Takeover Price Research Articles

Litigation risk and strategic M&A valuations

We study the role of litigation risk in M&A valuations. Specifically, we hypothesize that litigation risk leads to strategic valuations in fairness opinions (FOs) obtained in M&A transactions. Employing a regulatory shock to merger litigation risk and focusing on the most common valuation techniques – peer firm comparables and DCF analysis – we find that target-sought FOs exhibit lower valuations when litigation risk is high. The effect is concentrated in deals with greater agency conflicts between target management and outside shareholders. Furthermore, downward-biased valuations reduce appraisal litigation but are also associated with lower premiums. In contrast to prior work suggesting that target-sought FOs are used to negotiate a higher takeover price, our findings imply that they are used, at least in part, to mitigate litigation risk and facilitate successful deal completion. Our findings are relevant to academics, practitioners, and regulators interested in M&A price formation, and highlight the role litigation plays therein.

Peer selection and valuation in mergers and acquisitions

Using unique data, this paper examines investment banks’ choice of peers in comparable companies analysis in mergers and acquisitions. We find strong evidence that product market space is amongst the most important factors in peer selection, but Standard Industrial Classification (SIC) codes, particularly three and four digit codes, do a poor job of categorizing related firms in this setting. Banks strategically select large, high growth peers with high valuation multiples, factors that are also positively related to premiums. Our evidence is consistent with target-firm advisors selecting peers with high valuation multiples to negotiate higher takeover prices.

Peer Selection and Valuation in Mergers and Acquisitions

Using unique data, this paper examines investment banks’ choice of peers in comparable companies analysis in mergers and acquisitions. We find strong evidence that product market space is amongst the most important factors in peer selection, but we provide evidence indicating that Standard Industrial Classification (SIC) codes, particularly three- and four-digit codes, do a poor job of categorizing related firms in this setting. Banks strategically select large, high growth peers with high valuation multiples, factors that are also positively related to premiums. Our evidence is consistent with target-firm advisors selecting peers with high valuation multiples to negotiate higher takeover prices.

Do Firms Strategically Internalize Disclosure Spillovers? Evidence from Cash‐Financed M&As

ABSTRACTWe investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm‐initiated disclosures during all‐cash acquisitions, we find evidence consistent with acquirers strategically generating news that they expect will depress the target's stock price. Our results suggest the disclosure strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. These findings are robust to a battery of specifications and falsification tests. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures in M&A transactions.

The Feedback Effect of Disclosure Externalities

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find evidence consistent with acquirers strategically generating news that they expect will depress the target’s stock price. Our results suggest the disclosure strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. These findings are robust to a battery of specifications and falsification tests. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures in M&A transactions.

Inside the 'Black Box' of Private Merger Negotiations

Using unique, hand-gathered data, this paper examines how public news about the target firm released publicly during the private merger negotiation process affects bidding strategies. We provide strong evidence that market reactions to information events during the private sale process have a substantial impact on takeover prices. However, the sensitivity of private bids to target-firm public market returns varies significantly depending on the source of the news. Moreover, bidders are more sensitive to news releases in their first private bids and have lower sensitivity to news released when they make bid revisions after the initial private bid submission. In general, bid responses to positive news are stronger than bid responses to negative news. Overall, our findings provide novel evidence suggesting that the market reactions to the release of information during merger negotiations have important implications for takeover costs.

Use of reference point theory to explain the price paid for private targets

We investigate whether reference points influence the price paid for private targets. Contrary to prior literature, we consider reference points of both target and bidder firms. Because market valuations of private targets are not available, we use comparable public firms and actual deals to derive an implied reference point for private targets. We find that when private firms have an implied valuation that is further from their implied reference points, they require a higher premium. In addition we find that the price paid for private targets is influenced by the bidder’s own reference point. We also show that the degree to which the target reference point influences the price paid for private targets is time-varying and affected by the prevailing economy. Private targets rely less heavily on their implied reference point to negotiate their takeover price when economic conditions are strong. Our findings confirm existing evidence that behavioral biases (reference points) are an important determinant of observed acquisition premiums.

White Knights and the Corporate Governance of Hostile Takeovers

We analyze the dynamics of takeover contests where hostile raiders compete against white knights involved by a lead blockholder of the target firm (the incumbent). We assume that the incumbent has the power to bargain with the potential bidders to set a minimum takeover price. We characterize the conditions under which a white knight wins the takeover contest despite the smaller value of its synergies as compared to those of the hostile bidder. The paper provides a new explanation for the reason why we observe so few hostile takeovers in reality; moreover, it sheds some light on the effectiveness of white knights as an anti-takeover device and the role played by leading minority blockholders in the market for corporate control.

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.

The Price of Media Capture and the Debasement of the French Newspaper Industry During the Interwar

Measurement of the value of “media capture” (the control of newspapers by business or political interests) is difficult. However, if capture is valuable, it should affect the price of newspaper shares. Useful information about the value of media capture should be retrievable from Stock Exchange data. Interwar France provides a unique setting to implement this idea because key newspapers floated voting and nonvoting stocks. Combined with takeover prices, data yield estimates of the price of media capture and of the time-series evolution of this price. Comparison with Britain sheds new light on a dark episode of French history.

Does the Disposition Effect Matter in Corporate Takeovers? Evidence from Institutional Investors of Target Companies

AbstractThis paper examines whether one of the most important participants in the takeover market, the institutional investors of target companies, suffers from the disposition effect and, if so, how this selling bias influences the takeover outcomes. I report robust evidence that target institutional investors are reluctant to realize losses. This bias further allows their sunk cost to affect both the takeover price and the deal success. My results are explained by neither the undervalued targets nor the 52-week-high price effect. They are most pronounced among targets whose investors have a strong propensity to hold on to loser stocks.

