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.     

Do Spin‐offs Expropriate Wealth from Bondholders?

A wealth transfer from bondholders to stockholders is one of several hypotheses used to explain stockholder gains on the announcement of a spin‐off. However, previous empirical research has not found systematic evidence supporting the wealth expropriation hypothesis. Using a larger sample with comprehensive bond data, we find evidence consistent with wealth expropriation. Bondholders, on average, suffer a significant negative abnormal return during the month of the spin‐off announcement. However, even accounting for the loss to the bondholders, the aggregate value of the publicly traded debt and equity increases on a spin‐off announcement, suggesting that the wealth expropriation hypothesis is not a complete explanation of the stockholder gains. In explaining the magnitude of the losses to bondholders, we find they are a function of the loss in collateral in the spun‐off subsidiary and the level of financial risk of the parent firm. Consistent with a loss to bondholders, firms are more likely to have their credit rating downgraded than upgraded after a spin‐off. Additionally, consistent with the wealth transfer hypothesis, losses to bondholders tend to be more severe, the larger the gains to shareholders.     

The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions

This study presents direct evidence on the effect of international acquisitions on stock prices of U.S. bidding firms. Shareholders of MNCs not operating in the target firm's country experience significant positive abnormal returns at the announcement of international acquisitions. Shareholders of U.S. firms expanding internationally for the first time experience insignificant positive abnormal returns, while shareholders of MNCs operating already in the target firm's country experience insignificant negative abnormal returns. The abnormal returns are larger when firms expand into new industry and geographic markets—especially those less developed than the U.S. economy. The evidence is consistent with the theory of corporate multinationalism, predicting an increase in the firm's market value from the expansion of its existing multinational network.     

Returns to bidders and targets in the acquisition process: Evidence from the banking industry

This article examines the effects of acquisition announcements of publicly traded banks on stockholder wealth using event-study methodology and an updated and enlarged sample of such banking organizations. The findings imply that on average, acquisitions in the banking industry result in a wealth transfer from the shareholders of bidding firms to the shareholders of target firms, with no overall gain to the shareholders of the two firms combined. Of the characteristics examined, only capitalization of the target firm is found to distinguish between combinations with positive and negative combined wealth effects.     

The value of control: Evidence from full and partial acquisitions in the real estate industry

We investigate the differential wealth effects of (1) full and partial control acquisitions, (2) nonreal estate, real estate and REIT participants, and (3) single- and multiple-bidder events. We find that target firms earn positive excess returns at the announcement of partial and full acquisitions, but acquisitions that result in control earn larger excess returns than noncontrol acquisitions. An examination of industry differences shows that real estate firms or REITs do not earn higher returns relative to nonreal estate firms. Our analysis of market structure finds that bidders that are not involved in an acquisition program earn greater announcement period returns than prior acquirers. For target firms, we find that those with a single offer earn higher returns than those with subsequent offers. A cross-sectional regression analysis shows that while market structure is important in explaining returns, the main determining factor for target firms is the degree of control sought.     

BANK HOLDING COMPANY ACQUISITIONS,STOCKHOLDER RETURNS,AND REGULATORY UNCERTAINTY

This paper examines the returns accruing to the bank holding company (BHC) stockholders when an acquisition is initiated by the BHC. There is a significant, positive abnormal return to these shareholders when the acquisition is announced. The magnitude of this return does not depend on the relative size of the acquired firm. Further, the regulatory environment for these BHC acquisitions introduces uncertainty about the eventual outcome of the review process. Upon approval from the Federal Reserve Board (FRB), the BHC stockholders earn an additional, significantly positive abnormal return.     

Returns to acquirers of privatizing financial services firms: An international examination

While the literature reports improved performance for privatizing firms, banking markets are different. Many privatizing financial services firms face unique problems such as an overhang of problem loans and weak credit cultures and legal systems. We investigate the returns to successful bidders in privatization acquisitions of financial services firms, examine short-horizon performance, and test whether such acquisitions result in a change in risk for the bidding firm. Our results show that the cumulative abnormal returns to shareholders of bidding firms are positive, perhaps reflecting initial optimism that the foreign firm acquiring the privatizing firm would share in the success associated with privatization. Bidders also experience an increase in their total risk following the acquisition.     

