Naked M&A Transactions: How the Lack of Local Expertise in Cross‐Border Deals Can Negatively Affect Acquirer Performance – and How Informed Institutional Investors can Mitigate This Effect

This paper tests how informed investors with local expertise can affect cross‐border deal success using a comprehensive dataset of corporate acquirers’ share registers. We posit that deals in which long‐term investors have a high level of expertise in the target firm's region are more likely to perform better than if the deal is ‘naked’, i.e., when such regional expertise amongst the investors is low. We show that the strength of this effect depends upon an index of country‐level M&A maturity which measures the relative divergence between acquirer and target countries. Specifically, we investigate whether acquirers investing in countries with low M&A maturity gain greater benefit from investors with regional expertise. We present evidence which confirms the hypothesis that acquirers in cross‐border corporate transactions are more likely to be successful if the acquirer's investors have a higher level of expertise in the target region, and that this effect is strongest when the maturity for corporate transactions of the target country is low. This provides a specific setting which is consistent with earlier theoretical work that argues in general that information flows should not just be from firms to capital markets but also in the opposite direction, and that this flow of information is particularly important whenever information is dispersed.     

Mutual fund skill and the performance of corporate acquirers

We show that the commonly observed correlation between institutional investor ownership and the success of mergers is partly driven by active stock picking. Several mutual fund stock selection skill measures strongly predict the post-merger performance of corporate acquirers even after controlling for possible shareholder monitoring. These findings are stronger for funds with characteristics more indicative of active stock picking. Moreover, firms held by funds with higher stock selection skills are more likely to subsequently become acquirers, suggesting that the mutual fund skill set includes the ability to identify acquirers with value-enhancing acquisition opportunities.     

Beyond Financial Reporting An Integrated Approach to Disclosure

A company's market value is a key determinant of its future success, affecting its ability to raise capital, recruit and retain key employees, and make strategic acquisitions. Confident, well‐informed investors are necessary for achieving and maintaining accurate valuation of a company's stock. But standard disclosure practice has left many companies releasing a great deal of data while conveying only limited understanding to outsiders. This article presents the outline of an integrated approach to corporate disclosure in which each of the three major elements–required financial reports, supplemental disclosure, and interactions with investors and intermediaries–are consistent and mutually reinforcing. Such an approach begins with required reports that refiect as closely as possible the economic reality of a company's business. But if GAAP income statements and balance sheets are often useful for communicating current and past performance, they are not designed to convey management's strategic vision and the company's prospects for creating value. To achieve and maintain accurate valuation, management must supplement mandated financial reporting with voluntary communication that highlights value drivers and helps investors understand both the company's strategic goals and management's progress in meeting those goals. Finally, management must interact with investors and capital market intermediaries in ways that provide them with a clear and compelling picture of the company's prospects, which should help both analysts and institutional investors become more effective monitors of the firm's performance. Through consistent communication that goes well beyond the sell side's focus on quarterly earnings per share, management will discover that it has the power to set the agenda for how the company's performance is evaluated by the market. In the process, companies are also likely to find that their investors (and analysts) are more patient than they thought, while their operating managers feel less pressure to take shortsighted steps to boost EPS. Both of these expected benefits of an integrated disclosure policy should end up increasing a company's value.     

Are frequent acquirers more entrenched?

We do not find a significant influence of management entrenchment on the firm's propensity for frequent acquisition, in contrast to the existing studies that show entrenched managers are more likely to become frequent acquirers. We show that entrenched management is less likely to engage in frequent acquisitions because of low strategic managerial ability. Strategic managerial ability is positively associated with the firm's propensity for frequent acquisition. Entrenched acquirers have lower strategic managerial ability; and lower ability acquirers are more likely to be entrenched. Reducing acquisition frequency exacerbates management entrenchment. Frequent acquisitions further enhance strategic managerial ability, and high-ability management is likely to be more acquisitive. Frequent acquirers are 40% less likely to be entrenched compared to non-frequent acquirers. Our results are consistent with the notion that the market for corporate control effectively disciplines frequent acquirers such that their management are less likely to be entrenched. Entrenched acquirers suffer a loss in firm value, which further supports that the market for corporate control is effective in penalizing entrenched management. Frequent acquirers, often being in the market for targets, are disciplined by the market for corporate control. Frequent acquisitions appear to be driven by strategic managerial ability, rather than by management entrenchment.     

