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RESEARCH PAPERS | M & A

Managerial Motivation

M&A DEAL INITIATION AND MANAGERIAL MOTIVATION

Jana P. Fidrmuc, and Chunling Xia
2016
On a sample of 1098 US publicly listed target firms, we show that target initiated deals face potential financial distress and have higher CEO ownership. We further show that CEOs are motivated to offer their firm for sale due to their higher ownership, golden parachutes and stock and stock option grants before the takeover. Moreover, motivated CEOs seem to actively participate in deal negotiations rather than be just bribed not to resit the deal and their ownership and equity grants are positively correlated with premium. This suggests a positive role for deal initiation for target shareholders. >more


Director Experience

THE EFFECT OF DIRECTOR EXPERIENCE ON ACQUISITION PERFORMANCE

Laura Casares Field, and Anahit Mkrtchyan
2016
Prior research finds that firms hire directors for their acquisition experience, regardless of acquisition quality (whether their prior acquisitions earned positive or negative announcement returns). Using several short- and long-run measures, we examine the effects of directors’ acquisition experience on the acquisition performance of firms hiring them. We find that board acquisition experience is positively related to subsequent acquisition performance, demonstrating that firms appropriately value experience. Beyond experience itself, however, the quality of directors’ prior acquisitions is also important. Our results suggest that firms may be better served to select directors based upon both past acquisition experience and acquisition performance. >more


Diversification

THE HUMAN FACTOR IN ACQUISITIONS: CROSS-INDUSTRY LABOR MOBILITY AND CORPORATE DIVERSIFICATION

Geoffrey A. Tate, and Liu Yang
2016
The benefits of internal labor markets are largest when they include industries that utilize similar worker skills, facilitating cross-industry worker reallocation and collaboration. We show that diversifying acquisitions occur more frequently among industry pairs with higher human capital transferability. Such acquisitions result in larger labor productivity gains and are less often undone in subsequent divestitures. Moreover, acquirers retain more high skill workers and more often transfer workers to jobs in other industries inside the merged firm. Overall, our results identify human capital as a source of value from corporate diversification and provide an explanation for seemingly unrelated acquisitions. >more

Agency Conflicts

EMPLOYEE-MANAGER ALLIANCES AND SHAREHOLDER RETURNS FROM ACQUISITIONS

Ronald W. Masulis, Cong Wang, and Fei Xie
2016
We identify a subtle but important role for employee voting rights in manager-shareholder agency conflicts highlighted by corporate acquisitions. When employees hold larger equity positions, acquirers make more unprofitable empire-building acquisitions, while disciplinary takeover bids are less likely to follow. Importantly, these findings are concentrated in firms where worker-manager alliances are more likely, e.g., when workers enjoy favorable employment policies and higher job security, and in diversifying acquisitions that are less likely to trigger layoffs. Overall, our evidence indicates that potential worker-management alliances when employees hold large voting blocks exacerbate manager-shareholder agency conflicts and facilitate managerial extraction of private benefits. >more


Shareholder Voting

DOES MANDATORY SHAREHOLDER VOTING PREVENT BAD ACQUISITIONS?

Marco Becht, Andrea Polo, and Stefano Rossi
2016
Shareholder voting on corporate acquisitions is controversial. In most countries acquisition decisions are delegated to boards and shareholder approval is discretionary, which makes existing empirical studies inconclusive. We study the U.K. setting where shareholder approval is imposed exogenously via a threshold test that provides strong identification. U.K. shareholders gain 8 cents per dollar at announcement with mandatory voting, or $13.6 billion over 1992-2010 in aggregate; without voting U.K. shareholders lost $3 billion. Multidimensional regression discontinuity analysis supports a causal interpretation. The evidence suggests that mandatory voting imposes a binding constraint on acquirer CEOs. >more


Merger Activity

THE REAL EFFECTS OF UNCERTAINTY ON MERGER ACTIVITY

Vineet Bhagwat, Robert A. Dam, and  Jarrad Harford
2016
Firm value can change substantially between the time deal terms for a public target are set and closing, risking renegotiation or termination. We find increases in market volatility decrease subsequent deal activity, but only for public targets subject to an interim period. The effect is strongest when volatility is highest, for deals taking longer to close, and for larger targets. Merging parties attempt to shorten the interim window as risk increases. Firm- and industry-level uncertainty measures reveal similar findings, ruling-out an unobserved macro variable. We conclude interim uncertainty contributes to understanding the timing and intensity of public firms’ merger activity. >more


Announcement Returns

WHY DOES SIZE MATTER SO MUCH FOR BIDDER ANNOUNCEMENT RETURNS?

