Acquisition Returns Research Articles

Empirical evidence of the value of monitoring in joint ownership

Joint ownership of assets by two partners can have an adverse effect on the incentives to invest and can result in unstable and inefficient organizational structures. Control sharing, however, plays an important role in economic, political, and social institutions. There is scarce empirical evidence on the benefits of joint ownership in corporate finance. We analyze acquisitions of corporate assets by joint ventures to empirically ascertain the value of joint ownership in economic activities. The results indicate that firms experience significantly larger returns in joint acquisitions than in full-control acquisitions and that this difference is restricted to the sample of firms in which both partners share equal ownership in the target. These findings suggest that monitoring in joint ownership structures ameliorates the possibility of value-destroying corporate decisions.

CEO DIRECTORS, EXECUTIVE INCENTIVES, AND CORPORATE STRATEGIC INITIATIVES

I study how directors who are chief executive officers (CEOs) of other firms affect board effectiveness. I find that CEOs are paid more and their compensation is less sensitive to firm performance when other CEOs serve as directors. This is not an employment risk premium because CEO directors are not associated with higher turnover-performance sensitivity. Also, CEO directors have no effect on corporate innovation but are associated with higher acquisition returns, especially for complex deals. My results suggest that the advisory benefits of CEO directors must be balanced against the distortions in executive incentives associated with their board service.

Do Private Equity Sponsors Sacrifice Long-Term Value for Short-Term Profit? Evidence from a Comprehensive Sample of Large Buyouts and Exit Outcomes

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. Yet, we find that on average, public companies benefit when they buy financial sponsors’ portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run post-transaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses, either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism.

Corporate Venture Capital and the Acquisition of Entrepreneurial Firms - DISSERTATION EXECUTIVE SUMMARY

This dissertation uses quantitative and qualitative methods to examine the “direct” (e.g. the effect when acquiring portfolio companies) and “indirect” (the effect on all startups the firm acquires) impact of corporate venture capital investments on the acquisition of technology startups. In the first study, I examine the acquisition of startups by 61 top CVC investors between 1987 and 2003. I find evidence that established firms use external venturing programs as a mechanism for identifying and monitoring potential acquisition targets. The strategic investors in my sample had a prior equity investment in one of every five startups they acquired in this 16-year period. Interestingly, I find that firms are more likely to destroy value acquiring startups from within their CVC portfolio (e.g. “trying before they buy”) than when acquiring startups outright. I then explore several alternate explanations for these puzzling results. Overall, the evidence suggests that value-destroying takeovers of portfolio companies stem from managerial overconfidence or agency problems at the CVC program level.I supplement the quantitative analysis with interviews with CVC managers, independent VCs, and entrepreneurs. While many of the managers I spoke with agreed that acquisitions of portfolio companies ended up destroying value, several of them made comments like, “even if we overpay for the startups we invest in first and then acquire, it is still worth it to us to stay connected to the community of startups and venture capitalists.” I explore this potential for spillover benefits in the second empirical study. Specifically, I examine the extent to which CVC investments provide information flows that can improve the firm’s acquisition performance more generally. I find that CVC investments do in fact provide a boost to acquisition performance relative to noninvestors; however, this advantage dissipates quickly and is subject to diminishing returns. Contrary to my expectations, however, I do not find that acquisition returns are higher when firms’ portfolio companies are concentrated in the same industries as the startups they acquired. Instead, investments in startups in IT and life science industries increase acquisition returns (when acquiring startups in IT) by roughly the same magnitude.

Globalization, Governance, and the Returns to Cross-Border Acquisitions

Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirer's industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.

Prior Target Valuation Changes and Acquirer Announcement Returns in Acquisitions of Recently Listed Targets

We provide new insights into the determinants of acquirer announcement returns with a unique sample of targets that are acquired within three years of their IPOs. Existing studies of acquisitions of private and established public targets find positive relations between acquirer announcement returns and prior target valuation changes. In our sample of recently listed targets, we measure the prior target valuation change as the return from the IPO offer price to two weeks before the acquisition. Inconsistent with the behavioral biases based on prospect theory studied in the related literature, the relation between acquirer announcement returns and targets’ returns since their IPOs is negative. We separate our target prior return variable into two components, the target’s first day return (IPO underpricing) and the return from the first day close until two weeks before the acquisition (Prior return). We contend that IPO underpricing is a proxy for target valuation uncertainty and Prior return is a proxy for target distress-related bargaining power. The positive relations of these two variables to other proxies for target valuation uncertainty and target distress support our interpretation. Both IPO underpricing and Prior return have significantly negative relations with acquirer announcement returns. Therefore, our empirical findings show that rational causes related to target valuation uncertainty and bargaining power explain a large part of the effect that prior target valuation changes have on acquirer announcement returns. Our study also adds to the debate over how much irrational behavior, as opposed to rational actions, affect major corporate events.