Understanding merger incentives and outcomes in the US mutual fund industry

This paper examines the incentives of acquirers and targets in the merger market. Using data on acquisitions among mutual fund management companies from 1991 to 2004, I estimate a two-sided matching model of the merger market jointly with equations representing merger outcomes. According to the empirical investigation, although the desire to achieve a sufficient scale to attract investors is a key driver for mergers, some mergers seem to be driven by objectives other than shareholder value maximization. I find that companies that are potentially prone to misaligned incentives between owners and managers are more acquisitive than others, yet have significantly worse post-merger operating performance. I also find that these acquirers, despite their higher willingness to pay for targets, are not any more likely to match with high-quality targets, potentially due to targets’ incentive to avoid bad organizations.     

CREATING VALUE IN PENSION PLANS (OR, GENTLEMEN PREFER BONDS)

Pension funds are typically one-half to two-thirds invested in equities because equities are expected to outperform other financial assets over the long term, and the long-term nature of pension fund liabilities seems well suited to absorbing any short-term return volatility. What's more, U.S. GAAP currently makes it possible to take credit in advance for the higher anticipated earnings on equity investments without acknowledging their inherent risk. But by allowing the higher expected returns from stocks to reduce a company's current pension expenses, the accounting treatment conflicts with some very basic principles of finance (in particular, the idea that investors must earn higher returns on riskier investments just to "break even"), conceals systematic biases in the actuarial analysis, and gives managers considerable latitude to manipulate the bottom line.
The authors suggest a startlingly different approach. They argue that pension assets should be invested entirely in duration-matched debt instruments for two reasons: (1) to capture the full tax benefits of pre-funding their pension obligations and (2) to improve overall corporate risk profiles by converting general stock market risk into firm-specific operating risk, where corporate managers should have a comparative advantage and can generate real value. Investing exclusively in bonds would take better advantage of the tax-exempt status of pension plans and greatly reduce fund management costs, while at the same time helping o shore up fund quality and sharpening corporate executives' focus on their real operating assets.     

Friends in the right places: The effect of political connections on corporate merger activity

This study examines how the appointment of former politicians and regulators to boards of directors or management teams influences corporate acquisition activity and performance. We find that bidders with political connections are more likely to acquire targets and avoid regulatory delay or denial. The merger premium paid increases with political connectedness. The announcement period returns show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected bidders make more bids and bid on larger targets. Connected acquirers also enjoy superior post-merger financial and operating performance.     

When to walk away from a deal

Deal making is glamorous; due diligence is not. That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value. The momentum of a transaction is hard to resist once senior management has the target in its sights. Companies contract "deal fever," and due diligence all too often becomes an exercise in verifying the target's financial statements rather than conducting a fair analysis of the deal's strategic logic and the acquirer's ability to realize value from it. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed. In a recent Bain & Company survey of 250 international executives with M&A responsibilities, only 30% of them were satisfied with the rigor of their due diligence. And fully a third admitted they hadn't walked away from deals they had nagging doubts about. In this article, the authors, all Bain consultants, emphasize the importance of comprehensive due diligence practices and suggest ways companies can improve their capabilities in this area. They provide rich real-world examples of companies that have had varying levels of success with their due diligence processes, including Safeway, Odeon, American Sea-foods, and Kellogg's. Effective due diligence requires answering four basic questions: What are we really buying? What is the target's stand-alone value? Where are the synergies--and the skeletons? And what's our walk-away price? Each of these questions will prompt an even deeper level of querying that puts the broader, strategic rationale for acquisitions under a microscope. Successful acquirers pay close heed to the results of such in-depth investigations and analyses--to the extent that they are prepared to walk away from a deal, even in the very late stages of negotiations.     

Exploring the transitional behavior among value and growth stocks

Unlike the corporate funds in the US, mutual funds in many countries such as China and Germany operate under a different governance arrangement and are thus called “contractual funds.” The governance structure of contractual funds allows shareholders of fund management companies, rather than the fund investors, to be responsible for asset management decisions. Therefore, a fund’s governance attributes may be especially important in driving its performance. Using a comprehensive governance data covering Chinese mutual funds, this paper finds that the governance and organizational structures of Chinese fund management companies significantly influence the performance of their affiliated funds. In particular, while a larger stake from the top1 shareholder significantly improves the performance of affiliated funds, the presence of multiple largest shareholders reduces their performance. Moreover, fund management companies that offer fewer fund products and charge higher management fees tend to perform better. Finally, more institutional holding in a fund appears to function as an external supervisory surrogate for internal board governance to help improve fund performance.     

The attenuation effect of social media: Evidence from acquisitions by large firms

We examine the role of social media in firm acquisitions. Twitter utilizes the “push” technology that allows firms to reduce information asymmetry by disseminating news to a broader set of investors in a timely manner. Using hand collected acquisition announcements from Twitter covering the period from 2009 to 2012, we find that the acquirer size is a main determinant of disclosing acquisition announcements on Twitter. Large acquirers announce their acquisitions on Twitter and, as a result, are able to attenuate the anticipated negative market reaction at acquisition announcement. We find no evidence that the attenuation effect of announcing acquisitions on Twitter subsequently reverses or that announcing acquisitions on Twitter is positively associated with pre-announcement earnings management. Overall, our results suggest that Twitter has become an important investor relation channel for major corporate events such as acquisition announcements and that large acquirers can use this new channel to enhance stability in their stock prices.     

