Target Shareholders Research Articles

Investors’ activism and the gains from takeover deals

We examine whether activists add value to the shareholders of targets and their acquirers. Several findings emerge. First, acquirers of targets that have activists outperform acquirers of other targets in both the short and long term. Second, the premium received by the shareholders of targets is not affected by activism. Third, superior gains achieved by the acquirers of targets with activists are driven by non-cash deals, while the average target benefits more from cash deals.

The value of CEOs' supply chain experience: Evidence from mergers and acquisitions

Acquirer CEOs with experience in the target's industry supply chain (‘supply chain CEOs’) are associated with wealth effects of first-order importance: they earn 1.5% higher merger announcement returns. Conversely, their targets get a lower share of the merger gains. Acquisitions by supply chain CEOs also exhibit higher synergies, better post-deal accounting performance, and less goodwill written off. These findings withstand checks for endogeneity, anticipation bias, and numerous robustness tests. In takeovers by supply chain CEOs, superior acquirer performance stems from both value creation and rents negotiated away from target shareholders.

Do Appraisal Challenges Benefit Target Shareholders Through Narrowing Arbitrage Spread?

There is an on-going debate regarding the extent to which the increased appraisal litigation in Delaware Chancery courts is beneficial from a public policy perspective. Boone et al. (2019) documents that, compared to deals without appraisal challenges, deals subject to appraisal challenges have 6% lower post-announcement arbitrage spread on average. Based on this observed gap in arbitrage spread, the authors claim that appraisal challenges benefit target shareholders through narrowing arbitrage spread. We find that the observed gap in arbitrage spread is driven by outliers and sampling biases. In fact, after controlling for these biases, the gap completely closes. Therefore, there is no evidence that target shareholders share the gains from merger arbitrage through narrowing arbitrage spread.

What's the Deal with Revlon?

Under the Revlon doctrine, courts are to apply a higher level of scrutiny in certain takeover situations in an attempt to control potential conflicts of interest that might prejudice target shareholders. However, the doctrine has always had sufficient “play in the joints” that one might reasonably wonder whether it has much of an effect in practice on short-term shareholder returns. Additionally, in recent years, the trend in Delaware’s Revlon jurisprudence seems to be to defer to the target board as long as there are no glaring conflicts of interest. Taken together, these facts raise concern over the continued relevance of the Revlon doctrine. It turns out this concern is justified. In this article, I present evidence that Revlon has a significant effect on the type of sales process that target boards adopt – when in Revlon mode, they pursue active market checks with greater frequency, engage with more potential bidders and receive more bids. However, this difference in process has no discernible effect on shareholder returns, whether measured as abnormal market returns upon deal announcement or deal premia. And yet, there is still evidence, in this study and others, that conflicts of interest abound. In other words, the modern incarnation of Revlon no long appears up to the task for which it was intended. Consequently, I argue that that courts should re-orient the doctrine around a robust review of the types of conflicts of interest that might actually harm target shareholders. Additionally, if as the Delaware Supreme Court has indicated, target shareholders might ratify the types of problems Revlon was intended to address through the mandatory statutory merger vote requirement, it will be necessary to adopt additional securities disclosure rules to provide shareholders with sufficient information to make an informed ratification decision.

Being True to Trulia: Do Disclosure-Only Settlements in Merger Objection Lawsuits Harm Shareholders?

A significant debate within mergers and acquisitions law concerns the explosive popularity of the “merger objection lawsuit” (MOL), a shareholder action seeking to enjoin an announced deal on fiduciary duty grounds. MOLs blossomed during the Financial Crisis, becoming popularly associated with “shareholder shakedowns,” whereby quick-triggered plaintiff attorneys would file against — and then rapidly settle with — acquirers, typically on non-monetary terms containing modest added disclosures in exchange for blanket class releases and attorney fee awards. This practice unleashed a torrent of criticism from lawyers, commentators, academics, and (ultimately) judges, culminating in a doctrinal shift in Delaware law in the January 2016 Trulia opinion, which virtually prohibited disclosure-only settlements. This paper investigates the implications of this doctrinal shock from a shareholder welfare perspective. We argue that — notwithstanding the intuitive appeal of prohibiting / discouraging disclosure settlements — it is far from clear whether doing so helps or hurts target shareholders ex ante, since the threat of MOLs interacts with other intra-corporate agency costs (such as those of managers and buyers negotiating deals). Reducing the credibility of a litigation threat may deter shakedowns at the cost of reduced deal premia and shareholder value — consequences inconsistent with conventional commitments of corporate law. We develop a theoretical model of company acquisitions formally demonstrating that the competing equilibrium effects of Trulia are indeterminate, an insight that hoists a flag of caution regarding the doctrinal innovation. Moreover, our model delivers testable implications related to Trulia, which we investigate empirically. Our empirical analysis suggest that the recent doctrinal shock does not appear to have resulted in a discernible increase to target shareholder welfare.