Ownership Structure and Acquisition Return: Chinese Perspective

Based on a sample of 995 acquisition events in Chinese stock market from 1999 to 2007, we simultaneously investigate the acquisition return for bidders and the target and find that both of them are slightly positive, which is inconsistent with foreign experiences. Besides, we also construct detailed research for the relationship between acquisition return and ownership structure and find that both of them are very weak and statistically insignificant. Furthermore, we find in our results that, as ownership structure decentralization process going on for Chinese publicly listed firms, the traditionally agency problem between the biggest shareholder and rest shareholders in China has been shifting to classical agency problem, the conflict between shareholder and manager. Finally, we find that hostile attack positively affects seller’s acquisition return but damage buyer’s profit and that Chinese stock market reform has significant influence on acquisition return, for both of them.

Bidders' board structure and acquisition returns

The extant academic evidence is, at best, mixed regarding whether bidders gain from their acquisitions. It suggests that many, arguably most, acquirers fail to add to shareholder value through their bids. This paper proposes and explains why companies with boards of directors, which are relatively independent of management, should make better acquisition bids. This prediction is tested using financial event study methodology. Evidence that Cumulative Abnormal Return (CAR) on acquisition is significantly positive for companies with independent boards is reported. Furthermore, these companies have significantly higher abnormal returns (ARs) than those with non-independent boards.

The Evidence on Market Abnormal Returns in Acquisitions on the Warsaw Stock Exchange

The paper provides evidence on abnormal returns performance in acquisitions on the Warsaw Stock Exchange. From a variety of measures, the authors chose the event study methodology, used in developed markets to evaluate post-acquisition performance and based on the market data, and Cumulative Average Abnormal Return (CAAR). The research sample has included acquired (target) firms quoted on the Warsaw Stock Exchange and selected according to the tender offers announcement in 1998-2004 as one of the formal ways of acquisition offer. The research study has focused on short-term abnormal returns (60 days before and 60 days after bid announcement). The evidence leads to the conclusion that positive reaction of investors to bid announcement on Polish market is similar to the reaction of investors on developed markets, and results in positive abnormal return for shareholders of acquired (target) firms. However the results obtained for individual sectors do not allow to draw unambiguous conclusions and indicate that abnormal returns for shareholders of acquired (target) firms are sensitive to the adopted model of evaluation.

Implications of Early Versus Late-Mover Status for Bidders and Their Rivals in Cross-Border Acquisitions

The purpose of this paper is to examine if early market entrants benefit from positive announcement returns in cross-border acquisitions. In examining the acquiring firm shareholder wealth effects, we find evidence that cross-border mergers and acquisitions are wealth-destroying if the announcing firm is an early-mover, especially if the firm's R&D expenses are high. Thus, internalization benefits appear not to be large enough to compensate early-movers for the costs of entering the foreign market. While early-movers seem to experience value destruction from internalizing their intangibles, we find evidence that cross-border acquisitions provide advantages to later market entrants. Specifically, we show that innovative followers (i.e., those with high R&D spending) experience significantly positive CARs upon the announcement of a cross-border acquisition. The potential benefits to these innovative followers are plentiful. First, followers can learn from early-movers and thereby avoid costly mistakes. Further, followers can benefit from early-movers' groundwork of preparing the foreign market and government for the new U.S. presence in their country. Finally, followers can improve products and/or production offered by the early-movers which allows followers to ensure market share. Followers might also enter the foreign market early enough to secure loyal workers, suppliers, and customers. However, these followers enjoy positive CARs only if they expand into countries with a national culture similar to the U.S., where successful integration of the target firm is relatively easy. Rival firms tend to experience similar CARs as the announcing firm which is indicative of a contagion effect. Specifically, cross-border acquisitions announcements appear to provide information about industry conditions that prompt investors to re-assess values of other firms in the same industry. We further find some evidence for certain competitive responses. While cross-border acquisitions generally appear to be value-destroying to early-movers, they increase value for the rival firms. Consistent with our earlier findings, it is beneficial to wait and possibly learn from early-movers. Rivals of followers, on the other hand, experience negative announcement CARs. This finding suggests that followers enjoy great benefits and may be able to create barriers of entry which makes it harder for rival firms to subsequently enter the foreign market.

