Cash Mergers Research Articles

Earnings management by acquiring firms in cash mergers

We examine earnings management by cash bidders with debt financing. We hypothesise and find that highly leveraged cash bidders seeking to fund bids with debt manage earnings in the pre-merger period to secure the funding with better terms. Leverage plays a key role in this setting because we expect more leveraged bidders to find it more difficult to obtain the necessary funds with good lending terms to carry-out the bid, which increases their incentives to manage earnings. We consider earnings management through classification shifting and accruals, and find that classification shifting is more prevalent when managers appear to be constrained in their ability to manage accruals. Additionally, we find evidence that greater earnings management is associated with lower interest rates, larger debt amounts, and fewer financial covenants. This suggests that pre-merger earnings management efforts by highly leveraged cash bidders appear to be successful in securing debt funds with better terms. Whereas prior research on earnings management by bidders focuses primarily on stock bidders, we extend this research to cash bidders; we highlight that highly leveraged debt-financed bidders also engage in opaque financial reporting decisions prior to the bid announcement.

Earnings Management by Acquiring Firms in Cash Mergers

Earnings Management by Acquiring Firms in Cash Mergers

Cash Induced Demand

AbstractI show that cash distributions through cash mergers, dividend payments, and stock buybacks are, in principle, similar to investor fund flows in generating demand for investable assets. Abnormal returns on certain assets can be forecasted because delegated investors predictably reinvest cash returns toward certain holdings. Novel measures of stock-level demand constructed using proportional reinvestments by mutual funds predict abnormal returns and issuances in noncash-paying stocks. These results highlight an alternative and substantial source of price fluctuations in the cross section of equities.

The destiny of kibbutz industry in Israel: From family businesses to cash mergers

In 2000, the list of the Israeli Kibbutz Industry Association included 346 factories. In 2017, only 203 of those plants still appeared on the list, most of the others were sold. This paper propounds a theory that explains these facts from a kibbutz perspective. The paper rests on a meta-analysis of three case studies of kibbutz enterprises conducted between 2009 and 2015, and other sources of data. The main claim is that kibbutz factories previously operated as family businesses; but in recent decades, they have experienced a process of "de-familiarization", described in this paper, that often led to their sale. No literature relates to this dramatic recent development in kibbutz industry yet. In addition, this study sheds some light on change processes which may affect ownership in family business. • After generations of industrial tradition, kibbutz industry is severely shrinking. • Kibbutz industry has undergone a process of loss of "familiness". • Kibbutz members, as owners, felt alienated from their factories and sold them. • Is long term sustainability of industry possible in kibbutzim?

Research on the Influence Factors of the Performance of corporate Mergers and Acquisitions based on the perspective of management innovation

Enterprises will generate mergers and acquisitions to expand their value, which will have far-reaching effects on both parties' current benefits and future development. Moreover, from the perspective of management innovation capability, the study of mergers and acquisitions performance influencing factors is essential for enterprises to improve internal control management and increase value creation. This paper first uses the mixed cross-sectional data of listed companies as the research sample. Then, based on the volatility and conflict perspective of the indicators, we quantified the corporate management innovation capability using information weight, independence weight, and the TOPSIS method. Then, operating cash flow, firm size, and mergers and acquisitions size were used as control variables to investigate the effect of management innovation capability on corporate mergers and acquisitions performance using a robust linear regression model, and a robustness test was conducted. The empirical results show that management innovation capability has a significant positive relationship with mergers and acquisitions performance, which confirms that management innovation capability is a requirement for firms to create practical value. Finally, this paper puts forward relevant suggestions for enterprises to achieve high-quality development and improve mergers and acquisitions performance.

Option Prices and the Probability of Success of Cash Mergers

Abstract We study both theoretically and empirically option prices on firms undergoing a cash merger offer. To estimate the merger’s success probability, we use a Markov Chain Monte Carlo (MCMC) method using a state space representation of our model. Our estimated probability measure has significant predictive power for the merger outcome even after controlling for variables used in the merger literature. As predicted by the model, a graph of the target firm’s implied volatility against the strike price has a kink at the offer price, and the kink’s magnitude is proportional to the merger’s success probability.

Does Stock Misvaluation Drive Merger Waves?