The Information Provision in the Corporate Acquisition Process: Why Target Firms Obtain Multiple Fairness Opinions

ABSTRACTUsing a hand-collected dataset for takeovers from 1996 to 2013, I examine why some target firms obtain a second fairness opinion and the associated wealth effects of doing so. I find that multiple opinions are more likely to be used in deals in which management/investment bank conflicts of interest are high—e.g., buyouts and stapled financing deals. In addition, the use of a second opinion has a significantly positive impact on target shareholders' wealth in these two types of deals. Fairness opinion valuation predominantly relies on accounting data, and the benefit of seeking a second opinion increases with a firm's earnings quality. Collectively, the results suggest that a second opinion is used to facilitate transactions.JEL Classifications: G34; G24; J33.

Merger Negotiations in the Shadow of Judicial Appraisal

The recent surge in appraisal litigation has sparked debate over the desirability of appraisal and how this remedy should be structured. Much of this debate is based on untested assertions about appraisal’s ex ante effect on the structure and pricing of takeovers. Systematically investigating this effect, we find evidence that target shareholders receive higher abnormal returns as the strength of the appraisal remedy increases. We find no evidence that bidders offer a lower up-front price as a means to pay off dissenting shareholders after a sale. Furthermore, threat of appraisal does not appear to limit takeover activity or impact the method of payment. Overall, our results suggest that appraisal provides an important ex ante protection for target-firm shareholders.

The impact of possible-offer announcements on the wealth effect of target firms

ABSTRACTThe stock market materially and positively responds to released information on possible offers, likely because such announcements signal the high probability that formal bids will be offered. If potential takeover discussions are revealed earlier, then target shareholders will gain significantly lower abnormal returns around the time of when formal offers are announced. Financial bidders are less likely to approach targets with earlier possible offers; however, if they do offer possible takeovers, they need to pay incrementally higher bid premiums in their formal offers. The reform inherent in the U.K. Takeover Code of 2011 weakens a bidder’s willingness to offer possible takeovers. The pre-reform effects of possible offers on the wealth effect of targets differ from those seen after the reform.

The Information Provision in the Corporate Acquisition Process: Why Target Firms Obtain Multiple Fairness Opinions

Using a hand-collected dataset for takeovers from 1996 to 2013, I examine why some target firms obtain a second fairness opinion and the associated wealth effects of doing so. I find that multiple opinions are more likely to be used in deals in which management/investment bank conflicts of interest are high -- e.g., buyouts and stapled financing deals. In addition, the use of a second opinion has a significantly positive impact on target shareholders’ wealth in these two types of deals. Fairness opinion valuation predominantly relies on accounting data and the benefit of seeking a second opinion increases with a firm’s earnings quality. Collectively, the results suggest that a second opinion is used to facilitate transactions.

Government investment in publicly traded firms

I examine shareholder wealth effects associated with different types of government investors in an international sample. I develop a taxonomy to identify government political, financial, and industrial arms. State investments, similar in dollar amount to state privatizations, have increased target shareholder wealth by over USD 50 billion. But market participants differentiate among government entities as target shareholders lose over USD 14 billion, when the investment is announced by the political arms of government rather than the industrial or the financial arms. The apparent intent of government agency is considered by private investors. Post-investment performance tests, institutional environment analysis, and access to credit tests corroborate this.