Two faces of busy outside directors

In this study, we examine how multiple directorships held by outside directors (busy outside directors) influence shareholder wealth in diversifying acquisitions. With a sample of 893 diversifying acquisitions from 1998 to 2004, we find a negative (positive) busy-director effect for diversifying acquisitions of public-targets (private-targets). Busy directors are negatively (positively) associated with the five-day cumulative abnormal returns in acquisitions involving public (private) targets, where merger-related agency problems are more likely. Our evidence support the notion that, in the case of diversifying acquisitions, increased managerial monitoring plays a more important role versus enhanced advising and business connection from busy directors.

How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?

We examine the theoretical predictions that link acquirer returns to diversity of opinion and information asymmetry. Theory suggests that acquirer abnormal returns should be negatively related to information asymmetry and diversity-of-opinion proxies for equity offers but not cash offers. We find that this is the case and that, more strikingly, there is no difference in abnormal returns between cash offers for public firms, equity offers for public firms, and equity offers for private firms after controlling for one of these proxies, idiosyncratic volatility. (JEL G31, G32, G34) This article examines whether variables suggested by diversity-of-opinion models and information asymmetry models are helpful in understanding the cross-sectional variation in acquirer announcement returns using a sample of pure equity offers and pure cash offers for public and private firmsfrom1980to2002.Wedocumentthatthesevariables,theuncertainty proxies, explain a significant fraction of the cross-sectional variation in acquirer announcement returns. Perhaps most strikingly, after controlling for the uncertainty proxies, there is no difference in abnormal returns between cash offers for public firms, equity offers for public firms, and equity offers for private firms. Using two proxies for diversity of opinion employed previously in the literature, the standard deviation of analyst forecasts and breadth of ownership, we show that bidder abnormal returns for acquisitions of

Alternative Methods of Convergence Toward U.S. Market and Legal Regulations: Cross-Listing vs. Merging with U.S. Bidders

Non-U.S. firms have two options to converge toward U.S. capital market and legal regulations - to cross-list in the U.S. or to agree to be acquired by a U.S. bidder. We show that companies that have lower growth opportunities, are more capital intensive, and seek bonding benefits through compliance with U.S. exchange (rather than OTC market) requirements are more likely to be acquired, and that firms from civil law countries tend to cross-list. We document that the adoption of Sarbanes-Oxley Act of 2002 (SOX) led to an increase in the propensity to be acquired for firms from civil law countries, and to a greater rate of cross-listings for capital intensive firms from common law countries and for firms from countries with strong protection of investor rights. We also show that Market-to-Book values of non-U.S. firms following cross-listing in the U.S. tend to be lower when these firms were expected to be acquired. Similarly, both non-U.S. targets and U.S. bidders experience lower abnormal returns in acquisitions involving targets expected to cross-list. Our results imply the existence of optimal convergence choices of non-U.S. firms. In addition, the adoption of SOX appears to have changed some determinants of these choices due to shift in benefits and costs of compliance with U.S. regulations.

Do European Acquisitions in China Outperform?

We examine bidder returns for European acquisitions in China. In particular we study whether the bidder returns in the Chinese emerging economy are larger than those in the United States. For both target countries no significant cumulative abnormal bidder returns are found and we do not find significant differences between acquisitions in China and in the USA, except for a significant lower standard deviation of bidder returns in China. Regression analysis confirms that acquisitions in China do not outperform those in the USA. Univariate tests indicate that acquisitions in China perform worse if the target is a private company or when the acquirer comes from the European continent, but this result is not confirmed with regression analysis. These results suggest that Chinese targets are normal targets in the world of cross-border acquisitions. The only relative benefit of acquisitions in China is that it is significantly less likely to result in fierce negative reactions of investors.

THE USE OF ACQUISITIONS AND JOINT VENTURES BY U.S. BANKS EXPANDING ABROAD

AbstractWe examine international bank expansions, which are classified as banking (scale related) or nonbanking (complementary) moves into developed or developing markets. The market responds favorably to expansions through joint ventures by U.S. banks, and insignificantly to expansions through acquisitions. Accounting and operating performances (for joint venture banks) and long‐period holding returns (for acquisitions) show improvement in the two years following the announcement. Systematic risk declines for the sample overall, for acquisitions, and for expansions into developing countries. In general, scale or developing expansions are better pursued through acquisitions, whereas complementary or developed expansions are best pursued through joint ventures.

When does cross‐border acquisition of insurance firms lead to value creation?

