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Accepting or Rejecting the Bid? The Target's Response to Takeover Offers Based on Its Valuation and Managerial Ownership
Abstract
This paper examines how the valuation of a firm that becomes the target of an acquisition impacts its reaction to the takeover offer. I find that target managers whose firm is highly valued are more likely to commit to target termination fee provisions, which can be regarded as an endorsement of the transaction by the target's management, and the merger bid is significantly more likely to be successful than if the target's valuation is low. Furthermore, targets with a high valuation demand significantly lower acquisition premiums than low valuation targets. In a second step, I examine how the over- or undervaluation of the target managers' shareholdings relative to their annual compensation affects the M&A deal. This managerial welfare variable also has a positive impact on the likelihood of a target termination fee provision and merger bid success, though the relationship is less significant than for the target valuation ratio alone. I also find that targets whose managers own a large fraction of the firm's shares receive higher premiums, while targets whose managers can profit from a large dollar-overvaluation of their ownership stake relative to their annual compensation receive lower premiums than those whose managers are holding a large undervalued equity stake.
The main objective of this paper is to examine the impact of related/unrelated merger and acquisition (M&A) on value creation and research and development (R&D) of Indian non-financial sector companies. This study focuses on whether related M&A outperforms unrelated M&A in the context of value creation and R&D. The sample of the study includes 64 companies to evaluate the significance of relatedness and unrelatedness between target and acquiring companies of the Indian non-financial sector using panel data from the period from 2015 to 2020. The study employs a logistic regression model, which is a predictive model employed wherein the response variable is categorical. The idea of logistic regression is to establish a relationship between variables and the probability of a given outcome. The results of our outcome reveal that partner familiarity affects the post-acquisition value creation and R&D. Further, the findings of the study acclaim that related M&A outperform unrelated M&A. The study indicates that related M&A create positive value but influence negatively to R&D. The findings of the study have several implications for the managers and policymakers who need to understand the dynamics of related/unrelated mergers to take a valid judgment before making merger and acquisition decisions
We examine long-run firm performance following open market share repurchase announcements, 1980–1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1%. For ‘value’ stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3%. For repurchases announced by ‘glamour’ stocks, where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements.
The bid premium acquiring companies offer for target company shares may be expected to be a positive function of potential acquisition-related benefits and a negatie function of the bargaining power of the bidder. A bid premium model using debt, working capital, type of combination, valuation-related variables and bargaining-strength variables has relatively high explanatory power for a wide moss-section of firms and a predictive power superior to that of naive bidding strategies. Firms with declining amounts of leverage and firms with relatively low valuation ratios command significantly higher bid premiums. The percentage of shares already controlled by the offering company, its ability to acquire enough shares to be able to implement potentially beneficial changes, and the existence of an opposing bid at the time an offer is made are also significant determinants of bid premiums. When two or more bidders compete for the same target, the bid premium averages 30 percentage points higher than the sample mean. Premiums in offers where the bidder seeks majority control are 9 percentage points higher than when the bidder does not seek majority control, and premiums on nonconglomerate offers tend to be 7 percentage points higher than premiums on conglomerate offers.
This paper analyzes 4,750 mergers from 1963 to 1998 to characterize the risk and return in risk arbitrage. Results indicate that risk arbitrage returns are positively correlated with market returns in severely depreciating markets but uncorrelated with market returns in flat and appreciating markets. This suggests that returns to risk arbitrage are similar to those obtained from selling uncovered index put options. Using a contingent claims analysis that controls for the nonlinear relationship with market returns, and after controlling for transaction costs, we find that risk arbitrage generates excess returns of four percent per year.
Tender offers provide an ideal setting for the analysis of agency relationships since the best interests of the principal (target firm shareholders) and agent (target firm managers) are often in conflict. Moreover, the actions and stated rationale of target managers in resisting or not resisting tender offers are readily observable, and the size of the possible agency costs is great. This research provides direct empirical evidence on the relationship between managerial welfare and takeover bid resistance. Tests on a sample of cash tender offers provide support for the managerial welfare hypothesis. The existence or absence of bid resistance is found to be directly related to the personal wealth changes of the target firm's managers. The relationships between managerial actions and bid premium size, bidder nationality, conglomerate offers, and "ex post settling up" are also examined.