Christoph Schneider, and  Oliver G. Spalt
2016
Bidder and target size are major determinants of bidder announcement returns in corporate acquisitions. The leading explanations in the literature attribute this to size proxying for underlying value drivers. A simple but powerful test rejects size-as-proxy explanations: correlations between size and bidder announcement returns change sign across economically significant subsets of the takeover universe. A scaling framework in which (bidder, target, and relative) size magnifies a given per-dollar value gain parsimoniously explains these sign-changes and yields additional testable predictions we confirm in the data. Our results advocate a fundamental shift in thinking about the role of size in takeovers. >more


Misvaluation

INEFFICIENCIES AND EXTERNALITIES FROM OPPORTUNISTIC ACQUIRERS

Di Li, Lucian Taylor, and Wenyu Wang
2016
If opportunistic acquirers can buy targets using overvalued shares, then there is an inefficiency in the merger and acquisition (M&A) market: The most overvalued rather than the highest-synergy bidder may buy the target. We quantify this inefficiency using a structural estimation approach. We find that the M&A market allocates resources efficiently on average: Opportunistic bidders crowd out high-synergy bidders in only 8% of transactions, resulting in an average synergy loss equal to 12% of the target's value in these inefficient deals. The implied average loss across all deals is 1%. Although the inefficiency is small on average, it is large for certain deals and in times when misvaluation is more likely. Even when opportunistic bidders lose the contest, they drive up prices, imposing a large negative externality on the winning synergistic bidders. >more


Overbidding

EMPIRICAL EVIDENCE OF OVERBIDDING IN M&A CONTESTS

Eric de Bodt, Jean-Gabriel Cousin, and Richard Roll
2016
Overbidding implies a failure to adequately account for the winner’s curse. Surprisingly few papers have attempted to develop a direct empirical test of the presence of overbidding in M&A contests. We develop such a test grounded on a necessary condition for profit maximizing bidding behavior; the test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to the joint presence of conflicts of interest and irrational bidding behavior. >more


Serial Acquirers

ARE SERIAL ACQUIRERS BORN OR MADE?

Antonio J. Macias, P. Raghavendra Rau, and Aris Stouraitis
2016
Serial acquirers conduct the vast majority of acquisitions in the U.S. We show that serial acquirers are not all alike. There is considerable heterogeneity in acquirer types, with four major types of acquirers common in the data – loners, occasional acquirers, sprinters, and marathoners. Importantly, these acquirers can be distinguished on an a priori basis. Marathoners comprise the most efficient acquirers who learn from prior acquisitions. Peer effects and overvaluation matter for sprinters who acquire large numbers of targets in short intervals. Path dependency typically does not matter in making an acquirer a serial acquirer. >more


M&A Bidder Gains

DO WEALTH CREATING MERGERS AND ACQUISITIONS REALLY HURT BIDDER SHAREHOLDERS?

Mark Humphery-Jenner,  Ronald W. Masulis, and  Peter L. Swan
2015
We examine the economic benefits of acquisitions for U.S. public firms. We estimate revelation bias from recent investment decisions and find it leads to negative bidder returns, often interpreted as shareholder wealth destruction. Examining exogenously failed bids, which lack revelation bias, we demonstrate that bidders capture roughly 78 percent of economic gains. Combined economic gains are large at 15.4% of combined firm assets. Adjusting for revelation bias over the M&A bid cycle, we find that conventional methodology seriously understates bidder returns. We confirm the neoclassical view that takeovers are highly profitable for typical bidders, consistent with disciplinary takeovers based on private information. >more


