Merger Premiums Research Articles

Evaluation of merger premium and firm performance in Europe

Evaluation of merger premium and firm performance in Europe

Asset specificity and firm value: Evidence from mergers

This study explores the effect of asset specificity on a target firm's value in a merger. Using US merger data, I show that, when their industry experiences a negative cash flow shock, target firms that consist of more industry-specific real assets receive a lower merger premium than do those consisting of more generic assets. Results also suggest that the asset specificity discount in the target return is more pronounced if target firms are financially distressed. However, the negative value effect of asset specificity is mitigated in the presence of financially unconstrained industry rivals who place high value on the targets' assets, compete for the targets, and, thereby, are more likely to acquire the targets. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm's value.

Who asks for higher merger and acquisition premiums? The perspective of national collectivism

This study explores the impact of a collectivist culture on the premiums of cross-border merger and acquisition (M&A). Using a sample of cross-border M&A transactions conducted by Chinese firms, this study empirically investigates the role of a tendency toward collectivism in the target firm’s country in M&A pricing. The results show that collectivism in the target firm’s country, measured as an institutional collectivist tendency and an in-group collectivist tendency, negatively correlates with M&A premiums, in both statistically and economically significant ways. A one-point increase in institutional collectivism and in in-group collectivism can reduce the M&A premium by around 30 and 20 percentage points, respectively, ceteris paribus. I draw from the empirical results the conclusion that national collectivism has a great impact on M&A premiums. This conclusion is significantly revealing about the cross-border M&A decisions of enterprises in emerging markets.

The Method of Estimating the Premium in Mergers and Acquisitions in Emerging Markets for Private Companies

The Method of Estimating the Premium in Mergers and Acquisitions in Emerging Markets for Private Companies

Friends in the right places: The effect of political connections on corporate merger activity

This study examines how the appointment of former politicians and regulators to boards of directors or management teams influences corporate acquisition activity and performance. We find that bidders with political connections are more likely to acquire targets and avoid regulatory delay or denial. The merger premium paid increases with political connectedness. The announcement period returns show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected bidders make more bids and bid on larger targets. Connected acquirers also enjoy superior post-merger financial and operating performance.

Inter-firm linkages and M&A returns

This study investigates the value of customer/supplier relationships in mergers and acquisitions. The findings indicate that targets (suppliers) with strong customer/supplier relationships obtain higher abnormal returns and higher merger premiums when compared to targets with weak customer/supplier relationships. However, targets with a strong connection to a customer have a lower chance of being acquired. Acquirers that purchase targets with strong customer/supplier relationships have negative long run abnormal returns suggesting that the acquirers may have overpaid for these targets. The implications of customer/supplier relationships on customers, rivals, and competing rivals are presented.

An international study of shareholder protection in freeze-out M&A transactions

Freeze-out M&A transactions are those initiated by controlling shareholders to acquire minority shareholders' ownership in the firm. We compare international freeze-out mergers in 35 countries in merger premium, choice of payment, and completion probability. We find greater merger premium and probability of cash payment but lower deal completion rates in countries with stronger minority shareholder protection. Using detailed minority shareholder protection indexes, we find some evidence that the ex-post anti-self-dealing law enforcement is more important than the ex-ante anti-self-dealing law regulation in protecting minority shareholder value. Our study provides new evidence of minority shareholder protection in the setting of conflicts of interest between majority and minority shareholders.

The role of leverage in cross-border mergers and acquisitions

We examine the relationship between leverage and cross-border mergers and acquisitions. Using a sample of 85,560 cross-border mergers and acquisitions in 57 countries over the period 1990 to 2010, we find that firms with higher leverage are less likely to acquire foreign targets, whereas firms with lower leverage tend to be targets acquired by foreign firms. These effects are more pronounced in Asian countries than North America. Acquisition premium, the likelihood of all-cash offer and the percentage of cash in the acquisition offer decrease with leverage in cross-border mergers and acquisitions. Foreign targets gain positive abnormal returns in the both short run and long run, while acquirers earn positive abnormal returns in the short-run, but negative returns in the long run. We also find that firms adjust their capital structure after the acquisition by issuing more equity if they were overleveraged, or issuing more debt if they were underleveraged before the acquisition. Our results provide international evidence on how leverage affects managerial decision to acquire foreign targets, payment method and acquisition premium in cross-border mergers and acquisitions. This study shows that the interdependent relationship between investment decision and financing decision exists worldwide.

Friends in the Right Places: The Effect of Political Connections on Corporate Merger Activity

This study examines how the appointment of former politicians and regulators to boards of directors or management teams influences corporate acquisition activity and performance. We find that bidders with political connections are more likely to acquire targets and avoid regulatory delay or denial. The merger premium paid increases with political connectedness. The announcement period returns show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected bidders make more bids and bid on larger targets. Connected acquirers also enjoy superior post-merger financial and operating performance.

Does asymmetric information affect the premium in mergers and acquisitions?

AbstractWe test the influence of information asymmetry on the premium paid for an acquisition. We analyze mergers and acquisitions as English auctions. The theory of dynamic auctions with private and common value predicts that more informed bidders may pay a lower price. We test that prediction with a sample of 1,026 acquisitions in the United States between 1990 and 2007. We assume that blockholders of the target's shares are better informed than other bidders because they possess privileged information on the target. Our empirical results show that blockholders pay a much lower premium than do other buyers

Incentive pay and acquirer returns – The impact of Sarbanes–Oxley

Abstract This study examines how pay-for-performance influences the quality of merger decisions before and after Sarbanes–Oxley (SOX). Pay-for performance has a significant positive effect on acquirer returns of 0.9% pre-SOX and 1.1% post-SOX around the three-day event window. Bidders with high pay-for-performance pay a 23.3% lower merger premium in listed target acquisitions. The positive effect of pay-for-performance is more important for public target acquisitions overall, for small acquirers pre-SOX, and for large acquirers post-SOX. In the long run, bidders with high pre-merger pay-for-performance do not necessarily outperform.

