Glamour acquirers are those firms that are highly valued in the stock markets as a result of their prior stock market performance (Sudarsanam and Mahate, 2003). Their stocks receive premium ratings in the form of market value to book value ratio, or reversely a low book-to-market ratio (Hashem and Su, 2015). In contrast, firms with high book-to-market ratio ratings are undervalued, but may have the potential for subsequent value gains. In their landmark seminal researches, Fama and French (1992, 1996) argue that the book-to-market ratio is a risk proxy. Value stocks are regarded as more risky than glamour stocks and thus can be expected to out-perform glamour stocks. Some research highlights the tendency of “value” stocks to outperform “glamour” firms (Piotroski and So, 2012) as glamour portfolios consist of an excessive share of overvalued firms and value portfolios contain a disproportionate share of undervalued companies, but many investors are more likely to shift their investment toward ‘good’ or ‘glamour’ equity rather than basing their investment decisions on objective risk characteristics, especially for banks and mutual funds (Andriosopoulos et al., 2016; Del Guercio, 1996). Some researchers recognize also (Sudarsanam and Mahate, 2003) that glamour stocks are high growth and value stocks are low growth firms, since their high market valuation may reflect the expected high growth or investment opportunities.

The literature includes a large number of examples showing diverted behaviours of the glamour stocks: negative long-run returns following mergers and acquisitions (M&A) announcements are found in most of the cases (Kohers and Kohers, 2001; Rau and Vermaelen, 1998) but Mitchell and Stafford (2000) report that both growth and value acquirers have abnormal performance that is insignificantly different from zero and from each other. Therefore, the returns and the source of these return differential remains a subject of considerable debate (Piotroski and So, 2012).

On the other hand, the telecommunications sector, one of the most active and dynamic sectors of the economy, experienced profound strategic changes that began at the end of the 20th century and continue now in the 21st century (Eliassen et al., 2013; Girdzijauskas and Štreimikiene, 2009) with an intensive activity in M&A (Krolikowski and Okoeguale, 2018). Despite the increasing interest in this sector, there is an observable shortage of statistical and econometric analyses of a sectoral nature in telecommunications M&A (Navio-Marco et al., 2016), and the researches of the strategic impact of glamour M&A in this sector are nonexistent. Our study tries to fill this gap of research. Many companies in this industry are behaving outstandingly in the markets and can be catalogued as glamorous, so it is worth analysing if this glamour conducts to performance and value creation. Additionally, the period of study was selected due to its importance in telecommunications history. It comprises the immediate year after the sector liberalisation and the Internet bubble. As “bubbles” are rarely analysed in scholar papers (Lacalle, 2018), the analysis is of special interest.

Considering this situation, this paper reviews the performance of glamour acquirers in the telecommunication sector, evaluating their glamorous M&A strategy and delving into the determinants of success or failure of this strategy and the implications it has in the acquirer company. This research examines the general question of whether low book-to-market acquisitions have more favorable impacts on the performance of acquiring companies than value acquisitions, the influence on these results of organizational behavioural patterns that can differentiate glamour acquirers from value ones and the implications of these organizational decisions.

The present study comprises four sections. After the introduction, Section 2 reviews the literature about the concept and performance of glamour acquirers. Section 3 presents the empirical analysis of the glamorous telecom M&A between 2000 and 2010. Finally, Section 4 contains the conclusions of the paper and its implications for the telecom sectoral strategy, as well as its limitations and future avenues of research.

In their seminal work, Fama and French (1992) documented that two variables, market equity (ME) and the ratio of book equity to market equity (BE/ME) capture much of the cross-section of average stock returns. The book-to-market ratio subsumes the predictive power of other valuation ratios, and reflects compensation for financial distress risk. Consistent with this risk-based interpretation, Fama and French (1993, 1996) and Penman (1996) supported an inverse relation between book-to-market portfolios, future earnings, and future growth rates.

In the literature, glamour acquirers are a group of firms identified as likely underperformers in the years post-acquisition (Donnelly and Hajbaba, 2014; Lakonishok et al., 1994; Rau and Vermaelen, 1998). The latter authors report that, glamour acquirers generate negative abnormal returns following an acquisition. However, value acquirers achieve positive abnormal returns over the same period. These results are supported by Sudarsanam and Mahate (2003) and Gregory and Matatko (2005). Lakonishok et al. (1994) document that book-to-market ratios are positively related to future changes in earnings, changes in cash flows, and revenue growth, while LaPorta (1996) document that the one-year-ahead earnings announcement period returns to glamour firms are negative.

Among the factors influencing the glamorous M&A, Andriosopoulos et al. (2016) find indications about the possible role of company size in glamour acquisitions, suggesting that glamour acquirers are smaller in size, have lower leverage and higher cash ratios. In general, among the factors influencing the success of M&A, size is one of the included, well-studied ones (Akhigbe and Madura, 1999; Kallunki et al., 2009; Benou et al., 2007).

