Cross-border acquisitions and shareholder wealth: Tests of the synergy and internalization hypotheses

In this paper, we test the synergy and internalization hypotheses for international acquisitions using a sample of foreign acquisitions of U.S. firms during the period 1979–1990. The major findings include: First, shareholders of our paired sample of U.S. targets and foreign acquirers experienced significantly positive combined wealth gains, $68 million on average, indicating that cross-border takeovers are generally synergy-creating activities. Second, shareholders of the U.S. targets realized significant wealth gains, regardless of the nationality of acquirers. Third, the Japanese acquisitions in our sample generated the largest net wealth gains, $398 million on average, which was shared by both target shareholders (43%) and acquirer shareholders (57%). Fourth, foreign acquirers benefitted from the targets' R&D capabilities, supporting the ‘reverse-internalization’ hypothesis.     

INDUSTRY PROSPECTS AND ACQUIRER RETURNS IN DIVERSIFYING TAKEOVERS

We use a sample of 816 diversifying takeovers from 1978 to 2003 to examine whether takeover announcements release negative information about the future prospects of the acquirer's main industry. We find that rivals that are most similar to the acquirer (homogeneous rivals) experience significant negative cumulative abnormal returns (CAR) around takeover announcements. Takeovers that result in negative wealth effects to acquirers are associated with negative abnormal revisions in analysts' forecasts of homogeneous rivals' earnings per share. We also find a decline in the posttakeover operating performance of rival firms. The decline is especially pronounced for homogeneous rivals and for takeovers with negative wealth effects to acquirers. Our findings imply that CAR-based estimates of acquirer wealth gains from takeovers that do not account for industrywide information releases are significantly biased downward.     

Acquisitions: Private versus Public

Takeovers of privately held companies represent more than 80% of all takeovers. Despite their significance, studies of such takeovers and their impact on the wealth of shareholders are rare. Using a very large, near exhaustive, sample of listed and privately held UK targets we examine the impact of such takeovers on the risk adjusted return of listed UK acquirers over the period 1981 to 2001. Acquirers earn significant positive returns during the period surrounding the bid announcement although the gains are dependent on target status, mode of payment, and the relative size of those involved. The much quoted conclusion, derived from the experiences of listed firm bidders that the shareholders of acquiring firms fail to gain from takeovers, cannot be generalised. Acquiring a privately held company is an attractive option for maximising shareholder wealth.     

Is the grass on the other side greener? Testing the cross-border effect for U.S. acquirers

Why do U.S. acquirers fare worse when acquiring targets in foreign countries than when acquiring domestic targets? This paper investigates reasons for the so called “cross-border effect” by examining the influence of target public status and competitiveness of the takeover market in the target country. Our findings show that the listing status of the target drives the cross-border effect in two opposite directions: acquirers of private targets fare worse in cross-border takeovers, while acquirers of public targets experience significantly higher gains in acquisitions of foreign targets. The positive cross-border benefit for acquirers of public targets is more pronounced if the target is from a country with a less competitive takeover market.     

Do Capital Structure Adjustments by Takeover Targets Influence Acquisition Gains?

We link debt issuances by target companies around takeover announcements to enhanced target bargaining power in negotiations with bidders over merger synergy gains in completed takeovers. Announcements of debt issuances by targets—especially new bank loans—are associated with more positive target equity returns relative to those made by nontargets, particularly for debt issuances immediately surrounding the takeover announcement. At least some of these gains to targets come at the expense of bidder shareholders, as bidder equity abnormal returns at target debt issuance are negative. We further show that targets issuing debt are primarily those with relatively low acquisition abnormal returns, consistent with initially poor target bargaining power. Subsequent debt issuances by targets increase the likelihood of positive adjustments to acquisition premiums offered by acquirers.     

