Deal Premiums Research Articles

Evaluation of merger premium and firm performance in Europe

This paper investigates whether the deal premium affects the performance of the acquiring firms in European mergers and acquisitions (M&As) deals for the period 2000–2013. We find a significant reduction in short-term performance of the acquiring firms after the M&As, reflecting the overpayment hypothesis. Our result also indicates that the negative effect on the performance of the acquiring firms is less pronounced in the long-term. The result confirms the synergy hypothesis and the existence of quadratic relationship between high premium and performance. Our findings are robust as we control for firm and time trends. The findings of our study have implications for companies engaging in acquisitions in Europe.

Institutional cross-ownership and corporate strategy: The case of mergers and acquisitions

This article provides new evidence on the important role of institutional investors in affecting corporate strategy. Institutional cross-ownership between two firms not only increases the probability of them merging, but also affects the outcomes of mergers and acquisitions (M&As). Institutional cross-ownership reduces deal premiums, increases stock payment in M&A transactions, and lowers the completion probabilities of deals with negative acquirer announcement returns. Furthermore, deals with high institutional cross-ownership have lower transaction costs and disclose more transparent financial statement information. The effect of cross-ownership on the total deal synergies and post-deal long-term performance is positive, which can be attributed to independent and non-transient cross-owners. Our findings are robust after mitigating the cross-ownership asymmetry concern. Overall, our results suggest that the growth of institutional cross-holdings in U.S. stock markets may greatly change corporate strategies and decision-making processes.

Impact of SOX on the returns to targets and acquirers in corporate tender offers

We argue that, following the sweeping reforms introduced by the Sarbanes-Oxley Act (SOX), managers of bidding firms have become more strategic in choosing acquisition targets in inter-firm tender offers. Using a large sample of tender offers between 1996 and 2009, we report that the proportion of synergy-driven value-maximizing acquisitions increased following the passage of SOX. Targets experience lower pre-bid share price run-up, receive larger deal premiums, and have larger announcement period abnormal returns after SOX. Acquiring firm shareholders also experience significant wealth gains around the announcement in the post-SOX period. Employing industry and matched firm portfolios, we also document that both the operating performance and buy-and-hold abnormal returns over the three- and five-year post-acquisition period improved significantly after SOX. Overall, our evidence shows that SOX had a positive influence in the market for inter-firm tender offers.

The Effect of Prohibiting Deal Protection in Mergers and Acquisitions: Evidence from the United Kingdom

AbstractSince 2011, the United Kingdom has prohibited all deal protections—including termination fees—in mergers and acquisitions (M&A) deals. We examine the effect of this regulatory change on deal volumes, the incidence of competing offers, deal-jumping rates, deal premiums, and completion rates in the United Kingdom relative to the other European Group of 10 (G-10) countries. We find that M&A deal volumes in the United Kingdom declined significantly in the aftermath of the 2011 reform (in absolute terms and relative to deal volumes in other European G-10 countries). We find no countervailing benefits to targets’ shareholders in the form of higher deal premiums or more competing bids. Completion rates and deal-jumping rates also remained unchanged. Our results suggest that deal protections provide an important social welfare benefit by facilitating the initiation of M&A deals.

Institutional Cross-Ownership and Corporate Strategy: The Case of Mergers and Acquisitions

This article provides new evidence on the important role of institutional investors in affecting corporate strategy. Institutional cross-ownership between two firms not only increases the probability of them merging, but also affects the outcomes of mergers and acquisitions (M&As). Institutional cross-ownership reduces deal premiums, lowers completion probabilities of deals with negative acquirer announcement returns, and increases stock payment in M&A transactions. Furthermore, deals with high institutional cross-ownership have lower transaction costs and disclose more transparent financial statement information. The effect of cross-ownership on deal performance is mixed. Institutional cross-ownership is negatively related to acquirer announcement returns, a measure of the market perceived deal quality. However deals with high cross-ownership are more likely to be non-diversifying and independent institutional cross-ownership is positively related to deal long-run performance. Overall, our results suggest that the growth of institutional cross-holdings in U.S. stock markets may greatly change corporate strategies and decision making processes.

