Smoking laws and their differential effects on restaurants, bars, and taverns

This article examines the effect of restrictive smoking laws on restaurants, bars, and taverns. Supporters of these laws often argue that they do not harm firms and may even raise profits. Opponents argue that owners cater to customer smoking preferences, and laws mandating specific policies will negatively impact profits. This article provides a framework for examining the distribution of effects that smoking laws exert on businesses, and demonstrates that changes in total sales or tax revenues do not provide a meaningful understanding of the economic implications because smoking laws exert different effects on different firms. The distribution of these effects is examined using data from a nationwide survey of 1,300 restaurant, bar, and tavern owners. While some subsets of firms are predicted to suffer revenue declines, bars are predicted to be more than twice as likely to experience losses as restaurants. An important implication is that the increasing level of governmental restrictions on smoking in the hospitality sector could gradually impact the types of service available to the public.     

African elephants: the effect of property rights and political stability

African elephant populations have declined by more than 50% over the past 20 years. International outrage over the slaughter led to a worldwide ban on ivory sales beginning in 1989, despite the objections of many economists and scientists, and of several southern African countries that have established systems of property rights over elephants. Far from declining, elephant populations in many of these countries have increased to levels at or above the carrying capacity of the ecosystem. This article estimates the determinants of changes in elephant populations in 35 African countries over several time periods. The authors find that, controlling for other factors, countries with property rights systems of community wildlife programs have more rapid elephant population growth rates than do those countries that do not. Political instability and the absence of representative governments significantly lower elephant growth rates.     

Stock or cash? The trade-offs for buyers and sellers in mergers and acquisitions

In 1988, less than 2% of large deals were paid for entirely in stock; by 1998, that number had risen to 50%. The shift has profound ramifications for shareholders of both the acquiring and acquired companies. In this article, the authors provide a framework and two simple tools to guide boards of both companies through the issues they need to consider when making decisions about how to pay for--and whether to accept--a deal. First an acquirer has to decide whether to finance the deal using stock or pay cash. Second, if the acquirer decides to issue stock, it then must decide whether to offer a fixed value of shares or a fixed number of them. Offering cash places all the potential risks and rewards with the acquirer--and sends a strong signal to the markets that it has confidence in the value not only of the deal but in its own stock. By issuing shares, however, an acquirer in essence offers to share the newly merged company with the stockholders of the acquired company--a signal the market often interprets as a lack of confidence in the value of the acquirer's stock. Offering a fixed number of shares reinforces that impression because it requires the selling stockholders to share the risk that the value of the acquirer's stock will decline before the deal goes through. Offering a fixed value of shares sends a more confident signal to the markets, as the acquirer assumes all of that risk. The choice between cash and stock should never be made without full and careful consideration of the potential consequences. The all-too-frequent disappointing returns from stock transactions underscore how important the method of payment truly is.     

THE MEASUREMENT OF POST-ACQUISITION PERFORMANCE: TOWARD A VALUE-BASED BENCHMARKING METHODOLOGY

Mergers and acquisitions are clearly the favorite corporate growth strategy of this generation's executive teams. But there is little evidence that such strategies have paid off for the acquiring companies' shareholders–and many transactions have proved disastrous for the careers of the executives as well as the pocketbooks of the shareholders of the acquiring firms.
This article presents a methodology for evaluating post-acquisition operating performance from the perspective of the acquiring company's shareholders. The cornerstone of the method is a performance benchmark that incorporates the operating performance expectations built into the pre-acquisition market values of the two companies plus the additional promise of performance created by the payment of an acquisition premium.
After illustrating the use of this methodology in the case of an actual acquisition, the article goes on to present the results of a study (using 41 major strategic acquisitions from the period 1979–1990) of the extent to which stock market reactions to acquirers are useful predictors of actual performance over a five-year period following the acquisition. The results of the study provide strong support for building current market expectations into the benchmarking methodology.
The 1990s are often said to have initiated an era of so-called "strategic" mergers. The clear message from this analysis is that, even if a deal is deemed "strategic," it will not add value unless the realized synergies justify the acquisition premium. The burden of proof is on the acquirer to demonstrate to the market that they will. This article provides a tool that senior executives can use both for pre-acquisition analysis and pricing and for post-acquisition performance evaluation and incentive compensation.     

Transactions, volume, and volatility

We show that the positive volatility-volume relation documentedby numerous researchers actually reflects the positive relationbetween volatility and the number of transactions. Thus, itis the occurrence of transactions per se, and not their size,that generates volatility; trade size has no information beyondthat contained in the frequency of transactions. Our resultssuggest that theoretical research needs to entertain scenariosin which (i) both the frequency and size of trades are endogenouslydetermined, yet (ii) the size of trades has no information contentbeyond that contained in the number of transactions.     

Avoiding the “Synergy Trap”: Practical Guidance on M&A Decisions for CEOs and Boards

When a major acquisition is announced, investors try to understand where the value is going to come from and whether the acquirer has a plan to achieve that value. Deals are often brought to market with one big synergy number and a statement that the deal will be “accretive” to earnings. The problem, however, is that investors can't understand or track one number. Going to market with just one number also suggests that the acquirer has no credible plan, which in turn gives investors more reason to sell shares than to buy, particularly when a significant premium is being offered. According to academic studies, the acquiring company's stock price has fallen upon the announcement of more than half of the large corporate M&A deals that have been transacted since the early 1980s. And as the authors find in their recent study of the merger boom of 1995–2001, such negative stock price reactions are a fairly reliable predictor of future disappointing operating performance and, in many cases, further stock‐market underperformance. But as the authors also point out, such studies focus mainly on average results. And whether or not mergers pay on average doesn't really matter‐at least not to well‐informed executives and boards. What matters is that the executives who make these major capital investment decisions, and the boards that monitor them, have the tools that can help them distinguish the good deals from the bad before committing shareholder capital. For any proposed transaction requiring a significant premium over market, the authors present a simple, earnings‐based model for the target that yields combinations of cost reductions and revenue enhancements that would j ustify that premium. The authors go on to present a capabilities/market access matrix that can be used to assess the potential sources of synergies in any deal. Their methodology can be used to inform and guide detailed discussions about the combination of revenue and cost synergies that management believes it can achieve in a potential deal, and that should become the main focus of management's communication to investors. While no substitute for a carefully considered DCF valuation, the authors' method is a complement to DCF and effectively translates DCF merger criteria into the operational language that is familiar to most corporate managers and investors. In so doing, it can help boards avoid obvious mistakes of overpayment, particularly when “accretive” deals clearly fall short on economic grounds.     

The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia

Despite the large number of event studies of mergers that have been undertaken, considerable disagreement still exists over whether mergers increase the value of the merging firms, and if so why. Most event studies measure the average returns to the acquired and acquiring companies' shareholders separately, and based on these averages conclude either that mergers increase wealth, or that they reduce it. From this the authors go on to claim support either for a hypothesis about how mergers increase efficiency, or for one that claims they do not. This paper develops a methodology that uses the distribution of gains and losses across the two samples of firms, and their relationship to one another to test four hypotheses about why mergers occur: (1) the market‐for‐corporate‐control hypothesis, (2) the synergy hypothesis, (3) the managerial discretion hypothesis, and (4) the hubris hypothesis. The hypotheses are tested with data for 168 mergers between large companies from 1978 through 1990. Considerable support is found for the managerial discretion and hubris hypotheses, and some support is found for the market‐for‐corporate‐control hypothesis. Little or no support is found for the hypothesis that mergers create synergies and that shareholders of both the acquiring and acquired firms share gains from these synergies. Copyright © 2003 John Wiley & Sons, Ltd.