Merger Transactions Research Articles

Firm Proximity and M&A Transactions

This paper examines how firm proximity affects merger and acquisition (M&A) deal outcomes, namely ease of execution and payment method. Firm proximity is defined as the ‘nearness in space or relationship’ between two companies and can be measured by firm similarity, board connections, prior business relationships, geographical proximity, shared auditors, and investor proximity. Prior studies have explored specific firm proximity factors in isolation, consistently identifying a positive effect on bidder M&A announcement returns. While these studies acknowledge that proximity, in different forms, contributes to information benefits for the bidder, none have studied the different proximity proxies together. In contrast to prior empirical studies, we argue that firm proximity is multifaceted and use an aggregate measure of proximity in our analysis. We study the effects of firm proximity on 316 Australian M&A transactions over the ten year period, January 1, 2004 to December 31, 2013. In the analysis, we find low correlation between the six proxies, indicating that the proxies capture different channels of information sharing. Using the aggregate measure of firm proximity, we find that proximity significantly increases the likelihood of announced M&A bids receiving a positive recommendation from the target board of directors and the likelihood of completion success. Furthermore, firm proximity increases the propensity of equity-based M&A transactions. Interestingly, firm proximity does not affect deal duration and is likely to be due to the Australian regulations in inhibiting the timeliness of the deal. We attribute our findings to the sharing of information when firms involved in the M&A are more proximate.

The Rise of the Equity Lending Market: Implications for Corporate Financial Policies

Ever increasing competition and search for yield have prompted institutional investors to routinely lend their equity holdings, making them the largest suppliers of stocks used for short selling. Shorting depresses stock prices, making it harder for firms to plan their payout policies, investments, merger deals, and employee compensation. We exploit the framework of institutional investing to show how shifts in the supply of lendable (shortable) stocks affect corporate policies. Firms react promptly to increases in lendable stocks by repurchasing shares and building cash reserves. The relations we document appear to be causal and consistent with the argument that firms shore up defenses against shorting activity. To fund their responses, firms pay fewer dividends, issue debt, and reduce investment spending. Firm responses are more pronounced when stocks are ex-ante more liquid, relatively overvalued, have higher pent-up shorting demand, and whose managers' personal compensation is more sensitive to stock prices.

Equity Investors Perception about Process Involved in Merger Deals

This proposed study tries to find the investors perception about process of mergers. This study also tries to find the influence of profile of investors on their perception about process of mergers. This study is fully based on primary data. Data have been collected from 513 equity investors in Chennai and Puducherry. The statistical tools of simple mean, cluster analysis, discriminant analysis, chi-square test, correspondence analysis, ANOVA, post-hoc analysis and canonical correlation have been adopted to analyse the data. This study finds that the equity investors feel that SEBI is effectively controlling the process of M & A. This study also finds that the profile of investors is not influencing their perception about process of mergers.

Market Reaction to Bidder Announcements of Horizontal Mergers in an Oligopolistic Industry: Evidence from the US Airline Industry

Mergers among US domiciled airlines have increased in recent years. These mergers are attempts by airlines to assuage operational and financial challenges and to obtain actual or ostensible benefits, including efficiency and market power gains, and improve competitive position. This study investigates the market reaction to merger announcements by bidder firms in the US airline industry, an oligopolistic industry, during the period 1985–2013. Results of the analysis show significant positive reaction to the announcements. The findings suggest that the market perceives these merger transactions as value-relevant events for bidders. In addition, the findings are consistent with the semi-strong form of the efficient market hypothesis.

