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.     

Director networks and takeovers

We study the impact of corporate networks on the takeover process. We find that better connected companies are more active bidders. When a bidder and a target have one or more directors in common, the probability that the takeover transaction will be successfully completed augments, and the duration of the negotiations is shorter. Connected targets more frequently accept offers that involve equity. Directors of the target firm (who are not interlocked) have a better chance to be invited to the board of the combined firm in connected M&As. While connections have a clear impact on the takeover strategy and process, we do not find evidence that the market acknowledges connections between bidders and targets as the announcement returns are not statistically different from those bidders and targets which are ex ante not connected.     

Employment growth following takeovers

We construct a comprehensive sample of takeovers in Belgium that shows they are remarkably common. Takeovers involve both small and large firms and, over a five‐year period, 17% of private sector employment. We estimate their impact on employment growth using a framework that explicitly takes into account that takeovers involve pairs of firms and that post‐merger outcomes are heterogeneous. The average merger temporarily reduces employment of the combined entity by ?1.4%. Mergers likely to be motivated by market power show a stronger and permanent employment reduction of ?14%, whereas those motivated by efficiency gains lead to employment expansions of +10%.     

Stock selling during takeovers

Stock sales during takeover negotiations weaken the target board's ability to recommend against the takeover, i.e., to resist. Sophisticated shareholders therefore face a coordination problem when deciding whether to sell-out early; and their actions generate a feedback loop between trading volumes and takeover outcomes. Bidding firms, anticipating the pressurising effect of future share sales on the target board, may reduce their bids. We study these tensions theoretically. We find that increasing the influence of shareholders during the bidding process lowers equilibrium bids; elongates the bidding process; but raises the overall probability of bid acceptance; and raises expected premia for unsophisticated shareholders.     

Investor activism and takeovers

Recent work documents large positive abnormal returns when a hedge fund announces activist intentions regarding a publicly listed firm. We show that these returns are largely explained by the ability of activists to force target firms into a takeover. For a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006, announcement returns and long-term abnormal returns are high for targets that are ultimately acquired, but not detectably different from zero for firms that remain independent. Firms targeted by activists are more likely than control firms to get acquired. Finally, activist investors’ portfolios perform poorly during a period in which market wide takeover interest declined.     

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.     

Failed bank takeovers and financial stability

Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies.     

Cash holdings and bond returns around takeovers

Using a large sample of 2712 unique U.S. domestic takeovers over the period 1993 to 2014, we show a negative relation between the level of cash holdings and post-announcement corporate bond returns. Our findings support the agency cost of cash holdings view and show that bondholders and shareholders share the same interests with respect to cash policy around takeovers. We further find that cash holdings are viewed less negatively by bondholders in firms with strong shareholders. This paper is the first to document the role of cash holdings on bondholder wealth around takeover announcements.     

Beyond takeovers: politics comes to corporate control

In the 1990s, politics will replace takeovers as the defining tool for corporate governance challenges, and a marketplace of ideas will replace the frenzied activity that once dominated the financial marketplace in the 1980s. In the transaction-driven market of the past, corporate raiders used junk bonds and other financial tools to take control of their targets. In the new marketplace of ideas, debate will replace debt as active shareholders press specific operating policies for their target corporations in a new politicized market for corporate control. John Pound, associate professor of public policy at the John F. Kennedy School of Government at Harvard, reports that investors are already using shadow management committees, independent director slates, and outside experts to influence management policy. Pound cites Carl Icahn's battle for control of USX as an example of the emerging trend. What began as a hostile takeover ended with a negotiated solution in which many constituencies ultimately played a role in the restructuring of the company. This political approach to governance gives management a chance to embrace a bargain that is in its long-term interest. By promoting politically based tactics, managers can generate political capital with their major investors. Managers in companies as diverse as Avon and Lockheed now meet regularly with investors, seeking their input on both financial and strategic decisions. In the new politicized market for corporate control, striking a bargain with long-term investors is ultimately in the best interest of the corporation.     

The Communist Party Committee and corporate takeovers

Existing empirical studies on Chinese corporate governance ignore the role of the Communist Party of China (CPC) in state-owned enterprises (SOEs) over which it has direct control. This study examines a unique corporate governance mechanism in Chinese SOEs: the co-existence of party committee and board of directors, and considers the monitoring effects of the party committee on the value creation of Chinese state-owned acquiring firms. I show that acquisitions with their own party committees create significantly higher market value for acquiring firms, especially for acquirers with fewer external monitoring mechanisms, while value creation remains in long-term, post-event periods. I further document that the collective decision can contain the “empire building” of mangers and reduce the premium is the source of this value creation, while the findings remain unchanged after controlling for endogeneities.     

