Intention to Acquire and M&As: Evidence from European IPOs

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In this paper we examine the disclosure on the IPO prospectus that refers to the firm’s intention to pursue an active acquisition strategy as one of the reasons for going public (disclosers). Based on research showing that properly evaluated M&As are more successful, we examine whether the disclosure of the intention to engage in future acquisitions captures the firm’s more diligent choice of acquiring target firms and the resulting increased synergies between the two companies (the signaling hypothesis). Our results are consistent with this conjecture. Using a dataset of European IPOs during the period 2002-2017, first we document that disclosers are more likely to engage in future M&A activity than non-disclosers supporting the notion that such disclosures are credible. Secondly, we document more positive market reaction around the announcement of the acquisition for disclosers than for non-disclosers. We examine the robustness of these results by controlling for shareholder rights and the bidders’ legal origin. As expected, firms in countries with better antidirector rights and stronger legal environment accentuate this result. Finally, results show that the long-run performance of the combined entity is more positive than that of non-disclosers up to a three year period following the merger. Interestingly, as the acquisition moves further away from the IPO date the long-run performance of the firm is reduced but remains reliably more positive than the post-acquisition performance of non-disclosers. Thus, our results suggest that the voluntary disclosure of the intention to acquire before the acquirer goes public can serve as a positive signal for the success of the acquisition.