Takeover Competition Research Articles

Target industry takeover competition and the wealth effects of mergers and acquisitions: International evidence

This paper studies how target industry takeover competition affects shareholder gains around mergers and acquisitions (M&As). We find that target industries with higher M&A activity negatively (positively) affect bidder (target) announcement returns, while the impact on bidder-target combined returns is negligible. The results corroborate the overpayment argument of acquiring targets from competitive industries. Importantly, we document that the lower bidder announcement returns associated with higher industry takeover competition are mitigated when bidders are from countries with better institutional quality, suggesting that country governance can prevent bidder managers from overpaying the targets.

How Does Takeover Competition Affect the Stock Performance of Targets and Acquirers? Evidence from the European Union

Abstract We examine the impact of M&A announcements on stock prices of targets and acquirers in the European Union from 2002 to 2021. In line with the literature, we find strong positive returns for the target firms’ stocks, whereas returns are low or insignificant for the acquirers. We contribute to the literature by focusing on the effect of takeover competition and distinguishing between the returns of first and later bids. Accordingly, we confirm strong relationships between subsequent offers and target firms’ stock returns. These returns increase if a second order is made and if the premium related to the second offer is higher.

Does takeover competition affect acquisition choices and bidding firm performance? Australian evidence

AbstractWe examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short‐term announcement window, competition‐induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock‐financed takeovers undertaken in a competitive takeover market show a long‐run decline in performance of acquirers.

How Has Takeover Competition Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed?In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period.First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders.The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.

How has takeover competition changed over time?

We study a random sample of completed and withdrawn takeovers during the 1981 to 2014 time period to provide new evidence on the role of takeover impediments such as poison pills, staggered boards and state antitakeover devices. Do such impediments act in the interest of management by promoting entrenchment or do they act in shareholder interest by improving bargaining power during the takeover auction process? We first confirm the growing trend of takeover impediments over time in our sample. We then relate these trends to changes in the takeover auction process over time. Although we corroborate prior findings of a decline in hostile takeovers and publicly reported takeover auctions between the 1980s and later time periods, we find that takeover competition across the entire auction process between deal initiation and completion has not declined. In effect, takeover competition via auctions has gone underground. Moreover, takeover premiums have not declined over time. We interpret the results to be consistent with the shareholder interest/bargaining power hypothesis and inconsistent with the management interest/entrenchment hypothesis. Our analysis highlights the usefulness of research sources for SEC merger documents including microfiche, Lexis Nexis and Thomson One Financial that provide historical information on the takeover auction process prior to the EDGAR filings that started in the mid-1990s.

Takeover Competition and Acquisition Choices in Australia

This paper extends our knowledge on acquisition decisions by examining whether takeover competition affects the acquisition choices of companies. To this end, we investigate four choices: (i) acquisition of a public versus a private firm; (ii) using stock versus cash as the method of payment; (iii) increasing the business focus versus diversification; and (iv) acquiring high tech firms versus non-high tech firms. As predicted, we find that Australian managers prefer to acquire public targets, use stock as the payment method, increase business focus and purchase high tech firms when confronted with potential takeover competition. However, among these four decision choices, the acquisition of public targets and the use of stock as the method of payment are penalised by the capital market with significantly lower returns for small acquirers. Somewhat in contrast, the acquisition choices of large acquirers are not associated with significantly low returns. A similar picture emerges from the analysis of long run operating performance of acquirers. The findings remain insensitive to a number of robustness tests.

Takeover Competition, Target's Organisational Form and the Market Reaction to Acquisition Announcements

We examine the influence of the takeover competition on the short-run market performance of acquirers of private and public targets. We use eight alternative measures to capture the takeover competition in order to provide robust results. The takeover competition has a significant positive association with the announcement period abnormal return earned by the acquirers of private targets while having no significant association with the market performance of the acquirers of public targets. When the sample was divided into two groups as large and small acquirers, it was found that the competition has a significant positive influence on abnormal return only when the large companies acquire private targets; the relationship turns out to be negative and significant when small companies acquire public targets. Additionally, competition induced bid attempts of strong governance companies are associated with positive abnormal return when they acquire private targets; weakly governed firms realise negative abnormal return as a result of the competition they face when they acquire public targets. The findings remain insensitive to a number of robustness tests.

How Has the Corporate Takeover Market Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed?. In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period. First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders. The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.