This paper uses a methodology robust to recent criticisms of standard long-horizon event study tests to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. However, the long-term underperformance of acquiring firms in mergers is predominantly caused by the poor post-acquisition performance of low book-to-market “glamour” firms. We interpret this finding as evidence that both the market and the management overextrapolate the bidder's past performance (as reflected in the bidder's book-to-market ratio) when they assess the desirability of an acquisition.
This paper studies the premiums paid in successful tender offers and mergers involving NSE and Amex-listed target firms from 1975-91 in relation to pre-announcement stock price runups. It has been conventinoal to measure corporate control premiums including the price runups that occur prior to the initial formal bid. There has been little evidence on the relation between the pre-bid runup and the post- announcement markup (the increase in the stock price measured from the date of the first bid). Under what circumstances are runups associated with larger total premiums? The evidence in this paper shows that in most cases, the pre-bid runup and the post-announcement markup are uncorrelated (i.e., little or no substitution between the runup and the post-announcement markup), so the runup is an added cost to the bidder. This has important implications for assessing the costs of illegal insider trading based on private information about a potential bid.
In this paper, we explore the probability of merger completion/success for the 1991 to 2001 period. We construct a prediction model for merger completion and, among other issues, test how payment methods/merger types can influence success for three basic types of takeover offers: cash tender, stock swap, and collar. Our multivariate test reveals that takeover attempts offering cash are more likely to succeed than those which offer payment in the form of stock. We argue that the uncertain equity values implicit in the stock payment method accounts for the reduced success rate. A range of exchange ratios (collar offers) tends to improve the chance of success as compared with a fixed exchange ratio. We find that our prediction model, based on both historical and new findings, can be used to improve the risk-adjusted returns of risk arbitrage and related strategies.
We present empirical evidence on the relation between changes in managerial wealth and tender offer characteristics. Changes in managerial wealth resulting from a tender offer are negatively related to the likelihood of managerial resistance to a tender offer and positively related to the likelihood of tender offer success. We also document that the abnormal returns to tender offers are lower for hostile than for friendly offers if we control for the tender offer premium. Finally, we find that the top executive gains, whereas outside shareholders do not gain, from management's decision to resist the tender offer.
This article presents international evidence on takeover activity, and uses that evidence to argue that the current takeover wave can fairly be called the first-ever international merger wave, as much or more than it can be called the fifth U.S. merger wave. I also discuss the factors that contribute to the strength of the current takeover wave and why the takeover boom has engendered so little political concern. A longer version of this article was published as The First International Merger Wave and the Fifth and Last U.S. Wave, 54 University of Miami Law Review 799-818 (2000), and is available from the Social Science Research Network electronic library at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=231101
We provide direct empirical evidence that stocks' overvaluation is an important motive for firms to make acquisitions with their stocks, supporting the market driven acquisition theory (Shleifer and Vishny, 2002). Overvaluation increases the probability of firms becoming acquirers and the probability of using their own stocks as the medium of exchange. Once overvaluations of the combined firms are taken into account, the merged firms do not fare worse than their matches. Compared to their matches before the merger announcement, the original acquirers' shareholders do not lose; instead long-term target shareholders are the losers if they do not exit around the merger dates.
We study benefits received by target company CEOs in completed mergers and acquisitions. These executives obtain wealth increases with a median of 5 million and a mean of 11 million, roughly in line with the permanent income streams that they sacrifice. CEOs receive lower financial gains from those transactions in which they become executives of the buyer, suggesting that tradeoffs exist between the financial and career-related benefits they extract. We find very high rates of turnover both at the time of the merger and, for those executives who stay, for several years post-merger. Regression estimates suggest that target shareholders receive lower acquisition premia in transactions that involve extraordinary personal treatment of the CEO.