Despite the mounting evidence that stock misvaluation affects takeover characteristics and outcomes at the deal level, there remains a prolonged debate over whether mispricing drives aggregate industry-level merger activity. We depart from the extant literature and investigate whether stock misvaluation drives industry-level merger waves by contrasting the effects of acquirer valuation during “stock” and “cash” merger waves, defined using pure stock or cash acquisitions during 1981-2015. Using the timing of stock waves, we find that acquirer valuation peaks during wave periods, and acquirers have low stock performance in the 5-year period after the merger bid, with especially acute underperformance for mergers announced during stock waves. There is little evidence of such patterns around cash merger waves. These results suggest that equity misvaluation drives stock merger waves, and agency costs associated with overvalued equity prevent acquirer shareholders from reaping gains from merger waves.

Empirical evidence of coercive tender offers in Japan

This is an empirical investigation of the degree to which legal rules impact the welfare of minority shareholders in acquisitions. While an efficient market for corporate control is vital for an economy’s growth and development, insufficient legal standards may permit coercive takeovers that have negative implications for capital markets. This research focuses on tender offers in Japan, where legal rules provide acquirers with the opportunity to make coercive takeovers that expropriate minority shareholder wealth. Japan’s legal system changed in 2006 to introduce cash mergers to freeze-out remaining shareholders after successful takeovers, and in 2007 to require bidders making tender offers that seek more than two-thirds of the voting securities of a target to offer to buy all the shares. However, acquirers with the stated aim of securing less than two-thirds of voting securities have no such obligation. We find evidence that these acquirers tend to make coercive two-tier offers that expropriate the interests of minority shareowners. Our results suggest that avoiding coercive takeovers requires that laws force acquirers to provide full information concerning the clean-up merger conditions as well as to pay an equivalent amount in the clean-up to minority shareowners as was offered in the initial tender offer without ambiguity. These conclusions have relevance for all countries that have not fully considered the appropriate level of protection for minority shareholders.

A Theoretical Model of Directional Volume on Acquirer Stock in Cash Mergers

The acquisition of a target firm in a transaction financed by cash is a cash merger. Announcements of cash mergers release the positive signal that the acquirer possesses cash reserves. As stock prices rise, informed traders may obtain abnormal returns by purchasing call options, selling put options or purchasing stock. This paper constructs a theoretical model in which call buy volume forms the upper bound of the final stock price, put sell volume forms the lower bound of the final stock price and stock purchase volume reveals the final stock price.

Predicting informed trading at merger announcements

Purpose – This paper aims to propose a method of forecasting the level of informed trading at merger announcements by permitting liquidity traders to adjust their trading based upon signals from informed traders. Informed traders typically take advantage of their knowledge of forthcoming mergers by trading heavily at announcement. For cash mergers, they respond to a positive signal by purchasing stock, and for stock mergers, they respond to a negative signal by selling stock. In response, exchanges (market makers) set wider spreads (charge higher transaction fees) for informed buyers. Uninformed traders are subject to such excessive fees unless they can accurately predict the period during which such fees are charged. Design/methodology/approach – This paper proposes a technique by which uninformed traders may make predictions by creating a vector autoregressive framework that links informed and liquidity trading through price changes. Findings – For cash mergers, transaction fees remained excessive for days −1 to +1. For stock mergers, fees remained high on days −1 to +1, started declining on days 2 and 3, and vanished on days 4 and 5. Research limitations/implications – Most theoretical models of informed trading have viewed informed trading and liquidity trading as tangentially linked. This study finds a direct link between these two trading activities. Practical implications – Uninformed traders may wish to limit their trading until after day +1 for both types of mergers. Originality/value – This paper defines the time period during which transactions costs for traders are at the maximum level. Short sellers have more information about the direction of stock movements and may sell during days of informed selling set forth by this study and repurchase stock afterwards.