Lawyer Expertise

M&A NEGOTIATIONS AND LAWYER EXPERTISE

Christel Karsten, Ulrike Malmendier, and Zacharias Sautner
2015
We shed light on the effects of lawyer expertise on contract design in the context of M&A negotiations. Using proprietary data on 151 private transactions, we document that more lawyer expertise is associated with more beneficial contract outcomes in terms of risk allocation and prices. Higher legal expertise does not come with larger legal fees, as high-expertise lawyers economize on transaction costs by reducing the length of negotiations. We address concerns about the endogenous allocation of lawyers by performing fixed-effects analyses and by exploiting firms’ inclination to work with the same lawyer on subsequent deals. Our results help explain the importance of league tables and variation in legal fees within the M&A services industry. >more


Hostile Tender Offers

HEDGE FUND ACTIVISM VS. HOSTILE TAKEOVER BIDS

Mike Burkart, and Samuel Lee
2015
We compare hedge fund activism and hostile tender offers in a unified framework where any investor who acquires an equity stake to improve firm value faces a dual free-rider problem: Neither do dispersed shareholders sell their shares unless the price fully reflects the anticipated value improvement nor do those who retain their shares participate in the costs. We show that activism and tender offers are polar approaches to this problem, and in terms of profitability, react contrarily to changes in the marginal return to effort. Activists can hence contribute to a more efficient control allocation by brokering takeovers, along the extensive margin (takeover activity) as well as the intensive margin (ownership concentration), partially obviating tender offers. We also show that pre-campaign coordination between bidders and activists reduces hold-up problems, and that allowing activists to disentangle votes and cash flow rights improves their incentives and ultimately serves to unify both sets of rights in the hands of bidders. >more


Cross-Border Deals

EXTENDING INDUSTRY SPECIALIZATION AND INTANGIBLES THROUGH CROSS-BORDER ACQUISITIONS

Laurent Frésard, Ulrich Hege, and Gordon M. Phillips 
2015
We investigate the role of industry specialization and intangibles in cross-border acquisitions. We find that acquirers from more specialized industries in a country are more likely to buy foreign targets in countries that are less specialized in these same industries. The magnitude of this specialization effect is stronger when cross-country and cross-industry differences in measures of educational attainment and intangible capital are higher. Post-acquisition performance is higher when specialized acquirers purchase assets in less specialized industries. These results are consistent with management and localized industry know-how being mobile factors that provide an advantage that can be deployed on foreign assets. >more


Method of Payment

ARE STOCK-FINANCED TAKEOVERS OPPORTUNISTIC?

B. Espen Eckbo, Tanakorn Makaew, and Karin S. Thorburn 
2013
The estimated probability that a bidder offers all-stock as payment in takeovers increases with measures of market overvaluation of bidder shares. However, when we instrument the bidder pricing error using aggregate mutual fund flows, the reverse happens: greater bidder overvaluation reduces the all-stock payment propensity. Since the price pressure created by aggregate fund flows is exogenous to bidder fundamentals -- while directly impacting bidder pricing errors -- this evidence rejects the notion that all-stock financed takeovers are opportunistic. Bidders paying with stock tend to be small, non-dividend paying growth companies with low leverage, suggesting that financing constraints play an important role in the all-stock payment decision. Moreover, all-stock payment is more likely in high-tech industries, when the two firms operate in highly complementary industries, and when the target is geographically close, indicating that targets in all-stock bids are relatively informed about bidder value. Overall, our evidence does not suggest a particular role for bidder mispricing in driving the all-stock payment decision in takeovers. >more


Use of M&A in Bankruptcy

CASHING OUT: THE RISE OF M&A IN BANKRUPTCY

Stuart C. Gilson, Edith S. Hotchkiss, and Matthew G. Osborn 
2015
The use of M&A in bankruptcy has increased dramatically in recent years, leading to concerns that the Chapter 11 process has shifted toward excessive liquidation of viable firms. In this paper, we argue that the rise of M&A has blurred traditional distinctions between “reorganization” and “liquidation”. We examine the drivers of M&A activity, based on factors specific to Chapter 11 as well as more general factors that drive M&A waves for non-distressed firms. M&A in bankruptcy is counter-cyclical, and is more likely when the costs of financing a reorganization are greater than financing costs to a potential acquirer. Consistent with a senior creditor liquidation bias, the greater use of secured debt leads to more sales in bankruptcy – but, this result holds only for sales that preserve going concern value. We also show that overall creditor recovery rates are higher, and unsecured creditor recoveries and post-bankruptcy survival rates are not different, when bankrupt firms sell businesses as going concerns. >more


