CLUSTERED SYNERGIES IN THE TAKEOVER MARKET

In a competitive market for takeover bids, the takeover premium serves as an effective proxy for the expected synergy. We find that the expected synergy is primarily related to the premiums paid in other recent takeovers in the same industry. This relation is even stronger when considering previous takeovers (especially over the previous three‐month horizon) in the same industry that have the same payment method (cash versus stock) or form of takeover (tender offer versus merger). More of the variation in expected synergies among takeovers can be explained by the premiums derived from recent takeovers in the same industry than by all bidder‐ and target‐specific characteristics combined. We also find that the bidder valuation effects are inversely related to the premium paid for targets, implying that abnormally high premiums may reflect overpayment rather than abnormally high synergies.     

Do auctions induce a winner's curse? New evidence from the corporate takeover market

We contrast the winner's curse hypothesis and the competitive market hypothesis as potential explanations for the observed returns to bidders in corporate takeovers. The winner's curse hypothesis posits suboptimal behavior in which winning bidders fail to adapt their strategies to the level of competition and the amount of uncertainty in the takeover environment and predicts that bidder returns are inversely related to the level of competition in a given deal and to the uncertainty in the value of the target. Our measure of takeover competition comes from a unique data set on the auction process that occurs prior to the announcement of a takeover. In our empirical estimation, we control for the endogeneity between bidder returns and the level of competition in takeover deals. Controlling for endogeneity, we find that the returns to bidders are not significantly related to takeover competition. We also find that uncertainty in the value of the target does not reduce bidder returns. Related analysis indicates that prestigious investment banks do not promote overbidding. Analysis of post-takeover operating performance also fails to find any negative effects of takeover competition. As a whole, the results indicate that the breakeven returns to bidders in corporate takeovers stem not from the winner's curse but from the competitive market for targets that occurs predominantly prior to the public announcement of bids.     

The dynamics of mergers and acquisitions

This paper presents a dynamic model of takeovers based on the stock market valuations of merging firms. The model incorporates competition and imperfect information and determines the terms and timing of takeovers by solving option exercise games between bidding and target shareholders. The implications of the model for returns to stockholders are consistent with the available evidence. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns and to the dispersion of beliefs regarding the benefits of the takeover.     

Competition and dynamics of takeover contests

This paper investigates the effect of potential competition on takeovers which we model as a bargaining game with alternating offers where calling an auction represents an outside option for each bidder at each stage of the game. The model describes a takeover process that is initiated by an unsolicited bidder, and it aims to answer three main questions: who wins the takeover and how? when? and how much is the takeover premium?Our results explain why the takeover premium resulting from a negotiated deal is not significantly different from that resulting from an auction, and why tender offers are rarely observed in reality. We also show that when the threat of the initial bidder to call a tender offer is not credible, the takeover process might end with a private auction organized by the target. Conversely, when the tender offer threat is credible, the takeover process ends with a deal negotiated bilaterally between the bidder and the target. The takeover premium always depends on the degree of potential competition, while it is affected by the target resistance only for weak initial bidders.Finally, the model allows us to draw conclusions on how other dimensions of the takeover process, such as termination fees, control benefits and tender offer costs, affect its dynamics and outcome.     

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 Effect of Illegal Insider Trading on Takeover Premia

This paper empirically investigates whether illegal insidertrading increases the premium a bidder pays for a target. Illegalinsider trading is trading by traditional corporate insiders,as well as others in a position of trust and confidence (e.g.investment bankers, lawyers), based on material, non-publicinformation (‘inside information’). The paper examinesthe premia of takeovers with known illegal insider trading andcompares them to a control sample of takeovers matched by industry,time period, and size that do not have detected illegal insidertrading. After controlling for differences in merger characteristics,such as number of bidders, type of offer, form of payment, etc.,we find that takeovers with detected illegal insider tradinghave takeover premia which are approximately 10 percentage points,or almost one-third, higher than the control sample. We conductadditional tests in an attempt to determine the direction ofcausality between illegal insider trading and takeover premiasize and explore the effect of potential detection bias. Theresults suggest both that illegal inside traders base theirtrades on factors other than premia size, and that illegal insidertrading in takeovers with large premia is not necessarily morelikely to be detected. Our findings are consistent with thehypothesis that the illegal insider trading itself tends tocreate larger takeover premia.     