The Engineering Gold Rush in Investment Banking

HR Discussion In the wake of the 2008 financial crisis, the investment banking industry was vilified by most of US (and perhaps rightfully so) as one of the main facilitators of “The Great Recession.” We cheered on as the industry was subject to an onslaught of new federal regulation, forcing many investment banks to slash thousands of jobs and drastically cut compensation for those on Wall Street. It is almost poetically ironic that with the recent downturn in the energy industry, investment banking (specifically energy investment banking) is well-positioned to not only weather the storm, but flourish in the current environment. Those who have followed the market closely in recent months are likely aware that the drop in commodity prices has forced many operators and service providers to slow production, cut costs, and restructure their current portfolios. The general consensus of industry experts is that it is only a matter of time before the industry sees a sizeable wave of merger and acquisition deals and consolidation. Consequently, energy investment banking groups are not only capitalizing on said restructuring, but will be one of, if not the main, beneficiaries as many companies in the industry will be forced to sell off assets and/or consolidate. Before diving into the specifics of what this means from a hiring perspective, it is important to understand how the energy investment banking industry, and particularly acquisitions and divestitures (A&D) groups, have evolved over the past 10 years. Before 2005, any type of transaction facilitated by an investment bank that required nuanced, technical due diligence was almost always outsourced to a third party engineering agency. For example, if an operator intended to divest an asset, an investment bank would be engaged to represent and advise on the divestiture, with any technical analysis likely handled by an independent advisory. The investment bank would take the findings of the third party agency and incorporate its analysis in determining the price/ fair market value of said assets. Senior level investment bankers would then pitch the potential acquisition to prospective buyers. As the energy investment banking industry became increasingly competitive, many investment banks began to realize a competitive advantage by conducting in-house technical analysis and evaluation for their clients. One example of this was Jefferies acquiring Randall & Dewey, a large and reputable independent oil and gas advisory firm, in February 2005. Through this acquisition, Jefferies was able to realize the value of conducting in-house technical analysis. Moreover, having seasoned reservoir engineers and geologists accompany traditional investment bankers as they pitched to C-suite executives (many of whom are engineers or geologists by background) proved to be paramount in winning new business.

Law and Practice of Mergers and Acquisition in Nigeria

As an expose on M&A law and practice, this paper commences by providing an overview of mergers and acquisitions in general terms – the meaning, rationale, types of mergers and key players in merger transactions while also addressing key concepts and process of acquisition in business parlance. Going further, this paper explores the legal and regulatory framework of M&A in Nigeria vis-a-vis procedural steps and documentation requirements that parties to M&A transactions must consider. Given the global scale far reaching economic implications of M&A deals, this paper touches briefly on cross-border mergers, whilst highlighting the legal and regulatory framework for M&As in United Kingdom and Germany.

Meger Means of Payment and Analysts' Bias between Merger Announcement Date and Merger Effective (Withdrawn) Date

We find strong evidence that analysts tend to have upward-biased earnings estimates in a time window between merger announcement date and merger effective date or between merger announcement date and merger withdrawn date. We also find that the increase of valuation ratios of target firms, such as initial target price ratio and market to book ratio, will lead to a decrease of realized forecast error in a time frame stated above. In particular, the impact of initial target price ratio on realized forecast errors is only observable within the first two trade months after merger announcement date. Compared to cash only deals, the magnitude of decrease in realized forecast error associated with increase in market to book ratio is larger for pure stock deals in the above time frame. Finally, we find a significant 1.65% cumulative abnormal return within a three day window around analysts forecast date that is within the stated time frame above. This stock price reaction can be explained by realized forecast errors that result from the merger means of payment and market to book ratio. Those findings suggest that merger and acquisition deal characteristics including merger means of payment and market to book ratios influence analysts’ near term bias with the stated time frame above.

Formation of Integrated Industrial Companies under Current Conditions

Economic researches in the area of integrated interrelations between industrial companies are particularly topical under conditions of globalization. The goal of this scientific research is to investigate the essence of integrated process with the participation of economic entities of the fuel and energy complex. In order to achieve the goal, the essence of industrial integration under current conditions was determined; its role in the development of integrated industrial structures of the fuel and energy complex of economy was defined; elements of the process of industrial integration on the basis of innovations and manufacture modernization were classified. In order to extend the research, special literature stating approaches to efficient management in the area of business combination is reviewed. Terms and conditions of establishing and conducting business in the country are characterized as the basis for integration processes. Integration of companies on the basis of merger and acquisition (M&A abbreviation) transactions is regarded as a special financial and economic tool. Measures on internal integration of manufacturing complexes on the basis of modernization and innovations are offered.

Reference Point Theory and Pursuit of Deals

AbstractTarget and bidder reference points have separate and joint effects on merger deals. A firm whose stock price is more distant from its 52‐week high reference point is less likely to attract bids but has a greater likelihood of being acquired by its own managers (vs unaffiliated bidders). Firm propensity to submit a bid increases if its prevailing stock price is closer to its 52‐week high. When both parties’ reference points are close to their current stock prices, they are more willing to complete a deal. Hostile deals result when the bidder's stock price is closer to its reference point.

