Private Targets Research Articles

The post-merger performance of the European M&As: Does pre-merger earnings management matter?

This paper empirically examines the post-merger performance of a sample of 1,320 European mergers and acquisitions deals. Specifically, we investigate the impact of pre-merger earnings management of acquirers on both the short-term and long-term post-merger performance, for M&A deals completed between 2003-2012, considering both the form of payment and the target firm’s listing status. The findings suggest that acquirers report higher abnormal accruals before those deals where they pay with their stock and the target firms are private. The reported evidence suggests that, as a consequence, investors correct for these efforts in the long-term post-merger period – usually within the first 12 months. Moreover, acquirers are likely to experience positive abnormal returns in case of bidding for private targets, whereas negative abnormal returns are documented in case of a publicly traded target, respectively.

Operating Performance Following Corporate Acquisitions: Does the Organisational Form of the Target Matter?

We compare long-run operating performances between acquirers of private targets and acquirers of public targets using samples of Australian acquisitions for the period 2000-2010. The acquirers of private targets realise statistically significant positive abnormal returns during the announcement period of completed acquisitions while acquirers of public targets earn normal returns. However, the operating performance of the former group during the post-acquisition period is not significantly different from that of the latter group. The stock-financed acquisitions are not associated with significant performance improvements irrespective of whether this method of payment is used to finance acquisitions of private or public targets. However, there is evidence to suggest that cash-financed acquisitions of public targets are associated with significant performance improvements while no such performance improvements were evident for cash-financed acquisitions of private targets. The concentrated ownership created through acquisitions of private targets is associated with significant improvement in the long-run operating performance for acquirers. Acquisitions of private targets are also associated with significant performance improvements if they are undertaken by experienced acquirers.

Learning About Target Firms and Pricing of Acquisitions

We analyze the effects of learning about target firms on acquisition pricing. Newly public firms should be more opaque than established firms with long track records. An acquirer with superior information about a newly public firm can negotiate a favorable takeover price because lessinformed potential acquirers have a bidding handicap. Consistent with the effects of learning, acquirer announcement returns decrease and takeover premiums increase with the length of time since the targets’ initial public offerings. Our results provide new insights into the determinants of acquirer announcement returns and the effects of learning on acquisition pricing. Moreover, the target’s listing status alone does not seem to fully explain why acquirer announcement returns in acquisitions of public targets are significantly lower than in acquisitions of private targets.

Bidder Gains and Losses: Evidence from Terminated Merger Proposals

In most cases market returns around merger announcements are difficult to interpret as the announcement of a bid usually conveys more information than the synergy from combination. Using a unique, hand-collected dataset on terminated merger proposals, we investigate termination returns in deals canceled for exogenous reasons unrelated to the bidder's valuation. This methodology permits a new assessment of value improvements from acquisitions. We find that bidder gains and losses vary significantly with the type of target acquired. Further evidence suggests that the liquidity needs of private targets significantly contribute to the positive gains to bidders.

Returns to Acquirers of Listed and Unlisted Targets: An Examination of Australian Bidders

We analyze the market reaction to the announcement of takeover bids initiated by Australian public firms on private and public targets. The results show that acquirers of private targets benefit from a significantly higher share price reevaluation. This so-called listing effect is broad-based and persistent. It does not appear to depend on whether the target is large or small; whether it is related or not to the bidder’s industry; whether it is domestic or cross-border; and whether it is in the resources sector or not. We find only minor evidence that bidder returns might be stronger for larger acquisitions of private targets; for targets in the resources sector; and in subdued market conditions such as in the wake of the global financial crisis. In addition, our selection model suggests that endogenous choice of target is unlikely to have produced biased results. Overall, our findings are supportive of the view that market frictions contribute to make private firms attractive targets.

