Crossing takeover premiums and mix of payment: An empirical test of contractual setting in M&A transactions

The analyses of the tender offer premiums and of the means of payment should not be performed separately. In the empirical literature, these two variables are often considered independently, although they may have an endogenous relationship in a contractual setting. Using a sample of European M&As over the 2000–2010 decade, we show that these two variables are jointly set in a contractual empirical approach. The relationship between the percentage of cash and the offer premium is positive: higher premiums yield payments with more cash.     

Toehold strategies,takeover laws and rival bidders

Prior to the announcement of a tender offer, the bidding firm is legally allowed to acquire shares in the open market, subject to some limitations. These pre-announcement purchases are known as toeholds. This paper presents a simple model that describes the bidder's optimal toehold acquisition strategy, within an environment that closely parallels the present legal institutions. The model shows that toeholds and bids interact in a complex manner even without the presence of asymmetric information. By examining a simple environment the paper provides a useful alternative hypothesis for tests of other, presumably more complex, models. One of the main implications of our model is that if no competing bidders are expected, no toeholds should be purchased. The paper also demonstrates that the correct specification of an empirical model can be critical. For example, under some parameter values toehold purchases may exhibit a negative cross-sectional correlation with the pre-announcement run up in the stock price. This occurs even though prices are strictly increasing the size of the toehold. Several implications concerning various aspects of merger legislation are considered. For example, we demonstrate that a rule similar to a “fair price” provision has the desirable property that a second bidder arrives and wins if and only if he places a higher value on the target than the initial bidder.     

Predicting takeover targets: A methodological and empirical analysis

Several published studies claim that acquisition targets can be accurately predicted by models using public data. This paper points out a number of methodological flaws which bias the results of these studies. A fresh empirical study is carried out after correcting these methodological flaws. The results show that it is difficult to predict targets, indicating that the prediction accuracies reported by the earlier studies are overstated. The methodological issues addressed in this paper are also relevant to other research settings that involve binary state prediction models with skewed distribution of the two states of interest.     

A note on takeover success prediction

A takeover success prediction model attempts to use information that is publicly available at the time of the announcement in order to predict the probability that a takeover attempt will succeed. This paper develops a takeover success prediction model by comparing two techniques: the traditional logistic regression model and the artificial neural network technology. To alleviate the problem of bias from the sampling variation, we validate our results through re-sampling. Our empirical results indicate that 1). Arbitrage spread, target resistance, deal structure and transaction size are the dominating factors that have impacts on the outcome of a takeover attempt. 2). Neural network model outperforms logistic regression in predicting failed takeover attempts and performs as well as logistic regression in predicting successful takeover attempts.     

Term premiums and default premiums in money markets

There are time-varying term and default premiums in the expected returns on money market securities. Default premiums decline with maturity and tend to be higher during recessions. Term premiums tend to increase with maturity during good times, but humps and inversions in the term structure of expected returns are common during recessions. Treasury bills produce positive average term premiums for the overall sample, but average term premiums for private-issuer securities are close to 0.0. A general conclusion is that variation in forward rates is primarily variation in current epected returns rather than in forecasts of changes in interest rates.     

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The role of defensive strategies and ownership structure of target firms: Evidence from UK hostile takeover bids

The outcome of a hostile takeover bid hinges on an interplay of the defensive strategies of targets and the offensive strategies of bidders. This study examines the determinants of outcome for a sample of 205 hostile bids for UK public company targets over the period 1983–1989. the impact of a number of defensive strategies adopted by the targets, their ownership structure which could aid or hinder the deployment of those strategies, and the method of payment selected by bidders is investigated using multivariate logit methodology. the City Code on Takeovers and Mergers in the UK and its influence on the choice of defensive and offensive strategies is described. the study finds outcome in hostile bids in the UK is significantly influenced by the use of certain defensive strategies, the presence of large institutional shareholders in targets, the size of targets and the method of payment chosen by the bidder. the results of this study are useful in devising effective strategies to frustrate or prosecute hostile bids.     

Unconditional and conditional takeover offers: experimental evidence

This article compares the predictions of finite-shareholdermodels of conditional and unconditional takeover offers withthe outcomes of laboratory experiments. In addition to differentiatingbetween types of offers, the experimental designs span smalland large firms as well as different levels of offer premiums.It is found that in unconditional offers to large groups ofsubjects (28-40), the symmetric Nash equilibrium predicts observedtendering frequencies quite accurately. For other experimentaldesigns, the results are mixed. The analysis of shareholdertendering strategies from the experiment yields insights into(I) the effects of takeover offer designs, (ii) the appropriatenessof finite-shareholder models for research, and (iii) the costsof free riding when shareholders are nonatomistic.     

Hostile bank takeover offers : Analysis and implications

A comparison of the financial characteristics of banks involved in hostile takeover bids with a control group of nonhostile bank mergers indicates: (1) hostile targets experience abnormal returns that are significantly greater than for the targets of nonhostile bank mergers; (2) hostile bidders experience negative abnormal returns that are insignificantly different than for bidders involved in nonhostile bank mergers; (3) hostile bank acquisition announcements produce positive net wealth effects which are larger than the wealth effects of nonhostile acquisitions; (4) a Logit regression model using financial ratios, stock price data, and ownership data is able to distinguish between hostile and nonhostile targets.     