Start-ups, incumbents, and the effects of takeover competition

Recent acquisitions involving Tumblr and Instagram have demonstrated that the takeover of an unlisted start-up company can offer enormous financial benefits to its (former) stakeholders. Considering the multimillion-dollar amounts paid for start-ups with no existing and highly uncertain future revenues, we investigate the process and outcome of negotiation dynamics in the context of takeovers. In a series of experiments, we show that even with a low level of uncertainty about a start-up's value and its financial resources, start-ups can influence bidders' behavior and consequently the start-ups' valuation. The results indicate that incumbents' bidding behavior is driven by the perceived threat level with respect to the start-up's business activities as well as by the uncertainty with respect to other incumbents' bidding behavior—drivers that are subject to activities by the start-ups' management. Interestingly, the effect even exists if incumbents clearly know that initiating a bidding process will very likely lead to losses.

The impact of target firm financial distress in Australian takeovers

AbstractOf the motives that have been advanced to explain corporate acquisitions, the least explored is the acquisition of a target experiencing financial distress. This study addresses this void by examining whether target firm financial distress is related to takeover: attitude, premiums, payment method, competition and outcome. Despite inconsistent findings across our distress measures the tenor of the results suggest that distressed targets receive higher premiums and are less likely to be offered cash consideration. Additionally, takeover completion is lower and takeover competition higher for targets in financial distress. Financial distress does not influence whether a takeover is hostile or friendly.

Do private equity consortiums facilitate collusion in takeover bidding?

We address whether the joint bidding by private equity consortiums facilitates collusion in the takeover market. We employ a sample of 870 takeovers of publicly traded targets in the 2003 to 2007 period, the time period which is the focus of investigation by the Justice Department and the source of cases for class action lawsuits. A unique aspect of our analysis is that we determine the identification of private equity bidders from actual merger documents rather than rely on sources such as Securities Data Corp and that we analyze both prominent private equity bidders as well as smaller private equity firms. Our analysis finds competitive reasons for consortium formation based on scale, risk and bidder expertise. We also find that both single private equity bidders and private equity consortiums are associated with significantly greater levels of takeover competition than other types of bidders. While we find some evidence that target abnormal returns are lower in private equity consortium deals for narrow windows around the initial takeover-related announcement date, we find that these results do not hold for longer event windows that better account for the differences in the takeover process across types of bidders. Analysis that controls for the endogenous selection of consortium formation also fails to find any negative effect of consortiums on either takeover competition or target returns. We also do not find any negative effects of consortiums formed by prominent private equity firms. We interpret the evidence to be inconsistent with a collusive explanation for consortium formation in the 2003 to 2007 period and to be consistent with competitive reasons for consortium formation.

Short Term Performance of Indian Acquirers – Effects of Mode of Payment, Industry Relatedness and Status of Target

We study the short term announcement period abnormal returns of acquiring firms in India, using a sample of 1177 transactions, taking place between April 1996 to March 2008. We focus on three determinants of acquirer performance – cash or stock as mode of payment, industry relatedness between target and acquirer, and whether the target is a domestic listed, or domestic unlisted, or a foreign firm. We find that cash financed acquisitions outperform stock paid ones, presumably because of beneficiary role of debt. We document that industry relatedness is a robust determinant of significantly positive abnormal returns, indicating higher value placed on synergistic combinations in India. We show that within domestic targets, acquisition of listed targets are more valuable than that of unlisted targets, a fallout of lack of takeover competition in the former case and fears of misappropriation amidst information unavailability in the latter. We find that cross-border acquisitions generate larger gains than domestic firms, implying that Indian acquirers take the acquisition route to attain parity with their international counterparts

The Effects of Management Involvement on Takeover Competition and Shareholder Returns

We examine the impact of target management involvement as bidders in a sample of completed going-private buyouts. Announcement period and long run target shareholder returns do not appear to be lower in management involved deals. We attempt to identify disciplining mechanisms in the takeover process that can explain this result. We find that target shareholder lawsuits are more likely when management is involved, and litigation risk appears to positively impact target returns. We also study a sample of withdrawn buyout deals and find that a significant number of management bids are unsuccessful, further suggesting that safeguards exist in management involved deals.

Do auctions induce a winner's curse? New evidence from the corporate takeover market

We contrast the winner's curse hypothesis and the competitive market hypothesis as potential explanations for the observed returns to bidders in corporate takeovers. The winner's curse hypothesis posits suboptimal behavior in which winning bidders fail to adapt their strategies to the level of competition and the amount of uncertainty in the takeover environment and predicts that bidder returns are inversely related to the level of competition in a given deal and to the uncertainty in the value of the target. Our measure of takeover competition comes from a unique data set on the auction process that occurs prior to the announcement of a takeover. In our empirical estimation, we control for the endogeneity between bidder returns and the level of competition in takeover deals. Controlling for endogeneity, we find that the returns to bidders are not significantly related to takeover competition. We also find that uncertainty in the value of the target does not reduce bidder returns. Related analysis indicates that prestigious investment banks do not promote overbidding. Analysis of post-takeover operating performance also fails to find any negative effects of takeover competition. As a whole, the results indicate that the breakeven returns to bidders in corporate takeovers stem not from the winner's curse but from the competitive market for targets that occurs predominantly prior to the public announcement of bids.

