Corporate Acquirers Research Articles

Determinants of earnout as acquisition payment currency and bidder’s value gains

We examine the wealth effects of a comprehensive sample of UK bidders offering contingent payment, or earnout, as consideration for their acquisitions. We show that bidders using earnout generate significantly higher announcement and post-acquisition value gains than bidders using non-earnout currencies (such as cash, stock exchange, or mixed payments). We construct a logistic model to predict when it is optimal for a bidder to offer earnout. We show that bidders offering earnout optimally enjoy significantly higher announcement and post-acquisition gains than bidders offering non-earnout currencies, consistent with our model of the choice of the optimal method of payment. Overall, we provide robust evidence that earnout is an effective payment mechanism to mitigate valuation risk to acquirers, and also enhances acquirer value during the announcement and post-acquisition periods. Our paper contributes to the broader literature on how corporate acquirers use payment currency to manage information asymmetry and the attendant valuation risk.

What is Different About Government-Controlled Acquirers in Cross-Border Deals?

We examine the motives for and consequences of 5,317 failed and completed cross-border acquisitions constituting $619 billion of total activity that were led by government-controlled acquirers over the period from 1990 to 2008. We benchmark this activity at the aggregate country level and also at the deal level with cross-border acquisitions involving corporate acquirers over the same period. We find that government-led deal activity is relatively more intense for geographically-closer countries, but also relatively less sensitive to differences in the level of economic development of the acquirer’s and target’s home countries, in the quality of their legal institutions and accounting standards, and to how stringent are restrictions on FDI flows in their countries. Government-led acquirers are more likely to pursue larger targets with greater growth opportunities and more financial constraints. But, the share-price reactions to the announcements of such acquisitions are not different. Among those deals involving government-controlled acquirers, we do find important differences involving sovereign wealth funds (SWFs). SWF-led acquisitions are less likely to fail, they are more likely to pursue acquirers that are larger in total assets and with fewer financial constraints, and the market reactions to SWF-led acquisitions, while positive, are statistically and economically much smaller. We discuss policy implications in terms of recent regulatory changes in the U.S. and other countries that seek to restrict foreign acquisitions by government-controlled entities.

The Bright Side of Bidder Competition

This paper examines the impact of financial sponsor competition on corporate buyers. We find that corporate acquirers who purchase targets that financial buyers also bid on outperform corporate acquirers who buy targets bid on by corporate firms only. Deal characteristics, acquirer abilities, and observable target characteristics cannot explain this difference in returns. Corporate acquirers have higher returns when they follow a first bid by a financial buyer rather than a first bid by another corporate buyer. The results suggest that financial bidders identify targets with high potential for value improvement and winning corporate bidders are competent in exploiting this potential.

Skill in Corporate Acquisitions

Are there skill differences in mergers and acquisitions? To investigate this question, we focus on persistence in the performance of corporate acquirers. We find persistence only when successive deals occur under the same CEO and conclude that skill differences in acquisitions reside with the CEO, not with the firm as a whole. These differences are economically meaningful. An acquirer that was successful in its last deal and kept its CEO earns 1.02% more on its next deal than does a previously-unsuccessful firm that kept its CEO. This percentage difference is equivalent to a $175 million difference in value creation.

Firm Acquisitions and Technology Strategy: Corporate Versus Private Equity Investors

Over the last few years, worldwide mergers and acquisitions (M&A) have increased sharply both in terms of value and volume. This development has not only been driven by corporate acquirers but also to an increasing extent by private equity investors. In this paper, we analyze differences in acquisition motives for corporate and private equity investors. We pay particular attention to the importance of technological assets in M&A transactions and distinguish between the technological value of patents and their potential to block competitors in technology markets. Our empirical results for European firm acquisitions in the period from 1999 to 2003 show that both corporate and private equity investors pay a higher price for target firms with valuable patents. However, patents with a potential to block technology competitors seem to be only of interest to corporate investors, especially if these are closely related to the patent portfolio of the acquirer.

Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements

Legal scholars devote much attention to the incorporation puzzle - why corporations so frequently incorporate in Delaware. This paper suggests that focusing on the incorporation decision overlooks a broader but intimately related set of questions. Choosing Delaware as the incorporation situs is, effectively, a choice-of-law decision. Incorporating in Delaware selects Delaware law for (and authorizes Delaware courts to adjudicate) legal disputes about the allocation of a firm's governance authority. In this sense, the incorporation decision is similar to any setting in which a company selects a law or authorizes a dispute resolution forum. We study a data set of 412 merger and acquisition contracts contained as exhibits in SEC Form 8-K filings over a seven month period in 2002 to assess the decisions the parties have made regarding choice-of-law and choice-of-forum. Although these contracts frequently select Delaware law and Delaware as a forum, there is a relative from Delaware in this contractual setting. Delaware corporations choose Delaware law less than other corporations choose the law of their state of incorporation. Furthermore, many contracts specifying Delaware law did not specify Delaware as the litigation forum. Contracts designating Delaware law tend to choose Delaware as a litigation forum less than contracts that designate other states' laws tend to choose such states as a litigation forum. Delaware was the place of incorporation for 189 merger contracts; it was the choice of law for 132. With respect to forum selection, 115 contracts that designated a forum had Delaware corporate acquirers. Yet only 64 contracts specified Delaware as the litigation forum. In contrast, for example, New York had eight corporate acquirers and 45 contracts specifying that New York law governed. We investigate the determinants underlying these decisions about choice-of-law and forum selection. Regression results confirm the flight from Delaware law and forum.

The Dynamics of Merger and Acquisition Waves

The past two decades have witnessed the largest merger and acquisition (M&A) waves in history. Yet, the empirical evidence suggests that the perceived financial benefits of M&As often are not realized for corporate acquirers. We build a three-stage conceptual framework to illuminate the dynamics of this mergers and acquisitions wave activity and to help explain the frenzied persistence of this phenomenon despite poor performance results. From this framework, we show key considerations that are often missed in M&A assessments, particularly during a merger wave, and offer advice to ensure that managers make more enlightened M&A decisions.

Hostile Corporate Takeovers: Why and How Their Numbers Grow

Hostile corporate acquisitions, which were virtually non‐existent a decade ago, have currently become one of the most publicized types of business transactions. Rumors about takeovers have had an enormous impact on stock market trading volume and price behavior for the past several years. This paper traces the legal, regulatory, and financial developments of the 1980s which have created an environment favorable to hostile takeovers, and it discusses controversial behaviors of corporate acquirers and defenders.

Neutralizing the Regulatory Burden: The Use of Equity Securities by Foreign Corporate Acquirers

Neutralizing the Regulatory Burden: The Use of Equity Securities by Foreign Corporate Acquirers