UK Acquirers Research Articles

Glamour Acquirers, Method of Payment and Post-Acquisition Performance: The UK Evidence

We study the effect of different acquirer types defined by financial status and their payment methods on their short and long-term performance in terms of abnormal returns using a variety of benchmark models. For a sample of 543 UK acquirers during 1983-95, we examine the relative performance of acquirers based on their pre-bid financial status as either glamour or value acquirers using both the PE ratio and market to book value. We also investigate the interaction between the pre-bid financial status of acquirers and the method of payment. We find that value acquirers outperform glamour acquirers in the three-year post-acquisition period. Price Earnings Ratio proves a better proxy for the glamour status than the market to book value ratio. We report that glamour firms tend to exploit their status and use equity financing rather than cash. However, the pre-bid financial status of the acquirer has a greater impact on the long run post acquisition performance than the method of payment. Glamour acquirers seriously underperform value acquirers irrespective of how they finance their acquisitions. Our results for the UK are broadly consistent with those for the US reported by Rau and Vermaelen (1998). As in their study, we find stronger support for the extrapolation hypothesis than for the method of payment hypothesis. Our conclusions based on a range of bench mark models for abnormal returns suggest that stock markets in both the US and the UK may share a similar proclivity to overextrapolation of past performance at least in the bid period. They also tend to reassess the acquirer performance in the post-acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries.

UK Takeovers and Acquiring Company Wealth Changes: The Impact of Survivorship and Other Potential Selection Biases on Post-Outcome Performance

A number of studies of takeover activity, both in the UK and elsewhere, have documented a pattern of long-run negative post-bid returns to shareholders of acquiring companies. One possible interpretation of the phenomena is that it represents a delayed market reaction to overpriced takeovers. An alternative explanation is that the phenomena is illusory and caused by methodological errors in the identification of long-run returns. These errors may arise through choice of inappropriate control models or through the introduction of some element of bias into the chosen sample, including the use of inappropriate tests of statistical significance. Potential sources of bias include survivorship and prior performance bias and the aggregation and testing of non-normal returns' distributions. In the current paper we demonstrate that the pattern of long-run negative returns to acquirers in UK acquisitions over the period 1977-1990 is not a function of survivorship bias. Nor do benchmark controls using both portfolios and matched pairs, with matching on book-to-market and size, provide results inconsistent with long-run negative wealth effects to shareholders of acquiring firms. However the application of test statistics that reflect the non-normal properties of distributions of long-run returns do reduce the significance of results based on parametric statistics. Our results also confirm that a number of characteristics of the acquiring firm can explain some of the cross-section distribution of wealth changes. In particular cash-financed acquisitions consistently outperform acquirers who rely on a method of financing based on equity. Cash-financed acquirers do not experience significant wealth changes when measured over a five-year post-acquisition period. We are unable to conclude that the negative wealth effects experienced by equity-financed acquirers is associated with long-run returns reversal, as tests that use benchmarks of companies matched on the basis of prior performance do not materially alter the pattern of negative long-run wealth losses. Large acquirers also suffer less-negative wealth effects than their smaller counterparts. In addition we also find that regular acquirers suffer no significant wealth losses, irrespective of the control model adopted, and consistently outperform single acquirers. This last finding does suggest that management do at least tend to learn from previous experience. In multiple regression tests, coefficients representing method of financing and experience of acquirers are the only variables that are significant. We find no evidence on any additional 'glamour versus value' effect after controlling for book-to-market and size.

Motives underlying the method of payment by UK acquirers: the influence of goodwill

The treatment of goodwill in the UK has been the subject of a recent contentious Financial Reporting Standard, FRS 10. It is shown that goodwill write-off considerations appear to have an influence on the form of payment used in the acquisition, and that this influence is associated with the relative portion of the acquirer's net worth which is available for write-offs and the ratio of goodwill to target asset value. These findings are robust to controlling for factors shown to have influenced the choice of acquisition financing by Martin (1996), and to additional controls for any over-valuation of equity. The result that the accounting treatment of goodwill is associated with the financing decision in an acquisition is one that may have important policy implications for UK accounting.

Post-takeover returns: The UK evidence

This paper looks for abnormal stock returns after the completion of takeovers in the UK. Over the period 1975 to 1990, and controlling for size, UK acquirers show zero abnormal returns in the three years following completion. However, over shorter periods we find evidence of significant clustering of positive and negative returns.

An Examination of the Long Run Performance of UK Acquiring Firms

This study examines a comprehensive data set of large domestic takeovers by UK listed companies between 1984 and 1992. The contribution of this paper is to show, by using a series of models of abnormal returns, together with the Ibbotson (1975) ‘Returns Across Time Series’ model and a simple cross‐sectional model of returns across all listed UK companies, that the average abnormal return for up to two years post‐acquisition is unambiguously and significantly negative. In particular, acquirers financing a takeover through equity, and single (as opposed to regular) acquirers exhibit significant negative performance. There is also some evidence to suggest that diversifying acquirers perform worse than non‐diversifying acquirers and that recommended bids are associated with poorer subsequent under‐performance by acquirers than are hostile bids.

Discussion of An Examination of the Long Run Performance of UK Acquiring Firms

<i>Discussion of</i> An Examination of the Long Run Performance of UK Acquiring Firms