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Competing Bids, Target Management Resistance, and the Structure of Takeover Bids
Abstract
We examine the structure of initial takeover bids and the frequency of observing competing bids and target management resistance.
We find the use of cash is not consistently correlated with the frequency of competition or resistance and that the cost of
acquiring information about a target is associated with the likelihood of competition and resistance. A high bid premium appears
to deter competing offers and is also associated with a lower likelihood of resistance. Finally, target management resistance
is associated with an increased likelihood of a competing offer arising and a larger increase in target shareholder wealth
between the initial public announcement and outcome dates relative to the not-resisted subsample for both successful and unsuccessful
acquisition proposals.
... While the supply schedule is not known with certainty, higher bid premia should result in an increased amount of shares being tendered, increasing the probability of success. Walkling [1985], Jennings and Mazzeo [1993], and Branch and Yang [2003] find empirical support for this hypothesis in that they show bid premia to be positively related to the likelihood of takeover success. ...
... Higher bid premia make an offer more attractive and have been shown to increase likelihood of completion [Branch and Yang, 2003;Jennings and Mazzeo, 1993;Walkling, 1985]. This would tend to reduce arbitrage spreads ceteris paribus. ...
... Therefore, the greater the bid premium, the wider the required arbitrage spread to compensate for the increased risk. On top of that, offers involving higher bid premia Chapter 1. Mergers and acquisition, CSR, and capital market implications 26 are less likely to attract competing offers and subsequent bid revisions [Jennings and Mazzeo, 1993;Jindra and Walkling, 2004]. This in turn, would act in favor of wider arbitrage spreads. ...
This thesis consists of three empirical essays investigating the impact of corporate social responsibility (CSR) on mergers and acquisitions (M&A). In the first essay, we investigate whether the CSR performance of firms impacts their propensity to become M&A targets. We find that the CSR performance of firms is positively related to takeover likelihood. We also show that the CSR performance of target firms is higher on average than the CSR performance of comparable non-target firms. In the second essay, we study the relationship between M&A targets’ CSR performance and the acquisition premium offered by acquirers. We show that CSR is positively and significantly associated with the premium offered by acquirers. We also find that the premium is explained by the environmental and social performances of firms but that social performance only commands a premium in the case of cross-border transactions. Finally, in the third essay, we analyze the impact of acquirers' CSR performance on M&A deal uncertainty. We document a negative association between arbitrage spreads and acquirers' CSR performance, showing that deal uncertainty decreases when M&A operations are initiated by high-CSR acquirers. Overall, our results suggest that CSR performance is a significant determinant of M&A decisions and expected outcomes.
... Prior studies (e.g. Berkovitch et al. 1989;Jennings and Mazzeo 1993;Officer 2003;Bates and Lemmon 2003) have focused on the reasons for the use of termination fee provisions and the relation between such provisions and deal premium, deal completion rate, or deal announcement returns. There has been surprisingly little research on the relation between such provisions and deal withdrawal returns. ...
... The efficiency hypothesis suggests that target termination fee provisions are used to encourage acquirer participation by inducing acquirers to make more deal-related investments before the merger, to commit to more active negotiation, and to reveal more valuable information during the bidding process. In the event of a deal withdrawal, the costs associated with these activities become sunk costs for acquirers; such sunk costs are very likely to outweigh the target termination fee, since they are usually very large (Jennings and Mazzeo 1993) and the target termination fee is relatively small (Bates and Lemmon 2003). Therefore, acquirers are more likely to suffer from losses in the event of the withdrawal of deals that have target termination fee provisions than deals without such provisions, all other things being equal. ...
... In addition, negotiation and pre-merger integration are very costly (Jennings and Mazzeo 1993). Bidders could be reluctant to commit to active negotiation or to pre-merger integration with a target if the target does not show a tangible commitment. ...
This paper provides evidence on the wealth effect in the event of the withdrawal of a merger or acquisition, and the impact of termination fee provisions on acquirer withdrawal returns. I report a significant negative correlation between acquirer withdrawal returns and announcement returns, consistent with the theory of managerial learning in M&As. Target firms reap net gains in deal withdrawals, showing evidence of a permanent revaluation of targets even if the deals fail. I also find that acquirer termination fee provisions are positively associated with acquirer withdrawal returns, suggesting that such provisions may play a disciplinary role in the withdrawal decision-making and protect acquirer shareholders’ interests in deal withdrawals. Furthermore, my results also show that target termination fee provisions are negatively associated with acquirer withdrawal returns, which supports the efficiency hypothesis.
... Goldman and Qian (2005) alone internalize pre-offer target board ownership in their toehold acquisition model. Consistent with Grossman and Hart's (1980) free rider rationale, they demonstrate that large toeholds generate profits if a takeover succeeds, so consistent with Hirshleifer and Titman (1990), Walking (1985), Choi (1991), Jennings and Mazzeo (1993) and Betton and Eckbo (2000) toeholds increase with the probability of success. However, Goldman and Qian (2005) show that larger toeholds can be detrimental to bidders if takeovers fail. ...
... They also find that failed takeovers in which target management retains control are characterized by ineffective block shareholder monitoring and under-perform relative to firms that replace their managers. Further, Jennings and Mazzeo (1993) find that the probability of a competing bid increases with target management resistance but does not justify the expected wealth loss due to rejection of existing bids. Target management resistance is not predicated unless target managers are entrenched. ...
... In OLS regression (1), toehold size is regressed on the principal outside block and entrenchment (=1) to ascertain any relationship on equity blocks alone. The regression diagnostics are satisfactory 18 . We find that toeholds relate only to the principal outsider. ...