An International Study on Shareholder Protection in Minority M&A Transactions

We define minority M&A transactions as those initiated by target controlling shareholders to acquire minority shareholders' ownership in the same target firm. Existing studies provide diverse evidence with regard to whether minority shareholders are expropriated by controlling shareholders in minority merger deals. Rather than studying transactions in a particular country, we use an international minority merger sample covering 55 countries. Furthermore, we examine multiple merger outcomes to present a comprehensive analysis of minority shareholder rights protection. We find, in countries with stronger corporate governance and legal enforcement, the merger premium and the probability of cash payment are higher but the deal completion rate is lower, suggesting stronger minority shareholder rights in these transactions. Our study provides new evidence of minority shareholder protection in the international scope. Our results suggest the different observation of minority shareholder protection can be attributed to the country-level corporate governance and legal enforcement.

Takeovers and the Market for Corporate Control in Japanese REITs

Japanese real estate investment trusts (J-REITs) were established in 2001. They have rapidly grown in number and size and there have been many J-REIT mergers following the Global Financial Crisis (GFC). J-REITs typically have a common ownership that renders most takeovers friendly, therefore the motivation for mergers is likely related to financial hardship. We examine the market response and the post- merger performance of these J-REIT mergers. We find significant abnormal trading volume for both surviving and absorbed J-REITs in the immediate days before the merger. Absorbed J-REITs suffer a significantly negative return in the two days before the merger announcement and there is no observed improvement in the post-merger operating performance. Unlike other mergers in Japan, the merger premium for J-REITs is inversely predictive of post-merger performance.

Do busy directors and CEOs shirk their responsibilities? Evidence from mergers and acquisitions

Abstract We examine the effects of busy directors on merger premiums and conclude that busy directors are not uniformly detrimental. We provide evidence that busy CEOs of acquirer firms are associated with lower premiums suggesting they do not shirk their responsibilities. Busy CEOs of target firms either accept lower premiums or do not play a significant role in determining the price, indicating they may either shirk or have hidden self-incentives. We find that when the majority of directors in target firms are busy, they negotiate better deals. The results show that busyness does not fully explain whether a CEO or director shirks responsibility. Additionally, our results confirm previous findings that the market reacts more negatively to high merger premiums.

The Evolution of U.S. Community Banks and its Impact on Small Business Lending

There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare pre- and post-acquisition performance and stock market reactions to these acquisitions, and investigate how the acquisitions have affected SBL. Contrary to concerns, we find that the overall amount of SBL tends to increase after a large bank acquires a community bank. The ratio of SBL to assets does decline in the large acquiring banks but at a slower rate than the decline seen in surviving community banks. Further, community banks that were merged during the financial crisis were mostly in poor financial condition, had been rated as unsatisfactory by their regulators on all risk aspects, and would have been unlikely to continue lending. We found that community bank targets accepted smaller merger premiums (or even discounts) to be part of a large banking organization. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL. This implies that a policy that discourages mergers between community banks and large banks is unwarranted and could potentially result in a weaker financial system and have an unintentional dampening effect on the supply of SBL.

How has the international harmonization of financial reporting standards affected merger premiums within the European Union?

We investigate the impact of IFRS adoption on merger premiums. Using a comprehensive database of M&A deals within the EU during 2000–2011 we examine the role of overall IFRS adoption, the differences between voluntary and mandatory adopters and the role of the target country's pre-IFRS accounting infrastructure and framework (absence of IFRS and IAS). We find that the introduction of the mandate is generally associated with lower merger premiums paid to targets. This decline is more pronounced in deals where the targets are mandatory adopters. We also find that the further away the target's country standards are from IFRS, the stronger the effect of IFRS adoption is on merger premiums. The results are robust to an exhaustive number of control variables and alternative model specifications, as well as across different subsamples.

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.

Asset Specificity and Firm Value: Evidence from Mergers

This study explores the effect of asset specificity on target firms’ value in merger. Using US merger data, I show that shareholders of target firms that consist of highly specialized real assets receive a lower merger premium than shareholders of target firms consisting of generic assets. Results also indicate that the asset specificity discount in the target premium is more pronounced if target firms are financially distressed and high valuation buyers of target assets are financially constrained. Further investigation reveals that firms with specialized assets reduce leverage more than other firms when the risk of liquidation loss is high. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm’s selling value as well as the value of its assets as pledgeable collateral.

Why Do Merger Premiums Vary across Industries and Over Time?

Why Do Merger Premiums Vary across Industries and Over Time?

The Role of Technological Synergy in Mergers and Acquisitions

While there is a large finance literature on the importance of synergy in mergers,there have been relatively few empirical studies that identify the specific sources of synergy and estimate their magnitudes. In this study, we concentrate on the value of synergy from combining two companies with complementary technologies. We identify several dimensions of technological synergy between acquirers and targets constructed from their patent portfolios data. Based on 2,626 horizontal acquisitions from 1977 to 2004, we find technological synergy is a positive determinant of merger premium. It also has a positive effect on the expected total synergy gain to the acquirers and target shareholders. The effect of technological synergy on total synergy gain is stronger if the acquirer and target are in less-competitive industries and if the target is under financial constraint. We verify our measures of technological synergy could capture acquirer’s expected technological synergy, i.e., increase in subsequent R&D investment, and realized technological synergy in increase in the number of patents in the post acquisition period.