The market valuation of M&A announcements in the United Kingdom

This paper investigates the short-term market reaction to UK acquirers announcing domestic and foreign mergers and acquisitions (M&As) from 2000 to 2010. We define acquirers as value, moderate and glamour acquirers based on equally weighted market-to-book terciles. We find that value acquirers outperform glamour acquirers during and after the M&A announcement. We also focus on the impact of institutional ownership and find that higher domestic, foreign and total institutional ownership leads to lower market reaction to M&A announcements. We also find that long-term institutional investors lead to a higher post-announcement market performance. Finally, we find that greater domestic institutional ownership mitigates the typical poor short-term performance following M&A announcements of glamour acquirers.     

Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions

We document that acquiring firms are more likely than nonacquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long‐run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock‐swap acquisitions. This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.     

DO INSIDERS PRACTICE WHAT THEY PREACH? INFORMED OPTION EXERCISES AROUND MERGERS AND ACQUISITIONS

We examine executive stock option exercises around a sample of merger and acquisition announcements between 1996 and 2006, focusing on a subset we identify as potentially informed. For stock‐financed acquisitions, we find a surge in informed exercises by acquirer insiders in the year leading up to the acquisition announcement, but target insiders display no similar increase. We find the market reaction upon the announcement for acquirers is negatively related to extreme early exercises and find some evidence of long‐run underperformance. Overall, our evidence indicates that insiders knowingly bid for firms when they personally believe their own firm is overvalued.     

Corporate Cash Holdings and Acquisitions

We find that acquirers’ announcement returns decline with their cash holdings, but only when at least part of the payment is in the form of stock. We further find evidence that acquirers that use stock payment are overvalued, especially when they have excess cash that they could have used instead. Collectively, our results suggest that investors interpret announcements of stock acquisitions as a signal that the acquirers’ equity is overvalued and that high cash holdings intensify this signal. However, our results are inconsistent with the common belief that cash holdings induce value‐destroying acquisitions.     

The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions

We investigate how the liquidity and trading activity effects of the announcement of the acquisition of private targets vary by payment method. We find significant increases in trading activity around acquisition announcement dates irrespective of the payment method used; however, fluctuations are lower for acquisitions financed by earnouts and cash. Similarly, the stocks of acquirers using cash and earnouts are also less affected by a general loss of liquidity that accompanies announcements. We show that these effects are explained by the interpretation of cash acquisition by the market as an option used when acquirers perceive no risk of being adversely selected, and the potential of earnout as an adverse selection risk reduction tool.     

Intra-industry signals embedded in bank acquisition announcements

Bank acquisitions have increased in recent years, as more banks attempt to exploit potential synergies, economies of scale, and other benefits. Numerous studies have determined that bank acquisitions generate strong positive valuation effects for targets on average, while the evidence of the impact on acquirers is mixed. Our objectives are: (1) determine whether the announcement of a bank acquisition transmits intra-industry signals; (2) explain why the intra-industry effects vary across acquisition announcements; and (3) explain why the valuation effects of individual rival banks vary. We find that bank acquisition announcements generate significant positive intra-industry effects, on average.The intra-industry effects of rival bank portfolios are not uniform across announcements, as they are conditioned by variables that could signal information about the probability that rival banks will become takeover targets. The valuation effects of rival bank portfolios are positively related to the valuation effects of the target banks, and inversely related to the size and prior performance of rival bank portfolios. Furthermore, the valuation effects are more favorable for individual rival banks that are ultimately acquired. To the extent that these variables reflect the probability of being acquired in the future, the intra-industry effects appear to be more favorable for acquisitions in which there is a higher probability that the corresponding rivals will become targets. Overall, investors discriminate based on event-specific and rival bank-specific characteristics when interpreting the signal transmitted as a result of bank acquisitions.     

Deal size,acquisition premia and shareholder gains

This study examines the contradictory predictions regarding the association between the premium paid in acquisitions and deal size. We document a robust negative relation between offer premia and target size, indicating that acquirers tend to pay less for large firms, not more. We also find that the overpayment potential is lower in acquisitions of large targets. Yet, they still destroy more value for acquirers around deal announcements, implying that target size may proxy, among others, for the unobserved complexity inherent in large deals. We provide evidence in favor of this interpretation.     

Are frequent acquirers more entrenched?