We document empirical evidence that bidders tailor their takeover strategy when facing entrenched target managers. Key elements of a takeover strategy comprise the toehold purchase and the initial bid premium. We find that toeholds are acquired in cognizance of the principal outsider and target management block. Bidders’ free rider cost savings are measured by the product of the toehold and the initial bid premium. Several relationships are identified. Initial bid premiums for targets characterized by entrenchment are comparatively low and result in low free rider benefits to bidders. To avoid overpayment, bidders do not compensate entrenched managers for lost private benefits. Instead, in entrenchment scenarios toeholds are optimized with respect to the principal outsider as well as the target management block in order to create a foothold that neutralizes entrenchment. At the median toeholds match the spread between the principal outsider and the target management block in entrenchment scenarios, are about double the spread for shareholder-aligned targets and much smaller for owner-managed targets. Takeovers of owner-managed targets rely more on a higher offer price.
... To investigate the relation between acquirer's CSR and arbitrage spreads and make sure our CSR measure does not proxy for other known factors that influence arbitrage spreads (Branch and Yang, 2003;Branch and Wang, 2008;Cornelli and Li, 2001;Hoffmeister and Dyl, 1981;Jennings and Mazzeo, 1993;Jetley and Ji, 2010;Jindra and Walkling, 2004;Walkling, 1985), we include several firm and deal-related controls in our regressions. Specifically, we include the bid premium, the target's cumulative return prior to deal announcement, abnormal trading volume around announcement, acquirer size, target size, the target's market-to-book ratio, the acquirer's Tobin Q and previous market-adjusted return. ...
... An increase in target's share price before the announcement as measured by cumulative price return can be an indicator of shifts in ownership distribution, which is associated with increased speculative activity, the accumulation of shares in more neutral hands, and therefore a decrease in arbitrage spreads (Jindra and Walkling, 2004). Hostile deals are often associated with multiple bidders, target resistance and a higher likelihood of bid revision, thereby decreasing spreads (Jennings and Mazzeo, 1993). In contrast to Jindra and Walking (2004) who find abnormal volume and toehold are negatively related to arbitrage spreads, we find they are insignificant. ...
We contribute to the corporate social responsibility (CSR) literature by investigating whether the CSR of acquirers impacts mergers and acquisitions (M&A) completion uncertainty. Using arbitrage spreads following initial acquisition announcements as a measure of deal uncertainty, we document –for an international sample of 726 M&A operations spanning the 2004–2016 period– a negative association between arbitrage spreads and acquirers' CSR. Specifically, we show arbitrage spreads are reduced by 1.10 percentage points for each standard deviation unit-increase in the acquirer's CSR score. Findings are qualitatively similar when we focus on individual CSR dimensions (environmental, social, and governance). Our results suggest the CSR of acquirers is an important determinant of the way market participants assess the outcome of M&As worldwide.
... On the contrary, that of a hostile takeover is just 61%. Studying a sample of mergers planned in the United Kingdom between 1989and 1993, O'Sullivan and Wong (1998 find that in 47% of the cases self-defense techniques prevented the success of hostile takeovers. In our analysis we control whether a deal is considered as hostile by the target's management. ...
... This shows that bidders are more likely to use shares as a method of payment when their stock price is overvalued, with respect to what is predicted given its fundamentals. However, regarding the specific issue of abandonment, Asquith (1983) and Jennings and Mazzeo (1993) find that, in the U.S., announced equity-paid M&As are not more likely to be abandoned. They only cause a stronger drop in the bidder stock price than in the announcement of cash-paid deals. ...
The consolidation process which characterized the banking industry in the last decades has been widely analyzed, but very few studies have investigated the reasons which bring a number of announced deals to failure. We fill this gap in the literature analyzing the characteristics of failed M&A operations in a large sample, including all the major domestic and cross-border deals in the banking sector announced worldwide between 1992 and 2010. The results show that the most important factors which determine the failure of an announced operation are deal specific characteristics, in particular the hostility of the bidder and the presence of multiple potential acquirers. Moreover, lengthier negotiations have a lower probability of success. Contrary to expectations, cross-border operations are more likely to be successfully completed than domestic ones.
... Existing research has suggested that the level of acquisition premium is positively associated with the added value from combining two firms (i.e., synergies) (Gupta & Gerchak, 2002;Slusky & Caves, 1991). Premiums are also positively influenced by the level of competition among potential acquiring firms (Jennings & Mazzeo, 1993). There is also evidence that premiums tend to be higher when the method of payment is cash rather than equity (Eckbo & Langohr, 1989;Faccio & Masulis, 2005;Martin, 1996). ...
... Following the elaborated group polarization theory discussed earlier, I suggest that when previous premiums experienced by directors would lead them to on average support a relatively high premium before a board meeting, arguments that support high premiums tend to prevail while counterarguments may be poorly represented during board discussions as directors try to present themselves favorably and confidently before others (Leary et al., 1994;Vohs et al., 2005). For example, directors may emphasize that high premiums are essential to win the competition of acquiring a valuable target (Jennings & Mazzeo, 1993), that high premiums are justified considering the expected high synergies from combining two firms (Gupta & Gerchak, 2002;Slusky & Caves, 1991), that similarly high premiums are common and legitimate in many previous acquisitions (Haunschild, 1994;Haunschild & Beckman, 1998), and so on. Furthermore, they may avoid expressing concerns about paying high premiums because they want to portray an image of confidence. ...
