Acquisitions Of Private Firms Research Articles

Seller Debt in Acquisitions of Private Firms: A Security Design Approach

Abstract We propose a security design model in which a potential acquirer approaches a firm with a value-add plan. The target has a single owner, who possesses private information: he alone knows whether his firm is compatible with the plan. The owner agrees that the acquirer will add value but believes that the value-add will not be as much as what the acquirer expects. Although the acquirer can choose any monotone limited liability security to offer along with cash, we show that, under general conditions, any security that is employed always takes the form of nonrecourse debt provided by the seller. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Valuations in Corporate Takeovers and Financial Constraints on Private Targets

I examine acquisitions of private firms by public acquirers to better understand the effects of financial constraints on the division of economic gains in takeovers. Empirical tests exploit interstate bank branching deregulation, which relaxes financial constraints on private firms and can strengthen their bargaining position in an acquisition. Using a proxy for the degree to which targets depend on acquirers for financing, I find that private targets depend less on acquirers as a result of interstate bank branching deregulation. Relaxing financial constraints on private targets leads to an increase in target valuation multiples and a decrease in acquirer wealth gains.

Returns to acquirers of listed and unlisted targets: an empirical study of Australian bidders

PurposeThis paper aims to evaluate the robustness of the listing effect in Australia, that is whether acquisitions of private firms create more value to the bidding firm’s shareholders than acquisitions of publicly listed firms.Design/methodology/approachThe authors analyze the market reaction to the announcement of takeover bids initiated by Australian public firms on private and public targets over the period 1990-2011. The analysis controls for a wide range of bidder, deal and target country characteristics that are likely to correlate with the target’s listing status and acquirer abnormal returns. The authors also use a selection model to address the endogenous choice of the target’s listing status.FindingsThe results indicate that bidders experience significantly higher abnormal returns of about 1.7 per cent in the 11-day event window when the target is a private firm. The authors show that this result is broad-based and persistent. It does not appear to depend on whether the target is small or large; whether it is related or unrelated to the bidder’s industry; whether it is in the resources sector; and whether the transaction is domestic or cross-border. They find some evidence that bidder returns might be stronger for larger acquisitions, for unrelated targets, and in poor market conditions such as in the wake of the recent global financial crisis.Research limitations/implicationsThe research would benefit from the inclusion of the bidding firm’s ownership and governance characteristics.Practical implicationsThe results support the view that market frictions contribute to make private firms attractive targets.Originality/valueThe analysis confirms the pervasiveness of the listing effect in a market characterized by a lesser degree of competition, higher search costs and the significance of the natural resources sector.

When do managers listen to the market? Impact of learning in acquisitions of private firms

We study the influence of market signals and agency problems on the decision to cancel an announced acquisition. We find major differences between deals involving private vs. public targets. First, controlling for the value of expected synergies, acquisitions are less likely to be cancelled when the target is private rather than public. This finding supports learning rather than the alternative common-information hypothesis. Second, better manager-shareholder interest alignment makes the cancellation of a “bad” deal more likely only when the target is a private firm. This suggests bidder agency problems have a greater influence on acquisition outcome (i.e., learning) when the target is private. Third, cancellation is more likely for private targets when their post-announcement abnormal returns are low, especially if the method of payment includes stock. This indicates that it is important to control for bidder overvaluation when testing the managerial learning hypothesis. Overall, both the learning and agency hypotheses help explain observed differences in deal completion by target type.

Globalization, Country Governance, and Corporate Investment Decisions: An Analysis of Cross-Border Acquisitions

Using a sample of control cross-border acquisitions from 56 countries from 1990 to 2007, we find that acquirers from better governed countries gain more from such acquisitions and their gains are higher when targets are from worse governed countries. Other acquirer country characteristics, including the indices for laws protecting investors the earlier literature focuses on, are not consistently related to acquisition gains. However, globalization leaves a strong mark on acquisition returns. Acquisition returns are affected by global factors at least as much as they are by acquirer country factors. First, across all acquisitions, the acquirer's industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. A country's governance and global mergers and acquisitions activity are important predictors of mergers and acquisitions activity in that country. Finally, we find strong evidence that at the firm-level better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance for the bidder.