This paper analyzes tax and non-tax determinants of corporate acquisition structure for 340 acquisitions involving public U.S. acquirers and targets during 1985-1988. The results indicate that the acquiring firm's tax and non-tax characteristics significantly affect transaction structure, but the data provide almost no support for the conclusion that potential target shareholder capital gains tax liabilities or target firm tax and non-tax characteristics influence acquisition structure. Detailed analyses of the magnitude of tax and non-tax costs and benefits indicate that built in target shareholder capital gains are not large on average and target shares turnover quickly indicating that the benefits of tax deferral are modest; expected acquiring firm shareholder wealth losses associated with a tax-free stock merger exceed the tax benefits derived from preserving target firm NOLs in most transactions; and the immediate tax cost of stepping-up the basis of the target's assets often exceeds the future tax benefits from such a structure.
This paper examines the relation between managerial ownership and the probability of being a target firm, and the impact of managerial ownership on target shareholder returns. The paper finds that targets have lower managerial ownership than either their industry counterparts or randomly selected nontargets. Managerial ownership is significantly lower in contested compared to uncontested offers, and in unsuccessful compared to successful cases. Managerial ownership is significantly related to abnormal returns in contested cases that are ultimately successful. The results are consistent with a positive impact of managerial ownership where it is used to negotiate, but not ultimately block, an acquisition.
Mergers and acquisitions are well-suited events for a detailed study of the valuation effects of corporate governance structures. Using a sample of 388 takeovers announced in the friendly environment of the 1990s, I empirically show that target shareholder control, proxied by low target chief executive officer share ownership, low fractions of inside directors, and the presence of large outside blockholders, is positively correlated with takeover premiums. In contrast, studies of takeovers in the hostile environment of the 1980s have shown a negative relation between target shareholder control and takeover premiums.
We present a model of mergers and acquisitions based on stock market misvaluations of the combining firms. The key ingredients of the model are the relative valuations of the merging firms and the market's perception of the synergies from the combination. The model explains who acquires whom, the choice of the medium of payment, the valuation consequences of mergers, and merger waves. The model is consistent with available empirical findings about characteristics and returns of merging firms, and yields new predictions as well.
A diversified portfolio of risk arbitrage positions produces an abnormal return of 0.6–0.9% per month over the period from 1981 to 1996. We trace these profits to practical limits on risk arbitrage. In our model of risk arbitrage, arbitrageurs’ risk-bearing capacity is constrained by deal completion risk and the size of the position they hold. Consistent with this model, we document that the returns to risk arbitrage increase in an ex ante measure of completion risk and target size. We also examine the influence of the general supply of arbitrage capital, measured by the total equity holdings of arbitrageurs, on arbitrage profits.
We examine the provision of termination fee clauses in merger agreements between 1989 and 1998. Target-payable fees are observed more frequently when bidding is costly and the potential for information expropriation by third parties is significant. Fee provisions appear to benefit target shareholders through higher deal completion rates and greater negotiated takeover premiums. We conclude that target-payable fees serve as an efficient contracting device, rather than a means by which to deter competitive bidding. Bidder fee provisions appear to be used to secure target wealth gains in deals with higher costs associated with negotiation and bid failure.
Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of(i) uncertainty about true factor risk premiums and (ii) imp ecise estimates of the loadings of industries on the risk factors. Estimates of the cost of equity for firms and projects are surely even less precise.
The paper provides evidence on the effects of including a target termination fee in a merger contract. I test the implications of the hypothesis that termination fees are used by self-interested target managers to deter competing bids and protect “sweetheart” deals with white knight bidders, presumably resulting in lower premiums for target shareholders. An alternative hypothesis is that target managers use termination fees to encourage bidder participation by ensuring that the bidder is compensated for the revelation of valuable private information released during merger negotiations. My empirical evidence demonstrates that merger deals with target termination fees involve significantly higher premiums and success rates than deals without such clauses. Furthermore, only weak support is found for the contention that termination fees deter competing bids. Overall, the evidence suggests that termination fee use is at least not harmful, and is likely beneficial, to target shareholders.