The "barbarians" in the boardroom

According to conventional wisdom, the corporate raiders and buyout specialists who flourished in the 1980s were the antithesis of good management. Their goals of realizing quick profits from the acquisition of major companies--frequently through rapid cost-cutting and the breakup of conglomerates--made them the bane of old-school corporate leaders. Long-term management, it seemed, was being sacrificed on the altar of short-term profits. With the abatement of takeovers in recent times, top corporate managers have hailed a return to business-as-usual. But the takeover artists have not, in fact, retreated. Instead, these corporate acquirers, many of whom own large stakes in major industrial companies, are assuming board seats and switching their emphasis to overseeing the companies they control--with an eye toward the long term. In this new role, the takeover experts are not plunderers, nor are they creating quick profit at the expense of companies' long-term health; rather, they are defying expectations and, in a number of important respects, successfully implementing the agenda of the gurus of good management. Setting the pace in this new arena is the most powerful takeover group of the 1980s, the leveraged buyout firm of Kohlberg Kravis Roberts & Company. KKR's partners hold board seats at nine different companies with $1 billion a year or more in sales.(ABSTRACT TRUNCATED AT 250 WORDS)     

Are fairness opinions fair? The case of mergers and acquisitions

Over the period 1994–2003, 80% of targets and 37% of acquirers obtain a third-party assessment of the fairness of a merger or acquisition. These fairness opinions do not affect deal outcomes when used by targets, but they affect deal outcomes when used by acquirers. The deal premium is lower in transactions if the acquirer obtains a fairness opinion, and is further reduced if multiple advisors provide an opinion. However, the acquirer's announcement-period return is 2.3% lower if the acquirer has a fairness opinion, especially if the acquirer pays a high premium, indicating that investors are skeptical of these transactions.     

Disclosure of Proxy Voting Information by Australian Managed Investment Schemes

The US Securities and Exchange Commission requires registered management investment companies to disclose how they vote proxies relating to portfolio securities they hold. The primary purpose of this rule is to enable fund investors to monitor the role of institutional shareholders in the corporate governance practices of public companies. In Australia, despite reform proposals, there are no regulations requiring institutional investors to report proxy voting procedures and practices. There is little evidence of voluntary disclosure of proxy voting by Australian managed investment schemes in equities, indicating that there are costs involved in such disclosure.     

Does Corporate Governance Matter in the Contractual Form of Fund Management Companies in China?

ABSTRACT

Operating under a regulatory environment with weak enforcement of investor protection, the contractual form of fund management companies (FMCs) in China’s emerging fund industry presents some complex governance issues in addition to the conventional agency problems of modern public corporations. Using 288 firm-year observations covering more than 98 percent of FMCs in China, this article presents the first systematic study on whether the quality of corporate governance mechanisms affects the performance of the contractual form of FMCs. Our results suggest that FMCs with good corporate governance do matter in generating favorable performance for fund investors in China.     

PRIVATE EQUITY INVESTING IN EMERGING MARKETS

After a proliferation of emerging market funds in the 1990s, growth has slowed drastically due to disappointing preliminary results. Private sector funds initially appeared promising because of the burgeoning demand for capital in emerging markets, the new receptivity of governments to foreign investors, and the prospect of high returns. But in many cases, the regulatory and legal frameworks did not provide adequate investor protection, and dramatic differences in accounting standards, corporate governance, and exit potential created problems. These problems are often accentuated because local owners are adept at navigating the legal and accounting systems, placing investors at a disadvantage.
As global competition intensifies, local policies, regulations, and business practices are becoming increasingly important in attracting investors. Local governments must institute the reforms necessary to improve the investment environment, including the strengthening of shareholder rights and corporate governance standards and improving access to public equity markets. Development finance institutions must provide direction and leadership in these areas. And fund managers must align their business models more closely with emerging market realities by establishing a local presence, adopting a more hands-on approach to monitoring their investments, and developing creative exit strategies.     

The role of corporate governance in shaping accruals manipulation prior to acquisitions

Based on stock swap transactions involving public acquirers originating from the UK between 1998 and 2011, this paper investigates the role of corporate governance in shaping accruals manipulation prior to stock swap deals. In contrast to common claims that strong corporate governance constrains accruals manipulation, my results show that well-governed acquirers engage more aggressively in income-increasing accruals manipulation than those with weak governance. This finding is consistent with a role of corporate governance that incentivises managerial actions in the interests of firms’ shareholders. Overall, this finding highlights the setting-specific nature of the earnings management and corporate governance relation. My results are robust to different discretionary accrual models, differences in the firm's growth structure, merger and acquisition control variables, a control group of 100% cash acquirers, an analysis of buy-and-hold abnormal returns, and potential sample selection problems.     