Leverage and the Complexity of Takeovers

There is scant empirical evidence on how the leverage of target firms affects gains to their shareholders, although there are several widely cited economic theories offered in the literature. The limited available evidence shows that shareholders of targets with greater leverage experience higher returns. However, even this observed effect of debt on takeovers cannot be distinguished from a mere mechanical pure leveraging effect, leaving the economic explanations untested. Consequently, we adopt an alternative approach here to examine if targets' debt truly matters in takeovers. We report that acquisition processes involving targets with higher leverage tend to be significantly more complex in several ways. We find that such acquisitions tend to take a longer time to consume, are more likely to be associated with multiple bidder auctions, and experience greater revisions in offer prices. Finally, we find that factors that make takeovers more complex also lead to greater target gains.     

MANAGERIAL OWNERSHIP,TAKEOVER DEFENSES,AND DEBT FINANCING

We examine the effect of agency conflicts on debt financing and show that managerial ownership and its interaction with takeover defenses affect these decisions. We find that (1) the relation between leverage and takeover defenses becomes insignificant when we control for the interaction of these defenses with managerial ownership, and (2) firms with large managerial ownership operate at high debt levels unless they have a large number of takeover defenses. Therefore, a two‐dimensional aspect of governance that includes the interaction between managerial ownership and takeover defenses is useful in understanding the effect of agency conflicts on firms' debt financing decisions.     

Optimal Capital Structure and Industry Dynamics

This paper provides a competitive equilibrium model of capital structure and industry dynamics. In the model, firms make financing, investment, entry, and exit decisions subject to idiosyncratic technology shocks. The capital structure choice reflects the tradeoff between the tax benefits of debt and the associated bankruptcy and agency costs. The interaction between financing and production decisions influences the stationary distribution of firms and their survival probabilities. The analysis demonstrates that the equilibrium output price has an important feedback effect. This effect has a number of testable implications. For example, high growth industries have relatively lower leverage and turnover rates.     

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.     

Industry structure and horizontal takeovers: Analysis of wealth effects on rivals,suppliers, and corporate customers

We examine the wealth effects of horizontal takeovers on rivals of the merging firms, and on firms in the takeover industry's supplier and customer industries. Inconsistent with the collusion and buyer power motives, we find significant positive abnormal returns to rivals, suppliers, and corporate customers for the subsample of takeovers with positive combined wealth effect to target and bidder shareholders. Overall, our findings suggest that the average takeover in our sample is driven by efficiency considerations. However, we find evidence suggesting that horizontal takeovers increase the buyer power of the merging firms if suppliers are concentrated.     

Spillover of corporate governance standards in cross-border mergers and acquisitions

In cross-border acquisitions, the differences between the bidder and target corporate governance (measured by newly constructed indices capturing shareholder, minority shareholder, and creditor protection) have an important impact on the takeover returns. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for the bootstrapping effect.     

Product market competition and the cost of bank loans: Evidence from state antitakeover laws

The extant literature documents a positive relationship between a firm’s takeover vulnerability and its agency cost of debt. Using state antitakeover laws as an exogenous measure of variation in takeover vulnerability, I investigate whether product market competition has a disciplinary effect that can lower a firm’s cost of bank loans. After taking into account the industry composition of borrowers, I find that banks charge higher spreads to borrowers that are vulnerable to takeovers, but only in concentrated industries. In the absence of disciplinary competitive pressure, the effect of takeover vulnerability on the cost of bank loans is mitigated for larger firms, firms followed by analysts, firms with existing credit ratings, non-family firms, and for borrowers with shorter maturity loans or loans with covenants and collateral in place. Taken together, the results suggest that the effect of governance on the cost of financing is not homogenous across all industries, and that concentrated industry firms may need to use supplementary governance mechanisms to mitigate debt holder agency problems.     

The Effect of Illegal Insider Trading on Takeover Premia

This paper empirically investigates whether illegal insider trading increases the premium a bidder pays for a target. Illegal insider trading is trading by traditional corporate insiders, as well as others in a position of trust and confidence (e.g. investment bankers, lawyers), based on material, non-public information (inside information). The paper examines the premia of takeovers with known illegal insider trading and compares them to a control sample of takeovers matched by industry, time period, and size that do not have detected illegal insider trading. After controlling for differences in merger characteristics, such as number of bidders, type of offer, form of payment, etc., we find that takeovers with detected illegal insider trading have takeover premia which are approximately 10 percentage points, or almost one-third, higher than the control sample. We conduct additional tests in an attempt to determine the direction of causality between illegal insider trading and takeover premia size and explore the effect of potential detection bias. The results suggest both that illegal inside traders base their trades on factors other than premia size, and that illegal insider trading in takeovers with large premia is not necessarily more likely to be detected. Our findings are consistent with the hypothesis that the illegal insider trading itself tends to create larger takeover premia.     

