An analysis of advisor choice, fees, and effort in mergers and acquisitions

This paper investigates the choice of financial advisors in mergers and acquisitions, the fees that the targets and the acquiring firms pay to these advisors, and the speed with which advisors complete transactions. Our sample includes 5337 merger deals announced during the period January 1995 to June 2000, that involved publicly traded targets and acquirers. We find that top-tier advisors are more likely to complete deals and to complete them in less time than lower tier advisors. However, the synergistic gains realized by the acquirers declined when top advisors were used. We also find that contingent fees play a significant role in expediting the deal completion. Surprisingly, we find that deals that are initiated by the advisors do not seem to take less time to complete. Our results suggest that the payment of larger advisory fees do not play an important role in determining the likelihood of completing the deal, but they are associated with greater acquisition gains realized by the acquirer. In addition, these synergistic gains are also associated with the switching by acquirers of their financial advisors within the same tier.     

AN EMPIRICAL ANALYSIS OF SOME DETERMINANTS OF THE TARGET SHAREHOLDER PREMIUM IN TAKEOVERS

While a considerable amount of research in Australia, the United States and elsewhere shows that takeovers create value for target shareholders, there is relatively little research investigating the explanations for cross-sectional differences in the size of the premium paid to target shareholders. This paper tests various arguments proposed to explain some of the sources of this premium. One such explanation is the removal of inefficient target management. Takeovers have been recognised as a mechanism that allows management teams to compete for the right to manage corporate assets. We test the associations between bidder and target managerial ownership (proxied by director's holdings), the prior performance of the bidder and target and the size of the premium paid to target shareholders. Other potential influences on the premium include a reduction in the agency costs of free cash flow and the provision of financial slack or reserve borrowing capacity to the target firm by the bidder. Using a sample of seventy-eight Australian takeovers occurring between 1981 and 1989 our tests indicate that the provision of financial slack to the target is associated with a significantly higher premium, while high bidder ownership results in a significantly lower premium. The premium is found to be positively related to the performance of the bidder in the period prior to the bid. The tests disclose an association between the agency costs of free cash flow and the target premium which is inconsistent with the theory, and reveal only weak evidence that the takeover premium is higher when inefficient target management is removed.     

Did the goodwill accounting standard impose material economic consequences on Australian acquirers?

This research explores the empirical association between takeover bid premium and acquired (purchased) goodwill, and tests whether the strength of the association changes after the passage of approved accounting standard AASB 1013 in Australia in 1988. AASB 1013 mandated capitalization and amortization of acquired goodwill to the income statement over a maximum period of 20 years. We use regressions to assess how the association between bid premium and acquired goodwill varies in the pre‐AASB and post‐AASB 1013 periods after controlling for confounding factors. Our results show that reducing the variety of accounting policy options available to bidder management after an acquisition results in a systematic reduction in the strength of the association between premium and goodwill.     

CLUSTERED SYNERGIES IN THE TAKEOVER MARKET

In a competitive market for takeover bids, the takeover premium serves as an effective proxy for the expected synergy. We find that the expected synergy is primarily related to the premiums paid in other recent takeovers in the same industry. This relation is even stronger when considering previous takeovers (especially over the previous three‐month horizon) in the same industry that have the same payment method (cash versus stock) or form of takeover (tender offer versus merger). More of the variation in expected synergies among takeovers can be explained by the premiums derived from recent takeovers in the same industry than by all bidder‐ and target‐specific characteristics combined. We also find that the bidder valuation effects are inversely related to the premium paid for targets, implying that abnormally high premiums may reflect overpayment rather than abnormally high synergies.     

Fund Advisor Compensation in Closed-End Funds

This paper examines the relation between the premium on closed-end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor. We find that the fund premium is larger when: (a) the advisor's compensation is more sensitive to fund performance; (b) the assets managed by the advisor are concentrated in the fund in question; (c) the advisor manages other funds with low compensation sensitivity to performance and with low concentration of assets managed by the advisor; and (d) the advisor's compensation contract evaluates performance relative to a benchmark.     

Do financial advisors exhibit myopic loss aversion?

Myopic loss aversion (MLA) has been proposed as an explanation for the equity premium puzzle, and a number of experiments on students indicate that people do exhibit MLA. However, many people do not rely on their own judgment when making investment decisions, but obtain help from financial investment advisors on how to allocate their wealth. The preferences and choices of financial advisors are thus important for understanding investment behavior. In this paper we make use of 50 professional financial advisors to examine whether they exhibit behavior consistent with MLA. Indeed, we find that they behave consistently with MLA to a larger extent than students.     

OPTIMAL BIDDING FOR TENDER OFFERS

By modeling tender offers as auctions in which bidders arrive sequentially, I show that the first bidder includes a high premium in its opening bid in an attempt to freeze out potential competitors. When expected competition goes up, the premium offered increases as does target shareholder welfare, while bidders suffer. Also, total synergy gains generated increase with competition. Including a premium in the opening bid remains optimal for the first bidder when target management is permitted to resist. Target management's ability to resist, though, benefits target shareholders even when resistance is not actually observed. When agency costs are introduced, the effect of managerial resistance on target shareholder welfare becomes ambiguous.     

Shareholder Wealth Effects of European Domestic and Cross‐border Takeover Bids

This paper analyses the short‐term wealth effects of large intra‐European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short‐term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market‐to‐book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.     

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.     