This dissertation examines how a fundamental group decision-making bias referred to as group polarization may influence boards??? major strategic decisions (i.e. acquisition premiums, executive compensation, and diversification) and the diffusion of practices through interlock networks. I begin by explaining how directors??? average pre-meeting position tends to reflect the average decision they previously experienced across various boards. The elaborated polarization theory then suggests that board discussions can systematically induce directors to make a collective decision that amplifies their average pre-meeting position. For instance, I suggest that when prior acquisition premiums experienced by directors would lead them to on average support a relatively high (low) premium prior to a board meeting, they tend to approve a focal premium that is even higher (lower). I also examine several key moderators of the group polarization effect. I test the theory with a comprehensive dataset that includes historical records of major strategic decisions experienced by Fortune 500 directors across the population of U.S. public companies (1991-2006). Results provided strong evidence of group polarization in boards??? major strategic decisions. In addition, as predicted, group polarization was significantly reduced by the degree of demographic homogeneity among directors, the relative amount of experience (minority vs. majority in terms of opinions) with the type of decision under consideration, and the relative power (minority vs. majority). There is also evidence that board influence over management and the diversity of directors??? pre-meeting positions increase the polarization effect. The relative similarity of prior decisions (minority vs. majority) didn???t significantly reduce group polarization though. This dissertation extends corporate governance research from studying economic and sociological factors to examining social psychological processes of groups that can influence board decisions. It explains how group discussions may induce directors to approve a focal decision that is more extreme than the average decision experienced by directors on other boards, thus suggesting how group processes may distort network diffusion effects. Contributions to research on strategic decision-making processes, experience effects, and group polarization are also discussed.
... method of payment being stock based. This finding contrasts with Jennings and Mazzeo's (1993) finding of a positive association between cash offers and competition in the takeover market. Our finding might be Australian-specific due to the Australian market's favourable response to stock-financed acquisitions (Humphery-Jenner and Powell, 2011). ...
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.
... Relative deal size Ratio of deal size to acquirer size Larger size of a deal or target reduces takeover success (Branch & Yang, 2003) Target share price Target share price 1 day prior Target share price 1 day before merger announcement A rise in the target stock price prior to a merger announcement will deter competing bids and lower the probability of bid revision (Jennings & Mazzeo, 1993). In turn, the reduced competition and revision probability increases the likelihood that any one offer will be successful (Walkling, 1985) Target share price 1 week prior Hostile and tender offer dummies measure target resistance. ...
The traditional forecasting methods in the M&A data have three limitations: first, the outcome of M&A deal is an event with a small probability of failure, second, the consequences of misclassifying failure as success are much more severe than those of misclassifying success as failure, and third, the nonlinear and complex nature of the relationship between predictors and M&A outcome could limit the advantage of logistic regression. To overcome these limitations, we develop a forecasting model that combines two complementary approaches: a generalized logit model framework and a context-specific cost-sensitive function. Our empirical results demonstrate that the proposed approach provides excellent forecasts when compared with traditional forecasting methods.
... method of payment being stock based. This finding contrasts with Jennings and Mazzeo's (1993) finding of a positive association between cash offers and competition in the takeover market. Our finding might be Australian-specific due to the Australian market's favourable response to stock-financed acquisitions (Humphery-Jenner and Powell, 2011). ...
We examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short‐term announcement window, competition‐induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock‐financed takeovers undertaken in a competitive takeover market show a long‐run decline in performance of acquirers.
... В данной области существует целый ряд исследований, посвященных влиянию конкуренции среди покупателей на стоимость приобретаемой компании. В таких работах помимо влияния конкуренции также анализируется способ оплаты сделки (Berkovitch, Narayanan, 1990), последовательность ценовых предложений (Hirshleifer, 1989), сопротивление менеджмента приобретаемой компании (Jennings, Mazzeo, 1993) и другие аспекты. При этом в большинстве этих работ не придается значение тому, кто является конкурирующими покупателями. ...
Автор: Илья Маркович Партин НИУ ВШЭ ipartin@hse.ru Оценка стоимости компании в сделках по слиянию и поглощению (сделки M&A) может зависеть от того, кто является покупателем. Так, существует распространенное мнение о том, что стратегические инвесторы платят более высокую цену за акции компании, тогда как финансовые инвесторы стараются приобрести акции по более низкой цене. В статье проводится регрессионный анализ с целью проверить данную гипотезу, где в качестве зависимой переменной выступает мультипликатор EV/EBITDA по сделкам M&A. По результатам анализа был сделан вывод о том, что данная гипотеза не может быть отвергнута, поэтому собственникам продаваемых компаний в первую очередь нужно обращаться к стратегическим инвесторам, которые могут заплатить более высокую цену.
... The evidence of Jennings and Mazzeo (1993) that a high takeover bid premium is associated with a lower probability of competing offers is consistent with implication 5. The model has a further empirical implication that the jump in the second bid is an increasing function of the first jump: ...
We model sequential bidding in a private value English auction when it is costly to submit or revise a bid. We show that, even when bid costs approach zero, bidding occurs in repeated jumps, consistent with certain types of natural auctions such as takeover contests. In contrast with most past models of bids as valuation signals, every bidder has the opportunity to signal and increase the bid by a jump. Jumps communicate bidders' information rapidly, leading to contests that are completed in a few bids. The model additionally predicts; informative delays in the start of bidding; that the probability of a second bid decreases in, and the jump increases in, the first bid; that objects are sold to the highest valuation bidder; and that revenue and efficiency relationships between different auctions hold asymptotically.