The Deterring Role of the Medium of Payment in Takeover Contests: Theory and Evidence from the UK

The deterring role of the medium of payment in a takeover contest is analysed from the point of view of the bidder. Cash, debt and equity are considered as alternative mediums of payment, and the bidder equilibrium strategies are specified following the Perfect Bayesian Equilibrium requirements for a signalling game. The model predicts notably that cash offers signal a high‐valuing bidder, strongly determined to acquire the target firm. Moreover, cash offers deter competition better than debt or equity offers. The theoretical results are validated with data from the UK over 1995–96.     

Financing decisions and bidder gains

This paper analyzes the relation between bidder gains and the source of financing funds available. We document that after controlling for the form of payment, financing decisions during the year before a takeover play an important role in explaining the cross section of bidder gains. Bidder announcement period abnormal returns are positively and significantly related to the amount of ex ante equity financing. This relation is particularly strong for high q firms. We further report a negative and significant relation between bidder gains and free cash flow. This relation is particularly strong for firms classified as having poor investment opportunities. The amount of debt financing before a takeover announcement is not significantly related to bidder gains. Together, we take these findings as supportive of the pecking-order theory of financing and the free cash flow hypothesis.     

An empirical examination of forecast disclosure by bidding companies

This paper examines voluntary disclosure of profit forecasts by bidding companies during takeovers. Disclosure is examined from two perspectives: (i) factors influencing disclosure and (ii) the influence of good news and bad news on disclosure. Takeover documents published during 701 takeover bids for public companies listed on the London Stock Exchange in the period 1988 to 1992 were examined. Two variables accounted for almost all the influences on disclosure of forecasts: bid horizon and type of bid. Probability of forecast disclosure was greater the shorter the bid horizon and during contested bids. In addition, there was some evidence that the nature of the purchase consideration offered by the bidder (cash or paper) and the industry of the bidder influenced disclosure. Disclosure was significantly more likely in paper bids and in the durable goods industry. Forecasts were more likely to be disclosed when firms had good news to report.     

Initial Shareholdings and Overbidding in Takeover Contests

Within the context of takeovers, this paper shows that in private-value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e., to bid more than his valuation. This strategy, however, can lead to i) an inefficient outcome, and ii) the winning bidder making a net loss. Further, the overbidding result implies that the presence of a large shareholder increases the bid premium in single-bidder takeovers at the expense of reducing the probability of the takeover actually occurring.     

Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies

While takeover targets earn significant abnormal returns, studies tend to find no abnormal returns from investing in predicted takeover targets. In this study, we show that the difficulty of correctly identifying targets ex ante does not fully explain the below‐expected returns to target portfolios. Target prediction models’ inability to optimally time impending takeovers, by taking account of pre‐bid target underperformance and the anticipation of potential targets by other market participants, diminishes but does not eliminate the potential profitability of investing in predicted targets. Importantly, we find that target portfolios are predisposed to underperform, as targets and distressed firms share common firm characteristics, resulting in the misclassification of a disproportionately high number of distressed firms as potential targets. We show that this problem can be mitigated, and significant risk‐adjusted returns can be earned, by screening firms in target portfolios for size, leverage and liquidity.     

Are Golden Parachutes an Optimal Contracting Response or Evidence of Managerial Entrenchment?: Evidence from Successful Takeovers

Two models that attempt to explain the adoption of golden parachutes are examined. The first model views golden parachutes as an optimal contracting response to a takeover, the other perceives them as an outgrowth of severe managerial entrenchment that results in contracts for the benefit of managers. Using a sample of 169 successful acquisitions of NYSE targets from 1981 through 1989, I document that targets that have adopted golden parachutes experience significantly higher excess returns around the announcement of a takeover than targets without these contracts. I find similar increased excess returns for the bidder/target portfolios. In addition, bidder excess return is independent of the existence of golden parachutes in targets. Additional results suggest that golden parachutes do not reduce managerial resistance to takeovers. The results are consistent with the managerial entrenchment hypothesis and inconsistent with the optimal contracting hypothesis. Sensitivity tests confirm these results.