Divergence of US and Local Returns in the After‐market for Equity Issuing ADRs

We study one‐year post‐listing prices and returns to equity issuing ADRs that listed in the US between January 1991 and October 2000. ADRs from countries that impose restrictions on capital flows are priced at a premium to their home market ordinaries. While the mean premium for the full sample is statistically indistinguishable from zero, after an adjustment for asynchronous trading, the magnitude of the premium to ADRs from restricted markets is 11.33% at the 300‐day post listing interval, which is statistically significant. In the short run (30 days) following listing, the magnitude of the premium is larger for ADRs with larger excess demand from US investors. At the longer 300‐day horizon, Nasdaq listed ADRs earn a larger premium than their NYSE/AMEX listed counterparts. Time‐series regressions and two‐stage cross‐sectional regressions establish that the premium to foreign equity issuers is greater if the US listing attracts liquidity and if US returns have a lower correlation with the local country index.     

Bank reputation in the private debt market

We examine the impact of lead arrangers' reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender–borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.     

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.     

Testing the effect of portfolio holdings disclosure in an environment absent of mandatory disclosure

This study examines a number of portfolio disclosure regimes with respect to accuracy and susceptibility to copycat behaviour in an environment absent of mandatory disclosure. We find that periodic portfolio disclosure tends to underestimate true excess performance as well as idiosyncratic risk in top‐quartile fund managers, with longer inter‐reporting intervals tending to result in greater differences. ‘Copycat funds’ following the disclosed holdings of top‐tier managers significantly underperform the underlying fund, while copycats following bottom‐tier managers significantly outperform the underlying fund. Our findings suggest that periodic reporting at monthly intervals or longer would not affect fund alpha generation.     

The Risk Effects of Acquiring Distressed Firms

Existing research shows that bidder default risk increases following acquisitions due to a rise in post‐acquisition leverage and managerial risk‐taking actions offsetting the potential for asset diversification. This study examines whether the risk effects of acquiring distressed targets are fundamentally different and investigates possible explanations for any dissimilarities. Bidders often acquire relatively smaller distressed targets in domestic and related industries and have a higher initial target stake and more financial flexibility, thereby minimizing risk exposure. Controlling for several characteristics of bidder investment behaviour in both types of deals, however, we find that the increase in bidder default risk is substantially larger when acquiring distressed firms.     

Initial Shareholdings and Overbidding in Takeover Contests

Within the context of takeovers, this paper shows that in private-value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e., to bid more than his valuation. This strategy, however, can lead to i) an inefficient outcome, and ii) the winning bidder making a net loss. Further, the overbidding result implies that the presence of a large shareholder increases the bid premium in single-bidder takeovers at the expense of reducing the probability of the takeover actually occurring.     

Australian evidence on the determinants and impact of takeover resistance

In the present paper, we examine the determinants and impact of target bid resistance on the wealth of target shareholders and the takeover process in Australia. We find that bid resistance increases target shareholder wealth in the post‐announcement period and that the probability of bid hostility increases with the target's size, decreases with the target's performance and is unrelated to the size of the premium offered by the bidder. We also find that bid hostility decreases the probability of bid success, increases the probability of bid revision and has no effect on the probability of competing bidders entering the market.     

Bidder contests in international mergers and acquisitions: The impact of toeholds,preemptive bidding,and termination fees

For international mergers and acquisitions we analyze the effectiveness of different bidder strategies, first in preventing bidder competition, and second in increasing the likelihood of success. We provide robust empirical evidence of the effectiveness of toeholds and termination fees in reducing the likelihood of competition and, if a contest occurs, increasing the probability of success, especially after controlling for bidder asymmetries. The effects of termination fees vary over time and legal origin. Overall, there is hardly any evidence that high initial offers can prevent contests. However, competition is preempted in civil law countries with a high initial premium. A higher percentage of cash payment also increases the probability of success in bidder contest. Moreover, latent competition is generally not sufficient to curb the influence of observable bidder competition on target and bidder wealth. Finally, serial acquirers are more likely to prevent bidder contests and experienced and reputably advised bidders are more successful in deal completion. Overall, we offer novel evidence for the success of different bidding strategies in international mergers and acquisitions.     

Irrevocable Commitments,Going Private and Private Equity

This paper adds to growing interest in public to private buy‐outs and mechanisms to ensure bid success. Using a unique, hand‐collected dataset of 155 public to private buy‐outs we provide one of the first examinations of the determinants of irrevocable commitments. Irrevocable commitments involve undertakings given by existing shareholders to agree to sell their shares to the bidder before the bid to take the company private is announced. We find that, for management buy‐outs, the level of irrevocable commitments is increased by the bid premium, the reputation of the private equity backer and board shareholdings. The level of irrevocable commitments is reduced by rumours of a takeover bid and bid value. We therefore find evidence that management and private equity firms' activity prior to the bid's announcement can have an important impact on the process of going private.     

Learning by bidding

We analyze a dynamic second‐price auction with an informed bidder and an uninformed bidder who, upon seeing a posted price, learns whether his valuation is above that price. In the essentially unique equilibrium, an informed bidder bids in the first period if her valuation is below some cutoff and bids only in the last period otherwise. An uninformed bidder bids in every period to optimally change the price unless the price is above his valuation or he is the high bidder. This model also provides a rationale behind the use of a secret reserve price in private‐value settings.     

PARTIAL TAKEOVERS AS PUT OPTIONS

For stocks of a listed company subject to a takeover offer, a premium must be paid by the bidder to induce acceptance of the offer. For partial takeovers, this premium can be modelled as a put option. While the takeover is current, temporary support for the stock may materialize, possibly resulting in increased prices. The price of options or warrants over the target stock can be used as a means of estimating the ex-takeover stock price, the takeover premium and any extra support that temporarily may be in the observed market price. This leads to an evaluation of the probable success of the takeover.