Do Managerial Objectives Drive Bad Acquisitions?

In a sample of 326 US acquisitions between 1975 and 1987, three types of acquisitions have systematically lower and predominantly negative announcement period returns to bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target, and when its managers performed poorly before the acquisition. These results suggest that managerial objectives may drive acquisitions that reduce bidding firms' values.     

Target's organisational form and returns to Australian bidders in cross‐border acquisitions

We present large sample evidence on return performances of Australian acquirers who bid for public and private targets in cross‐border acquisitions. While placing a particular emphasis on the method of payment and the shareholder protection offered by the target country, we analyse the impact of various bid, firm and foreign‐acquisition‐specific characteristics on bidding firms' abnormal returns. We find that Australian investors perceive cross‐border acquisitions as value‐creating exercises regardless of the organisational form of the target acquired. However, bidders for private targets earn higher return when the method of payment is stock and the targets are located in high investor protection countries. We further find that the abnormal returns are conditional to the relative size of the target, bid frequency, target country destination and the preacquisition financial performance of bidding firms.     

Bank acquisition of non-bank firms An empirical analysis of administrative decisions

This study uses stock price data to examine certain aspects of Federal Reserve Boards' administrative decisions regarding non-bank acquisitions by bank holding companies (BHCs). The results suggest that stockholders of BHCs whose acquisition plans were approved realized positive abnormal returns following the announcement of the acquisition of a non-bank firm. This result is consistent with the synergy interpretation of non-bank acquisitions by BHCs. Another finding is that stockholders of BHCs that were denied permission to acquire non-bank firms sustained significant losses during the five weeks following the Board's decision. These abnormal losses can be interpreted as foregone synergy rents or as a market reaction to the Board's signal that the BHC in question is excessively risky.     

Index

This paper provides empirical estimates of the stock market reaction to tender offers, both successful and unsuccessful. The impact of the tender offer on the returns to stockholders of both bidding and target firms is examined. The evidence indicates that for the twelve months prior to the tender offer stockholders of bidding firms earn significant positive abnormal returns. In the month of the offer, only successful bidders earn significant positive abnormal returns. Stockholders of both successful and unsuccessful targe firms earn large positive abnormal returns from tender offers, and most of these returns occur in the month of the offer. For all classes of firms, there is no significant post-offer market reaction. The market reaction to ‘clean-up’ tender offers is also estimated and target stockholders again earn significant positive abnormal returns.     

Wealth Destruction on a Massive Scale? A Study of Acquiring‐Firm Returns in the Recent Merger Wave

Acquiring‐firm shareholders lost 12 cents around acquisition announcements per dollar spent on acquisitions for a total loss of $240 billion from 1998 through 2001, whereas they lost $7 billion in all of the 1980s, or 1.6 cents per dollar spent. The 1998 to 2001 aggregate dollar loss of acquiring‐firm shareholders is so large because of a small number of acquisitions with negative synergy gains by firms with extremely high valuations. Without these acquisitions, the wealth of acquiring‐firm shareholders would have increased. Firms that make these acquisitions with large dollar losses perform poorly afterward.     

Is Bancassurance a Viable Model for Financial Firms?

The bancassurance (i.e., bank and insurance company combinations) model for financial firm architecture has been widely used in Europe and recently has been adopted by U.S. financial firms. We provide evidence regarding the viability of bancassurance combinations for U.S. and non‐U.S. mergers between 1997 and 2002. We find positive gains and no significant risk shifts for shareholders of bidding firms, and that higher CEO stock ownership results in less positive gains for shareholders. These and other results suggest that bancassurance firms are viable entities that may play an important role in the future evolution of the U.S. financial system.     

