Shareholder Wealth Effects of European Domestic and Cross‐border Takeover Bids

This paper analyses the short‐term wealth effects of large intra‐European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short‐term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market‐to‐book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.     

Spillover of corporate governance standards in cross-border mergers and acquisitions

In cross-border acquisitions, the differences between the bidder and target corporate governance (measured by newly constructed indices capturing shareholder, minority shareholder, and creditor protection) have an important impact on the takeover returns. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for the bootstrapping effect.     

An Examination of Takeovers, Job Loss and the Wage Decline within UK Industry

This paper investigates the effects of takeovers on workers’ employment prospects and wages in the UK for the years 1987–1995. We address directly the idea that takeovers involve a ‘breach of trust’ with employees. Our results provide no support for the breach of trust hypothesis and rather suggest shareholders and workers in the post‐acquisition joint entity are locked in a form of ‘equal misery’ following the execution of the takeover. There already an exist a wide range of event studies documenting the effect of takeovers on shareholders and a smaller number of studies discussing the impact of takeovers on employees. The contribution of the present study is to relate the separate effects of acquisition on these two groups to each other. By doing so we seek to test directly the proposition that takeovers reallocate rents from workers to target shareholders, via the bid‐premia paid on acquisition.     

Earning per share and takeovers

Eps (earning per share) is widely used as a financial measure of performance, but it can be misleading in takeovers and mergers. Conditions are examined under which the eps of a combined enterprise is greater than that of each of the constituent companies prior to the bid, and the relative gains to the bidder (in terms of earning) are stated.     

An empirical examination of forecast disclosure by bidding companies

This paper examines voluntary disclosure of profit forecasts by bidding companies during takeovers. Disclosure is examined from two perspectives: (i) factors influencing disclosure and (ii) the influence of good news and bad news on disclosure. Takeover documents published during 701 takeover bids for public companies listed on the London Stock Exchange in the period 1988 to 1992 were examined. Two variables accounted for almost all the influences on disclosure of forecasts: bid horizon and type of bid. Probability of forecast disclosure was greater the shorter the bid horizon and during contested bids. In addition, there was some evidence that the nature of the purchase consideration offered by the bidder (cash or paper) and the industry of the bidder influenced disclosure. Disclosure was significantly more likely in paper bids and in the durable goods industry. Forecasts were more likely to be disclosed when firms had good news to report.     

AN EMPIRICAL ANALYSIS OF SOME DETERMINANTS OF THE TARGET SHAREHOLDER PREMIUM IN TAKEOVERS

While a considerable amount of research in Australia, the United States and elsewhere shows that takeovers create value for target shareholders, there is relatively little research investigating the explanations for cross-sectional differences in the size of the premium paid to target shareholders. This paper tests various arguments proposed to explain some of the sources of this premium. One such explanation is the removal of inefficient target management. Takeovers have been recognised as a mechanism that allows management teams to compete for the right to manage corporate assets. We test the associations between bidder and target managerial ownership (proxied by director's holdings), the prior performance of the bidder and target and the size of the premium paid to target shareholders. Other potential influences on the premium include a reduction in the agency costs of free cash flow and the provision of financial slack or reserve borrowing capacity to the target firm by the bidder. Using a sample of seventy-eight Australian takeovers occurring between 1981 and 1989 our tests indicate that the provision of financial slack to the target is associated with a significantly higher premium, while high bidder ownership results in a significantly lower premium. The premium is found to be positively related to the performance of the bidder in the period prior to the bid. The tests disclose an association between the agency costs of free cash flow and the target premium which is inconsistent with the theory, and reveal only weak evidence that the takeover premium is higher when inefficient target management is removed.     

The impact of possible-offer announcements on the wealth effect of target firms

The stock market materially and positively responds to released information on possible offers, likely because such announcements signal the high probability that formal bids will be offered. If potential takeover discussions are revealed earlier, then target shareholders will gain significantly lower abnormal returns around the time of when formal offers are announced. Financial bidders are less likely to approach targets with earlier possible offers; however, if they do offer possible takeovers, they need to pay incrementally higher bid premiums in their formal offers. The reform inherent in the U.K. Takeover Code of 2011 weakens a bidder’s willingness to offer possible takeovers. The pre-reform effects of possible offers on the wealth effect of targets differ from those seen after the reform.     

Leverage and the Complexity of Takeovers

There is scant empirical evidence on how the leverage of target firms affects gains to their shareholders, although there are several widely cited economic theories offered in the literature. The limited available evidence shows that shareholders of targets with greater leverage experience higher returns. However, even this observed effect of debt on takeovers cannot be distinguished from a mere mechanical pure leveraging effect, leaving the economic explanations untested. Consequently, we adopt an alternative approach here to examine if targets' debt truly matters in takeovers. We report that acquisition processes involving targets with higher leverage tend to be significantly more complex in several ways. We find that such acquisitions tend to take a longer time to consume, are more likely to be associated with multiple bidder auctions, and experience greater revisions in offer prices. Finally, we find that factors that make takeovers more complex also lead to greater target gains.     