The Sarbanes‐Oxley Act and Exit Strategies of Private Firms

The costs and benefits of the Sarbanes‐Oxley Act of 2002 (SOX) have been oft‐debated since the inception of the Act. Much of the extant literature has assessed the costs and benefits of SOX to publicly traded companies. We focus on the costs of SOX compliance for private firms wanting to exit the private market via either an acquisition by a public firm or an IPO. Consistent with our predictions we establish two principal findings. First, SOX appears to have shifted the preferences of private firms from going public to exiting the private market via acquisition by a public acquirer. Second, private target deal multiples are increasing in variables that proxy for a private target's level of pre‐acquisition SOX compliance. These findings suggest that SOX‐related costs have both restricted the action space of possible exit strategies for private firms and led to lower deal multiples for those private acquisition targets that are less likely to be SOX compliant prior to acquisition.

Does Stock Liquidity Affect Incentives to Monitor? Evidence from Corporate Takeovers

We test whether stock liquidity affects acquirer returns through its hypothesized effect on institutional monitoring. We find that firms with lower stock liquidity have higher acquirer gains for takeovers of private targets, but not for takeovers of public targets. The negative relation between liquidity and acquirer gains is stronger when the threat of disciplinary trading (exit) by institutions is weaker and acquirers have higher agency costs. Acquirers of private targets with lower stock liquidity are more likely to withdraw deals and experience higher involuntary CEO turnover following value-destroying acquisitions. Our results support the hypothesis that stock liquidity weakens institutions' incentives to monitor management decisions, except in those cases where the disciplining effect of the threat of exit may be particularly high.

Target's organisational form and returns to Australian bidders in cross-border acquisitions

We present large sample evidence on return performances of Australian acquirers who bid for public and private targets in cross-border acquisitions. While placing a particular emphasis on the method of payment and the shareholder protection offered by the target country, we analyse the impact of various bid, firm and foreign-acquisition-specific characteristics on bidding firms' abnormal returns. We find that Australian investors perceive cross-border acquisitions as value-creating exercises regardless of the organisational form of the target acquired. However, bidders for private targets earn higher return when the method of payment is stock and the targets are located in high investor protection countries. We further find that the abnormal returns are conditional to the relative size of the target, bid frequency, target country destination and the preacquisition financial performance of bidding firms.

Stat, kyrka och familj: Innehållet i allmogebarns uppfostran i Finland i början av 1900-talet

Sedan 1600-talet har staten och kyrkan varit de makthavande institutionerna när det gäller all pedagogisk undervisning i Finland. Artikeln handlar om de här institutionernas förväntningar på allmogensbarnuppfostran i relation till den förverkligade informella uppfostran som var den främsta inlärningsmiljö för allmogebarn i Finland i början av 1900-talet. Statens och kyrkans förväntningar utrönas genomanalyser av olika dokument. Artikeln fokuserar även på ordspråk som används vid vardagliga tillfällenmellan barn och vuxna. I narrativer placeras ordspråken i en naturlig kontext. Vardagslivet bjuder påhändelser som inte alltid uppfattas som inlärningssituationer men som i själva verket har stor betydelseför människans lärande.

Does the organisational form of the target influence market reaction to acquisition announcements? Australian evidence

Using public, private and subsidiary acquisitions, we examine whether abnormal returns to bidders depend on the organisational form of the target acquired. The evidence supports two main hypotheses: (i) bidders on private and subsidiary targets earn higher abnormal returns than bidders on public entities and (ii) bidders on private targets earn higher abnormal returns when the method of payment is stock. Acquisitions of unlisted public targets, privately negotiated acquisitions of private targets and acquisitions of subsidiaries from listed parents for cash are associated with higher abnormal returns.

Bidders’ gains and family control of private target firms

This paper examines the announcement returns of bidders acquiring private firms owned by families versus the returns of bidders acquiring non-family controlled private firms. The sample consists of 391 acquisitions of private targets in seven continental European countries for the period 1997–2008. We find evidence that bidder's cumulative announcement returns (CARs) are lower when they acquire family controlled targets compared to non-family controlled targets. We show that this result holds regardless of whether the deal is paid with shares or cash and whether or not the bidding firm is also privately owned. Moreover, the result is independent of the size of the acquisition relative to the size of the acquiring firm. Our findings are consistent with the notion that the bidder has to pay a higher price in order to convince the family owners to sell in return for giving up private benefits.

