Target Directors Research Articles

Are Third-Party Fundamental Valuations Relevant in Public Company Takeovers?

In U.S. mergers and acquisitions, target directors are required to consider third-party financial valuations, summarized in a “fairness opinion” before accepting a takeover offer. Critics argue (1) that these valuations are not relevant for public companies, which can assess the desirability of the deal based on the market premium, and (2) that the investment bank providers cater to management by “rationalizing” the deal price rather than providing an independent valuation check. I find that fairness valuations can provide valid information about the target’s value, incremental to its predeal stock price. They can impound expected transaction synergies, unravel rumor-driven stock price runups, and may signal ex ante fundamental mispricing. I also find evidence of the alleged catering, which I distinguish from “legitimate” valuation disagreements. This suggests that third-party fundamental valuation could play a useful role in the governance of public company takeovers, but there are flaws in its current implementation. This paper was accepted by Brian Bushee, accounting. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4959 .

Cine-AI: Generating Video Game Cutscenes in the Style of Human Directors

Cutscenes form an integral part of many video games, but their creation is costly, time-consuming, and requires skills that many game developers lack. While AI has been leveraged to semi-automate cutscene production, the results typically lack the internal consistency and uniformity in style that is characteristic of professional human directors. We overcome this shortcoming with Cine-AI, an open-source procedural cinematography toolset capable of generating in-game cutscenes in the style of eminent human directors. Implemented in the popular game engine Unity, Cine-AI features a novel timeline and storyboard interface for design-time manipulation, combined with runtime cinematography automation. Via two user studies, each employing quantitative and qualitative measures, we demonstrate that Cine-AI generates cutscenes that people correctly associate with a target director, while providing above-average usability. Our director imitation dataset is publicly available, and can be extended by users and film enthusiasts.

Are Third-Party Fundamental Valuations Relevant in Public-Company Takeovers?

In U.S. M&A, target directors are effectively required to consider third-party financial valuations, summarized in a “fairness opinion,” before accepting a takeover offer. Critics argue that these valuations are not relevant for public companies, which can assess the desirability of the deal in terms of the market premium. I identify conditions under which a target’s pre-deal market price will not provide directors with sufficient information to assess a takeover offer, and test for whether fairness valuations provide incrementally relevant information. I find they can impound expected transaction synergies and unravel abnormal runups in the target’s stock price prior to the announcement, and may signal ex ante fundamental mispricing. I also find that providers bias their valuations to cater to their clients. This suggests that third-party fundamental valuation has a plausible role in the governance of public-company takeovers, and has flaws in its current implementation.

Deal Protection Devices

In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms (deal protection devices) to deter third parties from jumping the deal and to compensate a disappointed buyer. This paper analyzes various deal protection devices, with a focus on two most commonly used mechanisms: target termination fees and match rights. A match right gives the buyer a right to “match” a third party’s offer so as to prevent the third party from snatching the target away, while a termination fee compensates the buyer when a third party acquires the target. Such mechanisms raise a number of important corporate and contract law questions. How effective are they in preventing third parties from competing for the target? Do they steer the target to be sold to the buyer who values the target less? Are the devices harmful to the target shareholders? To what extent can the negotiated deal price represent the target’s “fair value” when such devices reduce or eliminate the competition? The paper attempts to answer these questions with the help of auction theory. The paper shows, foremost, that these devices can actually increase the target and the buyer’s joint return and possibly the target’s stand-alone return. Termination fees and match rights function quite differently, however. While a larger termination fee reduces the target’s stand-alone return and can lead to allocative inefficiency, unlimited match right increases the target’s stand-alone return and promotes allocative efficiency. The paper argues that answering the corporate law questions ultimately turns on the question of how and why the target directors are utilizing the devices. If the devices are being deployed with the objective of maximizing the target shareholders’ return, not only can they be beneficial for the target shareholders, but their presence can also make the deal price a more reliable indicator of target’s fair value. With an improper objective, not only do the devices undermine target shareholders’ return, but the court also should not use the deal price as evidence of fair value. The paper also analyzes stock and asset lockups and examines deal protection devices through the lens of contract law.