... An increased fear of failure to reach an agreement in negotiations is therefore induced by the presence of competition, making the acquirer reluctant to rely on integrative comprehensiveness to decide on the premium it is willing to pay for the target (e.g., Kelley, Beckman, & Fischer, 1967). Finally, when additional bidders impose competition, the acquirer may be more likely to use preemptive bidding as means of eliminating the competition early in the acquisition process (e.g., Jennings & Mazzeo, 1993). Managers tend to make subsequent decisions to justify their earlier charted directions (Staw, 1976) and competitive situations aggravate this tendency (e.g., Zajac & Bazerman, 1991). ...
... While acquisitions and takeovers are very complex processes, variations of the simple English auction model are commonly used to describe the takeover contest. The early body of the theoretical research in takeover auctions was mainly focused on either cross-ownership that can exist among different parties or the explanation of the existence of jump bidding documented by Jennings and Bradley (1980), Jenning and Mazzeo (1993), and Betton and Eckbo (2000). Other takeover-specific characteristics, not discussed in this survey, include models of shareholder resistance, free-riding problem, and different forms of payment. ...
... Bae, Kang, and Kim (2002), however, find that in Korea the bidder's controlling shareholders transfer wealth from minority shareholders to the target that belongs to the same business groups ("Chaebols"). All of these studies focus on minority shareholder protection in one particular (Stulz, Walkling, & Song, 1990;Betton & Eckbo, 2000), alleviate the free-rider problem (Shleifer & Vishny, 1986;Chowdry & Jegadeesh, 1994), and decrease the likelihood of management resistance to a full takeover (Jennings & Mazzeo, 1993;Betton & Eckbo, 2000). In international M&A literature, Mantecon (2009) find that prior ownership in cross-border mergers reduces the uncertainty and the investment risk. ...
Freeze-out M&A transactions are those initiated by controlling shareholders to acquire minority shareholders' ownership in the firm. We compare international freeze-out mergers in 35 countries in merger premium, choice of payment, and completion probability. We find greater merger premium and probability of cash payment but lower deal completion rates in countries with stronger minority shareholder protection. Using detailed minority shareholder protection indexes, we find some evidence that the ex-post anti-self-dealing law enforcement is more important than the ex-ante anti-self-dealing law regulation in protecting minority shareholder value. Our study provides new evidence of minority shareholder protection in the setting of conflicts of interest between majority and minority shareholders.
Recent studies suggest that greater exposure to the market for corporate control matters for managers and shareholders since it affects firms’ ex‐post risk of experiencing a stock price crash. The findings though question the direction of the effect. In contrast, in this study, we are the first to examine the effects of firms’ ex‐ante risk of experiencing a stock price crash, a likely antecedent of which is managers’ concealment of news on aspects of the market for corporate control. We find that higher crash risk leads to greater takeover target likelihood. This relationship, which is robust to duly circumventing reverse causality, depends to a significant extent on inferior managerial quality and greater managerial discretion around financial accruals, affording richer insight into the notion that correction of managerial behaviour is a stimulus for the market for corporate control, but one that depends on the likely extent of managers’ concealment of news. We also concurrently find that actual takeover targets with higher crash risk generate a lower bid premium and receive more payment with stock. Overall, our findings strongly suggest that decision‐making in the market for corporate control is at least partially explained by incentives linked to opportunistic prices and takeovers of lemons.
The beginning of the twenty-century witnessed a new wave of private equities back into the takeover market. Advanced from the original business, financial payers have become more sophisticated in their organizational structures and activities, contributing to the corporate takeover market's development and efficiency. Accomplished for more than twenty-five percent of total capital transferred through the acquisition channel, the private equity buyer has significantly challenged the dominating role of the strategic buyer in this playground. On that account, the distinction between strategic and financial bidders has received considerable attention from academic in finance. Supported by a growing body of research on the influence of different bidder types on several aspects of corporate mergers and acquisitions, this thesis provides three empirical studies focusing on the competition between strategic and financial bidders. Using a unique hand-collected data set including 1,031 completed deals spread out between 2005 and 2016 in the U.S takeover market, this thesis uncovered an abundant resource of information from the private bidding process to answer several questions that remained unexplored by the existing literature. Our first paper provides progressive evidence to confirm the presence of market segmentation targeting different group of firms by strategic and financial bidders. Strategic bidders prefer targets with high possibility of synergy gain. In contrast, financial bidders are interested in targets with more prevailed stand-alone value improving potential and higher opportunities to explore leveraged buyouts. The second study aims to explain the controversial result reported by existing literature about the relationship between competition and seller's benefit. We provide a new measurement for competition level by combining both the number of bidders participating and the number of bids made by each bidder. Our results prove that competition benefits the seller's revenue, and this positive relationship is further escalated with the participation of financial bidders. In the last article, we investigate how bidding strategies can influence sellers' selection of the sale-procedure. Our result indicates that the bid revision is associated with the possibility of the initiating bidder to complete a deal by negotiation. Besides, the revision speed is found to enhance this relationship. We also evidence that the strategic bidders surpass financial bidders in completing the deal by negotiation because they typically revise their bids at a higher rate and a shorter time.
We present evidence on the effects of target firms’ accounting conservatism in a merger and acquisition transaction. Conservatism is distinct from other accounting or accrual quality constructs examined in prior work. Its unique features can lead to potential benefits for both the targets and the acquirers. The use of conservatism by targets reduces acquirers’ risks of acquiring underperforming assets or overpaying for well‐performing assets. In addition, targets’ conservatism results in greater production of verifiable information that can help the acquirers better estimate and realize synergies of the combined firm. Consistent with these arguments, we find that firms with greater accounting conservatism are more likely to receive a bid. We also find that targets’ conservatism increases the deal premium and the announcement returns of both the targets and the acquirers respectively. Overall, these results indicate that conservatism provides benefits to both sellers and buyers of equity in an acquisition transaction. This article is protected by copyright. All rights reserved.