The outcome of a hostile takeover bid hinges on an interplay of the defensive strategies of targets and the offensive strategies of bidders. This study examines the determinants of outcome for a sample of 205 hostile bids for UK public company targets over the period 1983-1989. the impact of a number of defensive strategies adopted by the targets, their ownership structure which could aid or hinder the deployment of those strategies, and the method of payment selected by bidders is investigated using multivariate logit methodology. the City Code on Takeovers and Mergers in the UK and its influence on the choice of defensive and offensive strategies is described. the study finds outcome in hostile bids in the UK is significantly influenced by the use of certain defensive strategies, the presence of large institutional shareholders in targets, the size of targets and the method of payment chosen by the bidder. the results of this study are useful in devising effective strategies to frustrate or prosecute hostile bids. Copyright Blackwell Publishers Ltd. 1995.
We estimate sequentially outcome probabilities and expected payoffs associated with first, second, and final bids in a large
sample of tender offer contests. Rival bids arrive quickly and produce large bid jumps. Greater bidder toeholds (prebid ownership
of target shares) reduce the probability of competition and target resistance and are associated with both lower bid premiums
and lower prebid target stock price runups. The expected payoff to target shareholders is increasing in the bid premium and
in the probability of competition, but decreasing in the bidder's toehold. The initial bidder's expected payoff is significantly
positive in the “rival-bidder-win” outcome, in part reflecting gains from the pending toehold sale. Despite these dramatic
toehold effects, only half of the initial bidders acquire toeholds.
This paper examines whether hostile takeovers can be distinguished from friendly takeovers, empirically, based on accounting and stock performance data. Much has been made of this distinction in both the popular and the academic literature, where gains from hostile takeovers result from replacing incumbent managers and gains from friendly takeovers result from strategic synergies. Alternatively, hostility could reflect strategic choices made by the bidder or the target. Empirical tests show that most deals described as hostile in the press are not distinguishable from friendly deals in economic terms, except that hostile transactions involve publicity as part of the bargaining process. Copyright The American Finance Association 2000.
This paper finds that, on average, targets that terminate takeover offers significantly increase their leverage ratios. Targets that increase their leverage ratios the most reduce capital expenditures, sell assets, reduce employment, increase focus, and realize cash flows and share prices that outperform their benchmarks in the five years following the failed takeover. Our evidence suggests that leverage-increasing targets act in the interests of shareholders when they terminate takeover offers and that higher leverage helps firms remain independent not because it entrenches managers, but because it commits managers to making the improvements that would be made by potential raiders. Copyright The American Finance Association 1999.
This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher preacquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers. Copyright 1996 by American Finance Association.
We document managers' vote holdings in a large random sample of industrial firms, and test whether the degree of managerial control of shares affects how often a firm is the target of control events. The likelihood of successful acquisitions of firms is unrelated to managers' holdings. But this insignificant relation reflects two opposing effects. Lower managerial control is associated with a higher probability that a firm will receive a takeover offer, but a lower probability that a takeover attempt will lead to a change in control.
This paper analyzes how managerial control of voting rights affects firm value and financing policies. It shows that an increase in the fraction of voting rights controlled by management decreases the probability of a successful tender offer and increases the premium offered if a tender offer is made. Depending on whether managerial control of voting rights is small or large, shareholders' wealth increases or falls when management strengthens its control of voting rights. Management can change the fraction of the votes it controls through capital structure changes, corporate charter amendments, and the acquisition of shareholder clienteles.
The excess returns earned by takeover targets raises questions of efficiency in the market for corporate control. Brown and Raymond and Samuelson and Rosenthal explain the target share pricing process as a function of the probability of success of the takeover bid. We highlight weaknesses in this work, propose an alternative model, and apply it to 245 Australian takeovers from 1980 to 1993. We find, for targets of successful bids, considerable non-convergence to the bid price. This is consistent with speculative trading models whereby the reduction in dispersion of traders' beliefs leads to the evaporation of market liquidity.