Stealth Acquisitions and Product Market Competition

This study examines whether and how firms structure their merger and acquisition (M&A) deals to avoid scrutiny from antitrust regulators in order to better understand how such deals can alter firms’ competitive landscapes. We find a significant bunching of M&A deals just below thresholds that trigger antitrust review, consistent with acquirers having incentives to manipulate deal values to avoid antitrust scrutiny. We show that these “stealth acquisitions” tend to involve acquisitions of private targets, contractual terms such as extending target director and officer insurance, contingent payments, and additional compensation for target managers (e.g., post-acquisition employment), all of which afford a greater scope for negotiating and assigning lower deal values. Finally, consistent with stealth acquisitions reducing product market competition, we show that the equity values, gross margins, and common product prices of acquiring firms’ competitors increase following stealth acquisitions, but no such evidence following similar acquisitions that undergo antitrust review. Collectively, our results provide insights into how firms can successfully manipulate M&A deals to avoid antitrust scrutiny, thereby leading to anticompetitive behavior.

Agency costs of board connections and director retention: evidence from UK takeovers

Purpose The purpose of this paper is to investigate whether ex ante board connections and director retention result in agency costs to target company shareholders in the form of reduced payment in mergers and acquisitions transaction. Design/methodology/approach The authors employ detailed data of ex ante board connection and director retention in the mergers and acquisition in the UK from 1999 to 2015. Ex ante board connections are measured as proportion of target and acquirer companies’ directors worked on the same board at any time prior to the takeover, while director retention is measured as proportion of target companies’ directors remains on board after the takeover is completed. For mergers and acquisition payment characteristics, the authors examine takeover premium, cash payment percentage and offer price adjustment. Findings The authors find that ex ante board connections and director retention lead to reduced offer prices and lower proportions of cash payment. Notably, when there is no connection and target directors are not retained, the authors find that the bidding companies increase their final offer by £14m more than in other scenarios. The authors also document strong evidence that ex ante board connections lead to a higher probability of director retention. Originality/value The paper highlights that ex ante board connections and director retention will lead to a significant cost on target company shareholders. The authors recommend that a more detailed set of information on ex ante board connections and intended target board retention should be disclosed.

Social connections, reference point and acquisition premium

This paper examines the impact of acquirer-target social connections along with the target 52-week high (Baker et al., 2012) on acquisition premiums. We show that acquisition premium is more sensitive to first-degree connection than the reference point, suggesting that information is the main driving force for determining acquisition premiums. The findings also indicate that connected directors are more likely to favour firms where they hold higher positions and negotiate favourable premiums. Acquirers pay lower premiums when target directors are retained in the new entity. Connected acquirers are also more likely to finance their deals with equity. Overall, this paper provides support to the information flow hypothesis that acquirers with social connections have better access to target information and enhanced bargaining power in negotiations.

How directors trade and learn during takeovers

•Compared to schemes, target directors engage in less buying in bids•Compared to schemes, acquirer directors engage in less selling in bids•Payment method does not affect preannouncement director trading•Directors learn from market reaction and target director trading in bid withdrawal

Choice of acquisition form in Australia and the post‐takeover employment of target firm directors on the acquiring firm board

AbstractIn Australia, a corporate acquisition can be structured as either a scheme of arrangement or a takeover. We investigate the association between deal structure and the retention of target directors on the merged entity board. We find that the odds of a target director subsequently sitting on the merged entity's board are significantly higher in schemes. The results also show that premiums are lower in schemes of arrangement when additional target directors are appointed to the board of the acquiring firm. The findings indicate that target director appointment is unrelated to the merged entity's post‐acquisition performance.

Jobs for the Boys? Exploring gender biased director’s selection

We use mergers and acquisitions to isolate demand from supply-side factors on board nominations. This event study allows considering target directors as appointed and discarded candidates to the merged board. Our results show empirical evidence consistent with bias against women.

Controlling Target Directors in Friendly Mergers and Acquisitions

Controlling Target Directors in Friendly Mergers and Acquisitions

Social Ties in the Making of an M&A Deal

This paper investigates whether and how social ties between targets and acquirers affect merger outcomes. I use merger-related SEC filings and news articles to detect if a social tie between directors or executives of merging firms is effective during the making of the deal. When there is a social tie, abnormal announcement returns accruing to the combined entity and to the acquirer firm are reduced by 2.4 and 2.8 percentage points, respectively. This adverse effect is mainly driven by deals in which the social tie is distant. Irrespective of the closeness of the tie, acquirer-target social ties significantly decrease the likelihood of receiving competing bids in the private takeover process. Moreover, connected deals, particularly those involving close ties, are associated with lower financial advisory fees and a shorter negotiation period. Interestingly, although close ties do not affect merger outcomes for shareholders; such ties help target directors by increasing their retention probability.