Longer time‐to‐completion (TTC) increases transaction costs, delays deal benefits, and reduces the probability of meeting transaction objectives in mergers and acquisitions (M&A) transactions. This paper conceptualizes the determinants of TTC and estimates their effects in the food and agribusiness industry (FABI) due to the critical importance of TTC to M&A success and the dearth of existing studies on the industry. We confirm that longer TTC increases the likelihood of deal failure. We also find the following: company‐specific factors such as acquirer solvency and leverage reduce TTC; deal complexity factors such as deals involving payment in cash or hard currency conclude faster; deals involving both acquirers and targets from the same country or industry take longer; using legal or financial advisers lengthens TTC; limited transparency or greater risk involved in a deal do not delay financing; deals consumed during a recession take longer; deal size and acquirer history of repeated M&A activities neither accelerate nor delay TTC. Considering the limited existing information on the contributions of various factors to timely deal completion or delays in FABI, our findings are useful in predicting M&A deal duration, costs, and potential for success. [EconLit Citations: G24, G34, L22, L66].
We investigate the informational role of the takeover premium as a forward looking price to expected synergies in the global market for corporate control. We find that premiums paid in the global market for corporate control are clustered in waves and driven to some extent by the US premium. International takeover premiums have become more responsive to US premiums as the globalization process evolved over time. Short-run divergent dynamics due to idiosyncratic or country-specific factors have become less severe, which suggests that expected synergies have become increasingly integrated in the global market for corporate control. Furthermore, we find that the region's takeover premiums typically become more responsive to US takeover premiums when US economic conditions are relatively weak, when the US monetary policy is restrictive, when US credit risk is high, and when the region's corporate governance (as measured by legal system quality and accounting quality) is high.
We review recent research into how firms navigate four complex decisions in corporate takeovers: ( a) deal initiation, ( b) pre-offer toehold acquisition, ( c) the initial (public) offer price, and ( d) the payment method. We focus the evidence on public targets and the theory on first-price or English (ascending-price) auctions with two competing bidders and a single (pivotal) seller. The evidence shows that nearly half of bids are initiated by the target (not a bidder). Notwithstanding the large offer premiums, only a small fraction of bidders acquire a target toehold prior to bidding. The first bid rarely attracts rival bidders, suggesting effective competition deterrence. Bid jumps are high, as predicted when bidding costs are large. Pre-bid stock price run-ups reflect rational market deal anticipation and are understood as such by the deal negotiators. Bidders select stock payment when concerned with adverse selection on the target side of the deal.
Some policymakers, courts, and academics have expressed concerns that when a firm’s patents are incorporated into a standard, the patents gain importance and can bestow on the patent holder market power that can be abused when the standard is commercialized. This paper extends the existing literature on the effect that standards can have on patents. This analysis has two aims: first, to better understand how an SSO might confer importance on included patents and second, to move closer to an empirical understanding of the impact of a standard on included patents. The authors create a dataset of patents named to voluntary standard setting organizations, as well as the patent pools that sometimes develop around such standards. The authors rely on proxies to capture a patent’s importance or value.
This paper develops a model of preemptive jump bidding in common value takeover auctions. It shows that, in a case of common values, jump bidding increases the social surplus and, under certain conditions, can lead to a higher expected target’s revenue. It also demonstrates that an increase in investigation costs may improve social efficiency even if it leads to larger direct social costs. Based on the results, the paper provides several implications related to legal fees and the length of the takeover contest.
Using a sample of U.S. domestic deals from 1990-2016, we find that bidders adjust the amount of premium paid in mergers and acquisitions (M&As) based on the levels of earnings management at target firms. However, the way a firm manipulates earnings upward matters: earnings management via real activities manipulation is more detrimental than discretionary accruals. As a result, target firms that engage in real earnings management receive lower premiums in M&As, while accruals management has no effect on premiums. Correspondingly, we find that the targets’ M&A announcement period cumulative abnormal returns are inversely related to their level of real earnings management, while the returns are not related to accruals management. Further analyses confirm that target shareholders' wealth is not driven solely by undervaluation, expected synergy and managerial hubris, but also reflect bidders’ perception of the target firms' earnings quality based on real earnings management.
This ticle analyses the pre-emptive jump bidding equilibrium in takeover auctions when bidders’ valuations of the target firm follow truncated normal distribution. It shows that potential heterogeneity of the targets’ value, measured by the standard deviation of the bidders’ valuation function, is especially important when it is small and, for extremely small values, the second bidder is almost always pre-empted. It also shows that, contrary to regular clock-style auctions, the increase in standard deviation may negatively affect the expected profit of the first bidder.
Previous studies have shown that shareholders of acquiring firms experience negative returns during takeover contests. Our investigation of white knights confirms these results using both short‐term and long‐term abnormal returns around such contests. Our results suggest that white knight bidders experience performance similar to other friendly bidders after making a bid. However, we find no significant effect of financial strength and ownership structure on the likelihood of a white knight takeover attempt. Instead, we find that having a classified board is an important determinant in predicting whether a firm will make a bid as a white knight. We find that white knight bidders are more likely to succeed as they offer a higher transaction value to target firms' shareholders.
Purpose
This paper evaluates the relation between acquisition premiums and amounts recognised as identifiable intangible assets in business combination, in periods before and after transition to IFRS.
Design/methodology/approach
Empirical archival research using data from business acquisitions.
Findings
In the pre-IFRS period there is evidence of firms recognising identifiable intangible assets in business combinations having higher acquisition premiums. This association of acquisition premiums and identifiable intangible assets ceased with transition to IFRS, notwithstanding the relative latitude provided in accounting standards for the recognition of identifiable intangible assets.