We do not find a significant influence of management entrenchment on the firm's propensity for frequent acquisition, in contrast to the existing studies that show entrenched managers are more likely to become frequent acquirers. We show that entrenched management is less likely to engage in frequent acquisitions because of low strategic managerial ability. Strategic managerial ability is positively associated with the firm's propensity for frequent acquisition. Entrenched acquirers have lower strategic managerial ability; and lower ability acquirers are more likely to be entrenched. Reducing acquisition frequency exacerbates management entrenchment. Frequent acquisitions further enhance strategic managerial ability, and high-ability management is likely to be more acquisitive. Frequent acquirers are 40% less likely to be entrenched compared to non-frequent acquirers. Our results are consistent with the notion that the market for corporate control effectively disciplines frequent acquirers such that their management are less likely to be entrenched. Entrenched acquirers suffer a loss in firm value, which further supports that the market for corporate control is effective in penalizing entrenched management. Frequent acquirers, often being in the market for targets, are disciplined by the market for corporate control. Frequent acquisitions appear to be driven by strategic managerial ability, rather than by management entrenchment.     

The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US

Abstract:  Using a sample of 129 mergers and acquisitions (M&As) in the US between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher R&D investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is −2.73% while the return for acquirers without IPRD write-offs is −0.60%. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.     

Relative equity market valuation conditions and acquirers’ gains

We examine whether the relative equity market valuation conditions (EMVCs) in the countries of merging firms help acquirers’ managers to time the announcements of both domestic and foreign targets. After controlling for several deal- and merging firm-specific features we find that the number of acquisitions and acquirers’ gains are higher during periods of high-EMVCs at home, irrespective of the domicile of the target. We also find that the higher gains of foreign target acquisitions realized during periods of high-EMVCs at home stem from acquiring targets based in the RoW (=World-G7), rather than the G6 (=G7-UK) group of countries. We argue that this is due to the low correlation of EMVCs between the UK (home) and the RoW group of countries. However, these gains disappear or even reverse during the post-announcement period. Moreover, acquisitions of targets domiciled in the RoW (G6) countries yield higher (lower) gains than acquisitions of domestic targets during periods of high-EMVCs at home. This suggests that the relative EMVCs between the merging firms’ countries allow acquirers’ managers to time the market and acquire targets at a discount, particularly in countries in which acquirers’ stocks are likely to be more overvalued than the targets’ stocks.     

TO PURCHASE OR TO POOL: DOES IT MATTER?

The recent decision by the Financial Accounting Standards Board to eliminate pooling accounting for acquisitions raises several important questions: Does the choice of “purchase” or “pooling” affect firm valuations? How do differences in goodwill and its amortization affect cash flow and price/earnings multiples? How has the market reacted to purchase and pooling acquisition announcements? The authors' new research suggests that the market already judges mergers and acquisitions based on fundamental economics, not on GAAP earnings. In a study of 1,442 large acquisitions in the 1990s, the authors find that, in the first month after the announcement of pooled transactions, the acquirer's stock fell by an average of almost 4%. By contrast, the market reaction to purchase acquisitions was extremely favorable, with a 3% positive abnormal return in the first month. But what about the ongoing effect of goodwill amortization on values? In the second part of their two-part study, the authors report that the P/E multiples of acquirers reporting increases in goodwill amortization increase significantly following the acquisitions, and that the increases in P/E are large enough to offset the negative impact of goodwill amortization on earnings. Moreover, the authors also tested for and were unable to find any evidence of a market bias against balance sheet goodwill as an indicator of future amortization charges. The authors thus conclude that changes in accounting for acquisitions should not be a concern for acquirers, and that the elimination of pooling should have no lasting impact on corporate strategic decisions or M&A activity. Nevertheless, they do suggest that companies with significant goodwill would benefit from making their amortization transparent in their financial statements by, for example, breaking out amortization from depreciation on their income statements.     

Is M&A different during a crisis? Evidence from the European banking sector

The financial crisis has affected the landscape of the banking sector around the world. We use a sample of transactions carried out by European acquirers in 2007–2010 to study the acquirer’s stock price market reaction to both announcements and completions of acquisitions. At the aggregate level, we find that there are no significant abnormal returns around the announcement of an acquisition while there are positive abnormal returns at completions. We study the cross-sectional determinants of abnormal returns and find that announcement returns are mainly explained by the acquirer bank characteristics, while completion returns mainly depend on opacity of the target and on the drop in idiosyncratic volatility associated with a reduction of uncertainty.     

The performance and motivation of serial acquisitions: Evidence from Australia

Using 2696 acquisition announcements reported in Australia between 2000 and 2016, we document lower stock returns but higher risk for deals made by serial acquirers compared to those made by single acquirers after controlling for firm and deal characteristics. We also find that serial acquirers' underperformance relative to single acquirers is more pronounced when managers gain more control over their firm's resources. Further analysis reveals that the outcome of the first transactions is key to deriving serial acquisitions' motivation and performance.     