The Post-Reform Bid-Ask Spread Disparity between Nasdaq and the NYSE

We report further evidence of the difference in execution costs between Nasdaq and the NYSE before and after the 1997 market reforms. We find that informed trading costs are consistently higher on Nasdaq both before and after the reforms. In the pre‐reform period the Nasdaq‐NYSE disparity in bid‐ask spreads cannot be completely attributed to the difference in informed trading costs. However, in the post‐reform period the spread difference between these two markets becomes insignificant with the effect of informed trading costs controlled. Our findings are consistent with the contention that the reforms have largely reduced noninformation trading costs and dealers' rents.     

US Evidence on Bank Takeover Motives: A Note

Existing studies on bank takeovers have not been able to distinguish among the three competing motives: synergy, agency, and hubris. This paper distinguishes the three competing motives by examining the relations between target gains and total gains and between acquirer gains and target gains. Empirical results show that bank takeovers are primarily motivated by synergy, although there is also strong evidence of hubris. Our results also suggest that hubris may explain the positive target gains and zero or negative acquirer gains found in this and many other bank takeover studies. Lastly, evidence exists to suggest that agency, along with hubris, may explain takeovers with negative total gains (JEL G21, G34).     

Nasdaq Trading and Trading Costs: 1993–2002

Nasdaq spreads decline from 1993 to 2002, largely independently of tick‐size reductions. Trade size declines, consistent with greater retail investor activity. Using the method of Chordia, Roll, and Subrahmanyam (2001), we find that concurrent market returns strongly affect liquidity and trading activity. Liquidity exhibits distinct day‐of‐the‐week patterns. There is little evidence that macroeconomic announcements or changes in key interest rates affect Nasdaq stocks overall; but in the bear market, we find a relation between some of these variables and effective spreads, which we interpret as consistent with Nasdaq participants' paying greater attention to fundamentals after the market crash.     

How Does National Culture Impact Internalization Benefits in Cross‐Border Mergers and Acquisitions?

We examine how cultural differences between bidder and target countries impact internalization benefits in cross‐border takeovers. The value of internalizing intangible assets may increase if cultural differences create high transaction costs. On the other hand, integration difficulties between culturally distant acquirers and targets may reduce the value of internalization. Our results show that greater cultural distance (CD) has a positive influence on the long‐run performance of bidders with high intangibles, suggesting that significant internalization benefits from technological know‐how are realized when CD is great. These findings highlight the importance of national culture when examining internalization benefits in cross‐border mergers.     

Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols

We examine whether equity‐linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups.     

An empirical investigation of mergers and acquisitions by Chinese listed companies, 1997–2007

We examine 136 M&A deals from 1997 to 2007 initiated by Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges, where the acquirer gains complete control of the target. Our data shows that the Chinese M&A market is dominated by domestic deals with unlisted targets that are either stand-alone private firms or wholly owned subsidiaries. Acquirers experience significant positive abnormal stock returns around the announcement date and over the three years after the acquisition. These results are largely driven by state-owned firms, cash acquirers and firms that acquire related targets. Cross-sectional tests show that announcement period returns are related to the acquirer's ownership status, industry relatedness of the acquirer and target, capital structure changes of the acquirer and the nature of the unlisted target. We find no change in operating performance from the pre to the post acquisition period for the acquirers.     

Reputational concerns in the market for corporate control

This paper explores whether corporate acquirers consider environmental reputations when planning and structuring takeovers. We find that firms with an environmentally toxic reputation, which have the greatest potential for negative spillovers to their merger partners, have a lower associated probability of being both acquirers and targets. Acquirers are more likely to pair with similar reputation firms and are less likely to acquire firms with lower reputations. Most notably, green firms in our sample never acquire toxic firms. Acquirers that buy firms with differing environmental reputations use a higher percentage of stock in their acquisition offers. We further show that the returns to acquirers are lower when they acquire firms outside of their area. Collectively, these findings suggest that managers account for potential negative spillover effects in acquisition decisions.     

DIRECT EVIDENCE ON THE MARKET‐DRIVEN ACQUISITION THEORY

We provide direct empirical evidence that share overvaluation is an important motive for firms to make stock acquisitions. We find that more overvalued firms are more likely to acquire with stock, and acquirers are more overvalued in successful stock mergers than in withdrawn mergers. Acquirers' overvaluation, on average, exceeds the targets' premium‐adjusted overvaluation. Shareholders of stock acquirers, whose overvaluation is greater than their targets' premium‐adjusted overvaluation, realize sustained wealth gains from one day before the merger announcement up to three years after the merger completion, as compared with a matching sample of similarly overvalued but nonacquiring firms.     

