Acquisition of Divested Assets and Shareholders' Wealth

The divesting of corporate assets has become quite popular. Previous studies of divestitures have found conflicting impacts upon shareholders' wealth of the buying firm. This study measures the impacts of product-line relatedness between the acquiring firm and the divested unit and financial weakness of the selling firm upon the abnormal returns to the acquiring firm. Although the study finds that the impact of financial strength of the seller is ambiguous, the purchase of related assets produces more wealth than does the purchase of unrelated divested units. Further, firms that purchase related divested units have larger proportions of insider ownership.     

50+ Years of Diversification Announcements

This paper studies announcement returns from 4,764 mergers over 57 years to shed light on several controversies concerning corporate diversification. One prominent view is that diversification destroys value because of agency problems or internal investment distortions, but we find that combined (acquirer plus target) announcement returns are significantly positive for diversifying mergers throughout the period, and no lower than the returns for related mergers. The returns from diversifying acquisitions fell after 1980, and investors rewarded mergers involving financially constrained firms before but not after 1980, consistent with the idea that the value of internal capital markets declined over time.     

Wealth effects for acquirers and divestors related to foreign divested assets

This study examines acquisitions of foreign divested assets by U.S. firms. The results indicate that the excess returns to these acquisitions is a significant 0.48%, suggesting that capital markets perceive potential synergies from the effective utilization and strategic management of these assets by U.S. companies. The wealth effects to divestors of these foreign assets is 0.65%, significant at the 1% level, indicating that firms benefit from reducing their geographic scope of operations. We further examine excess returns to acquirers, and we find that several firm-specific characteristics foster anticipation of positive performance gains resulting from the acquisition of divested assets in foreign countries. Similar results are observed for the divesting firms also. Analysis of long horizon performance provides weak indication that performance of divesting firms improves subsequent to the divestment.     

Where M&A Pays and Where It Strays: A Survey of the Research

This article uses a large and growing body of academic studies to refute the popular notion that corporate mergers and acquisitions generally fail to increase productivity and end up reducing shareholder value. A careful review of the evidence starts by con. rming the obvious–namely, that the shareholders of selling firms earn large returns from M&A–and goes on to demonstrate an economic reality that is not widely understood: shareholders of acquirers generally earn about the required rate of return on investment, and hence M&A is at least a value-maintaining proposition.
Of greatest interest to corporate practitioners, however, is the very large dispersion of outcomes that underlies the average returns. Closer inspection of this variability shows that certain circumstances and company characteristics are reliably associated with value-increasing M&A. In particular, acquisitions of related companies tend to be better received by the market and to produce higher post-merger operating returns than diversifying transactions (though there are a number of successful instances of the latter). Other fairly reliable indicators of value-increasing M&A are transactions involving mergers of equals or smaller, private targets (where the bidding competition is less intense) and deals structured as earnouts and financed primarily with cash rather than stock.     

The value of control: Evidence from full and partial acquisitions in the real estate industry

We investigate the differential wealth effects of (1) full and partial control acquisitions, (2) nonreal estate, real estate and REIT participants, and (3) single- and multiple-bidder events. We find that target firms earn positive excess returns at the announcement of partial and full acquisitions, but acquisitions that result in control earn larger excess returns than noncontrol acquisitions. An examination of industry differences shows that real estate firms or REITs do not earn higher returns relative to nonreal estate firms. Our analysis of market structure finds that bidders that are not involved in an acquisition program earn greater announcement period returns than prior acquirers. For target firms, we find that those with a single offer earn higher returns than those with subsequent offers. A cross-sectional regression analysis shows that while market structure is important in explaining returns, the main determining factor for target firms is the degree of control sought.     

Comparing acquisitions and divestitures

We study the acquisition and divestiture activity of a sample of 1305 firms from 59 industries during the 1990–1999 period. Consistent with the importance of restructuring activity during the 1990s, we find that half of the sample firms are acquired or engage in a major divestiture. Consistent with the notion that economic change is a source of the observed restructuring activity, we find significant industry clustering in both acquisitions and divestitures. We also study the announcement effects of the two forms of restructuring and find that both acquisitions and divestitures in the 1990s increase shareholder wealth. Moreover, the wealth effects for both acquisitions and divestitures are directly related to the relative size of the event. The symmetric, positive wealth effects for acquisitions and divestitures are consistent with a synergistic explanation for both forms of restructuring and are inconsistent with nonsynergistic models based on entrenchment, empire building and hubris.     

