Target Valuation Research Articles

Defensive resource allocation in terrorism conflict management based on graph model with relative preferences

In real-world counterterrorism activities, it is usually difficult for the defender and the attacker to accurately know the private information of the each other such as valuations of targets. Instead, players may only know the relative preference on the target valuations from the adversary. In the conflict analysis, graph model is a powerful tool for dealing with relative preferences. This paper studies the defensive resource allocation in terrorism conflict management with incomplete information by establishing a graph model. To solve the model, we divide the conflict states into two types and discuss the conditions under which these two types of states are at equilibrium. Furthermore, we study how the defender should optimally allocate the resource to achieve two goals: (i) achieving a certain Nash equilibrium state desired by the defender; and (ii) minimizing the total loss from an attack in equilibrium. Subsequently, we conduct several numerical analyses: (i) analyzing the effects of both players' investment effectiveness on the optimal defense loss; (ii) comparing our model's results with those obtained using three classical decision methods, revealing that the defense loss in our model is lower; and (iii) presenting a case study to illustrate the applicability of the proposed model. This paper provides novel insights on how to efficiently allocate defensive resource when the defender and attacker know only the relative preference of the adversary on target valuations.

Failed acquisition offers: The impact of failure reasons on target valuation

Using a large hand-collected sample of 1,246 failed acquisition offers from 1979 to 2016, we examine the effects of failure reasons on the revaluation of target firms. We find a negative revaluation of -16 % for failures not caused by target rejection, suggesting exposure of adverse information about the target's economic conditions. Conversely, targets declining offers show a positive revaluation of +7 %, indicating target management's private information about the firm's superior prospects. These revaluation effects are stronger for hard-to-value targets, consistent with failure reasons revealing more information when there is greater uncertainty about the target's value.

Manager sentiment, deal characteristics, and takeover performance

Various studies analyze the driving forces behind takeover activities, including investor sentiment, liquidity, and fundamental shocks. In this study, we examine how manager sentiment influences takeover characteristics and long-term performance using textual analysis of data in 10-K and 10-Q filings. Our findings identify that manager sentiment has strong positive predictive power for takeover activities, and high (positive) manager sentiment decreases the long-term performance of takeover deals. Moreover, we show that high-sentiment managers tend to undertake large deals, decrease all-stock transactions, acquire hard-to-value targets, and provide high target valuations, suggesting over-investment for underperforming high-sentiment deals.

Representations and warranties insurance in mergers and acquisitions

To mitigate information asymmetry in acquisitions, the seller makes contractual representations and warranties (referred to as “R&W” or “reps”) about the state of the target, such as attesting to the accuracy of the target’s financial statements. While seller indemnities allow buyers to impose costs due to breaches in the reps discovered after the deal’s close, these indemnities involve significant contracting costs. To mitigate these costs, the acquisition parties have increasingly turned to purchasing representations and warranties insurance. Using a proprietary and novel sample of R&W insurance policies issued worldwide for acquisitions of non-public targets, we find that the demand for R&W insurance, the premium charged for it, and the likelihood of a claim being filed are correlated with industry metrics for valuation uncertainty, the type of acquirer and seller, and the target’s legal regime. In particular, we find higher demand for R&W insurance and a higher R&W insurance premium charged when the target belongs to an industry with weaker internal controls. We also find that a higher premium is charged when the target is in an industry with relatively high levels of R&D to sales, indicating that the insurance company expects unrecognized intangible assets to have a greater risk of future claims. Our study adds to our understanding of how parties reduce target valuation uncertainty and the role of disclosures and R&W insurance policies in private mergers and acquisitions transactions.

Counterterrorism resource allocation during a pandemic: The effects of dynamic target valuations when facing a strategic terrorist.

The outbreak of pandemics such as COVID-19 can result in cascading effects for global systemic risk. To combat an ongoing pandemic, governmental resources are largely allocated toward supporting the health of the public and economy. This shift in attention can lead to security vulnerabilities which are exploited by terrorists. In view of this, counterterrorism during a pandemic is of critical interest to the safety and well-being of the global society. Most notably, the population flows among potential targets are likely to change in conjunction with the trend of the health crisis, which leads to fluctuations in target valuations. In this situation, a new challenge for the defender is to optimally allocate his/her resources among targets that have changing valuations, where his/her intention is to minimize the expected losses from potential terrorist attacks. In order to deal with this challenge, in this paper, we first develop a defender-attacker game in sequential form, where the target valuations can change as a result of the pandemic. Then we analyze the effects of a pandemic on counterterrorism resource allocation from the perspective of dynamic target valuations. Finally, we provide some examples to display the theoretical results, and present a case study to illustrate the usability of our proposed model during a pandemic.