Determinants of target selection and acquirer returns: Evidence from cross-border acquisitions

We examine cross-border acquisitions of private and public targets by U.S. firms by employing self selection models. We are particularly interested in the roles of country-level liquidity and transparency in cross-border acquisitions. Our results show that a typical acquisition deal of a private target is smaller in size, uses cash less frequently for payment, and involves more high-tech firms than that of a public target. Most importantly, we find that acquiring firms are more likely to buy private targets in lower-transparency countries, but the level of market liquidity in the target firm countries has little effect on the target selection. Furthermore, after accounting for the endogeneity bias associated with target selection, country liquidity is no longer a key determinant of acquirer returns in cross-border acquisitions. Our results are robust to alternative specifications of dependent variable and self selection models.

Does the Post-Acquisition Performance of Bidding Firms Depend on the Organizational Form of Targets Acquired?

A number of theoretical arguments such as corporate monitoring hypothesis, liquidity hypothesis and managerial motive hypothesis propose that the acquisitions of private targets are more value creating than the acquisitions of public targets. Using two large samples of acquirers of public targets and acquirers of private targets, we examine the post-acquisition operating performance of Australian bidders. The excess returns earned by these two samples during the announcement period reveal that the market perceives the acquisitions of private targets as value creating decisions while having a neutral view on the acquisitions of public targets. These findings corroborate existing evidence in the area while providing support for the relevant theories. An analysis of acquisition year financial profiles reveals that the acquirers of public targets are much larger in size, highly profitable and cash rich than the acquirers of private targets. Compared with acquisition-year performance, acquirers of public targets were able to maintain their performance in the post-acquisition years while the acquirers of private targets were able to show a significant improvement. However, when the industry-adjusted abnormal performance was analyzed, it was found that the former group outperformed their industry peers as well as the latter group by a significant margin. A number of bid and firm characteristics were found to have differential influences on the performance of two types of acquirers. Our sensitivity analyses revealed that the influences of bid and firm characteristics are somewhat sensitive to the benchmark used to generate abnormal performance and the scaling factor used to calculate performance measures.

What Influences the Discount Applied to the Valuation for Controlling Interests in Private Companies? (An Analysis Based on the Acquisition Approach for Comparable Transactions of European Private and Public Target Companies)

Abstract: In this study, we analyze what influences the size of the PCD for controlling stakes. As empirical research has shown, the discount applied to the value of private companies (or controlling stakes) can be quite significant. What is not clear, however, is what influences such a discount. In our study, we decided to analyze this issue focusing on the listing costs and the different types of buyers (listed or not listed) of the target companies. Since a private target company that is acquired by a publicly listed buyer is quasi automatically listed (through the acquisition) a public buyer saves the potential listing costs for the target company and should, therefore, be able to pay a higher price for the private target company, i.e., apply a lower, or no, discount for the private company. We use the acquisition multiple approach on a matched-pair sample (as done by Koeplin, Sarin and Shapiro 2000) for European target companies from 1999 to 2009. Thereby, we observe that, on average, the discount for private companies is different for the two types of buyers and a private buyer pays less for a private target than a public buyer.

Private acquisition gains: A contingent claims explanation

This paper studies announcement returns of Western European acquisitions of private and public targets. It uses a contingent claims perspective to offer a new explanation for the difference in abnormal returns between acquirers of private and public targets. In this context, an acquisition is analogous to buying a call option and the value of the acquirer increases with uncertainty about its growth prospects (options). We test this idea by studying the relation between announcement returns and acquirer's characteristics that proxy for the existence of growth options. Consistent with the contingent claims hypothesis, the private acquisition gains are associated with the combined effects of growth options (having higher runup before the acquisition announcement) with low level of leverage (near-all equity capital) and with uncertainty (measured by age and analyst coverage of acquirers).