Strategic merger decisions across business cycles: Evidence from bidders' time-varying appetite for operating leverage

In this study, we examine how bidders' appetite for their targets' operating leverage affects merger activities, and whether this appetite varies throughout the business cycle. We find that the association between a firm's operating leverage and the likelihood of it becoming a target or an acquirer—as well as the deal premium, the bidder's cumulative abnormal returns around the deal announcement date, and the bidder's long-run buy-and-hold abnormal returns—depend on the business cycle. The time-varying effects of operating leverage on merger decisions are strategic and consistent with their time-varying benefits and costs.

Management Control and Takeover Premiums

This study examines the relationships between the management control strength of target and acquiring firms, and takeover premiums. It uses a scorecard system, which aggregates the scores of twelve variables reflecting corporate governance quality and ownership structure characteristics, to define management control strength. Using descriptive statistics and regression analysis, a sample of eighty-one North American publicly traded companies that were in involved in M&A transactions between 2010 and 2013 is examined. Acquirers were found to have paid significantly higher premiums when at least half of the directors sitting on target boards held multiple directorships. Additionally, when at least half of the directors sitting on acquirers’ boards held multiple directorships, acquirers paid significantly lower premiums. The study also found that when an acquirer’s management control is strong and a target’s management control is weak, the size of the premium is significantly lower than the sample average. This could be explained by the acquirer’s greater ability to negotiate deal premiums when its management control is strong and by a lower perceived value of the target firm when target management control is weak. When a target management control is strong and acquirer management control is weak, and when both target and acquirer’s management control is either strong or weak, the premiums paid are not significantly different from the sample mean. These results provide the first step towards developing an investment screening tool for companies involved in M&A transactions.

The Effect of Prohibiting Deal Protection in M&A: Evidence from the United Kingdom

Since 2011, the U.K. has prohibited all deal protections – including termination fees – in M&A deals. Prior to 2011, the U.K. permitted termination fees up to 1% of deal value and there was no prohibition on other protection devices. We examine the effect of this regulatory change on deal volumes, the incidence of competing offers, deal jumping rates, deal premiums, and completion rates in the U.K., relative to the other European G-10 countries. We find that M&A deal volumes in the U.K. declined significantly in the aftermath of the 2011 Reforms, relative to deal volumes in the European G-10 countries. We find no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids. Completion rates and deal jumping rates also remained unchanged. We estimate that the incidence-rate ratio of U.K. deals to non-UK deals after the reform was approximately 50% the incidence-rate ratio of U.K. deals to non-U.K. deals prior to the reform. In addition, we estimate USD 19.3 billion in lost deal volumes per quarter in the U.K. relative to the control group due to the 2011 Reforms, implying a quarterly loss of USD 3.2 billion for shareholders of U.K. companies. Our results suggest that deal protections provide an important social welfare benefit by facilitating the initiation of M&A deals.

Management Control and Takeover Premiums

This study examines the relationships between the management control strength of target and acquiring firms, and takeover premiums. It uses a scorecard system, which aggregates the scores of twelve variables reflecting corporate governance quality and ownership structure characteristics, to define management control strength. Using descriptive statistics and regression analysis, a sample of eighty-one North American publicly traded companies that were in involved in M&A transactions between 2010 and 2013 is examined. Acquirers were found to have paid significantly higher premiums when at least half of the directors sitting on target boards held multiple directorships. Additionally, when at least half of the directors sitting on acquirers’ boards held multiple directorships, acquirers paid significantly lower premiums. The study also found that when an acquirer’s management control is strong and a target’s management control is weak, the size of the premium is significantly lower than the sample average. This could be explained by the acquirer’s greater ability to negotiate deal premiums when its management control is strong and by a lower perceived value of the target firm when target management control is weak. When a target management control is strong and acquirer management control is weak, and when both target and acquirer’s management control is either strong or weak, the premiums paid are not significantly different from the sample mean. These results provide the first step towards developing an investment screening tool for companies involved in M&A transactions.