Financial advisors,financial crisis,and shareholder wealth in bank mergers

This study investigates the relationship between the quality of investment banks and shareholder wealth in bank mergers. Focusing on a US sample of 415 targets and 1066 bidders from 1995 to 2010, I find that the quality of financial advisors appears to have a significant impact on shareholder wealth for bidding firms, but not for target firms. The results suggest that bidders experience higher losses when hiring tier-1 advisors. Further analysis shows that this finding holds during ‘normal’ periods, but not during crisis periods, where I find a significant positive relationship between tier-1 advisors and bidder announcement returns, suggesting that more prestigious financial advisors can offer superior advising services.     

Board gender diversity and acquisition choices

We investigate the influence of gender diversity on the acquisition choices of bidding firms and find that firms with greater gender diversity are more likely to acquire nonlisted targets, use cash as the method of payment, and purchase firms in similar industries. Results show that these preferences are significantly influenced by female directors' financial expertise, target industry experience, mergers and acquisitions (M&A) experience, academic and professional qualifications, and networks. The percentage of female directors on boards is positively correlated with the market response to the announcement of acquisition choices preferred by female directors. Furthermore, bidders improve efficiency and accumulate long-term value gains through the contributions made by their female directors to these acquisition choices.     

THE WEALTH EFFECTS OF VOLUNTARY SELLOFFS: IMPLICATIONS FOR DIVESTING AND ACQUIRING FIRMS

Previous research examining the wealth effects of voluntary selloffs has shown positive stock price movements around the announcement date for divesting firms. Shareholders realize positive economic gains from selloffs. One recent study indicates that shareholders of acquiring firms also realize economic gains. This study examines the division of economic gains between divesting and acquiring firms and the impact of the firm's financial condition and relative selloff size on the level of economic gains. Significant positive price movements are observed for divesting firms immediately prior to and on the announcement date. Some evidence of positive, although not significant, price movements is found for acquiring firms. These results suggest shareholders of divesting firms realize economic gains from selloffs while shareholders of acquiring firms neither gain nor lose. Also, as divesting firms sell off larger portions of their total assets, their shareholders realize greater economic gains; the division of economic gains becomes more one-sided (in favor of divesting firms) as the relative size of the selloff increases.     

Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.     

INTERSTATE BANK MERGERS: THE EARLY EVIDENCE

This study examines the wealth effects of interstate bank mergers to both the acquired and acquiring firms' shareholders. While the overall results are consistent with the findings of research on nonfinancial mergers — that acquired firms' shareholders gain and acquiring firms' shareholders break even — there is evidence that the acquiring banks cannot be considered a homogeneous group. Specifically, banks involved in relatively large acquisitions earn positive and statistically significant abnormal returns and significantly outperform those involved in relatively smaller mergers. The results suggest there are differential opportunities for gain from interstate mergers, dependent upon the relative size of the acquisition and the degree to which it expands the geographic market served by the bank.     

Wealth effects for acquirers and divestors related to foreign divested assets

This study examines acquisitions of foreign divested assets by U.S. firms. The results indicate that the excess returns to these acquisitions is a significant 0.48%, suggesting that capital markets perceive potential synergies from the effective utilization and strategic management of these assets by U.S. companies. The wealth effects to divestors of these foreign assets is 0.65%, significant at the 1% level, indicating that firms benefit from reducing their geographic scope of operations. We further examine excess returns to acquirers, and we find that several firm-specific characteristics foster anticipation of positive performance gains resulting from the acquisition of divested assets in foreign countries. Similar results are observed for the divesting firms also. Analysis of long horizon performance provides weak indication that performance of divesting firms improves subsequent to the divestment.     

An Empirical Study of the Consequences of U.S. Tax Rules for International Acquisitions by U.S. Firms

This article examines the effect of tax factors on the equity values of U.S. multinational corporations making foreign acquisitions. Abnormal stock returns are found to be related to a tax variable that captures differences in the international tax status of acquiring firms but not related to a naive tax variable that captures differences between tax rates in target countries and the United States. Our evidence suggests that aggregate intercountry differentials in after-tax returns are competed away, while firm-specific, tax-related advantages (or disadvantages) are reflected in abnormal returns around the announcement date of the acquisition.