Jobs for the Boys? The Glass Ceiling and the Market for Corporate Control

Women and ethnic minority groups hold few boardroom positions. In this paper, we adopt a novel identification strategy to test whether this is caused by a lack of suitable candidates for director positions or, alternatively, by discriminatory barriers that prevent these groups from progressing up the corporate hierarchy. We study the determinants of director appointments following completed mergers and acquisitions. Since directors at the acquisition target will be considered for an appointment at the newly merged firm, our approach allows us to observe the characteristics of successfully appointed target directors jointly with the characteristics of directors who have not been appointed to the board of the merged firm. Our results show empirical evidence consistent with biases in the recruitment of directors. We find that Hispanic directors are less likely to be appointed to the board of the merged firm. Further, women are less likely to be appointed if they previously held a non-executive post and if the representation of women on the acquiring firm’s board is higher. We also find that powerful CEOs are more prone to appoint women to the board. These effects cannot be explained by director and deal characteristics.

A Long-Term Vision for UK Firms? Revisiting the Target Director's Advisory Role Since the Takeover of Cadbury'S PLC

The takeover of Cadbury by Kraft in 2010 led to the questioning of the UK's open market for corporate control and initiated a political enquiry into the framework regulating takeover bids. One of the concerns brought forward is that, contrary to their role, target directors act more like “auctioneers” selling to the highest bidder rather than “stewards” looking after the company's long-term interests. The target board's role as an advisor will be analysed with reference to the City Code on Takeovers and Mergers, common law, the Companies Act 2006 and the EU Takeover Directive. It will be argued that the grey areas of law reported on are the result of the conflicting aims to facilitate an open market for corporate control, whilst sustaining companies with a long-term vision. The legal solution proposed is strengthening the target board's advisory role by providing directors with guidelines on how to construct their recommendation of a bid to shareholders.

Takeovers and Countering Short-Termism in Target Boardrooms

This two-part article considers the extent to which UK company law and takeover regulation may have contributed to the supposed short-termism exercised by target directors in takeovers, that is, target directors focusing only on short-term financial gain to the current shareholders, rather than the target’s long-term wealth creation. This article argues that general company law and takeover regulation do not mandate target directors to strictly prioritise the short-term financial interests of the company when determining whether to recommend a particular takeover bid. While company law and takeover regulation require the target board to consider stakeholders’ interests, neither shareholders nor stakeholders have an enforceable right of action against the directors in connection with their failure to do so.

Standing at the Singularity of the Effective Time: Reconfiguring Delaware's Law of Standing Following Mergers and Acquisitions

This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration of existing Delaware law under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.

Journeys in Revlon-Land with a Conflicted Financial Advisor: Del Monte and El Paso

Two recent cases in the Delaware Court of Chancery, In re Del Monte Foods Co. Shareholders Litigation and In re El Paso Corp. Shareholders Litigation, concern potential breaches of target directors’ Revlon duties when the company’s financial advisor has a conflict of interest related to the potential transaction. This article analyzes these cases with a view to exploring two main issues: (a) how breaches of the financial advisor’s duty of loyalty as an agent can support a claim that directors have breached their Revlon duties even if their reliance on the agent was entirely innocent, and (b) how, under Revlon, the directors’ fully-informed decision to engage or retain a financial advisor with a fully-disclosed conflict of interest should relate to subsequent decisions that the board may make relying on advice from such an advisor.

Controlling Target Directors in Friendly Mergers and Acquisitions

Controlling Target Directors in Friendly Mergers and Acquisitions

Board connections and M&A transactions

We examine M&A transactions between firms with current board connections and find that acquirers obtain higher announcement returns in transactions with a first-degree connection where the acquirer and the target share a common director. Acquirer returns are also higher in transactions with a second-degree connection where one acquirer director and one target director serve on the same third board. Our results suggest that first-degree connections benefit acquirers with lower takeover premiums while second-degree connections benefit acquirers with greater value creation. Overall, we provide new evidence that board connectedness plays important roles in corporate investments and leads to greater value creation.

Board Connections and M&A Transactions

We examine M&A transactions between firms with current board connections and find that acquirers obtain higher announcement returns in transactions with a first-degree connection where the acquirer and the target share a common director. Acquirer returns are also higher in transactions with a second-degree connection where one acquirer director and one target director serve on the same third board. Our results suggest that first-degree connections benefit acquirers with lower takeover premiums while second-degree connections benefit acquirers with greater value creation. Overall, we provide new evidence that board connectedness plays important roles in corporate investments and leads to greater value creation.