Bond market access and investment

Prior research has shown that differential access to debt markets significantly affects capital structure. In this paper, we examine the effect of access to debt markets on investment decisions by using debt ratings to indicate bond market access. We find that rated firms are more likely to undertake acquisitions than nonrated firms. This finding remains even after accounting for firm characteristics, for the probability of being rated, and in matched sample analysis as well as in subsamples based on leverage, firm size, age and information opacity. Rated firms also pay higher premiums for their targets and receive less favorable market reaction to their acquisition announcements relative to non-rated firms. However, the average announcement returns to rated acquirers are non-negative. Collectively, these findings suggest that the lack of debt market access has a real effect on the ability to make investments as well as on the quality of these investments by creating underinvestment, instead of simply constraining overinvestment.     

Regulatory Arbitrage and Cross‐Border Bank Acquisitions

We study how differences in bank regulation influence cross‐border bank acquisition flows and share price reactions to cross‐border deal announcements. Using a sample of 7,297 domestic and 916 majority cross‐border deals announced between 1995 and 2012, we find evidence of a form of “regulatory arbitrage” whereby acquisition flows involve acquirers from countries with stronger regulations than their targets. Target and aggregate abnormal returns around deal announcements are positive and larger when acquirers come from more restrictive bank regulatory environments. We interpret this evidence as more consistent with a benign form of regulatory arbitrage than a potentially destructive one.     

The Geography of Block Acquisitions

Using a large sample of partial block acquisitions, we examine the importance of geographic proximity in corporate governance and target returns. We find that block acquirers have a strong preference for geographically proximate targets and acquirers that purchase shares in such targets are more likely to engage in post‐acquisition target governance activities than are remote block acquirers. Moreover, the targets of these acquirers realize higher announcement returns and better post‐acquisition operating performance than do targets of other types of acquirers, particularly when they face greater information asymmetries.     

Does venture capital syndication affect mergers and acquisitions?

We find that venture capital (VC) syndicate-backed targets receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets receive lower cumulative abnormal returns surrounding the acquisition announcement, but they outperform the individual-backed targets in the long-term. We show that VC syndication creates value for entrepreneurial firms by leading to larger and more independent boards of directors prior to acquisition. It also leads to better incentive alignment between the CEO and the shareholders of the acquiring firm. In addition, syndicate-backed targets prefer stock as the method of payment in mergers and acquisitions. Collectively, we show that VC syndication creates value for both entrepreneurial firms and their acquirers in the long-term.     

Wealth Effects of International Acquisitions by US Banks

The wealth effects of international acquisitions by US banks (USBs) are examined in this study. The results show that shareholders of USBs experience significant negative excess returns when banks make international acquisition announcements. Excess returns are significantly negative when banks announce acquisitions in developed countries. The excess returns are not different for first time versus subsequent acquisition announcements. However, excess returns are significantly negative for USBs that are frequent acquirers overseas. Sampling by time periods, negative excess returns are observed during the fixed exchange rate regime (1965–1973) and during the post Tax Reform Act of 1986 era. Cross‐sectional regressions indicate that profitability and efficiency measures are positively associated with excess returns.     

Directors' and officers' liability insurance and acquisition outcomes

We examine the effect of directors' and officers' liability insurance (D&O insurance) on the outcomes of merger and acquisition (M&A) decisions. We find that acquirers whose executives have a higher level of D&O insurance coverage experience significantly lower announcement-period abnormal stock returns. Further analyses suggest that acquirers with a higher level of D&O insurance protection tend to pay higher acquisition premiums and their acquisitions appear to exhibit lower synergies. The evidence provides support for the notion that the provision of D&O insurance can induce unintended moral hazard by shielding directors and officers from the discipline of shareholder litigation.     

LABOR MARKET CONSEQUENCES FOR BUSY DIRECTORS: EVIDENCE FROM INTERNATIONAL MERGERS AND ACQUISITIONS

Using 13,233 acquisitions from 57 countries, we examine merger and acquisition (M&A) decisions made by busy boards. We find that few busy acquirers originate from emerging markets and that they tend to undertake cross‐border mergers, favor public targets, finance with cash and equity, pursue nondiversifying mergers, avoid targets with multiple bidders, and long‐term underperform relative to nonbusy acquirers. Importantly, we discover a nonlinear relation between an acquirer's board busyness and merger announcement returns. We find that the labor market penalizes directors who approve bad acquisitions but does not reward them for good mergers. We find a similar nonlinear relation between an acquirer's board busyness and its long‐term performance along with a suggestion of an optimal board busyness.