Corporate Portfolio Management Roundtable

The dean of a top ten business school, the chair of a large investment management firm, two corporate M&A leaders, a CFO, a leading M&A investment banker, and a corporate finance advisor discuss the following questions:

• ? What are today's best practices in corporate portfolio management? What roles should be played by boards, senior managers, and business unit leaders?
• ? What are the typical barriers to successful implementation and how can they be overcome?
• ? Should portfolio management be linked to financial policies such as decisions on capital structure, dividends, and share repurchase?
• ? How should all of the above be disclosed to the investor community?

After acknowledging the considerable challenges to optimal portfolio management in public companies, the panelists offer suggestions that include:

• ? Companies should establish an independent group that functions like a “SWAT team” to support portfolio management. Such groups would be given access to (or produce themselves) business‐unit level data on economic returns and capital employed, and develop an “outside‐in” view of each business's standalone valuation.
• ? Boards should consider using their annual strategy “off‐sites” to explore all possible alternatives for driving share‐holder value, including organic growth, divestitures and acquisitions, as well as changes in dividends, share repurchases, and capital structure.
• ? Performance measurement and compensation frameworks need to be revamped to encourage line managers to think more like investors, not only seeking value‐creating growth but also making divestitures at the right time. CEOs and CFOs should take the lead in developing a shared value creation model that clearly articulates how capital will be allocated.

     

TO PURCHASE OR TO POOL: DOES IT MATTER?

The recent decision by the Financial Accounting Standards Board to eliminate pooling accounting for acquisitions raises several important questions: Does the choice of “purchase” or “pooling” affect firm valuations? How do differences in goodwill and its amortization affect cash flow and price/earnings multiples? How has the market reacted to purchase and pooling acquisition announcements? The authors' new research suggests that the market already judges mergers and acquisitions based on fundamental economics, not on GAAP earnings. In a study of 1,442 large acquisitions in the 1990s, the authors find that, in the first month after the announcement of pooled transactions, the acquirer's stock fell by an average of almost 4%. By contrast, the market reaction to purchase acquisitions was extremely favorable, with a 3% positive abnormal return in the first month. But what about the ongoing effect of goodwill amortization on values? In the second part of their two-part study, the authors report that the P/E multiples of acquirers reporting increases in goodwill amortization increase significantly following the acquisitions, and that the increases in P/E are large enough to offset the negative impact of goodwill amortization on earnings. Moreover, the authors also tested for and were unable to find any evidence of a market bias against balance sheet goodwill as an indicator of future amortization charges. The authors thus conclude that changes in accounting for acquisitions should not be a concern for acquirers, and that the elimination of pooling should have no lasting impact on corporate strategic decisions or M&A activity. Nevertheless, they do suggest that companies with significant goodwill would benefit from making their amortization transparent in their financial statements by, for example, breaking out amortization from depreciation on their income statements.     

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

In this article, based on both parametric and non-parametric methods, we provide a robust solution to the long-standing issue on how earnouts in corporate takeovers are structured and how their structure influences the takeover premia and the abnormal returns earned by acquirers. First, we quantify the effect of the terms of earnout contract (relative size and length) on the takeover premia. Second, we demonstrate how adverse selection considerations lead the merging firms to set the initial payment in an earnout financed deal at a level that is lower than, or equal to, the full deal payment in a comparable non-earnout financed deal. Lastly, we show that while acquirers in non-earnout financed deals experience negative abnormal returns from an increase in the takeover premia, this effect is neutralised in earnout financed deals.     

Beliefs affecting additional investment intentions of mutual fund clients

In this article, we aim to examine mutual fund investors’ behaviour in decision-making situations and to analyse future investment decisions via a path model approach. Investors were divided into different groups based on the risk and distribution channel used, and the differences in their investment intentions were examined. The study used empirical survey data collected from the clients of a mutual fund company owned by a Finnish banking group. Loyalty to the common banking group dominated the explanation in the whole model. The safety of the investment was important for branch office investors, whereas obtaining a good return was important for internet investors. Ultimately, explanatory power was highest for the branch office investors and lowest for the internet investors with equity funds. Most investors intended to invest more, and thus there was little variance to be explained. The results indicate that branch office investors with money market funds require more information about the investment business, although it is difficult to see who would be responsible for providing that information. This study has implications for both the theory and management of financial services.