Competition in the acquisition market and returns to bidders in Australia

This study investigates the impact of takeover market competition on the short-run market performance of Australian acquirers. While the market for corporate control predicts a positive association between takeover market competition and acquirers’ announcement period returns, the winner’s curse hypothesis predicts a negative relationship. Using six alternative proxies to capture acquisitions market competition, I find that takeover market competition has a significant negative influence on acquirers’ announcement period returns. However, this effect is more pronounced among private target acquirers, large acquirers and stock-financed acquisitions. The findings further reveal that large bidders acquiring private targets through stock-financed acquisitions are the most penalised group in the capital market in a competitive acquisitions market. Additionally, evidence is found which suggests that competition-induced bids are associated with significantly higher bid premiums and experience negative post-acquisition performance. The findings remain robust to the implementation of alterations to several methodological concerns, the issue of endogeneity and sample selection variations.     

The usefulness of financial advisors to government-influenced Chinese acquirers

In this study, we examined the usefulness of financial advisors in mergers and acquisitions (M&As) by Chinese acquirers with different levels of government influence. Using a sample of 5614 M&A deals involving unlisted targets in which the use of advisors by acquirers is not mandated, we found that their use is determined by the complexities and information asymmetries associated with such deals, and whether the acquirer has government support. In our analysis of deal outcomes, we also found that the use of advisors increases the likelihood of deal completion and the long-term post-acquisition performance for deals involving acquirers with government control. This indicates an incremental benefit associated with the use of financial advisors for government-controlled acquirers.     

WEALTH EFFECTS FROM ACQUIRING FAILED THRIFTS SINCE FIRREA

This study investigates the market reaction to acquisitions of failed thrifts since the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. The study also assesses the influence of various factors on the share price response across acquirers. In general, the market reaction to the acquisitions is negative. Cross-sectional regression analysis reveals that acquisitions are likely to be more beneficial when they reflect industry diversification, a higher degree of government assistance, and less intense bidding for failed target thrifts. Our findings differ from previous studies which have documented a favorable share price response to assisted aquisitions. Apparently, the change in the amount and type of government assistance in the post-FIRREA period has affected the market reaction. Since the Resolution Trust Corporation controls the government assistance and the intensity of bidding for failed thrifts, its actions have a significant impact on the share price response to acquisitions. The results of the analysis are relevant to potential acquirers of failed thrifts, regulatory agencies, and taxpayers.     

The Winner's Curse and Bidder Competition in Acquisitions: Evidence from Failed Bank Auctions

This study examines the effect of bidder competition in acquisitions. We use predictions from auction theory to test whether acquirers of failed banks overpay (the “winner's curse”) when bidding in FDIC sealed-bid purchase and assumption (P&A) transactions (auctions). The empirical results indicate that winning bids tend to increase as the number of competitors increases, as predicted by theory. We also find that bid levels of all bidders increase with increased competition, which is consistent with bidders' failing to adjust for the winner's curse in a common value auction setting. However, additional tests using winning bids only are consistent with both a common value and a private values model, so this result should be interpreted with caution.     

Heterogeneity in the information content of 8-K disclosures about private targets: Acquirer size and target significance

In this paper, we empirically analyze the disclosures required by the Securities Exchange Commission (SEC) for acquisitions of privately held target firms by public acquirers. We find that 8-K disclosures filed by public acquirers within a week after the announcement date of the takeover of a privately held target firm materially affect the pricing and the trading of the acquirers' shares around the event date, but only for large acquiring firms. This impact is economically significant even for targets classified as “insignificant” by the SEC, but again, only for large acquirers. Our results suggest that it may be optimal to further reduce the disclosure costs faced by smaller acquirers in acquisitions of private targets.     

Impact of Acquisitions on Thrift Performance

This study focuses on the risk and return performance of savings and loans that were active acquirers during the early and mid-eighties relative to that of non-acquirers. Acquirers took on more risks than nonacquirers, but were less profitable. Separating acquirers by the health of their acquisitions, acquirers of both healthy and troubled associations or of troubled associations only were more highly leveraged and saw their profitability erode over the post-acquisition period. These results suggest that the problems of integration are compounded when there are multiple acquisitions over a relatively short period of time and when the acquired association is unhealthy.     

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 attenuation effect of social media: Evidence from acquisitions by large firms

We examine the role of social media in firm acquisitions. Twitter utilizes the “push” technology that allows firms to reduce information asymmetry by disseminating news to a broader set of investors in a timely manner. Using hand collected acquisition announcements from Twitter covering the period from 2009 to 2012, we find that the acquirer size is a main determinant of disclosing acquisition announcements on Twitter. Large acquirers announce their acquisitions on Twitter and, as a result, are able to attenuate the anticipated negative market reaction at acquisition announcement. We find no evidence that the attenuation effect of announcing acquisitions on Twitter subsequently reverses or that announcing acquisitions on Twitter is positively associated with pre-announcement earnings management. Overall, our results suggest that Twitter has become an important investor relation channel for major corporate events such as acquisition announcements and that large acquirers can use this new channel to enhance stability in their stock prices.     

