Model Of Takeovers Research Articles

Toehold Acquisitions, Market Reaction, and Corporate Control

This paper presents a takeover model with symmetric information regarding post-tender offer target values, and provides a solution to the empirical puzzle of zero or small toeholds acquired before tender offers. With endogenous market adjustment of pre-tender offer target price, we show that a risk-averse bidder forgoes an aggressive toehold strategy in order to minimize losses following failed takeovers due to target defense, and that a toehold does not solve the free-rider problem of target shareholders. When there is perfect information regarding the possible post-takeover target values, and that the profits and losses from toehold offset each other, then the optimal toehold is zero. But if acquiring a toehold benefits the risk-averse bidder beyond the payoffs from the takeover, for instance, to serve the bidder's portfolio risk reduction motive, or to generate profits from selling to rival bidders in a control contest, then a positive toehold is part of the equilibrium. We also study how the optimal toehold varies in both diversifying and related acquisitions, and how the presence of rival bidders affects the initial bidder's toehold strategies.

A model of takeovers of foreign banks

This paper investigates the determinants of the takeover of a foreign bank by a domestic bank whereby the former becomes a branch of the latter. Each bank is initially supervised by a national agency that cares about closure costs and deposit insurance payouts, and may decide the early closure of the bank on the basis of supervisory information. Under the principle of home country control, the takeover moves responsibility for both the supervision of the foreign bank and the insurance of the foreign deposits to the domestic agency. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign banking market) and its investments are risky (relative to those of the domestic bank). Moreover, the takeover is in general welfare improving for both countries.

A Model of Takeovers of Foreign Banks

This paper investigates the determinants of the takeover of a foreign bank by a domestic bank whereby the former becomes a branch of the latter. Each bank is initially supervised by a national agency that cares about closure costs and deposit insurance payouts, and may decide the early closure of the bank on the basis of supervisory information. Under the principle of home country control, the takeover moves responsibility for both the supervision of the foreign bank and the insurance of the foreign deposits to the domestic agency. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign banking market) and its' investments are risky (relative to those of the domestic bank). Moreover, the takeover is in general welfare improving for both countries.

The Dynamics of Mergers and Acquisitions

This paper presents a dynamic model of takeovers based on the stock market valuations of merging firms. The model incorporates competition and imperfect information and determines the terms and timing of takeovers by solving option exercise games between bidding and target shareholders. The implications of the model for returns to stockholders are consistent with the available evidence. Notably, the model predicts that (1) returns to target shareholders should be larger than returns to bidding shareholders, and (2) returns to bidding shareholders can be negative if there is competition for the acquisition of the target. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns and to the dispersion of beliefs regarding the benefits of the takeover.

The real estate takeover: Application of Grossman and Hart theory

In this article, I adopt a corporate takeover model to the problem of a developer who wants to renew an urban neighborhood. The problem outlined is a combination of the problems addressed by Grossman and Hart (1980)(. The Bell Journal of Economics 11, 42–64) and Shleifer and Vishny (1986)(. Journal of Political Economy 94, 461–488) in the corporate control literature. The relevant corporate story concerns value-improving monitoring performed by shareholders. Even though monitoring increases the value of the company for each investor, no shareholder would be willing to do it because there is an externality involved. Translating this into the language of urban redevelopment, no homeowner would do any improvement in the neighborhood unless he or she can internalize the benefit. The story in the urban renewal framework is more complicated. These property owners may differ in their valuation of even otherwise identical units since the owners may have different attachments to the neighborhood. I address some of these problems and also introduce the notion of dilution as the participating government agency's ability to force initial residents to sell to the developer or comply with costly new standards for development. Dilution increases the costs to potential holdouts.