Who Writes the News? Corporate Press Releases during Merger Negotiations

ABSTRACTFirms have an incentive to manage media coverage to influence their stock prices during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short‐lived run‐up in bidders' stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price.

Does Target Tax Aggressiveness Matter in Corporate Takeovers?

We examine whether tax avoidance of target firms affects takeover pricing. We find that acquirers pay lower premiums to tax aggressive targets. This effect is concentrated in acquisitions of opaque targets and targets operating in less competitive industries, and in acquisitions in which the acquirer hires a top-tier financial advisor. Tax aggressive targets are more likely to receive a downward adjustment to the initial offer price, and are more likely to be paid with acquirers’ stock. Overall, our evidence suggests that acquirers perceive tax aggressiveness of target firms as a contingent liability and adjust takeover price accordingly.

MBO Financing Risks And Managers' Use Of Anti-Takeover Measures

In a management buyout (MBO) offer, managers have an incentive to offer stockholders a price low enough to compensate them for the risks of increasing their equity ownership in a highly leve- raged buyout firm. As these risks increase, managers are more likely to combine their offer with an anti-takeover measure. These measures do not protect a low offer, but do result in a higher takeover price when managers are unwilling to match a competitive offer. Such measures, then, benefit shareholders.

Who Writes the News? Corporate Press Releases During Merger Negotiations

Firms have an incentive to manage media coverage to influence their stock price during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders' stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price.

Monitoring and the acquiring firm reaction to bad takeover bids

This study investigates variables that explain why bidding firms raise their offer price following a negative capital market reaction to a takeover announcement. We find that whilst an increasing number of blockholders restrains the pursuit of unprofitable takeovers, greater institutional ownership and takeover hostility increases the likelihood a bidder will raise their offer price. Multiple bidders and board independence are unrelated to an increase in takeover price. Inconsistent with agency theory, management ownership and free cash flow do not explain bidder actions.

White Knights and the Corporate Governance of Hostile Takeovers

We analyze the dynamics of takeover contests where hostile raiders compete against white knights involved by a lead blockholder of the target firm (the incumbent). We assume that the incumbent has the power to bargain with the potential bidders to set a minimum takeover price. We characterize the conditions under which a white knight wins the takeover contest despite the smaller value of its synergies as compared to those of the hostile bidder. The paper provides a new explanation for the reason why we observe so few hostile takeovers in reality; moreover, it sheds some light on the effectiveness of white knights as an anti-takeover device and the role played by leading minority blockholders in the market for corporate control.

Acquisition Bid Price: Is There an Optimal Cash-Equity Payment Mix?

This paper looks at the combination of cash and share payment in takeovers, particularly in analyzing the condition of its optimal mix setting. This problem develops in a context of asymmetry of information for the buyer has lower information on the target firm than the sellers. But the bidder has superior information on the true economic value of his own shares. In fact, a double asymmetry of information develops between both parties. The setup of the paper is to design the optimal payment mix considering payment with shares as insurance for the buyer against a risk in information, although at the same time new shares will entail dilution. That cash-shares mix is an element of the process which helps disclosing pieces of private information on the economic perspectives of the newly merged firms.We show that a payment scheme mixing cash and shares explains itself outside a pure strategic game aiming at discouraging competitors. The setting of common conditions of payment is part of the takeover transaction process. The optimal means of payment will be directly influenced by the correlation between the expected acquisition gains at the target and at the acquiring firm levels. This correlation will characterize strategies spanning from pure diversification of economic activities to business integration. A process of negotiation does not mean equally and symmetrically shared information, but that biases are limited. Exaggeration biases exist and are part of communication policy from one party to the other. That communication policy gains importance in a situation of negotiation of the means of payment or when the terms of payment are publicly revised in a mixed takeover offer. It also appeared that the final takeover price should be sensitive to the design of the scheme of payment.

Merger Clusters during Economic Booms

Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target - by setting the takeover price - screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively bad fit acquirers, leading to a hike in activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term - a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher profits during merger waves than outside of waves, which is also in line with empirical evidence.

Do Option Prices Support the Subjective Probabilities of M&A Completion Derived from Spot Prices?

This paper deals with the question, whether subjective probabilities of takeover completion, estimated from current observable spot-prices of target stock, from expected bid price and from current forecasted stand-alone price of target stock, enhance classical subjective probability forecasts, such as Black-Scholes model. Under Black-Scholes assumptions the future log stock price is normally distributed and one is able to forecast it knowing the current stock price and the mean and variation of the stock returns. However, if one pre-estimates the probability of takeover completion and current (also non observable) stand alone price of target stock, one can derive a mixed distribution for the target stock price at the expected completion date: It is then a mixture of a point probability at the expected takeover price and of a continuous stand alone distribution on the rest of the space. The problem is, that the reliability of such estimation can be hardly assessed based only on this data: probabilities are unique at any time point and there are no reasonable arguments why they should follow some parametric stochastic process, thus making filtering techniques useless. But the recent research in pricing derivatives (Ait-Sahalia and Lo 1998, Jackwerth and Rubinstein 1996) enables to recover subjective (risk-neutral) probabilities of certain future states of nature from derivative prices. The case of an expected M&A deal is exactly a situation where we expect a well-specified event to occur at rather certain time point in nearest future. Therefore, using nonparametric tests it can be shown, that the spot price model is more adequate to describe the option price distribution and hence subjective probability function of target stock price at the expected completion date.