RETRACTED: Natural Knowledge of Smart Bioinformatics to Reduce Tasks Without Added Value or Human Contact in a Pandemic

The use of technological innovations within the business context has a major influence on product, services, business processes, sales channels, and supply channels. The associated potential advantages include, among others, increased sales or productivity, innovations in price creation, and new sorts of client interaction. Global enterprises are facing supply chain issues, consequently potentially higher operational costs, lower inventory, and the prospects of lower demand will be reluctant to disburse resources and time to connect in M&A and financing activities, predominantly if valuations of targets remain high. Digitalization of supply chain (SC) could be a way that companies can start to strategize and accomplish trade strength against supply chain disturbance.

Accounting Firms in the European M&A Advisory Market

AbstractBuilding on the knowledge‐based view of the resource‐based theory, we propose that accounting firms leverage the industry expertise acquired from the audits of the targets’ industries to produce fairer target valuations on mergers and acquisitions (M&As). The accounting expertise competitive advantage explains why bidders choose accounting firms, rather than investment banks, to advise on transactions where the likelihood of overpaying for a target is high. We document that for such deals, acquirer announcement returns are higher and offer premia are lower if the bidders are advised by accounting firms that are audit specialists in the target's industry. Our results explain why accounting firms are listed among the top 10 M&A financial advisors in the European Thomson Reuters and Mergermarket league tables.

Does policy uncertainty predict the death of M&A deals?

Using a comprehensive sample of U.S. M&A deals from 2000 through 2020, we examine whether the magnitude of policy uncertainty can explain the likelihood of deal cancellation. Consistent with our conjecture, we find that policy uncertainty is a significant predictor of the death of deals. Moreover, we find evidence of a negative association between policy uncertainty and the target firm stock price levels, implying that the market also incorporates the consequences of policy uncertainty into target valuation and bid likelihood outcomes. Altogether, our findings add to the understanding of the interplay between policy uncertainty and external investments through M&A.

Learning in serial mergers: Evidence from a global sample

AbstractDo frequent acquirers learn from their experience in serial mergers? A recent stream of literature has proposed that the generally observed declining investor response (cumulative abnormal returns) to successive acquisitions by frequent acquirers may be evidence of learning, rather than the result of commonly attributed causes such as managerial hubris or empire building. We examine the learning hypothesis on a global scale, using a sample of 13,326 publicly listed acquiring firms representing 72 nations conducting 27,305 acquisitions over the period 1984–2014. Our results provide evidence of institutional‐based differences in acquirer learning on a global scale in the valuation of private targets. In contrast, we find evidence of hubris in takeovers of public targets, especially in the United States, and other competitive takeover markets, where acquirers experience persistent, significant losses over successive acquisitions, while targets continue to reap significant gains throughout the acquisition sequence.

M&As and political uncertainty: Evidence from the 2016 US presidential election

This paper investigates whether the takeover market has been affected by heightened macroeconomic uncertainty, following President Trump’s Election, both in the US and globally. We have based our analysis on a four-year period around the 2016 US elections, and as such we have observed an increase in M&A deals and associated valuations, after the election; this was especially true for cross-border deals acquiring U.S. targets, consistent with a tariff-jumping hypothesis. The high target valuations are also the product of the implementation of a lower corporate tax rate, which reveals positive externalities for U.S. targets, stemming from the protectionist and lower corporate tax initiatives of the regime.

Predatory FDI during economic crises: insights from outbound FDI from China and host country responses

Purpose This paper aims to analyze outbound investments from China at the time of economic crisis caused due to the coronavirus (COVID-19) pandemic and how target valuation and the host country’s inbound investment policies influence the acquisition intents. As firms witness low valuations during an economic downturn, they become attractive targets for opportunistic buyers, who may be driven by motives beyond business and influenced by the home country’s political agenda. Such attempts are countered with the adoption of restrictive investment policies in host countries. Design/methodology/approach The study uses secondary data on cross-border acquisitions from China over the past year and compares the characteristics of these acquisitions with cross-border acquisitions of acquirers from other large developed and developing economies. Findings Statistical analyzes show that there are significant differences in the way acquirers from China pursue strategic asset seeking, creeping and control seeking acquisitions during the pandemic and the pre-pandemic period. This paper also observes that reduced valuation of the target, due to economic downturn or otherwise, result in greater propensity in strategic asset seeking acquisitions by Chinese acquirers. At the same time, adverse policies at host nations negatively influence the strategic asset seeking propensity of these acquirers. In addition, the premium in the valuation of target assets during the pandemic does not drop significantly when compared with that of the pre-pandemic period. Originality/value With the outbreak of COVID-19 and its concomitant economic impact across the globe, the study brings forwards insights on predatory foreign direct investment (FDI) and explores how policy responses in host countries can be comprehensive rather than disembedded and unilateral.