Company takeovers and the auditor choice decision

There is a growing literature on how companies select their auditors. This literature emphasizes both theoretical development and empirical testing. Anderson, Stokes, and Zimmer (1993) recently identified corporate takeovers as events that generate auditor selection decisions; the acquiring company (the acquirer) has to choose whether to retain the new subsidiary’s (the acquiree) incumbent auditor or switch to its own auditor. To date, this is the only reported study that examines auditor changes following corporate acquisitions. Anderson et al. (1993) speculated that if the business activities of the acquirer and the acquiree are different, then the acquiree’s incumbent auditor is more likely to be retained. They used takeover type (horizontal, vertical, conglomerate) as a proxy for differences in activities. Their empirical results, however, were contrary to these expectations.The purpose of this paper is to test the robustness of Anderson et al.’s findings in a different national setting (Britain instead of Australia). Further, it modifies Anderson et al.’s test procedures by introducing new variables that are also hypothesized to affect auditor choice in acquired companies. The results show that proxies for differences in activities between acquirers and acquirees, namely takeover type and industry, are associated with the retention of the acquiree’s incumbent auditor. The takeover type finding therefore differs from the findings of Anderson et al. (1993).Other factors associated with the decision to retain auditors include audit opinions, contested takeover bids, changes in top management, restructuring and integration of businesses, and relative audit fees. Some of these factors have also been identified in other, non-takeover contexts. Finally, audit switches to Big Eight firms are found to be more likely than switches away from the Big Eight.     

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.     

The dynamics of the free-rider problem in takeovers

We explore the dynamics of a takeover bid. In contrast to precedingmodels, if the initial takeover bid is unsuccessful a raideris allowed to make a new tender offer in order to try and securethe remaining shares. Numerical analysis shows that the raider'stender offer rises over time as be accumulates more shares.The anticipation of a higher tender offer in the future makesshareholders more inclined to hold their shares and forces theraider to offer a higher premium than is predicted by statictheories. As the time between tender offers goes to zero, weshow analytically that the expected profit from engaging ina takeover goes to zero.     

Productivity,restructuring, and the gains from takeovers

This paper investigates how takeovers create value. Using plant-level data, I show that acquirers increase targets' productivity through more efficient use of capital and labor. Acquirers reduce capital expenditures, wages, and employment in target plants, though output is unchanged. Acquirers improve targets' investment efficiency through reallocating capital to industries with better investment opportunities. Moreover, changes in productivity help explain the merging firms' announcement returns. The combined announcement returns are driven by improvements in target's productivity. Targets with greater productivity improvements receive higher premiums. These results provide some first empirical evidence on the relation between productivity and stock returns in takeovers.     

Capital gains taxation and shareholder wealth in takeovers

Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non‐taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.     

Liquidity and information asymmetry considerations in corporate takeovers

ABSTRACT

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.     

Uncertainty triggers overreaction: evidence from corporate takeovers

Behavioural finance models suggest that under uncertainty, investors overweight their private information and overreact to it. We test this theoretical prediction in an M&A framework. We find that under high information uncertainty, when investors are more likely to possess firm-specific information, acquiring firms generate highly positive and significant gains following the announcement of private stock and private cash acquisitions (positive news) while the market heavily punishes public stock (negative news) deals. On the other hand, under conditions of low information uncertainty, when investors do not possess private information, the market reaction is complete (i.e. zero abnormal returns) irrespective of the type of acquisition. Overall, we provide empirical evidence that shows that information uncertainty plays a significant role in explaining short-run acquirer abnormal returns.     

Competition and the medium of exchange in takeovers

The role of the medium of exchange in competition among biddersand its effect on returns to stockholders in corporate takeoversare investigated. Consistent with recent empirical evidence,our model shows that stockholders of both acquiring and targetfirms obtain higher returns when a takeover is financed withcash rather than equity, and that returns to target shareholdersincrease with competition. The model predicts that the factionof synergy captured by the target decreases with the level ofsynergy. Finally, it is shown that, as competition increases,the case component of the offer as well as the proportion ofcase offered increases.     

Auctions vs. negotiations in takeovers with initial stakes

Takeover attempts from raiders with prior stakes in the target company (toeholds) are frequent in the market for corporate control. In this context, we propose a simple and realistic selling mechanism with an agenda of exclusive negotiations that discriminates against larger-toehold raiders. When a reserve price is absent, it is shown that this negotiation procedure outperforms, in terms of expected target price, conventional auctions frequently used to model takeover battles. However, when standard auctions can be improved with an optimal reserve price, our results indicate that this target price superiority is sensitive to the degree of toehold asymmetry.     

Corporate governance roles of information quality and corporate takeovers

We examine the corporate governance roles of information quality and the takeover market with asymmetric information regarding the value of the target firm. Increasing information quality improves the takeover efficiency however, a highly efficient takeover market also discourages the manager from exerting effort. We find that perfect information quality is not optimal for either current shareholders’ expected payoff maximization or expected firm value maximization. Furthermore, current shareholders prefer a lower level of information quality than the level that maximizes expected firm value, because of a misalignment between current shareholders’ value and total firm value. We also analyze the impact of antitakeover laws, and find that the passage of antitakeover laws may induce current shareholders to choose a higher level of information quality and thus increase expected firm value.