Corporate control activism

This paper studies the role of activist investors in the market for corporate control. Our theory proposes that activist investors have an inherent advantage relative to bidders in pressuring entrenched incumbents to sell. As counterparties to the acquisition, bidders have a fundamental conflict of interests with target shareholders from which activist investors are immune. Therefore, unlike activists, the ability of bidders to win proxy fights is very limited. This result is consistent with the large number of activist campaigns that have resulted with the target’s sale to a third party and the evidence that most proxy fights are launched by activists, not by bidders.

The performance of acquisitions by high default risk bidders

We investigate the takeover strategies of high default risk acquirers and their value impact. We find that these bidders select bigger, less profitable and unrelated targets, pursue transactions during recessions, and pay with shares by offering target shareholders high premiums. Their long-term buy-and-hold returns are extremely negative, and reflect fundamentally their substantial drop in profitability combined with high leverage. We show that the well-established long-run underperformance of acquiring firms is largely driven by this sub-set of acquirers. The results are similar when we use alternative measures of default risk and performance, and a global sample of non-US bidders.

Taxable Acquisitive Deal Structures for C Corporations

This technical note outlines the consequences to the acquirer, target, and the target's shareholders from a basic taxable acquisition of C corporations. Specifically, asset acquisitions, stock acquisitions, and 338(g) elections are covered. A numerical example illustrates the calculation of the after-tax proceeds to the target's shareholders and the after-tax cost to the acquirer. Excerpt UVA-F-1875 Jun. 25, 2019 Taxable Acquisitive Deal Structures for C Corporations Introduction You lead a company and want to expand. You have a target (T) company in mind, and your team has estimated what T's stock may be worth. You know the estimate is merely preliminary because the structure of the deal affects the ultimate “value of the deal” to both parties. A key factor that affects the ultimate value of the deal to the parties is the tax consequences. Before you determine the price you are willing to pay, there are two questions to ask that highlight the tax consequences of the deal for T and for the acquirer (A) (see Exhibit 1 for a summary): What are T's shareholders receiving (cash or stock)? . . .

Tax-Deferred Acquisitive Reorganizations for C Corporations

This technical note outlines the general judicial requirements an acquisition must meet to qualify as a tax-deferred reorganization. The variation in the specific requirements that must be met to qualify for different types of tax-deferred (“A,” Forward Triangular “A,” Reverse Triangular “A,” “B,” and “C”) reorganizations are addressed. Finally, the specific tax consequences to the target's shareholders and acquirer are outlined, and a numerical example illustrates the calculation of the after-tax proceeds to the target's shareholders and the after-tax cost to the acquirer. Excerpt UVA-F-1863 Rev. Aug. 30, 2019 Tax-Deferred Acquisitive Reorganizations for C Corporations Introduction You lead a company and want to expand. You have a target (T) company in mind and your team has estimated the price T's stock may be worth. You know the estimate is merely preliminary because the structure of the deal affects the ultimate “value of the deal” to both parties. A key factor that affects the ultimate value of the deal to the parties is the tax consequences. Before you determine the price you are willing to pay, there are two questions to ask that highlight the tax consequences of the deal for T and the acquirer (A) (see Exhibit1 for a summary): What are T's shareholders receiving (cash or stock)? . . .

Event Study of Effect of Merger Announcement on Stock Price in Nepal

Events like merger and acquisition affect the value of merging firms and also generate a positive or negative wealth effect for shareholders of firms involved. The purpose of this study is to investigate whether a merger announcement has generated wealth effects for the shareholders of bidding and target firms as well as it has aimed to assess the impact on overall banking sector. Two models; mean adjusted model and market risk adjusted model has been used in the study employing the ‘event study’ methodology to examine whether there is presence of abnormal return associated with merger announcement. In this method, 50 days premerger and 30 days post merger period is assumed as estimation period and (-15 and +15) days are taken as the window period. Fifteen financial institutions which entered into merger between years 2010 to 2012 are selected as sample. The findings of this study demonstrated that surrounding the announcement of merger proposals, the premerger abnormal return of individual firms is not significant to zero i.e. return is not affected by the merger announcement. Similarly, the abnormal return of bidding and target firms is not significant which indicates there is no impact of merger announcements on shareholder wealth in Nepalese capital market. Finally, the abnormal return during the premerger and post merger period of individual firms as well as the overall banking sector shows the same result, there is no significant difference on return before and after the merger announcement.