Advisor Choice

THE SOURCE OF SUPERIOR INFORMATION: M&A ADVISORS’ HOLDINGS OF CALL OPTIONS ON TARGETS

Zhongyan Zhu
2014
This study analyzes the relationship between an M&A advisor’s holdings of call options on M&A targets before announcements and the abnormal returns of such targets. Financial institutions with regular exposure to advisory business hold call options on selected targets, for which the announcement returns are higher than those of other targets. Among targets with call options held by institutions with a regular advisory service, advisors hold call options on selected targets, and these targets have higher returns than targets with call options held by non-advisors. Although the proprietary trading teams of advisor institutions may share superior information, another source of information also exists: the advisory team within the same institution. Through investigating the Top 10 financial institutions that are active in both advisory services and proprietary trading, we find evidence to suggest a flow of information between these two units of the same institution. This practice is found in 9 of the Top 10 financial institutions. >more


M&A Location

BUYING PRIVATE BENEFITS: EVIDENCE FROM THE LOCATION OF PRIVATE COMPANY SALES

Mark Jansen, and Adam Winegar 
2014
We identify a price premium for firms based in preferable U.S. geographic locations using a large proprietary database of private company transactions. The 16% premium is robust to controls for local economic characteristics, industry concentration, and the liquidity and availability of capital in the local transaction market. We introduce a new measure based on how noneconomic characteristics of a city affect its desirability and find that firms located in cities with higher values of our measure sell for a significant price premium. Further, the premium is not significant when the buyer is a publicly traded company that fails to derive benefits from a preferable location. We also provide evidence that local economic prospects are not the sole driver of an entrepreneur’s location preference. >more


Sales Method

DETERMINANTS AND SHAREHOLDER WEALTH EFFECTS OF THE SALES METHOD IN M&A

Frederik P. Schlingemann, and Hong Wu 
2014
We analyze the sales method for a sample of 575 M&A deals announced between 1998 and 2012 and find that targets use auctions to increase the probability of finding bidders that can relax their financial constraints rather than to create operational synergies. Auctions, compared to negotiated deals, are associated with significantly higher target announcement returns, especially for relatively small targets. Bidder returns are positively related to auctions for bidders acquiring relatively small targets, not for the full sample. Taking into account size differences, we find that auctions, decrease target gains and increase bidder gains expressed in dollars. >more


Private Company Sales

BUYING PRIVATE BENEFITS: EVIDENCE FROM THE LOCATION OF PRIVATE COMPANY SALES

Mark Jansen, and Adam Winegar 
2014
We identify a price premium for firms based in preferable U.S. geographic locations using a large proprietary database of private company transactions. The 16% premium is robust to controls for local economic characteristics, industry concentration, and the liquidity and availability of capital in the local transaction market. We introduce a new measure based on how noneconomic characteristics of a city affect its desirability and find that firms located in cities with higher values of our measure sell for a significant price premium. Further, the premium is not significant when the buyer is a publicly traded company that fails to derive benefits from a preferable location. We also provide evidence that local economic prospects are not the sole driver of an entrepreneur’s location preference. >more


Distressed Acquisitions

DISTRESSED ACQUISITIONS

Jean-Marie A. Meier, and Henri Servaes
2014
Firms that buy distressed and bankrupt companies or some of these companies’ assets earn excess returns that are at least 1.6 percentage points higher than when they make regular acquisitions. These returns come at the expense of the target firm’s shareholders, while overall wealth gains are not affected. Returns to acquirers of distressed assets are higher when fewer large firms operate in the target firm’s industry, and when firms in the target’s industry have lower liquidity, and are financially constrained, thus limiting the number of potential buyers. They are lower when the M&A market in the target firm’s industry is more vibrant, when the target’s assets have more alternative uses, and when the economy is doing well. This evidence is consistent with the view that some firms can take advantage of fire sales by distressed and bankrupt companies needing to sell assets while restructuring. >more