The Dividend Policy of the Merged Firm, Method of Payment, and Takeover Premium

Dividends, particularly of acquiring firms are influenced by several structural adjustments especially after mergers. Using the dividend clientele hypothesis, we hypothesize that acquirer dividend policy is more likely to change after the merger if dividend policies of firms involved in a stock-based merger are quite different, while it remains unaffected in cash deals. Initially, we analyze the relationship between the acquirer dividends after the announcement and the pre-merger dividend policy of the target. In a second step, a multivariate analysis will be conducted to detect dynamics of takeover premium with the differences in dividend policy between merged firms. From the observation of 663 M&As, we find that acquiring firms are more disposed to adjust their dividend policies to those of targets in case of stock mergers than for mergers in cash. Additional analyses show some evidence that higher acquirer dividend is associated with higher takeover premium in cash deals, but there’s no significant association between difference in dividend policies and takeover premium in stock deals. These results highlight the role of the premium to offset the opportunity cost of target shareholders to receive more dividends in the merged entity when they agree a cash merger, and justify the triviality of the premium in stock deals by the disposal of the acquirer to adjust its dividend policy.

Multimarket trading at merger announcement and completion

We examined multimarket trading in the stock and option markets during merger announcement and successful and failed completion. Using contemporary intraday stock and options data, we observed alternate call buying and stock selling for acquirer stock in cash mergers, call writing and stock selling, followed by put buying for acquirer stock in stock mergers at merger announcement. For successful completions, stock selling dominated for cash acquirers and put buying for stock acquirers. Deal failure was accompanied by initial put buying, followed by call writing and stock selling on target stock. Signalling between markets and the alternation of informed trading between markets was inferred.

Put Your Money Where Your Mouth is: Treasury Shares as Currency

This paper examines the historical question of whether treasury shares and newly issued shares are equivalent by considering their use in stock based M&A transactions. We quantify the differential market response to M&A announcements when bidders have sufficient currency in the form of cash or treasury shares to execute the deal versus bidders with insufficient currency. We confirm prior findings of a nonnegative market reaction to cash mergers of public targets and determine that this finding holds irrespective of the sufficiency of their currency on hand. In addition, we find that the presence of sufficient currency at the date of a stock M&A announcement leads to a significantly more favorable market reaction for public targets. Our results demonstrate that the legal equivalency of treasury and newly issued shares does not extend to these forms of currencies being economically equivalent.

Endogenous mergers: bidder momentum and market reaction

Recent empirical studies on stock misvaluation as a possible determinant of mergers are inconclusive concerning the central hypothesis that over (under) valuation is negatively (positively) associated with merger announcement returns in stock mergers, but not in cash mergers. We provide empirical support for this hypothesis. In contrast to prior research, we employ a two-stage model to account for endogenous mergers and suggest an alternative specification of misvaluation based on an asset-pricing model (bidder momentum). In the first stage, we specify panel logit models to predict US mergers from 1981 to 2003 and find that bidder momentum triggers stock mergers, but not cash mergers. In the second stage, we regress cumulated abnormal returns on merger probabilities to control for the endogeneity of mergers. This reveals a lower market response for stock mergers compared to cash mergers, which we identify as market correction of misvalued acquirers.

What Drives the Payment of Higher Merger Premiums?

This study examines whether the premiums paid to targets firms are affected by bidder CEO overconfidence, merger waves, method of payment, industry of merged firms, and capital liquidity. Using merger data for the period spanning from 1991 to 2000, this study finds that CEOs pay less premiums in cash mergers and pay more premiums for mergers undertaken during the year of high capital liquidity. Moreover, the findings also demonstrate that CEOs tend to pay higher merger premiums for mergers that occur during merger waves and in high capital liquidity year. CEOs’ behavior, which is the main variable examined in this study, does not show any significant effect on the premiums paid. This suggests that the effect of CEO overconfidence on the premiums paid may be exaggerated.

Option Pricing and the Probability of Success of Cash Mergers

In an empirical study of cash mergers since 1996, we nd that the equity options on rms that are the target of a merger display a pronounced smile pattern in their implied volatilities. We nd that this merger volatility smile is more pronounced when the success probability of the merger is higher. We then propose an arbitrage-free model to analyze option prices for rms undergoing a cash merger attempt. Our formula matches well the observed merger volatility smile. Furthermore, as predicted by the model, we show empirically that the merger volatility smile has a kink at the oer price, and that the magnitude of the kink is proportional to the success probability of the merger.