The role of lockups in takeover contests

We examine breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contests. Unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure the efficient allocation of the target to the highest‐valued buyer in a takeover auction. In contrast, stock lockups permit the target firm to subsidize entry of a new bidder at the expense of an incumbent bidder. Stock lockups induce too much competition when offered to a second bidder and too little competition when offered to a first bidder. Despite their socially wasteful properties, target management would favor stock lockups, as they induce takeover competition at least cost to the target.

Takeover Defenses and Competition

This paper studies the interaction between takeover defenses and product market competition. We find that firms in more competitive industries have more takeover defenses. This is the opposite result from what one would expect if takeover defenses always constitute an inefficient outcome that increases agency costs and managerial entrenchment. A novel explantion is provided by considering the nature of the relationship between the firm and the product (or labor) market. For firms in industries where a long-term relationship with customers and employees is vital, the disruption caused by takeovers could severely negatively impact the stakeholders. In particular, in a competitive environment, this could lead shareholders to optimally choose more takeover defenses to prevent such customers and employees from going to their closest competitor ex ante. We provide empirical evidence that stronger competition is linked to more defenses only in relationship industries, where the previously found negative relation between takeover defenses and firm performance is reversed. Our results cannot be explained by competition being a substitute for the market for corporate control. Finally, we discuss the implications of this framework for the design of various governance mechanisms. In conclusion, the paper provides a rationale for why shareholders themselves might want weak shareholder rights.

How Are Firms Sold?

ABSTRACTAs measured by the number of bidders that publicly attempt to acquire a target, the takeover arena in the 1990s appears noncompetitive. However, we provide novel data on the pre‐public, private takeover process that indicates that public takeover activity is only the tip of the iceberg of actual takeover competition during the 1990s. We show a highly competitive market where half of the targets are auctioned among multiple bidders, while the remainder negotiate with a single bidder. In event study analysis, we find that the wealth effects for target shareholders are comparable in auctions and negotiations.

Do Termination Provisions Truncate the Takeover Bidding Process?

We provide new evidence on termination provisions and the takeover bidding process. Our central contribution is a novel database from Securities and Exchange Commission (SEC) documents that accurately measures the incidence of termination provisions and the depth of competition in takeover deals. We show that biased data in prior research produced incorrect conclusions on the relation between termination provisions and judicial decisions, bidder toeholds, and deal size. Our comprehensive data also show that termination provisions are positively related to takeover competition. Our evidence is consistent with the information/commitment hypothesis in which termination provisions do not truncate bidding but instead culminate the takeover process. (JEL G34; K22; D44).

Do Termination Provisions Truncate the Takeover Bidding Process?

We provide new evidence on termination provisions and the takeover bidding process. Our central contribution is a novel database from SEC documents that accurately measures the incidence of termination provisions and the depth of competition in takeover deals. We show that biased data in prior research produced incorrect conclusions on the relation between termination provisions and judicial decisions, bidder toeholds and deal size. Our comprehensive data also show that termination provisions are positively related to takeover competition. Our evidence is consistent with the information/commitment hypothesis in which termination provisions do not truncate bidding but instead culminate the takeover process.

Do Takeover Auctions Induce a Winner's Curse?

We contrast the winner's curse hypothesis and the competitive market hypothesis as potential explanations for the observed returns to bidders in corporate takeovers. The winner's curse hypothesis posits sub-optimal behavior in which winning bidders fail to adapt their strategies to the level of competition and the amount of uncertainty in the takeover environment and predicts that bidder returns will be inversely related to the level of competition in a given deal and to the uncertainty in the value of the target. Our measure of takeover competition comes from a unique data set on the auction process that occurs prior to the announcement of a takeover. In our empirical estimation, we control for the endogeneity between bidder returns and the level of competition in takeover deals. Controlling for endogeneity, we find that the returns to bidders are not significantly related to takeover competition. We also find that uncertainty in the value of the target does not reduce bidder returns. Related analysis indicates that prestigious investment banks do not promote overbidding. Analysis of post-takeover operating performance also fails to find any negative effects of takeover competition. As a whole, the results indicate that the breakeven returns to bidders in corporate takeovers stem not from the winner's curse but from the competitive market for targets that occurs predominantly prior to the public announcement of bids.