PurposeThe purpose of this paper is to focus on international acquisitions that took place in the insurance sector by US‐based firms in the years 1997‐2003 and their impact on shareholder wealth.Design/methodology/approachThe study sample is based on 52 international acquisitions in 24 countries undertaken by US firms in the insurance industry during the years 1997‐2003. The event‐study methodology is used to verify the impact of international acquisition announcements on an insurance firm's shareholder wealth. Cross‐sectional regression analysis is used to determine the importance of host country factors.FindingsOverall results of this study show that firms undertaking overseas acquisitions face statistically insignificant negative market returns, indicating the market neither rewards nor penalizes such firms. The market returns faced by firms during such acquisitions tend to vary by the degree of wealth of the host country, amount of bilateral trade between host and home country, extent of potential liabilities of foreignness (LOF) faced by the firm, and economies of scope.Originality/valueAn important contribution of this study is that it indicates how these returns in insurer acquisitions are influenced by country characteristics. Insurers are likely to face relatively higher positive returns while seeking entry into countries with large size markets and which have extensive trade relationships with the US insurers are also likely to face negative returns when entering markets that have potential pitfalls of LOF. The market does see higher risk in acquisitions made in countries characterized by greater differences in culture, environment, legal systems, and geographic distance. Additionally, there is limited evidence indicating that firms gaining scope economies might be able to reduce the negative impact of LOF. Therefore, the conventional phrase, “look before you leap” would be apt for insurers planning acquisitions in overseas markets.

Investment Decisions and Managerial Discipline: Evidence from the Takeover Market

This article focuses on the relative importance of boards of directors and the hostile takeover market in disciplining managers who make poor acquisition decisions. The evidence shows a weak inverse relationship between acquisition performance and the likelihood of becoming a takeover target, but only after it becomes clear that the internal control mechanism has failed. A forced turnover of a top executive was more likely in the 1990s, the more negative the abnormal return associated with an acquisition announcement. The relationship between forced turnover and negative acquisition returns is stronger when hostile takeover activity is less intense. Hence, it appears that being disciplined for making a poor acquisition is a function more of the internal control mechanism than of the workings of the takeover market.

Anticipation, Acquisitions and Bidder Returns

This paper develops and tests the anticipation hypothesis as applied to bidding firm returns and the returns of their rivals. Our results provide strong support for anticipation throughout an industry and are suggestive of the type of information a bid reveals. First, the abnormal returns of bidding firms are significantly related to the degree of surprise surrounding a bid announcement. Second, at the time of an initial industry announcement, rival firms that will also become bidders in the near future experience significant and differential price adjustments. Third, these price adjustments are proportional to the abnormal returns earned by the initial industry bidder. Our results hold after controlling for variables typically associated with acquiring firm returns. Less anticipated bidding activity is, on average, a wealth creating activity. Moreover, the magnitude of the anticipation effect is large enough to alter some well known results. For example, the literature documents that bidders in stock acquisitions earn significantly negative returns. The same result is found in the literature for bidders seeking publicly traded targets. We find that bidders in less anticipated acquisitions earn significantly positive abnormal returns in stock acquisitions and insignificant returns in acquisitions of public targets. Thus, the magnitude of the anticipation effect is larger than that associated with either form of payment or organizational form of the target.

Do Acquirers with More Uncertain Growth Prospects Gain Less from Acquisitions?

Several literatures predict a relation between acquirer announcement returns and uncertainty about the acquirer's growth prospects. Models with downward-sloping demand curves for stocks predict that an increase in shares outstanding leads to a lower stock price for firms with greater diversity of opinion among investors. Information asymmetry models imply that equity issues by firms with greater information asymmetries are accompanied by larger share price decreases. Valuation models predict a negative relation between uncertainty resolution and share prices. We find that, for our sample of firms with long-term analyst forecasts, acquirer abnormal returns for acquisitions of public firms paid for with equity decrease as proxies for the acquirer's diversity of opinion, information asymmetry, and/or uncertainty resolution increase. In contrast, abnormal returns for acquisitions of public firms paid for with cash and for acquisitions of private firms paid for with equity either are unaffected or increase as these proxies increase. Strikingly, while diversity of opinion can explain the abnormal returns difference between cash and equity offers for public firms, idiosyncratic volatility appears to be capable of explaining abnormal return differences between cash and equity offers for public firms as well as equity offers for private firms.

Do early birds get the returns? An empirical investigation of early‐mover advantages in acquisitions

AbstractWe explore whether pioneering advantages exist for early‐mover acquirers in industry acquisition waves by examining both combined (target and acquirer) and acquirer stock returns. Combined abnormal returns are higher for acquisitions that occur at the beginning of acquisition waves. However, for acquirers' returns, only strategic pioneers—those acting in manners consistent with having superior information—capture significant advantages. Specifically, early‐mover acquirers who realize superior stock returns are those that conduct acquisitions in related industries, during industry expansionary phases, and finance their acquisitions as financial theory suggests they should when they possess an informational advantage—with cash. Our findings extend the first‐mover literature to corporate practices and link these practices to acquisition returns. Copyright © 2004 John Wiley & Sons, Ltd.