CEO Side-Payments in M&A Deals

In addition to golden parachutes, CEOs often negotiate for personal side-payments in connection with the sale of their firm. Side-payments differ from golden parachutes in that they are negotiated ex post in connection with a specific acquisition proposal, whereas golden parachutes are part of the executive’s employment agreement negotiated when she is hired. While side-payments may benefit shareholders by countering managerial resistance to an efficient sale, they can also be used to redistribute merger proceeds to management. The current article highlights an overlooked distinction between pre-merger golden parachutes and merger side-payments. Similar to a legislative rider attached to a popular bill, management can bundle a side-payment with an acquisition that is desired by target shareholders. Thus, even if shareholders would not have approved the side-payment for purposes of ex ante incentives, it may receive shareholder support as part of a take-it-or-leave-it merger vote. Because side-payments are bundled into a merger transaction, voting rights cannot adequately protect shareholders against rent extraction. My analysis helps explain empirical results which show that target CEOs sometimes bargain away shareholder returns in exchange for personal side-payments. I conclude with legal reforms to help unbundle side-payments from the broader merger vote.

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.

Are controlling shareholders extracting private benefits from European public acquisitions?

Purpose – The purpose of this paper is to examine the incentives of controlling shareholders in the market for corporate control. The author investigates the takeover premiums paid by a sample of European acquiring firms with voting rights structures that are highly concentrated. The results show a positive relationship between takeover premiums and the bidder’s concentration of both voting rights and excess voting rights over cash-flow rights. The author argues that with higher levels of entrenchment, takeover premiums reflect the private benefits of control which controlling shareholders in bidding firms seek to extract from a public transaction. Design/methodology/approach – This paper uses cross-sectional regression analyses to examine the relationship between takeover premiums and the extent to which bidding firm shareholders exert control as well as the arrangement which underlie this. The sample is composed by 210 deals. The data are collected from various databases (Thomson Financial’s Mergers and Acquisition; Faccio and Lang’s (2002); Datastream/Worldscope, LexisNexis). Findings – The premium paid in European M&A transactions is affected by the level of ownership exerted by the controlling shareholder. The results show premiums are positively and significantly associated with higher levels of voting rights, as well as, the level of separation of ownership and control when controlling shareholder ownership is low. Pyramiding structure seems to be the means of separation the most associated with takeover premiums. Research limitations/implications – This paper can be improved by other specifications. First, it would be interesting to analyze premiums paid by firms with dispersed ownership structure and to compare these premiums with those paid by firms with controlling shareholders. Second, the author suggests to examine whether a controlling shareholder occupy the seat of a CEO or a chairman. In these cases, the author assumes that the controlling shareholder can benefit from more discretion and can extract more private benefits. Third, the author suggests extending the sample period to 2007 at least to include the sixth wave. This wave was even more significant than the high-tech wave and has not been studied much. In these cases, the author assumes that the controlling shareholder can benefit from more discretion and can extract more private benefits. Originality/value – Previous studies show that the premium reflects the private benefits of control in privately negotiated transactions (mainly block transactions). In the present study, the author shows that the premium can also reflect private benefits in public merger transactions.

Are Firm-Advisor Relationships Valuable? A Long-Term Perspective

We examine long-term firm-advisor relations using an extended history of debt, equity, and merger transactions. Hard-to-value firms are more likely to maintain dedicated advisor relations (underwriters or merger advisors). Firms that retain predominantly one advisor over their entire transaction history pay higher underwriting/advisory fees, have inferior deal terms, and have lower analyst coverage relative to those that employ many advisors. When we condition on a firm’s information environment as a catalyst for long-term advisor retention, riskier firms obtain better terms when they utilize a variety of advisors, but informationally-opaque firms do not. Our results suggest that only some firms benefit from long-term advisor retention.

Improvement of efficiency of gas distribution sector in the Republic of Serbia: Some recommendations

This paper aims to investigate the possibilities for improvement of efficiency of the natural gas distribution sector in the light of supporting the competitiveness of the domestic companies. The gas distribution network operated by distribution system operators (DSOs) is an important link of the value chain in delivering natural gas to industrial consumers and households. DSOs are in a position of natural monopoly that is economically and socially acceptable. Because of their importance for the competitiveness of national economy, we analyzed their technical efficiency and financial condition. We found that many of those companies have a low level of technical efficiency and ruined financial health and investment potency. Several possibilities for improving this performance were analysed, and as the most viable seemed to be mergers of these companies into a fewer number of DSOs. The main DSO-specific sources of value that could be activated through merger transactions were identified and analysed in depth. The process of mergers should be initiated by government, and its implementation should be supported by local authorities if they founded the DSO.