Research limitations/implications
This paper complements Su and Wells (2015) which finds little association between identifiable intangible assets and performance subsequent to business acquisitions prior to transition to IFRS. The results here suggest that is attributable to overpayment. Problematically, the incentives for opportunism remain and an issue requiring address is whether alternative sources of accounting flexibility in relation to business combinations exist, such as goodwill which is no longer subject to mandatory amortisation.
Practical implications
Our results are consistent with accounting opportunism, and suggests ‘overpayment’ and accounting flexibility having an economic consequence. This would be expected to result in asset impairments in subsequent periods, however there is little evidence of this occurring.
Originality/value
This paper complements a number of papers concerned with the recognition of identifiable intangible assets in business combinations and confirms what many researchers in the area typically assume (triangulation).
Some bidders voluntarily announce a merger negotiation before the definitive agreement. We propose an “announce-to-signal” explanation to these early announcements: they allow bidders to signal to target shareholders high synergies so as to overcome negotiation frictions and improve success rates. Consistent with signaling, we show that negotiation frictions predict earlier announcements. Early announced transactions are associated with higher expected synergies, offer premium, completion rates, and public competition. Moreover, bidder announcement returns do not suggest overpayment and the existence of agency issues in these transactions. Taken collectively, our findings rule out alternative explanations such as managerial learning from investors and jump bidding.
We consider a takeover in which risk neutral bidders incur private costs when they participate in the auction. Supposing that valuations for a target firm are common knowledge, we study the optimal strategy of bidders and analyze the takeover result when they get or do not get toeholds in the target firm. We find that bidders' decision of participation is endogenous. By analyzing bidders' condition of participation, we find that there is a probability that the potential bidder with the highest valuation does not participate in the control. We show that this probability increases with the size of toeholds possessed by the bidder with a low valuation. Nevertheless, a larger size of toeholds possessed by the bidder with the highest valuation increases the probability of his participation in the auction. Asymmetric toeholds between potential bidders can accentuate inefficient allocation when participation costs are private information. However, if the bidder with toeholds deters completely bidders without toeholds in private valuation setting (Ettinger 2009 [Ettinger D (2009) Takeover contests, toeholds and deterrence. Scandinavian J. Econom. 111(1):103-124.]), the results of the current papers show that the phenomenon of fully deterring is destroyed when valuations are common knowledge.
This article provides new evidence on the important role of institutional investors in affecting corporate strategy. Institutional cross-ownership between two firms not only increases the probability of them merging, but also affects the outcomes of mergers and acquisitions (M&As). Institutional cross-ownership reduces deal premiums, increases stock payment in M&A transactions, and lowers the completion probabilities of deals with negative acquirer announcement returns. Furthermore, deals with high institutional cross-ownership have lower transaction costs and disclose more transparent financial statement information. The effect of cross-ownership on the total deal synergies and post-deal long-term performance is positive, which can be attributed to independent and non-transient cross-owners. Our findings are robust after mitigating the cross-ownership asymmetry concern. Overall, our results suggest that the growth of institutional cross-holdings in U.S. stock markets may greatly change corporate strategies and decision-making processes.
This paper extends the Fishman (1988) model of preemptive jump bidding in private value takeover auction to auctions with common and affiliated values. We show that in the presence of a common value component, jump bidding equilibrium results in higher social surplus. Furthermore, we show that, under certain conditions, allowing for preemptive jump bidding in common value auctions results in ex-ante Pareto improvement.
While several studies have demonstrated that there is a relative price difference between companies listed on the stock market and privately held enterprises, no academic study has addressed the question of how this private enterprise discount can be reduced and the proceeds from a divestment can be maximized. This research project has focused on the seller’s perspective in the takeover process in order to answer the following research question: What factors influence the ability of sellers to extract value when divesting a privately held target and how can these factors be optimized? Based on the existing knowledge base, the following key success factors have been determined to be the main elements of the divestment process to be studied: Increasing negotiation power by creating competition; Initiating the sales process under favourable market conditions; Selecting a group of bidders with the highest potential synergies; Inviting financial investors to the bidding process; Increasing transparency of target company information; Controlling information dissemination to potential bidders; Articulating a compelling value and growth story for each buyer; Optimizing the auction process used in the divestment; Overcoming price differences using deferred or conditional payments; and identifying and mitigating potential deal breakers. Typically, M&A advisors are hired by the owners of privately held companies in order to create a market for their illiquid asset. A survey-based study validating the perceived importance of the key success factors has been conducted in addition to multiple case studies, where specialized M&A advisors and their clients have participated. The study of five selected cases involving a privately held target company during and after the divestment process has produced results with high significance to other researchers and professionals involved in mergers and acquisitions. From multiple case studies, the best possible practices regarding the optimization of the key success factors has been derived and used to reappraise the existing knowledge base. While based on a systematic analysis of the data obtained, the research question has been answered, further studies with a larger sample will be necessary to generalize findings and to validate the theory developed.
Statistical models for predicting takeover targets by using publicly available information, specifically historical accounting information, has attracted considerable academic endeavour. These empirical studies draw from the stylized fact that has unequivocally emerged from literature on performance of mergers and acquisitions: that target firms gain abnormal returns when a takeover announcement is made. Hence, it has been hypothesized that early prediction of takeover targets can stimulate strategic trading that can consistently ‘beat the market’, and make abnormal returns. While it has now been generally proven that such a strategy cannot succeed within semi-strong efficient markets, attempts continue to construct such prediction models to identify potentially valuable firms that can at least provide higher returns under a new management with synergistic propositions. Besides, the characteristics identified by a robust model are also used for preliminary exploration for a potentially good target by acquirers.
