How Much Is Too Much: Are Merger Premiums Too High?

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long‐run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long‐run post merger underperformance.     

The Impact of Country Diversification on Wealth Effects in Cross-Border Mergers

We posit that country diversification via cross‐border mergers creates wealth by providing benefits for firms that are not available to their shareholders. We hypothesize that these benefits are inversely related to the extent of co‐movement in the economies of the bidder's and target's countries. We examine the wealth effects of U.S. targets and bidders involved in cross‐border mergers with firms in other countries during 1982–1991. We show that wealth effects vary, depending on country affiliations of two merging firms, and are inversely related to the degree of economic co‐movement between the two countries.     

Shareholder Value Creation in European M&As

This paper looks at the value generated to shareholders by the announcement of mergers and acquisitions involving firms in the European Union over the period 1998–2000. Cumulative abnormal shareholder returns due to the announcement of a merger reflect a revision of the expected value resulting from future synergies or wealth redistribution among stakeholders. Target firm shareholders receive on average a statistically significant cumulative abnormal return of 9% in a one‐month window centred on the announcement date. Acquirers’ cumulative abnormal returns are null on average. When distinguishing in terms of the geographical and sectoral dimensions of the merger deals, our main finding is that mergers in industries that had previously been under government control or that are still heavily regulated generate lower value than M&A announcements in unregulated industries. This low value creation in regulated industries becomes significantly negative when the merger involves two firms from different countries and is primarily due to the lower positive return that shareholders of the target firm enjoy upon the announcement of the merger. This evidence is consistent with the existence of obstacles (such as cultural, legal, or transaction barriers) to the successful conclusion of this type of transaction, which lessen the probability of the merger actually being completed as announced and, therefore, reduce its expected value.     

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.     

Corporate Restructuring and Bondholder Wealth

This paper provides an overview of existing research on how corporate restructuring affects bondholder wealth. Restructuring is defined as any transaction which affects the firm's riskiness by changing its underlying capital structure. Thus, it reaches well beyond asset restructuring and includes transactions such as leveraged buyouts, security issues and exchanges, and the issuance of stock options. We identify significant gaps in the literature, emphasize the potential differences in bond performance between market‐ and stakeholder‐oriented corporate governance systems, and provide valuable insights into methodological advances. We find that many issues remain as the empirical evidence is often inconclusive and focuses almost exclusively on the US. Research on other countries remains constrained by the lesser development of their bond markets, but is equally imperative because the position and bargaining power of creditors vis‐à‐vis the firm differ substantially across countries and governance regimes.     

Evaluating the SDC Mergers and Acquisitions Database

We compare 20 years of data from Thompson Financial SDC Platinum (SDC)'s Mergers and Acquisitions database with a hand‐collected database, providing evidence on the completeness and accuracy of SDC data across time. We find that our hand‐collected data is generally more accurate than SDC, but SDC's accuracy and coverage improves over time. Our investigation of discrepancies between the databases finds that SDC is more prone to errors on smaller, high book‐to‐market acquirers with weak announcement period market responses. Preliminary analyses suggest that this potential bias is not significant, but could affect inferences when examining smaller, high book‐to‐market firms.     

Officers’ fiduciary duties and acquisition outcomes

Using a Delaware case law that recognized officers’ distinct fiduciary duties for the first time in 2009, I examine the effect of officers' fiduciary duties (OFDs) on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement-period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.     

Governance and Performance Implications of Diversification Strategies: Evidence from Large U.S. Firms

Recent research focuses on explaining the diversification discount. However, there is little direct evidence regarding the relation among ownership structure, corporate governance, and corporate diversification. The results in this paper suggest that agency issues do not account for firms adopting a particular diversification strategy. Also, the performance consequences of the shift in the diversification strategy and the subsequent changes in institutional and block ownership structures are not related to agency issues. In fact, investors seem not to avoid diversified firms per se. We suggest that observed board and ownership differences between diversified and focused firms are due to their being at different stages of corporate evolution.     

Do Firms Use M&A Business to Pay for Analyst Coverage?

We find that acquirers in merger and acquisition (M&A) transactions are more likely to hire as advisors investment banks that provided analyst coverage for the acquirer prior to the transaction. We also find that compared to a matched control group of banks, the advisor banks are less likely to terminate and more likely to initiate analyst coverage of the acquirer after the transaction. Finally, the advisor banks that initiate coverage after the transaction collect higher fees. These findings suggest that firms value analyst coverage and use M&A advisor appointments and advisor fees to compensate for it.     

National Culture and Takeover Contest Outcomes

We examine the effects of cultural differences on the outcome of takeover contests. Our main focus is on individuality, which we posit to have an effect on firm behavior in international takeover contests. In a sample of international acquisitions with bidders from multiple countries, we find that individuality positively relates to the probability of placing the winning bid. We further find that takeover contest winners with high individuality scores experience lower announcement returns. Our results are consistent with the literature that links individuality to overconfidence. Our evidence suggests that firms should control culture‐related behavioral biases in their mergers and acquisitions activity.     