A Multi-level Approach to the Abandonment of Cross-Border M&As after Public Announcement

Abandonment of an merger and acquisition (M&A) deal causes both short-term monetary and time losses and severe damage to the strategy and reputation of the firms involved. Building upon managerial ...

Pfizer and Allergan announce US$160bn merger deal

Pfizer and Allergan announce US$160bn merger deal

Strategic Decision Models Cross-Validation by Use of Decision Reports Information Extraction

From all the events in the life of a business entity, the Mergers and Acquisitions transactions are one of the most challenging ones, as they drastically affect the life of the involved entities, but also their business stakeholders (like clients or suppliers). The Merger transaction can be seen as a growth crisis in the life of the buyer entity and a strive for survival in the life of the acquired company. Studying such transactions are being a constant preoccupation for both academia and practitioners, modeling mergers in order to predict them - one of the most ambitious task. In this paper, we present our technique of cross-validating the results of our model and use several boosting methods for improving the computed decisions scores.

Does pedigree matter? Earnings quality of U.S. listed domestic firms via reverse mergers

This paper examines earnings quality of U.S. domestic firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 to 2011. In order to mitigate confounding effects of legal regime, law enforcement, and culture, we require both the acquiring and target firms to be incorporated and headquartered in the U.S. to be included in our sample. We also use the Heckman (1976) procedure to control for self-selection bias. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, discretionary revenues, real activities earnings management, and accrual estimation errors. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that U.S. domestic RM firms have lower earnings quality compared with U.S. IPO firms. Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process.

Increased Frequency for Delaware Choice of Law in Merger Agreements and the Implications for Scholarly Research

The legal community has long recognized that business corporations heavily favor Delaware as the state of incorporation. However, a recent study suggested that despite Delaware’s prominence as the place of incorporation, companies “flee” from Delaware with respect to both choice of law and forum, and instead prefer New York. In Professor Eisenberg and Miller’s study, while 181 acquirers were incorporated in Delaware, only 135 chose Delaware law, and while there were only five acquirers that were incorporated in New York, 63 merger contracts chose New York law. Building on Professor Eisenberg and Miller’s work, we study a data of 343 merger and acquisitions contracted on between January 1, 2011 and June 30, 2011. We find that companies only display a New York bias when companies have connections to New York. In other words, a company’s place of incorporation, place of business, and merger attorneys’ locale substantially influence the choice of law for merger deals. Our study shows that by eliminating acquirers that are domiciled — either incorporated or having a primary place of business — in New York, as well as eliminating merger attorneys that have presences in New York, the data reflects little New York bias.Specifically, when the acquirer has no place of business in New York, only 12.23 percent of the merger deals chose New York law. Going one-step further, out of the ninety merger deals that did not have any New York connection, only 8.89 percent chose New York law. By eliminating all New York connections, the study shows that companies are much less likely to choose New York law. Moreover, the data reflects that a Delaware incorporated acquirer is more likely to choose Delaware law to govern their merger deals than any other state law — 64.37 percent of Delaware incorporated acquirers chose Delaware law, whereas only 14.94 percent chose New York law. Indeed, our data shows that when we follow the methodology and use the assumptions of the Eisenberg and Miller study in constructing our data set, the frequency with which Delaware law was chosen to govern the merger deal had substantially increased when compared to the frequency with which Delaware law was chosen by the parties in the Eisenberg and Miller study. Our results further nullify the premise that Delaware corporations are engaged in a flight to choose New York law in their merger agreements.

Implementation of EU Merger Directive into the Slovak Legislation and Certain Selected Types of Restructuring of Business in the Slovak Republic

Abstract (EN) The article presents and explains transactions of restructuring of businesses in respect of taking over transactions from the Slovak and European tax point of view. The merger transactions from the tax perspective are regulated by The Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States. In this respect, the article analyzes certain selected types of restructuring of businesses, such as (i) sale of business or the part of business, (ii) contribution in kind of business or the part of business, (iii) merger transaction from the selected Slovak legal implications that can be used in the agribusiness sector.