Following this strand of literature, this paper builds a prediction model for acquisition targets in India using logistic regression. For the estimation of the logistic regression, 122 target firms of acquisitions during the three year-period from 2002 to 2005 were considered, and matched with non-acquiring, non-target firms that had similar promoters' holdings and belonged to the same industry as the target. Results from logistic regression indicate that, a typical target is inherently strong with high growth and large free cash flow, in spite of high debt levels, but encumbered by an inefficient management, who are probably disciplined by takeover market. Traditional determinants of US and UK studies, viz., size and growth-resource imbalance are not significant in the Indian context.
Methodological care was taken at various steps to avoid known biases. Estimation period was taken for a modest three year period rather than a longer period to ensure minimal changes in the macro-economic landscape that might have a bearing on the target characteristics. Further, both raw accounting ratios, and industry adjusted ratios were used to account for non-normality of such data. To build the prediction model, cut-off values were calculated using two methods, one that minimized statistical errors and another that maximized returns; again, the latter was found to be superior. Finally, the prediction model was tested on an out-of-sample database of acquisitions that took place during 2005-2006 and was found to yield prediction accuracies up to 91 per cent.
We investigate for mergers and acquisitions in Europe and the USA whether the size of the takeover premium offered by the first bidder prevents a second bidder from making a competing offer. Previous studies find only mixed evidence for the relationship between the size of a takeover premium and the occurrence of a takeover contest. Because the size of the premium varies over time and between merger waves and usually differs between countries and industries, it is essential to use the excess premium instead of the standard premium. We introduce and compare different methods for calculating the excess premium and test for the 1990–2012 period whether or not bidders can prevent a takeover contest
when the initial offer includes an excess takeover premium. We calculate the excess premium as the percentage (a) above the pre-offer market value of the target, (b) over the industry mean, or (c) over the country mean. We then analyze whether these different methods provide results more consistent with the expected effect of excess premiums on the occurrence of takeover contests. The results suggest that the method used to calculate the excess premium significantly affects the size of the excess premium in takeover contests. We provide empirical evidence that when using the industry excess premiums, offering an above average premium reduces the probability of a takeover contest, especially in cash deals, whereas the standard method does not correctly discriminate between average and excess premiums. Consequently, only excess premiums are adequate for properly testing the effects of the premium size on the occurrence of takeover contests.
We examine the information role of financial advisors by focusing on mergers and acquisitions in which acquiring firms hire target firms’ ex-advisors. We document that by employing targets’ ex-advisors, acquirers pay lower takeover premiums and secure a larger proportion of merger synergies. The corresponding targets exhibit lower announcement returns and are less likely to be propositioned by competing bidders. These results indicate that acquirers take advantage of value-relevant information about targets through targets’ ex-advisors, and achieve bargaining advantages in deal negotiations. In contrast, we document no discernible value effects when targets hire acquirers’ ex-advisors, suggesting that the information role of acquirers’ ex-advisors hired by targets is weaker than that of targets’ ex-advisors hired by acquirers.
The aim of this paper is to analyse the influence that bid premium has on target shareholders' decision about selling in a tender offer. Neither empirical evidence nor theoretical models conclusively show that the higher the bid premium is, the higher the probability of bid success will be. In the Spanish market, we are not able to achieve conclusive results either since this influence depends on several variables such as the existence of previous sales agreement between some of the target shareholders and the bidder.
Tender offers provide an ideal setting for the analysis of agency relationships since the best interests of the principal (target firm shareholders) and agent (target firm managers) are often in conflict. Moreover, the actions and stated rationale of target managers in resisting or not resisting tender offers are readily observable, and the size of the possible agency costs is great. This research provides direct empirical evidence on the relationship between managerial welfare and takeover bid resistance. Tests on a sample of cash tender offers provide support for the managerial welfare hypothesis. The existence or absence of bid resistance is found to be directly related to the personal wealth changes of the target firm's managers. The relationships between managerial actions and bid premium size, bidder nationality, conglomerate offers, and "ex post settling up" are also examined.
This paper explores the determinants of corporate takeover methods (proxy fights versus tender offers) and their outcomes and price effects. We focus on the effect of leverage on the takeover method and outcome. The model predicts, for example, that the target's stock price appreciates less following a successful proxy contest than in a successful tender offer. In addition, we obtain several other results on price effects and on the capital structure changes that accompany contests for corporate control. Some of our results are compared with the existing empirical evidence.
This paper provides evidence on the daily market reaction to the announcement and subsequent acceptance or rejection of merger proposals. There is a swift and large positive market reaction to the first public announcement of the merger proposal. Subsequently, there is a positive reaction to the approval of completed proposals and a negative reaction to cancelled proposals. Where proposals are vetoed by incumbent target management, there is a negative market reaction to the veto, but this does not eliminate the earlier positive reaction to the first announcement. In these proposals there is a permanent revaluation of the target shares. This is in contrast to cancelled proposals that incumbent managements do not veto, where the target stock price falls back, on average, to the preproposal level.
We present empirical evidence on the relation between changes in managerial wealth and tender offer characteristics. Changes in managerial wealth resulting from a tender offer are negatively related to the likelihood of managerial resistance to a tender offer and positively related to the likelihood of tender offer success. We also document that the abnormal returns to tender offers are lower for hostile than for friendly offers if we control for the tender offer premium. Finally, we find that the top executive gains, whereas outside shareholders do not gain, from management's decision to resist the tender offer.