UK Evidence on the Profitability and the Risk-Return Characteristics of Merger Arbitrage

On a sample of 1105 UK cash and stock mergers over the period of 1987-2007, this study is the first to provide empirical evidence about the profitability and the risk-return characteristic of the merger arbitrage strategy in the UK market. Consistent with the findings in other markets, the UK merger arbitrage portfolios are profitable on risk-adjusted basis. The result is robust to a range of methods to control for risk. The most important contribution of this study is to show how takeover regulations can affect the risk-return characteristics of the merger arbitrage strategy. There is little evidence that the UK merger arbitrage portfolios exhibit any non-linear risk-return pattern. The finding is in line with restrictions imposed by the UK Takeover Code on the bidder's ability to renege on the bid. Combined with the US and Australian evidence under varying degree of such restrictions in these respective jurisdictions, the regulation impact is confirmed.

Why Do Firms Pay Cash in Acquisitions? Evidence from a Demand Perspective

I study the means of payment in acquisitions from a demand perspective. I propose that the decision to pay cash is positively related to the prevailing investor cash demand. To test this prediction, I construct a new measure of investor cash preferences using mutual fund flows (“cash popularity”). I show that the choice of cash offers is significantly affected by the cash popularity in the market. One standard deviation increase in cash popularity raises the probability of cash offers from 38% to 53%. When cash is very popular, cash mergers strengthen the bargaining power of the bidder. This effect is stronger in the cases where the target stock displays high idiosyncratic volatility and low institutional ownership. The use of cash when cash is popular also increases the probability of success of the deal. Overall, the evidence supports a cash demand explanation on the choice of payment methods in mergers and acquisitions.

The Google-Doubleclick Merger, the FTC, and the Future of Transactional Privacy Inquiries in the United States

On April 13, 2007, Google, the world's largest search provider, announced that it would acquire DoubleClick, the largest existing online advertising company, in a cash merger. Within days, Google's $3.1 billion acquisition of DoubleClick was challenged by Microsoft and others on privacy and antitrust grounds. On April 20, the Electronic Privacy Information Center (EPIC) filed a complaint with the Federal Trade Commission (FTC) requesting that the Agency: (1) issue an injunction to prevent the Google-DoubleClick merger from proceeding, and (2) conduct an investigation regarding the circumstances of the merger. The FTC recently concluded an initial investigation into whether the Google-DoubleClick merger would promote unfair and deceptive trade practices substantially likely to harm consumers and not outweighed by countervailing benefits to consumers. Rather than clearing the transaction, however, the FTC requested that the parties submit significant volumes of additional information to allow the Agency to perform a more thorough investigation and analysis of the anticompetitive effects of a proposed merger. Despite the FTC's clear antitrust authority, however, the bulk of the EPIC complaint, and therefore presumably the thrust of the investigation, addresses privacy issues and not antitrust or competition concerns. This paper argues that the FTC has no authority to address the privacy concerns raised by the Google-DoubleClick merger. Section II will examine the FTC's authority both to review mergers and to investigate privacy concerns under § 5 of the FTC Act. Part III will review the two § 5 cases relied upon by EPIC to support its argument that the FTC has the authority to review the Google-DoubleClick merger. This section will argue that the present merger differs in significant ways from prior instances in which the FTC relied upon § 5 of the FTC Act. Finally, Part III will analyze EPIC's unfair trade practices claims under the § 5 standard, concluding that it is not likely that the merger will result in substantial harm to consumers not reasonably avoidable and not outweighed by countervailing benefits. Part IV will look to the future of the Google-DoubleClick merger in light of both U.S. and international pressures, concluding that judicial intervention is likely regardless of the decision of the FTC. Finally, in order to prevent the necessity of judicial intervention in the future, Part IV recommends the passage of legislation providing the FTC or another federal agency with the authority to require that companies collecting large volumes of nonpublic consumer data put comprehensive and effective data protection provisions into place or face sanction.

A New Misvaluation Perspective on Why Cash Is King in M&As

We propose and test a new misvaluation approach to mergers and acquisitions (M&As) using a sample of 302 UK bidders and targets 1986-2002. Our model assumes that managers have insider information on book values while investors only have publicly available information. We find that bidders are overvalued relative to targets. Strikingly, bidders in cash mergers appear more overvalued to managers than do bidders in stock mergers in direct opposition to what is predicted by misvaluation theories. Since mergers directly benefit both bidder and target managers, they mutually agree on cash payment to ensure a friendly deal and thus maximize its chances of success by placating the target investors. This explains the puzzle of why bidders pay cash instead of their overvalued stock to finance the majority of UK M&As.