Determinants of M&A acquisition premium: a social capital perspective

PurposeWhat determines the level of acquisition premium? This paper aims to investigate the effect of acquirers’ social capital as reflected through their network position (structural holes and network density) on the level of acquisition premiums.Design/methodology/approachThis study predicts acquisition premiums using a panel data set of 324 mergers and acquisition (M&A) transactions including 161 unique acquirers over a 21-year timeframe. M&A and alliance information are obtained from the securities data company platinum database; firm financial data are obtained from the COMPUSTAT database.FindingsThe results show that alliance network social capital provides acquiring firms with information benefits, thus, reducing the acquisition premium. However, such information benefits are also contingent on target valuation uncertainty and acquirers’ structure exploitation tendency.Practical implicationsDifferent types of network structures provide different social capital influences: managers should be aware of their advantages and pitfalls when engaging in M&As. The findings suggest that firms should pay close attention to social capital when making decisions regarding acquisition premiums.Originality/valuePast research has indicated that acquiring firms tend to overestimate the value of target firms. Still, little attention has been paid to organizational-level social capital in analyzing the determinants of acquisition premiums. This study offers insight into the effect of network structure on M&A acquisition premiums.

Divergence of Investment Bank Valuation and the Winner’s Curse in Takeovers

We study the winner’s curse in mergers and acquisitions, in which winning bidders fail to account for the uncertainty about target value and thus overpay. Using a unique setting where target firms hire multiple investment banks as advisors, we construct a novel measure of target valuation uncertainty based on investment banks’ disagreement on target valuation. We find that when valuation disagreement is higher, bidders pay significantly higher acquisition premiums. Moreover, bidders who pay high premiums have lower announcement returns and lower long-term post-merger returns when valuation disagreement is high. These bidders also create lower merger synergies. Our findings suggest that the winner’s curse does exist in takeovers and cause distortion in resource allocation.

When Good Things Turn Bad: Evidence from G-7 Serial Acquirer Bidding

This study investigates the impact of acquirer bidding experience on acquiring abnormal returns based on empirical evidence from a large sample of 10,880 bidders making 23,852 deals from G-7 countries. Both event study and regressions analysis have been used to examine the impact of acquirer bidding experience on acquirer returns. The findings show that “single acquirers” achieve higher returns, with a cumulative average abnormal return (CAAR) of 3.354%, but this number tends to decrease with increasing numbers of previous bids. In addition, the results of the bivariate analysis demonstrate that a single acquisition alone generates greater abnormal returns than those which are part of a series of acquisitions, with very robust results even after accounting for additional heterogeneity in payment method, target status and country/industry diversification. The findings of the multivariate analysis also confirm that serial acquirers are associated with significantly lower abnormal returns. This evidence conflicts with the notion that more experience with mergers and acquisitions (M&As) will correspond to improve target valuation and thus lead to more profitable agreements. In contrast, my findings imply that shareholder wealth is destroyed by serial acquirers, which suggests that the goal of maximising firm value is not always the sole motivation for engaging in M&A activities.

On mergers and acquisitions in Greece - before and after the onslaught of the economic crisis

This study examines the impact of mergers and acquisitions (M&As) on the post-merger performance of Greek listed firms using accounting variables (profitability ratios). We examine firm profitability for the first years after M&As and in the long-run (before and after the onslaught of the economic crisis). For the purpose of the study, a set of five profitability ratios is employed for the examination of fifty mergers, in order to measure firms' post-merger performance and to compare pre- and post-merger firm profitability before and after the M&As announcements. To delve deeper, we analyze with nonparametric tests seven qualitative variables as strategic choices of the sample firms in M&As' past decisions: selection of merger or acquisition, hostile takeovers or friendly M&As, legal form and valuation of the target firm, method of payment, decision for an international merger or not and the type of the target's production line. We find these ratios to be statistically insignificant indicating firms do not experience a post-merger improvement in accounting performance the first years after M&As (before the outbreak of the economic crisis in Greece), but there is a partial deterioration of the post-merger performance in the long-run (during the economic crisis). In contrary, regarding the strategic choices during the first years after M&As, we provide evidence that the selection of acquisitions than mergers, as well as hostile takeovers than friendly M&As, affect positively firm profitability. Similar positive effects we have found concerning legal form of the target firm and method of the target valuation. We found no change in other examined strategic choices as method of payment, international merger or not, target's production line. The present study could be useful to several interested parties as a recent empirical result. Firstly, to business executives, consultants or potential investors that want to proceed on a possible investment through mergers or acquisitions in Greece, as several business characteristics for successful business strategies have been proposed. Secondly, for policy makers, tax and other state authorities paints a recent picture for M&As activities in Greece before and after the outbreak of economic crisis.