The impact of the EU takeover directive on takeover performance and empire building

This paper uses the EU takeover directive as a natural experiment to test when legal harmonization creates value, and to examine the impact of increased entrenchment on investment decisions. The EU promulgated the takeover directive in April 2004. The implementation deadline was May 2006. The goal was to encourage value-creating takeovers by harmonizing takeover laws across the EU. However, the takeover directive has received criticism for being vague and discretionary, and for entrenching managers. I hypothesize that because the directive hinders takeovers, it might increase managerial entrenchment and enable managers of EU-companies to make agency-motivated investments (or simply exercise less discipline). I find supportive evidence: after the directive, EU-companies make investments that are less profitable (as proxied by takeover returns) and that take longer to compete. Further, asset growth increased in treated companies following the takeover directive, suggesting that the additional entrenchment facilitates empire building.     

Non-executive directorship importance and takeover hostility: Australian evidence

This study investigates the importance of the target firm directorship to target firm non-executive directors during takeovers. Using Australian data and a size-based measure of directorship importance, we find a positive association between takeover hostility and directorship importance after controlling for takeover premiums and target firm size. Further analysis reveals that directorship importance leads to a greater likelihood of offer price revisions following initial rejection of a takeover bid, but not the likelihood of bid success. Our findings are consistent with target firm non-executive directors exhibiting self-serving behaviour at directorships which they consider more important to their reputation.     

Competition and dynamics of takeover contests

This paper investigates the effect of potential competition on takeovers which we model as a bargaining game with alternating offers where calling an auction represents an outside option for each bidder at each stage of the game. The model describes a takeover process that is initiated by an unsolicited bidder, and it aims to answer three main questions: who wins the takeover and how? when? and how much is the takeover premium?Our results explain why the takeover premium resulting from a negotiated deal is not significantly different from that resulting from an auction, and why tender offers are rarely observed in reality. We also show that when the threat of the initial bidder to call a tender offer is not credible, the takeover process might end with a private auction organized by the target. Conversely, when the tender offer threat is credible, the takeover process ends with a deal negotiated bilaterally between the bidder and the target. The takeover premium always depends on the degree of potential competition, while it is affected by the target resistance only for weak initial bidders.Finally, the model allows us to draw conclusions on how other dimensions of the takeover process, such as termination fees, control benefits and tender offer costs, affect its dynamics and outcome.     

Investors' time preferences and takeover performance

We investigate investors' time preferences and takeover outcomes in a cross-disciplinary international study. We use a cultural measure on long-term orientation (LTO) to capture investors' time preferences. Additionally, we study how investor protection and the nature of the deal (cross-border vs domestic) in connection with investors' time preferences come into play in explaining long-term takeover performance. Evaluating data on 38,153 M&A deals from 54 countries, over the period from 2000 to 2015, we offer empirical evidence that investors' future orientation significantly improves post-M&A performance, while short-term oriented behavior deteriorates takeover performance. Our findings further suggest that the positive impact of investors' future orientation on takeover performance is more pronounced in countries with strong investor protection. Moreover, the impact of investors' time preferences is stronger for domestic deals where the confounding impact of cultural differences is almost non-existent.     

Own company stock in defined contribution pension plans: A takeover defense?

If managers induce employees to hold company stock in defined contribution pension plans as a form of takeover defense, then changes in state laws that enhance managerial protection should lead to a reduction in employer stock in 401(k) plans. Delaware's mid-1990s validation of the poison pill in conjunction with a staggered board was followed by a significant decline in employee ownership within defined contribution plans for firms incorporated in Delaware. Evidence using governance data suggests that this is due to responses of firms with staggered boards. Binary choice models confirm that employee ownership in defined contribution plans lowers takeover probabilities.     

A test of bear market mergerstat control premiums

This paper examines all 340 of the 2001 “bear market” acquisition announcements of U.S. target firms reported by Mergerstat/Shannon Pratt’s Control Premium Study^TM. This paper compares the “Control Premium” reported by Mergerstat/Shannon Pratt’s Control Premium Study^TM to a comparable “Cumulative Abnormal Return”(CAR) calculated using event study methodology. While the average total “Control Premium” reported by Mergerstat differed by only −3.45% from the event study CAR, significant differences presented themselves when the event period was broken down between the day −63 to −1 “runup” period and the day 0 to end “markup” period.      

Delayed risks and risk premiums

In this paper, two possible premiums for delayed risks are presented and compared. It is shown that one of them possesses some properties usually considered desirable for ‘roulette gambles’ while the other definition does not meet the same requirements. Finally, the response of both premiums to increased wealth is discussed. The analysis of this problem sheds some light on the basic difference between delayed risks and roulette gambles.     

Binary choice models and corporate takeover

This paper utilizes four different classification procedures (binary choice models) and compares their ability to predict corporate takeovers. Specifically, the paper develops logit, probit, discriminant, and recursive partitioning, models to predict which firms will be taken over. The original classification accuracy and the validation test results indicate that the recursive partitioning model outperforms the other models (although its accuracy drops significantly in the validation test). The results also indicate the difficulty in predicting corporate takeovers.     

The real estate takeover: Application of Grossman and Hart theory

In this article, I adopt a corporate takeover model to the problem of a developer who wants to renew an urban neighborhood. The problem outlined is a combination of the problems addressed by Grossman and Hart (1980)(. The Bell Journal of Economics 11, 42–64) and Shleifer and Vishny (1986)(. Journal of Political Economy 94, 461–488) in the corporate control literature. The relevant corporate story concerns value-improving monitoring performed by shareholders. Even though monitoring increases the value of the company for each investor, no shareholder would be willing to do it because there is an externality involved. Translating this into the language of urban redevelopment, no homeowner would do any improvement in the neighborhood unless he or she can internalize the benefit. The story in the urban renewal framework is more complicated. These property owners may differ in their valuation of even otherwise identical units since the owners may have different attachments to the neighborhood. I address some of these problems and also introduce the notion of dilution as the participating government agency's ability to force initial residents to sell to the developer or comply with costly new standards for development. Dilution increases the costs to potential holdouts.