Riklis Chair in Business and Associate Professor of Finance, The Ohio State University, and Assistant Professor of Finance, San Diego State University, respectively. We are grateful to Anup Agrawal, Warren Bailey, John Byrd, K. C. Chan, Larry Dann, Harry DeAngelo, Mike Fishman, Gerald Garvey, Rob Heinkel, Mike Jensen, Gregg Jarrell, Jon Karpoff, Mike Long, Francis Longstaff, Wayne Marr, David Mayers, Wayne Mikkelson, Patricia Reagan, Richard Ruback, Andrei Shleifer, Bill Schwert, Rex Thompson, and Mark Wolfson for useful discussions and comments, to participants at sessions at the American Finance Association and the Western Finance Association, and to the seminar participants at Harvard University, Indiana University, the Ohio State University, Southern Methodist University, the University of Rochester, and the Washington State University for helpful comments.
Data on U.S. mergers and aquisitions from 1987 to 2006 indicate that firms with high market-to-book values (i.e., Tobin's Q) tend to merge with firms that have lower Q's, but that target Q's are on average higher than those of firms not involved in mergers at all. We capture this fact with a model in which the ratio of a bidder's Q to that of a prospective target has a non-monotone, inverted U-shaped effect on the probability of the two firms merging. Further, we find that the likelihood of a merger is positively and linearly related to the ratio of the growth potential of an acquirer and its prospective target. Using data from Compustat, a series of bootstrap logit regressions bear out these implications.
This paper analyzes the managerial, regulatory, and financial determinants of U.S. bank merger premiums. The author uses both individual acquirer and target bank characteristics. He also examines state regulation of acquirer and target banks from a geographically dispersed population, allowing him specifically to te st the effect of a varied state regulatory menu. The study finds merger premiums to be related to the characteristics of both acquirer and target banks and the regulatory environments in both acquirer and target bank states. The author also finds evidence that the separati on of ownership and control in acquirer and target banks has a signific ant effect on merger premiums. Copyright 1993 by Blackwell Publishing Ltd.
Does valuation affect mergers? Data suggest that periods of stock merger activity are correlated with high market valuations. The naïve explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over- and undervaluation of the stock market. Thus, valuation fundamentally impacts mergers. Copyright 2004 by The American Finance Association.
This paper examines movements in the prices of target stocks as predictors of the ultimate success or failure of tender offers. An empirical investigation of 100% cash tender offers during the years 1976 to 1981 leads to the conclusion that, with few exceptions, market prices are well‐calibrated, i.e., the current target price during the offer period measures the expected (discounted) stock price at the conclusion date. The market's probability predictions improve monotonically over time. 1986 The American Finance Association
0055 (.660) .0001 (.991) .0058 (.643)
- P S Acq
Acq P/S
.0073
(.553)
.0055
(.660)
.0001
(.991)
.0058
(.643)
.0019
(.882)
.0058
(.638)
.0081
(.508)
- M Dong
- D Hirshleifer
- S Richardson
- S H Teoh
Dong, M. / Hirshleifer, D. / Richardson, S. / Teoh, S. H. (2006): Does Investor Misvaluation
Drive the Takeover Market? Journal of Finance 61, 725-762.