This paper reviews much of the scientific literature on the market for corporate control. The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose. The gains created by corporate takeovers do not appear to come from the creation of market power. With the exception of actions that exclude potential bidders, it is difficult to find managerial actions related to corporate control that harm shareholders. Finally, we argue the market for corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.
We propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parameters of alternative securities. In contrast with earlier work, we show that parameter uncertainty, or estimation risk, can have an effect upon market equilibrium. Under reasonable conditions, securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured, ceteris paribus. The initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions. We provide theoretical support for the empirical examination of at least three proxies for relative information: period of listing, number of security returns observations available, and divergence of analyst opinion.
Abnormal returns earned by target firms at the time of initial acquisition announcements are related to form of payment, degree of resistance, and type of offer. Results indicate that interdependence among these characteristics is important. Previous research suggests that tender-offer targets earn higher abnormal returns than merger targets. After controlling for payment method and degree of resistance, however, the difference in abnormal returns between tender offers and mergers is insignificant. Resisted offers are associated with insignificantly higher returns than unresisted offers. Abnormal returns associated with cash offers are significantly higher than those associated with stock offers.
This study investigates the effect of merger bids on stock returns. Abnormal stock returns are examined throughout the entire merger process for both successful and unsuccessful merger bids. The evidence shows that increases in the probability of merger benefit the stockholders of target firms, and that decreases in the probability of merger harm the stockholders of both target and bidding firms. There is also evidence that the stock market forecasts probable merger targets in advance of any merger announcement, and because of this, previous studies have underestimated the market's reaction to merger bids.
We present a model of corporate acquisitions in which initially uninformed bidders must incur costs to learn their (independent)
valuations of a potential takeover target. The first bidder makes either a preemptive bid that will deter the second bidderfrom
investigating or a lower bid that will induce the second bidder to investigate and possibly compete. We show that the expected
price of the target may be higher when the first bidder makes a deterring bid than when there is competitive bidding. Hence,
by weakening the first bidder’s incentive to choose a preemptive bid, regulatory and management policies to assist competing
bidders may reduce both the expected takeover price and social welfare.
This paper presents a model of tender offers in which the bid perfectly reveals the bidder's private information about the size of the value improvement that can be generated by a takeover. The authors argue that bidders with greater improvements will offer higher premia to ensure that sufficient shares are tendered to obtain control. The model relates announcement date returns and takeover success or failure to the amount bid, the initial shareholdings of the bidder, the number of shares the bidder attempts to purchase, the dilution of minority shareholders, and managerial opposition. They show that managerial defensive measures will sometimes increase the probability of the offer's success. Copyright 1990 by University of Chicago Press.
Public tender offers for control are often resisted by the target's top management. This recalcitrance takes many forms, from newspaper advertisements urging shareholder rejection to more costly legal actions. This paper focuses on litigious target managements, since these serious defensive effects usually delay considerably the execution of the defendant's tender offer. In some cases the litigious defense forces the sole bidder to withdraw the premium offer, imposing large losses on shareholders. These losses cause many to question whether strenuous legal defense by target management is consistent with their legal duty to maximize shareholder wealth.
This article develops a model of the takeover bidding process. The model can be described as a form of auction in which a bidder can acquire costly information after the bidding has begun. Implications concerning the interrelationships between bidders' and targets' profits, bidders' initial offers, single and multiple bidder contests, and the effects of takeover legislation are developed. Additionally, the model provides a rationale for bidders to make high premium ("preemptive") initial bids, rather than making low initial bids and raising them if there is competition.
The role of the medium of exchange in competition among bidders and its effect on returns to stockholders in corporate takeovers
are investigated. Consistent with recent empirical evidence, our model shows that stockholders of both acquiring and target
firms obtain higher returns when a takeover is financed with cash rather than equity, and that returns to target shareholders
increase with competition. The model predicts that the fraction of synergy captured by the target decreases with the level
of synergy. Finally, it is shown that, as competition increases, the cash component of the offer as well as the proportion
of cash offered increases.
This paper analyzes how managerial control of voting rights affects firm value and financing policies. It shows that an increase in the fraction of voting rights controlled by management decreases the probability of a successful tender offer and increases the premium offered if a tender offer is made. Depending on whether managerial control of voting rights is small or large, shareholders' wealth increases or falls when management strengthens its control of voting rights. Management can change the fraction of the votes it controls through capital structure changes, corporate charter amendments, and the acquisition of shareholder clienteles.
I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner; (ii) if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia. Finally, I show that the occurrence of crises episodes (in particular, systemic crises) amplifies the transmission of housing market shocks to financial markets and the banking sector.
Several observed features of takeover contests appear to be inconsistent with value‐maximizing behavior on the part of the agents involved. For instance, managers occasionally resist takeover bids, presumably in order to facilitate competition among bidders. However, counterbids do not always materialize, suggesting that management resistance was not in the best interests of the firm's shareholders. On the other hand, a successful takeover is sometimes accompanied by a decrease in the value of the acquirer's shares. In addition, valuable combinations are occasionally not consummated.
We present a simple illustration of sequential takeover bidding in which all managers act in the best interests of their respective shareholders. Within the context of this model, we provide an explanation of the type of behavior described above.
2,500 acquisitions in the United Kingdom and United States are used to examine means of payment in acquisitions. There has been a substantial increase in the proportion of acquisitions financed with cash in the United States over the period of the study from 1955 to 1985. Mixed bids are more common in the UK. Bid premia are significantly larger in cash than equity acquisitions and the differences cannot be wholly attributed to the nature of the bid. Cash acquisitions display a better post acquisition performance than equity. These results bear directly on theories of acquisition finance and cast serious doubt on several commonly cited factors.