Is an M&A self-dealing? Evidence on international and domestic acquisitions and CEO compensation

We examine the effect of international acquisitions on CEO compensation for US firms from 1995 to 2016 using both domestic acquisition and no acquisition firms as benchmarks. We find that acquisitions lead to a greater increase in CEO compensation (especially incentive-based compensation), which is consistent with agency theory and inconsistent with stewardship or reputation theory. We also find that international acquisitions lead to a greater increase in CEO incentive-based compensation than domestic acquisitions, supporting matching theory given that international acquisitions are larger and more complex to manage. Additionally, we document that CEO tenure has a positive effect on CEO compensation, whereas firm relatedness has a negative effect on post-acquisition CEO compensation. This is the first study of its type based on comprehensive data, and it contributes to our understanding of the role of international and domestic acquisitions in CEO compensation.     

Post‐Merger Performance of Bank Holding Companies, 1987–1998

This paper examines the results of material mergers between bank holding companies (BHCs). Merged BHCs experience post‐merger profitability below the industry average. The market reaction to the merger announcements is significantly negative. The most important causes of the poor post‐merger performance are credit quality and the inadequate generation of fee income. Asset mix and capitalization also play a major part. The controllability of these items demonstrates the management challenge associated with a material merger.     

Impact on Target Firm Risk-Return Characteristics of Domestic and Cross-Border Mergers and Acquisitions in Emerging Markets

Using a large sample of partial cross-border mergers and acquisitions from emerging countries, we show that these acquisitions significantly reduce the risk of the target firms and that the risk reduction is directly related to the changes in the international shareholder base and the strength of the investor right protection of the acquirer. We also find that these acquisitions are value creating because we see improvements in both the short-term and long-term risk-adjusted stock performance in target firms during the postacquisition period.     

Corporate Raiders,Performance and Governance in Europe

I analyse 136 block purchases made by corporate raiders in Europe between 1990 and 2001. Contrary to the hypothesis that these investors expropriate the target companies, there is a positive market reaction to the first public announcement of these purchases. In the long‐run, raiders earn an abnormal profit when they sell their stakes. When they still held their positions at the end of the sample period, abnormal returns were insignificant. Raiders' activities do not improve operating performance. The findings are consistent with superior stock picking ability among these investors, but do not support the hypothesis that raiders are governance champions.     

Uncertainty or Misvaluation? New Evidence on Determinants of Merger Activity from the Banking Industry

We use data from the past 30 years of takeover activity in the U.S. banking industry to test competing neoclassical and misvaluation merger theories. Test results are consistent with evidence in the literature that merger activity is significantly related to both structural industry change and stock price misvaluation. Our primary contribution is to show that changes in misvaluation reflect a rise in industry‐wide risk taking and that increases in risk originate from changes in industry structure due to deregulation. A measure of bank risk taking subsumes the power of stock price misvaluation to explain subsequent merger activity.     

Do Firms Strategically Internalize Disclosure Spillovers? Evidence from Cash-Financed M&As

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find evidence consistent with acquirers strategically generating news that they expect will depress the target's stock price. Our results suggest the disclosure strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. These findings are robust to a battery of specifications and falsification tests. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures in M&A transactions.     

Mergers and Acquisitions in Latin America: Industrial Productivity and Corporate Governance

This article examines the impact of industrial productivity in the country of origin on transnationals M&As, directed from OECD countries toward Latin America in the period 1996–2010. It also analyzes the relationship between external mechanisms of corporate governance and transnational M&As. Employing a gravitational model at the industry level, we find that industry productivity in the country of origin promotes transnational M&A activity, although capital productivity affects it negatively. We also find evidence that higher standards of corporate governance in both origin and destination countries increase the likelihood of transnational M&As taking place.     

Diversification,Refocusing and Firm Value

At any point in time a firm faces three restructuring choices: diversify, refocus, or do nothing. This study analyses the causes and the consequences of these actions in a unified framework using the appropriate methodologies. Various factors, such as firm's characteristics and multinational nature, its industry's characteristics, its exchange and index inclusion, and divested (or acquired) segment(s)' industry conditions, are considered as the determinants of the diversifying and the refocusing decisions. The estimation results from the corresponding multinomial logit model suggest that refocusing occurs generally due to firm‐specific reasons, and diversification due to outside factors, such as industry and economic conditions. Added or dropped segment's industry profitability, its relationship to the core business of the firm, and its relatedness to the businesses of the conglomerate's other segments have a nontrivial effect on either decision. In a related analysis, the paper explicitly models and estimates the valuation consequences that are sustained by the firm after it undertakes a refocusing or a diversification action. To isolate the changes in firm's value that are due to these decisions only, a 2SLS estimation is used to control for endogeneity that arises because the factors that affect a firm's value are likely to have also induced the firm to make the corresponding decision. The novelty of my approach is in its inclusion of variables measuring the consequences due to both actions, the diversification and the refocusing, in the same valuation equation. Contrary to some earlier findings, I find no evidence of ‘diversification discount’ or ‘refocusing premium.’ The choice of this paper to analyse all corporate restructuring decisions in a unified framework yields valuable business insights into the reasons for undertaking such corporate events.     

Bank Mergers and Diversification: Implications for Competition Policy

This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterise the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers.     

Can Stock Markets Predict M&A Failure? A Study of European Transactions in the Fifth Takeover Wave

In this paper we develop various measures of M&A failure for an intra‐European sample during the fifth takeover wave: inferior long‐term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short‐term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately‐held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long‐term losses. In contrast, when targets are privately held, we find no evidence of such an association.