Does takeover competition affect acquisition choices and bidding firm performance? Australian evidence

We examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short-term announcement window, competition-induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock-financed takeovers undertaken in a competitive takeover market show a long-run decline in performance of acquirers.     

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.     

How Has Takeover Competition Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed? In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period. First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders. The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.     

Takeover premiums and the perception of auditor independence and reputation

This study investigates if there is a positive association between takeover premiums and the bidder’s perception of target firm auditor reputation and independence. Using auditor size as a proxy for auditor reputation, the results indicate that in hostile takeovers target shareholders receive a higher takeover premium when a Big 4 auditor audits the target firm prior to the takeover. This result is only significant, however, in the period prior to the highly publicised audit failures. The impact of perceived auditor independence on takeover premiums is studied using the levels and size of non-audit service (NAS) fees provided by the target firm auditor. Using three proxies for auditor independence, the results show no association between perceived auditor independence and takeover premiums. This finding is robust to partitioning the sample by auditor size, takeover hostility and splitting the sample into takeovers pre- and post- the corporate scandals that occurred in 2002.     

What is the relationship between investor protection legislation and target takeover returns? Evidence from Europe

We show that investor protection legislation is an important determinant of the returns of target companies that are subject to takeovers within Europe. Announcement and post-announcement returns are higher in strong investor protection countries, which indicates that bidders are forced to offer larger premiums when the original offer is made, and are more likely to have to revise their offer higher before a takeover is successful. This is consistent with targets having relatively greater bargaining power in strong investor protection environments. Our findings are robust to the inclusion of common determinants of takeover returns.     

Price and Probability: Decomposing the Takeover Effects of Anti-Takeover Provisions

We study the effects of anti-takeover provisions (ATPs) on the takeover probability, the takeover premium, and target selection. Voting to remove an ATP increases both the takeover probability and the takeover premium, that is, there is no evidence of a trade-off between premiums and takeover probabilities. We provide causal estimates based on shareholder proposals to remove ATPs and address the endogenous selection of targets through bounding techniques. The positive premium effect in less protected firms is driven by better bidder-target matching and merger synergies.     

What do premiums paid for bank M&As reflect? The case of the European Union

We analyze the takeover premiums paid for a sample of domestic and cross-border bank takeovers in the European Union between 1997 and 2007. We find that acquiring banks value profitable, high-growth and low risk targets. We also find that the strength of bank regulation and supervision as well as deposit insurance regimes in Europe have measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is driven by domestic deals. Similar qualitative results are found for both the entire sample and the sample of publicly traded targets.     

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.     

The effect of quarterly earnings guidance on share values in corporate acquisitions

We investigate whether quarterly earnings guidance by corporate takeover targets is associated with acquisition premiums. Regulators have expressed recurring concerns that quarterly guidance is associated with a misallocation of resources because it encourages management to focus on excessively short-term horizons. If so, firms providing quarterly guidance represent an acquisition opportunity for non-guiding firms because acquired resources can be redeployed towards more productive long-term uses. Based on prior research that finds value created by acquisitions accrues primarily to target shareholders, we predict that an expected increase in value from the termination of guidance will be observed in acquisition premiums. We find that, after controlling for the other determinants of acquisition gains, the premium paid for an acquired corporation is associated with the target's practice of issuing quarterly earnings guidance. Consistent with our prediction, we find that no incremental premium is paid to acquire guiding targets when the bidding firm also provides guidance.     

Target’s earnings quality and bidders’ takeover decisions

This study examines how takeover decisions are influenced by the quality of information in target firms’ earnings. We show that bidders prefer negotiated takeovers in deals involving targets with poor earnings quality. Moreover, earnings quality and takeover premiums are negatively related in negotiated takeovers, suggesting that bidders obtain valuable private information through negotiations. We also find that bidders share information risk with target shareholders by paying with more equity for targets with poor earnings quality. These findings are driven primarily by the asymmetric information component of earnings quality (as opposed to the symmetric component) and are observed mainly in inter-industry takeovers, where asymmetric information concerns are greater, rather than in intra-industry takeovers. We conclude that targets’ earnings quality affects bidders’ takeover decisions, particularly in cases of large asymmetric information between targets and bidders.     

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.     

Does cross-listing in the US foster mergers and acquisitions and increase target shareholder wealth?