Government Investment in Publicly Traded Firms

I examine shareholder wealth effects associated with different types of government investors in an international sample. I develop a taxonomy to identify government political, financial, and industrial arms. State investments, similar in dollar amount to state privatizations, have increased target shareholder wealth by over USD 50 billion. But market participants differentiate among government entities as target shareholders lose over USD 14 billion, when the investment is announced by the political arms of government rather than the industrial or the financial arms. The apparent intent of government agency is considered by private investors. Post-investment performance tests, institutional environment analysis, and access to credit tests corroborate this.

Financial constraints and synergy gains from mergers and acquisitions

AbstractThis paper examines mergers and acquisitions motivated by financial constraints. Synergy gain is measured as the cumulative abnormal return of a value‐weighted portfolio of the acquirer and the target around the acquisition announcement. By constructing a financial constraint difference between the target and the acquirer, we find a positive relationship between the financial constraint difference and synergy gains generated from the acquisition. The positive effect of the financial constraint difference is only significant for high growth targets and severely constrained targets. The acquirer's corporate governance also enhances the synergy gains created from the financial constraint difference. Additional evidence shows that both acquirer's and target's shareholders benefit from the financial constraint difference. Our results are robust for different measures of financial constraint.

Appraising the “Merger Price” Appraisal Rule

This paper develops an auction design framework to analyze various methods for assessing “fair value” in post-merger appraisal proceedings. Our inquiry spotlights an approach recently embraced by some courts benchmarking fair value against the merger price itself. We show that the merger price deference effectively nullifies the role that appraisal can potentially play in establishing a de facto reserve price for company auctions, thereby depressing both acquisition prices and target shareholders’ expected welfare relative to both the optimal appraisal policy and a variety of other valuation measures. We also examine conditions under which deference to the merger price may nonetheless be defensible on economic grounds. Our results have empirical implications for understanding appraisal, and they likewise help to inform doctrine by providing guidance to legal actors about when a sales process can be considered sufficiently “robust” to justify deal price deference.

Does the Mandatory Bid Rule Add Value to Target Shareholders?

AbstractI investigate whether implementation of the mandatory bid rule—the rule that grants all shareholders the right to participate in a takeover transaction at equal terms—affects target announcement returns. I use a difference‐in‐differences approach and the staggered adoption of the rule across 15 European countries. I find that the rule change leads to higher target returns. In full transactions, better accounting standards and shareholder protection norms of the acquirer leads to higher target returns. In majority transactions, greater value transfer from acquirers with weak accounting standards leads to higher target returns. I find weak evidence of overpayment by acquirers.

Stock Recalls As a Source of Informational Advantage Through Short Selling: Empirical Evidence from Mergers and Acquisitions

We apply the idea of Strych (2020) that short sellers of acquirers’ stocks infer from their private observations of stock recalls that the deal will be more likely terminated. To profit from such informational advantage through short selling, Strych (2020) expects that acquirers’ short sellers become merger arbitrageurs after deal announcement to obtain a trading option on acquirers’ stock recalls. The higher this trading option value, the more merger arbitrageurs are willing to pay for target shares than incumbent target shareholders require as premium from the acquirer. Anticipating this, we expect that acquirers reduce bid premiums accordingly. Consistently, in a sample of U.S. deal announcements from 2004 to 2017, we find that a one standard deviation increase of acquirers’ short interest (i.e., magnitude of merger arbitrage activity) and institutional ownership concentration (i.e., likelihood of an observable recall) is associated with a 10.53 percent decrease of the one-week premium. In addition, this premium reduction effect is accompanied with positive long-term buy-and-hold abnormal returns for acquirer stocks and tighter arbitrage spreads. As channel of the information about this premium reduction effect, we regard advice to acquirers by M&A advisors with high equity capital market expertise. As a result, M&A advisors add value to acquirers consistent with Dessaint, Eckbo, and Golubov (2019). Moreover, this effect is more pronounced for targets with low insider ownership and for acquirers with high active institutional ownership.