Globalization, Governance, and the Returns to Cross-Border Acquisitions

Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirer's industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.

Shareholders’ reactions to announcements of acquisitions of private firms: Do target and bidder markets make a difference?

We study announcement effects of cross-border acquisitions of private firms on short-term bidders’ stock market returns in the European Union. We assume that the development status of the target market and the governance within the bidder market make a difference. Investors of bidding companies react positively to private acquisition announcements in both China and the United States of America (US). Moreover, the bidder returns do not differ significantly between the two target markets. We find bidder market effects for the US: private acquisitions by civil law firms generate smaller bidder returns, while relatively large private acquisitions by common law firms increase such returns. For China we do not find bidder market effects, nor variables that significantly explain shareholders’ reactions to announcements of private acquisitions.

The underpricing of private targets

We examine acquisitions of private firms with valuation histories and find a positive relation between acquirer announcement returns and target valuation revisions. Similar to other studies, acquirer announcement returns are positive, on average. However, positive acquirer announcement returns are mainly driven by targets that are acquired for more than their prior valuation. This relation is consistent with pricing effects associated with target valuation uncertainty and behavioral biases in negotiation outcomes.

Valuation Risk, Control and the Public Financing of Entrepreneurial Firms

Entrepreneurial firms seeking public financing are typically intrinsically difficult to value, and investors are subject to valuation risk. Public firms, motivated by profitable acquisition opportunities, compete with stock markets (i.e., IPOs) in evaluating and financing such firms. We theoretically and empirically analyze the allocation of going-public firms between IPOs and acquisitions when there is valuation risk and costly information generation by investors. Owners of private firms trade off the loss of control from sellouts against IPO price discounts due to valuation risk. We empirically test the predictions from this framework on the universe of private firms (i.e., including those that choose not go public) in the UK during 1996-2006. Consistent with the theoretical predictions, but in contrast to the recent literature on merger and acquisition activity between publicly traded firms, stock market overvaluation and higher expected capital productivity have a negative influence on acquisitions of private firms, especially for family-owned and concentrated-ownership private firms. Moreover, other things held fixed, high valuation-risk firms are more likely to be acquired by public firms than do IPOs because public firms have greater incentives for increasing information investment for such firms compared with the dispersed owners in the stock market.

The Underpricing of Private Targets

We examine acquisitions of private firms with valuation histories and find a positive relation between acquirer announcement returns and target valuation revisions. Similar to other studies, acquirer announcement returns are positive, on average. However, positive acquirer announcement returns are mainly driven by targets that are acquired for more than their prior valuation. This relation is consistent with pricing effects associated with target valuation uncertainty and behavioral biases in negotiation outcomes.

Do Acquirers with More Uncertain Growth Prospects Gain Less from Acquisitions?

Several literatures predict a relation between acquirer announcement returns and uncertainty about the acquirer's growth prospects. Models with downward-sloping demand curves for stocks predict that an increase in shares outstanding leads to a lower stock price for firms with greater diversity of opinion among investors. Information asymmetry models imply that equity issues by firms with greater information asymmetries are accompanied by larger share price decreases. Valuation models predict a negative relation between uncertainty resolution and share prices. We find that, for our sample of firms with long-term analyst forecasts, acquirer abnormal returns for acquisitions of public firms paid for with equity decrease as proxies for the acquirer's diversity of opinion, information asymmetry, and/or uncertainty resolution increase. In contrast, abnormal returns for acquisitions of public firms paid for with cash and for acquisitions of private firms paid for with equity either are unaffected or increase as these proxies increase. Strikingly, while diversity of opinion can explain the abnormal returns difference between cash and equity offers for public firms, idiosyncratic volatility appears to be capable of explaining abnormal return differences between cash and equity offers for public firms as well as equity offers for private firms.