Target Company Cross‐border Effects in Acquisitions into the UK

We analyse the abnormal returns to target shareholders in cross‐border and domestic acquisitions of UK companies. The cross‐border effect during the bid month is small (0.84%), although cross‐border targets gain significantly more than domestic targets during the months surrounding the bid. We find no evidence for the level of abnormal returns in cross‐border acquisitions to be associated with market access or exchange rate effects, and only limited support for an international diversification effect. However, the cross‐border effect appears to be associated with significant payment effects, and there is no significant residual cross‐border effect once various bid characteristics are controlled for.     

Acquirer-target social ties and merger outcomes

This article investigates the effect of social ties between acquirers and targets on merger performance. We find that the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms has a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm?s chief executive officer (CEO) and a larger fraction of the target firm?s pre-acquisition board of directors remain on the board of the combined firm after the merger. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to take place between two firms that are well connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision making and lower value creation for shareholders overall.     

Diversification to mitigate expropriation in the tobacco industry

While it is well established that diversifying acquisitions by large, cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show that these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show that wealth creation increases in the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms’ influence in more political districts) and in the liquidity of tobacco firms’ assets (converting cash to harder-to-expropriate operating assets). We also show that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.     

A Reexamination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View

One possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less-developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially "unconstrained" buyers acquire "constrained" targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided company-specific operational information, while the bidder provided capital-budgeting expertise.     

Is the M&A announcement effect different across Europe? More evidences from continental Europe and the UK

The United Kingdom (UK) and Continental Europe are two of the most dynamic markets for mergers and acquisitions in the world. Using a sample of 2823 European acquisitions announced between 2002 and 2010, we investigate the effect of M&A announcements on stock returns of acquiring companies located in Continental Europe and the UK. The analysis is based on characteristics of takeover transactions such as method of payment, listing status of the target company, geographic scope (cross-border vs. domestic), industry relatedness of the bidding and the target company, amongst other factors. We find that European bidders earn positive abnormal returns both in cross-border and domestic acquisitions, and there is a significant difference between the abnormal returns of stock and cash deals, and between acquisitions of listed and unlisted target companies. However, the cross-border wealth effects are not significantly different between the UK and Continental Europe. We find that bidding firm’s shareholders gain more in equity than in cash offers if they are located in the UK and if they acquire unlisted targets. Cash bids for listed targets are associated with higher abnormal returns for bidders located in Continental Europe. We do not find supportive evidence that industry diversification destroys value for shareholders of both Continental European and the UK bidders.     

Asymmetric information and target firm returns

This article examines the relationship between asymmetric information and target firm returns in mergers and acquisitions (M&As). We argue that if managers possess favourable (unfavourable) asymmetric information, they will offer, ceteris paribus, a high (low) premium, affecting target firm returns accordingly. We propose several proxies of asymmetric information. The empirical evidence strongly supports our hypothesis as we find that target firm returns are significantly negatively related to asymmetric information regarding synergy gains. Our results are robust after controlling for several target and deal characteristics.     

Diversification, Ownership and Control of Swedish Corporations

We study the short‐ and long‐term valuation effects of Swedish takeovers. Using a sample of 93 bidding firms that acquired 101 targets between 1980 and 1995, we find that diversifying acquisitions lead to a negative market reaction and deterioration of the operating performance of the bidder. Announcement and performance gains in each of the three years following the acquisition occur only when bidders expand their core rather than their peripheral lines of business. Our findings suggest that focused acquisitions lead to greater synergies and operating efficiencies than diversifying acquisitions. Intra‐group acquisitions, however, show that bidders do not realise significant gains whether they adopt diversifying or focusing investment strategies by purchasing firms controlled by the Wallenberg and SHB conglomerate groups. Intra‐group targets realize significant gains regardless bidder's investment strategy. Finally, the evidence does not support the view that intra‐conglomerate acquisitions are associated with expropriation of minority shareholders. However, they appear to enhance the control rights of large shareholders of the bidding firm.     