Furthermore, as glamour is linked also with reputation and firm recognition, companies with high market-to-book ratios are subject to higher information asymmetries because a large proportion of their market value comes from intangible assets (Moeller et al., 2004; Hutt, 2016; Allee, 2000). Currently, practitioners are increasingly examining the role of cultural and intangible factors (Hofstede, 1980; Malekzadeh and Nahavandi, 1990). Srinivasan and Hanssens (2009) cite several studies that may be considered related to intangibles, indicating the positive relationship between stock returns and brand valuation, but they relate them to stock market evolution rather than potential abnormal returns. Additionally, Berry (2006) indicates that it has been found that the international investments of companies are only valued in the presence of intangible assets in technology.

Regarding the analysis of motivations in glamour acquisitions, the reasons generally given to justify these operations, and their potential underperformance relative to value stocks in the long run, includes hubris and mispricing (Malmendier and Tate, 2008; Doukas and Petmezas, 2007). The positive expectation of future growth allows glamour acquirers to make value-decreasing acquisitions for which the market may not penalize them (Sudarsanam and Mahate, 2003; Andriosopoulos et al., 2016). This is in line with the hypothesis that managerial hubris plays an important role in the decision-making process of glamour acquirer firms when managers may be overconfident about their ability to manage an M&A deal. As these firms shows low book-to market rations, they are more likely to be overvalued (Dong et al., 2006). Managers of glamour firms may know that their shares are trading at unsustainable levels and will try to convert shares into real assets. This is one of the reasons why glamour acquirers prefer to make share payments for acquiring firms (Rau and Vermaelen, 1998; Sudarsanam and Mahate, 2003).

Consequently, we hypothesized that glamour is negatively associated to performance in this kind of M&A operation in the telecommunications sector, while the acquirer’s size and intangibles are positively related to performance.

To conduct this analysis, telecommunications M&A that occurred between 1995 and 2010 were preselected as samples from the Thomson Reuters One-Banker database. In addition, data were collected from CRSP database of monthly listings and stock market data. Financial information was obtained from S&P’s COMPUSTAT database. The information dispersed among the databases were homogenized manually to include all of the information related to the merger and the firms involved.

We obtained results for a decade (2000–2010) and involves previous years’ data for “training” portfolios comparison, which had to be constructed and renewed in a 3-year timeframe before and after analyzing the abnormal returns for each M&A, as required by the selected methodology to quantify the value creation.

In this study, we have examined the M&A performance in the telecommunications sector and the role of the glamour in these types of operations. The research applied a robust method (CTAR) to understand the glamour firms’ behaviour versus that of value companies and to study the factors influencing the success of these operations. This paper’s contribution to this area of research is primarily threefold: first, it further contributes to the development of M&A research in a specific area, i.e., glamour M&A, by identifying factors and patterns with relevant implications in the M&As performance. Second, this article combats the shortage of research of a quantitative sectoral nature on telecommunications M&A, when leading international companies like Vodafone, Cable and Wireless, France Telecom or Telecom Italia are very active in these types of operations. Third, this research approaches the analysis on a long-term basis, by using a longer-term performance indicator (CTAR) rather than the heavily criticised, short-term abnormal stock returns commonly used in the literature, providing clearer insights on long-term performance.

In summary, there is evidence of the progressive “negativization” of the M&A performance results, in all the cases. In other words, as we move towards long-term time horizons, we evolve towards value destruction by mergers and acquisitions in telecommunications.

We have proceeded to conduct our analysis also by selecting subsamples (glamour versus non-glamour). In addition, in all cases, with the different time horizons, the value destruction is more evident in glamour firm that in non-glamour companies, and the value destruction is significant for glamour firm in certain periods of analysis. It is possible to conclude that glamour tends to be opposite to value creation in the long run.

From our analysis, it is evident that certain acquirers’ characteristics, such as size, are determinant in the glamour behaviour. In this sense, our results are aligned with the literature (Rau and Stouraitis, 2016). Related to this, the influence of the intangible assets (and particularly the intangible ratio) is a new contribution that is worth studying as a new avenue of research.

Currently, one new area of research is the study of M&A underperformance, in terms of the cumulative dysfunctional impact that the event itself has, its associated uncertainty and consequences, and the subsequent process of integration of individual organizational members (Shrivastava, 1986). In this context, the results of this study, are timely and relevant, and contribute to fill this research gap. Undoubtedly, our study is not without shortcomings, the complexity of preparing comparison portfolios that contain a varied number of companies and are modified from month to month is a great limitation. The method is very robust, but it reduces the number of results and is not very flexible, which constrains the analysis. Despite this, we believe that the findings of our research represent an original contribution to the understanding of such a troubled period (a bubble) in the telecommunications sector.