Valuation of Private, Innovative Targets: Evidence from Cisco's Acquisitions

We estimate the value of innovative assets of private, innovative firms. Since young, private firms are the primary drivers of mold-breaking innovation, we focus on such firms. We adopt a novel approach that uses the price paid in the market for acquisitions of young, private targets and combine it with unique data hand-collected from Google Patents. We minimize systematic biases by comparing across deals undertaken within the same year by the serial acquirer Cisco Systems, whose processes for acquisitions are quite fine-tuned. To alleviate concerns about external validity, we cross-check the estimates obtained using Cisco's acquisitions with those undertaken by Yahoo and Google. We find order-ofmagnitude higher estimates for the value of patents when compared to existing studies. Apart from the intellectual property rights provided by patents, the value of a portfolio of innovative assets increases with the expertise underlying the assets as measured using citations to patents. Finally, consistent with intangible assets having a value that is contextspecific, we find that the value of the target’s innovative assets increases when these assets overlap more with the acquirer’s assets and with the assets of the acquirer’s competitors. Ours is the first study to attribute a value to the innovative assets of private, innovative firms and to value innovative assets in mergers and acquisitions.

Does overvaluation of bidder stock drive acquisitions? The case of public and private targets

We test the implications of the misvaluation hypothesis (Shleifer and Vishny, 2003) for a large sample of acquirers of private and public target firms. Consistent with the misvaluation hypothesis we find that acquirers are overvalued. The overvaluation is higher for stock acquisitions of private targets. We find that the announcement period returns are lower for firms that are overvalued at the time of acquisition. Announcement period returns are lower for larger acquisitions of public targets and higher for larger acquisitions of private targets. We also examine the factors that determine stock as the method of payment. Consistent with the misvaluation hypothesis we find that firms that have higher valuation measures at the time of acquisition tend to use stock. Acquirers of public targets tend to use stock more frequently.

"Wealth Effects of Horizontal Acquisitions on Rivals of Public, Private and Subsidiary Targets"

This study investigates the wealth effects of 182 European horizontal acquisitions in the manufacturing industry on rivals of the merging firms, thereby distinguishing between acquisitions of public, private and subsidiary targets. Based on a case-by-case investigation of the European Commission, over 800 publicly-listed rivals were identified. The event study around acquisition announcement indicates that especially rivals of private targets gain upon acquisition announcement but not rivals of public or subsidiary targets. We hence contribute to the acquisition literature by highlighting that acquisitions of private and of subsidiary targets, which until now have been treated as a single category, have different effects on rival returns. We argue that motives for acquiring a private, public or subsidiary target are highly distinct and consequently affect rival firms differently. Compared to acquirers of private companies, acquirers of publicly-traded firms are prone to agency risks and hubris, while acquirers of subsidiary targets are mainly buying poorly performing lines of business. Different motives explain differences in wealth effects.

The appeal of private targets in international acquisitions

Using a sample of 8000 targets in the US and Western Europe over the 1997–2009 period, we find that private targets receive significantly higher payments from bidders than public targets. We find that the private valuation premium is inversely related to the size of the target. We also find that the private valuation is relatively high when the target has better access to debt in its home country. Also, the private valuation premium is relatively high when the bidder country stock market is more fully developed and relatively low when the bidder has ample access to debt.

Business cycle and asset valuation in the gaming industry

This study values takeover targets in the gaming industry and finds that privately held takeover targets command lower valuations than publicly traded firms. On average valuation multiples are 46% lower for private targets relative to public firms. This finding has significant implications for owners of privately held gaming companies who may consider a takeover as an option to maximize shareholder value. The study examines the effect of recessions and expansions on valuation. The discount of private targets relative to public targets is present at all stages of the business cycle. Acquisition targets receive lower valuations in recessions and the relative discount for private gaming firms deepens further in recessions. Jointly, the results suggest that recessions have an important impact on the market for corporate control in the gaming industry.