0459 c (.093) .0036 (.962)
- Sombind
SOMBInd
.0459 c
(.093)
.0036
(.962)
.0071
(.923)
4715 a (.003)5451 a (.001)4386 a (.005)4286 a (.006) Toehold .6273 (.419)4382 (.568)5246 (.527) .5271 (.508) .5571 (.500) .5673 (.437) .5527 (.486) Fortune 500 -.8273 c (.076) -.9524 b (.036)
- Rel
- Size
Rel. Size
.4322 a
(.005)
.4259 a
(.005)
.5121 a
(.001)
.4715 a
(.003)
.5451 a
(.001)
.4386 a
(.005)
.4286 a
(.006)
Toehold
.6273
(.419)
.4382
(.568)
.5246
(.527)
.5271
(.508)
.5571
(.500)
.5673
(.437)
.5527
(.486)
Fortune 500
-.8273 c
(.076)
-.9524 b
(.036)
-.9598 b
(.038)
-.7986 c
(.093)
-.9430 b
(.045)
-.8830 c
(.058)
-.8398 c
(.072)
Tgt Leverage
-1.5716 a
(.003)
-1.1026 b
(.018)
-1.2751 a
(.006)
-1.7010 a
(.001)
-1.2984 a
(.005)
-1.5555 a
(.004)
-1.5472 a
(.004)
Premium
1.9956 a
(.004)
1.6755 b
(.010)
1.6217 b
(.017)
1.9156 a
(.007)
1.6334 b
(.019)
2.0634 a
(.003)
2.0566 a
(.003)
0475 (.452)0447 (.481)0402 (.530)0377 (.554) Defense .0320 (.769)0211 (.846) .0370 (.735) .0325 (.763) .0365 (.736) .0323 (.767) .0234 (.830) Diversifying -.0187 (.502)
- Unsolicited
Unsolicited
.0405
(.526)
.0422
(.510)
.0418
(.512)
.0475
(.452)
.0447
(.481)
.0402
(.530)
.0377
(.554)
Defense
.0320
(.769)
.0211
(.846)
.0370
(.735)
.0325
(.763)
.0365
(.736)
.0323
(.767)
.0234
(.830)
Diversifying
-.0187
(.502)
-.0271
(.327)
-.0204
(.466)
-.0246
(.376)
-.0230
(.410)
-.0210
(.456)
-.0223
(.421)
Tender Offer
.0605
(.124)
.0506
(.188)
.0493
(.206)
.0615
(.118)
.0497
(.200)
.0598
(.129)
.0528
(.175)
Stock Offered
.0020
(.952)
-.0088
(.783)
-.0007
(.983)
-.0007
(.983)
-.0046
(.885)
.0018
(.957)
.0016
(.960)
0885 a (.001)0946 a (.000)1035 a (.000) .1071 a (.000) .0898 a
- Tgt Leverage
Tgt Leverage
.0926 a
(.000)
.0885 a
(.001)
.0946 a
(.000)
.1035 a
(.000)
.1071 a
(.000)
.0898 a
(.000)
.0895 a
(.000)
5062 b (.008) -.5223 a (.007) -.5269 a (.005) -.4781 b (.009) -.5032 a
- Acqps
AcqPS
-.4597 b
(.013)
-.3829 b
(.027)
-.5062 b
(.008)
-.5223 a
(.007)
-.5269 a
(.005)
-.4781 b
(.009)
-.5032 a
(.007)
Own Pct
-.2188
(.169)
-.1821
(.239)
-.2596 c
(.098)
-.0763
(.643)
-.1586
(.340)
-.3113 c
(.055)
-.2824 c
(.079)
3450 a (.006) -2.6057 a
- Ombind
OMBInd
.0361 c
(.092)
-2.3450 a
(.006)
-2.6057 a
(.004)
-2.3715 a
(.006)
-2.5525 a
(.004)
-2.4863 a
(.005)
0807 a (.008)0791 a (.010)0750 b (.014) .0843 a (.007)
- Tgttermfee
TgtTermFee
.0700 b
(.021)
.0807 a
(.008)
.0791 a
(.010)
.0750 b
(.014)
.0843 a
(.007)
.0669 b
(.028)
.0682 b
(.025)
Behavioral Corporate Finance Handbook of Corporate Finance: Empirical Corporate Finance, Volume A (Handbooks in Finance Series
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- J Wurgler
Baker, M. / Ruback, R. S. / Wurgler, J. (2006): Behavioral Corporate Finance. In: B. Espen
Eckbo (ed.), Handbook of Corporate Finance: Empirical Corporate Finance, Volume A
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