The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions

This study presents direct evidence on the effect of international acquisitions on stock prices of U.S. bidding firms. Shareholders of MNCs not operating in the target firm's country experience significant positive abnormal returns at the announcement of international acquisitions. Shareholders of U.S. firms expanding internationally for the first time experience insignificant positive abnormal returns, while shareholders of MNCs operating already in the target firm's country experience insignificant negative abnormal returns. The abnormal returns are larger when firms expand into new industry and geographic markets—especially those less developed than the U.S. economy. The evidence is consistent with the theory of corporate multinationalism, predicting an increase in the firm's market value from the expansion of its existing multinational network.     

Do Stock Mergers Create Value for Acquirers?

This paper finds support for the hypothesis that overvalued firms create value for long-term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We solve this endogeneity problem by creating a sample of mergers that fail for exogenous reasons. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer-target combination would have earned higher returns. None of these results hold for cash bids.     

Analysing the wealth effects of UK divestitures: An examination of domestic and international sales

Here we analyse divestiture announcement effects for UK multinational corporations accounting for the location of the unit sold. We find some bias in market reactions with larger abnormal returns for UK divestitures when compared to overseas sales. US sales generate larger returns than those in Continental Europe or the Asia-Pacific region. We analyse the determinants of abnormal returns using accounting and transaction data, supplemented with country specific data for overseas sales. Abnormal returns for UK sales are explained by financial characteristics of the selling firm but the size of the transaction relative to the firm is the most significant factor in overseas divestitures.     

Voluntary Divestitures and the Choice Between Sell-Offs and Spin-Offs

A voluntary divestiture may either be a sell-off or a spin-off. In a sell-off, the divesting firm receives cash (or cash equivalents) and gives up ownership and control of the divested asset. In a spin-off, the divested asset becomes an independent entity under a new management but ownership remains with the old stockholders of the original firm. The study investigates the divestiture decision and the choice between sell-offs and spin-offs by constructing a model of the multi-divisional firm. The results show that firms undertake voluntary divestitures because of low marginal return coupled with high joint operating and financial costs. The form of the divestiture is determined by the operating risk of the division being divested. The implications of the model are empirically tested for the period 1969–87 and the results support the postulates of the model.     

The Impact on UK Acquirers of Domestic, Cross‐border, Public and Private Acquisitions

Abstract:   We examine the announcement and post‐acquisition share returns of UK acquirers in over 4,000 acquisitions of domestic, cross‐border, public and private targets. Domestic public acquisitions result in negative announcement and post‐acquisition returns, whilst cross‐border public acquisitions result in zero announcement returns and negative post‐acquisition returns. In contrast, both domestic and cross‐border private acquisitions result in positive announcement returns and zero post‐acquisition returns. The main differences between private and public acquisitions are that glamour acquirers underperform in public acquisitions but not in private acquisitions, and that acquirers using noncash methods of payment underperform in domestic public acquisitions but not in domestic private acquisitions. Overall, cross‐border acquisitions result in lower announcement and long run returns than domestic acquisitions. In cross‐border acquisitions, those involving high‐tech firms perform relatively well, as do those with low national cultural differences.     

Index

This paper provides empirical estimates of the stock market reaction to tender offers, both successful and unsuccessful. The impact of the tender offer on the returns to stockholders of both bidding and target firms is examined. The evidence indicates that for the twelve months prior to the tender offer stockholders of bidding firms earn significant positive abnormal returns. In the month of the offer, only successful bidders earn significant positive abnormal returns. Stockholders of both successful and unsuccessful targe firms earn large positive abnormal returns from tender offers, and most of these returns occur in the month of the offer. For all classes of firms, there is no significant post-offer market reaction. The market reaction to ‘clean-up’ tender offers is also estimated and target stockholders again earn significant positive abnormal returns.     

Is more less? Propensity to diversify via M&A and market reactions

Mergers and acquisitions (M&As) could lead to a firm diversifying into new industries, and the impact of this may be related to the firm's prior diversification. Using a panel of 1030 M&A transactions from 2000 to 2010, we find that previously diversified firms are more likely to pursue industrially diversifying M&As. Both previous and contemporary diversification measures are not associated with the firm's cumulative abnormal returns (CARs) at time of announcement but have a lasting effect on various performance measures up to two years later. We find evidence supporting both a diversification discount and premium, which can be predicted by the sign of the CAR at the time of announcement. This suggests that while diversification is necessary to explain firm value, it is not sufficient.