Acquisitions of bankrupt and distressed firms

We focus on acquisitions of bankrupt firms and firms that recently emerged from Chapter 11 and compare these firms with acquired distressed firms to determine whether or not transaction timing plays a role in the outcomes of the mergers. We analyse deal premiums (or lack thereof) and evaluate post-merger operating cash flows to determine whether or not timing of the transactions impacts their effectiveness and success. We find that distressed targets sell their assets at a premium or at a discount smaller than bankrupt firms do, thereby benefiting from acquisitions more than bankrupt targets. We also find that abnormal post-merger cash flow and cumulative abnormal return changes are more pronounced for bankrupt than distressed firms, indicating that acquisitions in Chapter 11 add greater economic value for both target and its acquirer than do acquisitions outside of bankruptcy. We observe post-merger market performance improvements for bankrupt and not distressed firms.

Shared auditors in mergers and acquisitions

We examine the impact of shared auditors, defined as audit firms that provide audit services to a target and its acquirer firm prior to an acquisition, on transaction outcomes. We find shared auditors are observed in nearly a quarter of all public acquisitions and targets are more likely to receive a bid from a firm that has the same auditor. Moreover, these shared auditor deals are associated with significantly lower deal premiums, lower target event returns, higher bidder event returns, and higher deal completion rates. These results are driven by bids in which targets and acquirers share the same practice office of an audit firm and in which the target is small. Overall, our evidence suggests that bidders benefit from sharing an auditor with the target. Our results are robust to controls for alternative explanations and for selection bias in the shared-auditor effect.

Shared Auditors in Mergers and Acquisitions

We examine the impact of shared auditors, defined as audit firms that provide audit services to a target and its acquirer firm prior to an acquisition, on transaction outcomes. We find shared auditors are observed in nearly a quarter of all public acquisitions and targets are more likely to receive a bid from a firm that has the same auditor. Moreover, these shared auditor deals are associated with significantly lower deal premiums, lower target event returns, higher bidder event returns, and higher deal completion rates. These results are driven by bids in which targets and acquirers share the same practice office of an audit firm and in which the target is small. Overall, our evidence suggests that bidders benefit from sharing an auditor with the target, and that these results are robust to controls for alternative explanations and for selection bias in the shared-auditor effect.

Measuring Deal Premiums in Takeovers

We investigate whether the merger announcement dates provided in the Securities Data Corporation (SDC) database are handled correctly by researchers performing event studies. We find that in 24.1% of deals, the popular choice of using the SDC's “Date Announced” field as the event date leads to biased estimates of target firm abnormal returns because of earlier abnormal price movements due to merger‐related events such as merger rumors or search‐for‐buyer types of announcements. We hand collect the merger‐related events from news sources and make the complete data set publicly available at the Financial Management website.

Effective Post‐Signing Market Check or Window Dressing? The Role of Go‐Shop Provisions in M&A Transactions

AbstractThis paper examines the use of go‐shop provisions in M&A. We find that go‐shop deals tend to have higher deal premiums and receive more competing bids while the length of the go‐shop period does not affect deal premium and competition. Also, deals are less likely to be completed when a go‐shop provision is included and when the go‐shop length is longer. However, go‐shops have no effect on the completion of high premium deals. We also find that the presence of a go‐shop provision leads to a positive market reaction to deal announcements. Overall, our findings support the proposition that go‐shops reflect the efforts of target managers to fulfill the Revlon duties in the form of a post‐signing market check, which is consistent with stewardship theory.

Merger Performance and Antitrust Review: A Retrospective Analysis

Many empirical studies have shown negative abnormal returns to occur shortly after a once promising merger is consummated. There are few consistent explanations for the poor performance of so many mergers. This article considers mergers of concern to antitrust authorities to examine how structural factors, including market concentration and R&D intensity, as well as valuation metrics, such as merger premiums and merger waves, affect abnormal returns. Our results suggest that acquirer R&D intensity, market concentration of the deal premium, and deal size have a negative impact, whereas the target's intangible asset intensity and the presence of a merger wave positively influence merger performance.