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.     

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.     

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.     

Selling Failed Banks

The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.     

How do US investors perceive the risk of local political corruption? Evidence from acquisition announcement

This study examines the impact of local political corruption on investors’ evaluation of firms’ mergers and acquisitions (M&As) in the US. Using the number of corruption convictions of government officials reported by the US Department of Justice, we find that acquirers in more corrupt court districts experience lower acquirer announcement returns, lower combined acquirer and target announcement returns, and are less likely to complete acquisitions. We further find that the relation between local political corruption and acquirer announcement returns is worsened when acquirers operate primarily in the headquarters state. Overall, the results suggest that local political corruption has an adverse impact on investors’ evaluation of a firm’s M&A profitability.     

Sources of value gains in minority equity investments by private equity funds: Evidence from block share acquisitions

Using block share acquisitions made by private equity (PE) funds, we examine the sources of value gains in PE minority equity investments. We find that compared with non-PE acquirers, PE acquirers are more likely to place representatives with finance experience or those with experience in the target's industry on the target's board when the need for target oversight and/or advice is higher. The targets in PE acquisitions, particularly poorly performing targets, targets with high R&D intensity, and targets with PE-appointed directors who have experience in the target's industry, realize both higher announcement returns and better post-acquisition operating performance than do targets in non-PE acquisitions. These findings suggest that the governance and operational engineering that PE acquirers apply to their targets constitutes important sources of value creation in PE minority equity investments.     

Do targets grab the cash in takeovers: The role of earnings management

Extant research on Mergers and Acquisitions (M&A) provides evidence that acquirers underperform subsequent to the takeover completion. Such evidence is more unequivocal for acquirers that finance the acquisition by issuing equity relative to those that use cash. Current literature recognizes various reasons for this underperformance, most of which suggest overvaluation of the acquirers and/or overpayment for the targets at the time of acquisition announcement. Alternatively, this paper aims to investigate whether acquirers' post-takeover abnormal return is also attributed to target firms' real and/or accrual earnings management. Our results indicate that, on average, targets manage earnings upwards using real transactions rather than accruals, during the year preceding the takeover. More specifically, we find evidence of earnings management through sales among targets of cash acquisitions and that it is significantly and negatively related to the post-acquisition performance of the acquirers. These findings suggest that there is an association between the method of financing in acquisitions and earnings management in target firms, which could impact the post-takeover performance of 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.     

Acquisitions driven by stock overvaluation: Are they good deals?

Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.     

Foreign Acquisitions and Managerial Discretion

Foreign acquisitions have been growingdramatically since the 1980s despite academic studiesshowing that shareholders of acquirers generally donot realize any significant gain. In this paper, weinvestigate whether foreign acquisitions aremotivated by managerial self-interest. Logisticregressions are performed to establish a link betweenforeign acquisitions and the acquirer's free cashflow. The results show that foreign acquisitions oflow-Q firms are strongly influenced by managerialdiscretion. In addition, acquisitions of low-Q firmsare conducted without consideration of theperformance of the acquirers. Foreign acquisitions ofhigh-Q firms, however, do not representoverinvestments.     

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.     

Acquisitions and the cost of debt: Evidence from China

A large body of literature has examined the effect of mergers and acquisitions (M&As) on firm valuation, and generally find that M&As reduce acquirers' shareholder value. However, relatively little is known about the effect of M&As on the pricing of corporate debt by debtholders, especially for firms in less developed countries. Using a sample of Chinese listed firms with outstanding bonds from 2007 to 2020, we find that the cost of debt is lower for acquirers than for non-acquirers, and that the effect of acquisitions in reducing cost of debt is more pronounced for firms from provinces with less developed markets, for private firms, and for firms undertaking cross-province acquisitions. Our results are robust to a series of robustness checks that address various endogeneity concerns, including the use of a matched-sample approach, the use of the Heckman two-stage model and a change analysis, the control for acquirers' pre-acquisition bond yield spread, and the exclusion of acquisitions of publicly listed targets. Our analyses of provincial institutional factors show that the relationship between M&As and cost of debt is moderated by government relations to market, private economy development, and the development of market intermediaries and legal environment. We further document that acquirers have lower default risk during the post-acquisition period because of a coinsurance effect, and that acquirers attract more analyst following and investors after acquisitions. Overall, our results indicate that acquisitions can reduce cost of debt through reducing firms' default risk and information risk, and that institutional factors matter for the effect of M&As on the cost of debt.