Employment growth following takeovers

We construct a comprehensive sample of takeovers in Belgium that shows they are remarkably common. Takeovers involve both small and large firms and, over a five‐year period, 17% of private sector employment. We estimate their impact on employment growth using a framework that explicitly takes into account that takeovers involve pairs of firms and that post‐merger outcomes are heterogeneous. The average merger temporarily reduces employment of the combined entity by ?1.4%. Mergers likely to be motivated by market power show a stronger and permanent employment reduction of ?14%, whereas those motivated by efficiency gains lead to employment expansions of +10%.     

Capital gains taxation and shareholder wealth in takeovers

Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non‐taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.     

Who Disciplines Management in Poorly Performing Companies?

Economic theory points to five parties disciplining management of poorly performing firms: holders of large share blocks, acquirers of new blocks, bidders in takeovers, nonexecutive directors, and investors during periods of financial distress. This paper reports the first comparative evaluation of the role of these different parties in disciplining management. We find that, in the United Kingdom, most parties, including holders of substantial share blocks, exert little disciplining and that some, for example, inside holders of share blocks and boards dominated by nonexecutive directors, actually impede it. Bidders replace a high proportion of management of companies acquired in takeovers but do not target poorly performing management. In contrast, during periods of financial constraints prompting distressed rights issues and capital restructuring, investors focus control on poorly performing companies. These results stand in contrast to the United States, where there is little evidence of a role for new equity issues but nonexecutive directors and acquirers of share blocks perform a disciplinary function. The different governance outcomes are attributed to differences in minority investor protection in two countries with supposedly similar common law systems. Journal of Economic Literature Classification Number: G3.     

The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads,Depth, and Volatility

This study presents an analysis of the impact of the introduction of quotes in sixteenths of a dollar on the AMEX, Nasdaq, and NYSE in mid-1997 on select market characteristics such as spreads, effective spreads, quoted depth, and volume. The findings of the study document reductions in the bid-ask spread, effective spread, and a statistically significant increase in the number of quotes. Interestingly, we find that liquidity, as measured by the total depth at the bid and ask, declines significantly on the AMEX and NYSE, but increases on the Nasdaq. Trading volume increases on the NYSE, but remains unchanged for the AMEX and Nasdaq. We also find that the proportion of even-increment quotes is a relevant factor affecting percentage spreads for Nasdaq both before and after and for the NYSE only after the change in quoting increments.     

Does takeover competition affect acquisition choices and bidding firm performance? Australian evidence

We examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short-term announcement window, competition-induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock-financed takeovers undertaken in a competitive takeover market show a long-run decline in performance of acquirers.     

Negotiations under the threat of an auction

Many takeovers occur after one-on-one negotiations, which suggests a troubling lack of competition. We seek to determine whether acquirers in such friendly deals are truly insulated from competitive pressures. We study two countervailing influences: (1) potential but unobserved latent competition, i.e., the likelihood that rival bidders could appear, and (2) anticipated auction costs when negotiations fail. Using various proxies, we find that latent competition increases the bid premium offered in negotiated deals and that auction costs reduce the premium.     

The flash crash: An examination of shareholder wealth and market quality

We investigate stock returns, market quality, and options market activity around the flash crash of May 6, 2010. Abnormal returns are negative on the day of and the day after the flash crash for stocks that had trades that executed during the crash subsequently cancelled by either Nasdaq or NYSE Arca. Consistent with studies that suggest that other sources of liquidity withdrew from the markets during the flash crash, we find that the fraction of trades executed by the NYSE increases during this volatile period. Market quality deteriorates following the flash crash as bid-ask spreads increase and quote depths decrease. Evidence from the options markets indicates that investor uncertainty increased around the time of the crash and remained elevated for several days.