BHARs are not statistically different from zero based on either benchmark, while Target firms significantly outperform the market portfolio by 41 percent during the event window [-2, 2].

All Firms with SIC 3841
Abnormal Return Metric Obs Mean Std. Err. 95% Conf. Interval t.stat p.val
Acquiror CARs [-2, 2] 71 -0.00700 0.0080 -0.231 0.009 -0.8555 0.4
Target CARs [-2, 2] 86 0.41000 0.0450 0.321 0.500 9.1900 0***
Acquiror BHARs [0, 36] 64 -0.01200 0.0500 -0.114 0.087 -0.2650 0.792
Equal-weighted Port. FF 4-Fac 132 -0.00016 0.0030 -0.006 0.005 -0.1700 0.868
Value-weighted Port. FF 4-Fac 132 0.00300 0.0025 -0.002 0.008 1.0700 0.286

Triple asterisk indicates significance at the 1% confidence level

Companies operating under Primary SIC code 3841 only

I further restrict the analysis to firms operating under a primary SIC 3841 only, again excluding NuVasive in order to isolate its performance. This group is the best representation of NuVasive’s industry and competitors. Acquirer CARs and BHARs based on either benchmark are not statistically different from zero, while target CARs outperform the market portfolio by 28 percent around the event window.

Firms with Primary SIC 3841 Only
Abnormal Return Metric Obs Mean Std. Err. 95% Conf. Interval t.stat p.val
Acquiror CARs [-2, 2] 24 -0.0240 0.0200 -0.060 0.020 -1.25 0.22
Target CARs [-2, 2] 30 0.2800 0.0400 0.200 0.350 7.75 0***
Acquiror BHARs [0, 36] 22 -0.0300 0.0800 -0.210 0.150 -0.37 0.72
EqualValue-weighted Port. FF 4-Fac 128 -0.0007 0.0040 -0.009 0.007 -0.17 0.86
Value-weighted Port. FF 4-Fac 128 0.0007 0.0032 -0.006 0.007 0.22 0.83

All NuVasive Combined Acquisitions

I combine all NuVasive-only acquisitions for which there is available data into a portfolio in order to evaluate the company’s cumulative post-acquisition performance since its IPO date. All NuVasive target firms were private. NuVasive outperforms the market portfolio by 4.5 percent around the event window at a statistically significant level.

All NuVasive (combined) Acquisitions
Abnormal Return Metric Obs Mean Std. Err. 95% Conf. Interval t.stat p.val
NuVasive CARs [-2, 2] 8 0.0447 0.024 -0.130 0.100 1.8300 0.055**
NuVasive BHARs [0, 36] 7* 0.4860 0.382 -0.450 1.420 1.2715 0.875
Equal-weighted Port. FF 4-Factor 128 0.0110 0.010 -0.008 0.031 1.1600 0.25
Value-weighted Port. FF 4-Fac 128 0.0110 0.010 -0.008 0.030 1.1300 0.26

Single asterisk indicates omission of one acquisition due to insufficient data; double asterisk indicates significance at the 10% confidence level

NuVasive Individual Acquisitions

I examine each of NuVasive’s individual acquisitions based on CARs, BHARs (when there is sufficient available data), and graphically.

Individual NuVasive Acquisitions
Target Name Announcement Date Effective Date Perc. Shares Acq. CARs BHARs
RSB Spine LLC-Cervical Plate 6/6/05 6/6/05 100 -0.024 1.628
RiverBend Design LLC 8/12/05 8/12/05 100 0.026 1.398
Radius Medical LLC 1/23/07 1/23/07 100 0.024 0.357
Osiris Therapeutics Inc- 5/8/08 7/24/08 100 0.012 -0.454
Cervitech Inc 4/22/09 5/8/09 100 0.207 -1.072
ANC LLC 5/6/13 5/6/13 100 0.038 1.281
Ellipse Technologies Inc 1/5/16 2/11/16 100 0.025 0.266
Biotronic NeuroNetwork 6/6/16 7/5/16 100 0.049 NA

RSB Spine – Cervical Plate Acquisition