Predicting mergers and acquisitions in the food industry

Two logit models are estimated to explain merger and acquisition (M&A) activities in US food manufacturing using firm level data for public firms: a “target model” predicting the likelihood of a firm being targeted for M&A and a “takeover model” predicting the likelihood of a targeted firm being taken over. Target model results suggest the importance of firm liquidity, debt/leverage, profitability, growth in sales, stock earnings capacity, percentage of common stocks traded in the stock market, and market-to-book ratio. Activity or turnover ratio, firm size, and price–earnings ratio were not statistically significant. Takeover model results suggest the importance of degree of officer control, attitude surrounding the transaction, number of prior bids, existence of litigation during negotiations, and involvement of the bidder and/or target in other takeovers during negotiations. With predictive accuracy of 74.5 and 62.9%, respectively, these models suggest the systematic nature of M&A activities. © 1999 John Wiley & Sons, Inc.

Predicting mergers and acquisitions in the food industry

Two logit models are estimated to explain merger and acquisition (M&A) activities in US food manufacturing using firm level data for public firms: a “target model” predicting the likelihood of a firm being targeted for M&A and a “takeover model” predicting the likelihood of a targeted firm being taken over. Target model results suggest the importance of firm liquidity, debt/leverage, profitability, growth in sales, stock earnings capacity, percentage of common stocks traded in the stock market, and market-to-book ratio. Activity or turnover ratio, firm size, and price–earnings ratio were not statistically significant. Takeover model results suggest the importance of degree of officer control, attitude surrounding the transaction, number of prior bids, existence of litigation during negotiations, and involvement of the bidder and/or target in other takeovers during negotiations. With predictive accuracy of 74.5 and 62.9%, respectively, these models suggest the systematic nature of M&A activities. © 1999 John Wiley & Sons, Inc.

TAKEOVERS OF DIFFUSELY HELD FIRMS: A NONSTANDARD APPROACH

A common theme in the literature on corporate control is that, when share ownership is diffuse, the free‐rider problem prevents raiders from making acquisitions at tender prices below the postacquisition share price. In this paper, we address this question by formulating a nonstandard model of takeovers of diffusely held firms. It is demonstrated that, even when individual shareholdings are infinitesimal relative to firm size, takeovers succeed with positive probability and equilibria exist in which the raider earns substantial per share profits. Further, the Nash equilibria of the game are characterized with regard to raider profit, the aggregate fraction of shares tendered, and the relation between raider profit and the degree of randomization exhibited by shareholder tendering strategies.

An Evaluation of the Corporate Takeover Model Using Neural Networks

AbstractNeural networks have been found to be promising in financial prediction tasks like bankruptcy and loan defaults. Their use in the capital markets is relatively new, although they have been used with some success in picking undervalued stocks. Accurate prediction of corporate takeover targets results in high financial payoffs. Researchers have used statistical procedures like logistic regression with little success in predicting corporate takeover targets. We use neural networks that are capable of producing complex mapping functions to predict mergers. We develop several neural network models carefully controlling for overfitting. Our results indicate that although neural networks map the data very well, they do not predict merger targets significantly better than logistic regression. This strongly suggests that the financial models used to predict mergers are inadequate. Firms should approach the development of merger prediction models cautiously and identify other factors that are more likely to predict mergers. Attempts to apply better analysis techniques to existing models will most likely produce similar results.

Repetition, Reputation, and Raiding

I develop a multitarget takeover model with bid revisions, in which bidders desire a reputation for having low valuations. Such a reputation increases the likelihood that future targets will accept low premium bids. Bidders develop reputation by using low take-it-or-leave-it offers. Consequently, tender premiums bid revision rates, and success rates are lower for continuing bidders than for those considering only a single target. Success rates vary within a series, and reputation building is more likely with highly correlated target valuations. I provide an exploratory empirical analysis consistent with lower premiums from continuing bidders and discuss some resulting implications regarding raiders, conglomerates, and resistance strategies. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Noise Trading and Takeovers

A model of takeovers is investigated in which noise provides camouflage that makes it possible for a large corporate outsider to purchase enough shares at favorable prices so that takeovers become profitable. Although the model accommodates the possibility of dilution (Grossman and Hart, 1980) and a large incumbent shareholder (Shleifer and Vishny, 1986), neither dilution nor a large incumbent shareholder is necessary for costly takeovers to be profitable. Noise trading tends to encourage costly takeovers that otherwise would not occur and to discourage beneficial takeovers that otherwise would occur.

Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests

In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear cross-sectional regressions fail to support the model predictions.