What Matters for Organizing M&As Successfully?

How is merger and acquisition (M&A) success associated with firm internal M&A process organization? The literature thus far acknowledges that unobservable internal firm characteristics are at least as important as observable firm- and deal-specific characteristics in regard to explaining M&A success. Thus, this paper directly asks M&A experts around the globe to shed more light on this important issue. We investigate three indices, capturing the degree of M&A 1) process standardization, 2) process duration, and 3) process attention. Next, we analyze the process participation among four organizational layers, i.e., the functional involvement of the a) top management team, b) headquarters, c) business unit management, and d) business unit functions. We predict and find that all three indices are positively associated with M&A success, while process standardization and attention to deal strategy are of particular importance. Turning to the four organizational layers, a textured analysis shows that, for instance, target valuation should be performed by the headquarters functions but not by the top management team or the business unit. Overall, our findings are important to better understand unexplored M&A success drivers and provide directions for future research. Finally, our results might help practitioners adjust their M&A process organization to further improve their M&A success.

An efficient graphic processing unit parallel optimal point searching approach on complex product response surface

Response surface-based simulation optimization method is widely used in the design of complex products for its low-cost in optimization target valuation. However, when design variables increase, it often takes considerable time for high-dimensional response surface to search the optimal point, which falls easily into the local optimum due to the large search space.To solve these problems, a GPU (Graphic Processing Unit) parallel optimization based on branch and bound is proposed in this paper, of which the main algorithm flow can be described as the following steps: the optimization space is branched to subsets and mapped to different GPU threads; the Chebyshev response surface is constructed within the threads; the compact convex hull of the subsets are obtained through the interval operation, and the optimization space is reduced on a large scale by pruning; all subsets that may contain optimal design points are efficiently obtained by repeating spatial subdivision and demarcation; finally, all the reserved subsets are mapped to different GPU threads, and all global optimization design points are obtained through sequential quadratic programming and comparative analysis.

Time since targets’ initial public offerings, asymmetric information, uncertainty, and acquisition pricing

Abstract We document that acquirer announcement returns decrease and takeover premiums increase with the length of time since targets’ initial public offerings. Declining asymmetric information that leads to lower target valuation uncertainty for the acquirer can explain these effects. Newly public firms should have greater information asymmetry than established public firms that makes the target valuation more uncertain for a less-informed acquirer. Risk-averse acquirer managers pay less for riskier targets, resulting in relatively low takeover premiums and high acquirer announcement returns. Over time, as a target builds a public track record, the asymmetric information about its valuation declines, and takeover premiums increase to the benefit of target shareholders and the detriment of acquirer shareholders.

The information content of Fairness Opinions in M&A: Evidence from Italy

One of the major sources of inefficiencies in M&A transactions is the asymmetry of information between the bidder and the target. Several disclosure strategies are used by bidders to convince target shareholders to tender their shares but also to convince their own shareholders about the value of the proposed deal. Target managers also try to communicate to their shareholders their appreciation of the offer. To add credibility to this communication, experts are often called on to express an independent opinion on the offer price, in a document called the Fairness Opinion (FO). While FOs have been found to have no effect on deal efficiency in the US, this study re-examines the issue by considering the actual content of the document, in terms of the valuation process that leads to the expert opinion, in the context of Italian M&As where FOs are mostly voluntary and often provide detailed information about target valuation. The results show that even in a setting where weak enforcement of disclosure regulations allows bidders and targets to choose the level and detail of disclosure, the quality of the content of FO has only a weak association with the performance of the deal, both in terms of bidder announcement returns and of post-deal market and operating performance.

Do Family Firms Have Higher or Lower Deal Valuations? A Contextual Analysis

How does the socioemotional wealth (SEW) of a family firm affect its deal valuation in acquisition? Using a sample of 515 completed transactions of S&P 500 firms over the period 2003–2016, we examine a number of contexts and find that SEW creates differential valuations of targets by family firms vis-à-vis non-family firms. Particularly from an internationalization perspective, acquisitions may be an ideal option for family firms because foreign acquisitions may be loosely coupled from the core firm. Post-hoc analyses on the heterogeneity in family governance reveal that founder and descendant board chairs may have different perceptions of SEW.