Acquisitions: Private versus Public

Takeovers of privately held companies represent more than 80% of all takeovers. Despite their significance, studies of such takeovers and their impact on the wealth of shareholders are rare. Using a very large, near exhaustive, sample of listed and privately held UK targets we examine the impact of such takeovers on the risk adjusted return of listed UK acquirers over the period 1981 to 2001. Acquirers earn significant positive returns during the period surrounding the bid announcement although the gains are dependent on target status, mode of payment, and the relative size of those involved. The much quoted conclusion, derived from the experiences of listed firm bidders that the shareholders of acquiring firms fail to gain from takeovers, cannot be generalised. Acquiring a privately held company is an attractive option for maximising shareholder wealth.     

Effect of independent expert reports in Australian takeovers

The Corporations Law 2001 mandates the preparation of an expert report in circumstances where the bidder is perceived to have a superior bargaining position. The present study tests whether the findings in Eddey (1993) can be extrapolated to all bids, irrespective of payment method. Inconsistent with Eddey, the results indicate that target premiums are lower where an expert report is required. The results confirm a higher frequency of price revisions where an expert indicates that the offer is ‘not fair’. However, this increased offer is insufficient to raise the price to the level in takeovers without expert reports.     

Business Groups,Bank Control,and Large Shareholders: An Analysis of German Takeovers

To analyze the consequences of concentrated ownership and bank control for the performance of acquiring firms, I employ a unique data set of 715 German takeovers. First, I find that takeovers increase bidder value, but majority owners provide no clear benefit. Second, bank control is beneficial only if it is counterbalanced by another large shareholder. Third, the worst takeovers are completed by firms that are majority-controlled by financial institutions. I conclude that majority control, whether exercised by a bank or another shareholder, increases the likelihood of decisions that do not maximize shareholder value. Journal of Economic Literature Classification Numbers: G34, G32, G21.     

Creditor financing and overbidding in bankruptcy auctions: Theory and tests

We present unique empirical tests for auction overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. However, we argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy, and we show that the optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank–bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.     

The Performance of the European Market for Corporate Control: Evidence from the Fifth Takeover Wave

This paper presents an in‐depth analysis of the performance of large, medium‐sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistically significant abnormal returns of 9.13% for the target and of 0.53% for bidding firms. The characteristics of the target and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the target's but decreases bidder's returns; (ii) the private status of the target is associated with higher bidder's returns; and (iii) an equity payment leads to a decrease in both bidder's and target's returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre‐announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidder's and target's share prices. Bidders that accumulate a toehold stake in the target experience higher post‐announcement returns. A comparison of the UK and Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the target's incumbent shareholders.     

Irrevocable Commitments,Going Private and Private Equity

This paper adds to growing interest in public to private buy‐outs and mechanisms to ensure bid success. Using a unique, hand‐collected dataset of 155 public to private buy‐outs we provide one of the first examinations of the determinants of irrevocable commitments. Irrevocable commitments involve undertakings given by existing shareholders to agree to sell their shares to the bidder before the bid to take the company private is announced. We find that, for management buy‐outs, the level of irrevocable commitments is increased by the bid premium, the reputation of the private equity backer and board shareholdings. The level of irrevocable commitments is reduced by rumours of a takeover bid and bid value. We therefore find evidence that management and private equity firms' activity prior to the bid's announcement can have an important impact on the process of going private.     

Does Investor Misvaluation Drive the Takeover Market?

This paper uses pre‐offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price‐to‐book, or price‐to‐residual‐income‐model‐value) are related to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement‐period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre‐1990 period than in the 1990–2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990–2000 period than in the pre‐1990 period.     

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.     

Industry structure and horizontal takeovers: Analysis of wealth effects on rivals,suppliers, and corporate customers

We examine the wealth effects of horizontal takeovers on rivals of the merging firms, and on firms in the takeover industry's supplier and customer industries. Inconsistent with the collusion and buyer power motives, we find significant positive abnormal returns to rivals, suppliers, and corporate customers for the subsample of takeovers with positive combined wealth effect to target and bidder shareholders. Overall, our findings suggest that the average takeover in our sample is driven by efficiency considerations. However, we find evidence suggesting that horizontal takeovers increase the buyer power of the merging firms if suppliers are concentrated.     

Hostility in Takeovers: In the Eyes of the Beholder?

This paper examines whether hostile takeovers can be distinguished from friendly takeovers, empirically, based on accounting and stock performance data. Much has been made of this distinction in both the popular and the academic literature, where gains from hostile takeovers result from replacing incumbent managers and gains from friendly takeovers result from strategic synergies. Alternatively, hostility could reflect strategic choices made by the bidder or the target. Empirical tests show that most deals described as hostile in the press are not distinguishable from friendly deals in economic terms, except that hostile transactions involve publicity as part of the bargaining process.     

Financing and takeovers

This paper analyzes the interaction between financial leverage and takeover activity. We develop a dynamic model of takeovers in which the financing strategies of bidding firms and the timing and terms of takeovers are jointly determined. In the paper, capital structure plays the role of a commitment device, and determines the outcome of the acquisition contest. We demonstrate that there exists an asymmetric equilibrium in financing policies with endogenous leverage, bankruptcy, and takeover terms, in which the bidder with the lowest leverage wins the takeover contest. Based on the resulting equilibrium, the model generates a number of new predictions. In particular, the model predicts that the leverage of the winning bidder is below the industry average and that acquirers should lever up after the takeover consummation. The model also relates the dispersion in leverage ratios to various industry characteristics, such as cash flow volatility or bankruptcy costs.     

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.