We examine the role of cross-listing in alleviating domestic market constraints and facilitating mergers and acquisitions. Our results show that cross-listing allows shareholders of target firms to extract higher takeover premiums relative to their non-cross-listed peers. Moreover, shareholders of Sarbanes–Oxley-compliant targets seem to benefit from a higher premium. We also find that cross-listed firms are more likely to be acquisition targets, consistent with the belief that cross-listing increases firms’ attractiveness and visibility on the market for corporate control. Our results are robust to various specifications and to the self-selection bias arising from the decision to cross-list.     

The Value of Strategic Alliances in Acquisitions and IPOs

This paper investigates how firms’ strategic alliance experience affects their valuations as acquisition targets or in initial public offerings (IPOs). We propose that alliance experience serves as a valuable signaling device for opaque firms. The results show that takeover targets with alliance experience receive higher premiums than those without such experience. More recent alliance experience as well as alliances in the same industry also contributes to a larger target gain. Similarly, IPO firms that have alliance experience obtain higher valuations than those without the experience. Finally, alliance experience increases the likelihood that private firms exit by going public rather than being acquired.     

Cash holdings and the bargaining power of R&D-intensive targets

Prior literature suggests that R&D-intensive firms hold large amounts of cash due to financing constraints. This paper examines whether such firms could also use cash holdings as a strategic bargaining tool in M&A transactions. Using a large sample of takeover bids announced between 1980 and 2012, we demonstrate that cash holdings positively impact R&D-intensive targets’ takeover premiums and announcement-period abnormal returns. These effects disappear in non-R&D-intensive firms. Controlling for various endogeneity and financing concerns, we also find that R&D-intensive firms build up cash holdings in anticipation of becoming a takeover target. Further analysis indicates that in R&D-intensive firms, such cash holdings are valued highly by the market. Taken together, our findings shed new light on the strategic bargaining role of corporate cash holdings in the outcomes of acquisitions targeting R&D-intensive firms.     

Impact of Shareholder Proposals on the Functioning of the Market for Corporate Control

Firms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.     

Let's make a deal! How shareholder control impacts merger payoffs

Mergers and acquisitions are well-suited events for a detailed study of the valuation effects of corporate governance structures. Using a sample of 388 takeovers announced in the friendly environment of the 1990s, I empirically show that target shareholder control, proxied by low target chief executive officer share ownership, low fractions of inside directors, and the presence of large outside blockholders, is positively correlated with takeover premiums. In contrast, studies of takeovers in the hostile environment of the 1980s have shown a negative relation between target shareholder control and takeover premiums.     

How Are Firms Sold?

As measured by the number of bidders that publicly attempt to acquire a target, the takeover arena in the 1990s appears noncompetitive. However, we provide novel data on the pre‐public, private takeover process that indicates that public takeover activity is only the tip of the iceberg of actual takeover competition during the 1990s. We show a highly competitive market where half of the targets are auctioned among multiple bidders, while the remainder negotiate with a single bidder. In event study analysis, we find that the wealth effects for target shareholders are comparable in auctions and negotiations.     

Bidding strategies and takeover premiums: A review

I review recent empirical research documenting offer premiums and bidding strategies in corporate takeovers. The discussion ranges from optimal auction bidding to the choice of deal payment form and premium effects of poison pills. The evidence describes the takeover process at a detailed level, from initial premiums to bid jumps, entry of rival bidders, and toehold strategies. Cross-sectional tests illuminate whether bidders properly adjust for winner's curse, whether target stock price runups force offer price markups, and whether auctions of bankrupt firms result in fire-sale discounts. The evidence is suggestive of rational strategic bidding behavior in specific contexts.     

Corporate acquisitions and financial constraints

Using a large sample of US acquisitions made between 1985 and 2013, we study the effect of financial constraints on acquisition gains and acquisition likelihood. Our findings show that financial constraints of target companies significantly increase acquisition premiums and abnormal returns for both parties. Our results further show that the presence of financial constraints in the target is one of the most important determinants of a takeover bid. This supports the idea that acquisitions may improve the ability of financially constrained companies to access capital through a better reallocation of resources within segments of the same company (e.g., internal capital market) or through better access to external markets. This would eventually benefit bidders too, as new capital would be invested in valuable growth opportunities that otherwise would expire unexercised.     

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.