The value of “boutique” financial advisors in mergers and acquisitions

Between 1995 and 2006 about a quarter of merging firms hired boutique banks as their advisors on mergers and acquisitions (M&A). Boutique advisors, often specialized by industry, are generally smaller and more independent than full-service banks. This paper investigates firms' choice between boutique and full-service advisors and the impact of advisor choice on deal outcomes. We find that both acquirers and targets are more likely to choose boutique advisors in complex deals, suggesting that boutique advisors are chosen for their skill and expertise. After controlling for the endogenous choice of advisors, we find lower deal premiums when acquirers hire boutique advisors. In addition, boutique advisors spend more time, probably on due diligence and negotiation, to complete deals. Overall, our findings suggest that boutique advisors are chosen in more complex deals and they achieve more favorable deal outcomes.

Measuring Deal Premiums in Takeovers

We investigate whether the merger announcement dates provided in the Securities Data Corporation (SDC) database, a commonly used source in mergers and acquisitions (M&A) research, are handled correctly by researchers performing event studies to measure the wealth effects of mergers. We find that in a non-trivial number of deals, the popular choice of using the SDC’s “Date Announced” (DA) field as the event date leads to biased estimates of target firm abnormal returns because of earlier abnormal price movements due to merger-related events such as merger rumors or search-for-buyer types of announcements. We capture market reactions around these early dates with the “Original Date Announced” (ODA) field in the SDC database. Target firms’ stock prices increase by an average of 12.6% around the ODA and another 11% around the DA. We argue that the proper event windows should include the market reactions around both dates. Our analysis also includes the characteristics of target firms that are involved in such events, acquirer abnormal returns around the ODA and the accuracy of the ODA in capturing the early dates.

Equity grants to target CEOs during deal negotiations

I investigate the determinants and consequences of granting equity to the target's Chief Executive Officer (CEO) during deal negotiations. These negotiation grants likely reflect information about the acquisition, benefit from the deal premium, and provide more timely bargaining incentives. I find that CEOs are more likely to receive equity during negotiations when they negotiate for the target, particularly when the target has more bargaining power. This suggests that boards use equity to enhance bargaining incentives for CEOs with the most influence over deal price. I find limited evidence that negotiation grants are used as compensation and no evidence that they have a material adverse effect on shareholders.

How much is reasonable? The size of termination fees in mergers and acquisitions

We investigate termination fee size in mergers. Although the deal premium does not significantly affect fee size, smaller targets and targets with lower institutional ownership offer larger fees. Low or moderate fees do not eliminate post-announcement competing bids, while large fees do. Fee size is generally positively correlated with deal completion. However, large fees are negatively correlated with the consummation of high-premium deals. Fee size is generally unrelated to announcement-date cumulative abnormal returns. However, returns are significantly lower for deals including fees larger than 5%. Overall, the study provides evidence that low- or moderate-size fees serve as efficient contractual devices, while large fees are less beneficial to shareholders and therefore tend to suggest agency conflicts.

The Impact of Common Advisors on Mergers and Acquisitions

We examine the conflict of interest that an investment bank faces when advising both the target and acquirer in a merger or acquisition (M&A) by investigating how common advisors affect deal outcomes. We compare M&As with common advisors to deals in which targets and acquirers use different advisors and account for the endogenous nature of this choice. We find that (1) deals with common advisors are less likely to be completed and take longer to resolve, and (2) sharing advisors does not affect the wealth gains of shareholders of targets, acquirers or the combined firm and the post-acquisition performance of acquirers. We find some evidence that valuation multiples paid for targets and deal premiums for public targets are significantly lower in transactions with common advisors, suggesting that common advisors tend to favor acquirers over targets, with an eye on future investment banking business from the larger, surviving firm. But most of our results suggest that common M&A advisors lead to neither better deal outcomes by facilitating information flow between targets and acquirers, nor worse deal outcomes by influencing both sides to hasten deal completion.