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Merger Waves and Corporate Inversions: Causes and Consequences
Abstract
A number of reports from the business press have suggested that corporate cash hoarding may have served as the motivation for the recent rise in inversions. While access to cash may motivate some inversions, it is difficult to differentiate the importance of corporate cash availability from other influences such as business environment shocks or relative equity valuations. Regardless of the specific motivation, inversion transactions have garnered the attention of the public, the media and the government. This recent spike in scrutiny carries with it the possibility that some action may be taken to at least partially eliminate any potential tax benefits of an inversion, suggesting that firms considering such a move might be wise to move quickly. © 2015 Wiley Periodicals, Inc.
We examine a sample of corporate inversions from 1993 to 2015 by firms active in the U.S. markets and find that shareholders experience positive abnormal returns in the short-run. In the long-run, inversions have a deleterious effect on shareholder wealth. The form of the inversion and country-pair differences in geographic distance, economic development and corporate governance standards are determinants of shareholder wealth. Furthermore, we find evidence of a negative and non-linear relation between CEO total return and long-run shareholder returns.
In this chapter, Vlcek provides a close consideration of the practices of the USA to deal with its tax nomads. After providing the historical context, the Foreign Accounts Tax Compliance Act (FATCA) is investigated not only for its role to pursue individual American tax nomads but also for its use by other countries in pursuing their tax nomads. The situation for American corporate tax nomads is quite different, and Vlcek shows it is a consequence of US corporate income tax policies.
In this chapter Vlcek establishes the theoretical background for the book, starting with the important role that state sovereignty plays in determining tax policies and practices. The concept of a tax nomad is then developed, and the differences between the individual tax nomad and the corporate nomad are highlighted. The application of Michel Foucault’s concept of governmentality is explained with the importance that governmentality places on the conduct of power in the relations between the state and the nomad.
We develop a theory which shows that merger waves can arise even when the shocks that precipitated the initial mergers in
the wave are idiosyncratic. The analysis predicts that the earlier acquisitions produce higher bidder returns, involve smaller
targets, and result in higher compensation gains for the acquirer's top management team than the later acquisitions in the
wave. We find strong empirical support for these predictions. The model also generates additional predictions, some of which
remain to be tested.
This article discusses section 7874 of the Internal Revenue Code and regulations issued thereunder by the IRS and Treasury in 2005 and 2006. The statute is aimed at discouraging corporate inversions and potential US tax avoidance that can result from an inversion transaction. The regulations deal with a number of issues arising from the statutory language, and include anti-avoidance measures thought to be authorized by the broad regulatory authority granted to the IRS and Treasury by Congress to issue regulations to prevent avoidance of the purposes of the statute.
We study industry-level patterns in takeover and restructuring activity during the 1982–1989 period. Across 51 industries, we find significant differences in both the rate and time-series clustering of these activities. The interindustry patterns in the rate of takeovers and restructurings are directly related to the economic shocks borne by the sample industries. These results support the argument that much of the takeover activity during the 1980s was driven by broad fundamental factors and have general implications for the stock price spillover effects of takeover announcements, corporate performance following takeovers, and the timing of takeover waves.
Aggregate merger waves could be due to market timing or to clustering of industry shocks for which mergers facilitate change to the new environment. This study finds that economic, regulatory and technological shocks drive industry merger waves. Whether the shock leads to a wave of mergers, however, depends on whether there is sufficient overall capital liquidity. This macro-level liquidity component causes industry merger waves to cluster in time even if industry shocks do not. Market-timing variables have little explanatory power relative to an economic model including this liquidity component. The contemporaneous peak in divisional acquisitions for cash also suggests an economic motivation for the merger activity.
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.
US corporations hold significant amounts of cash on their balance sheets. This paper develops and tests the hypothesis that the magnitude of US multinational cash holdings are, in part, a consequence of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms facing higher repatriation taxes hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. In addition, less financially constrained firms and those that are more technology intensive exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.
This paper examines the impact on acquiring firm shareholder wealth of mergers during the oligopoly merger wave of the 1920s. These acquisitions were relatively unregulated; the Securities and Exchange Commission did not exist and antitrust laws were only loosely enforced. Although the lack of financial market controls and the possibility of monopoly gains should have permitted acquiring companies to capture large take-over profits, stock price data on 134 firms indicate only modest success. The average profitability of an acquisition in the 1920s does not differ from the profitability resulting from mergers in the 1960s and 1970s, despite vast differences in the economic environments.
We study benefits received by target chief executive officers (CEOs) in completed mergers and acquisitions. Certain target
CEOs negotiate large cash payments in the form of special bonuses or increased golden parachutes. These negotiated cash payments
are positively associated with the CEO's prior excess compensation and negatively associated with the likelihood that the
CEO becomes an executive of the acquiring company. Regression estimates suggest that target shareholders receive lower acquisition
premia in transactions involving extraordinary personal treatment of the CEO. Target CEOs experience very high turnover rates
both at the time of acquisition and, for those who remain employed, for several years thereafter.
Using 947 acquisitions during 1970-89, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five-year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of -25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns. Copyright 1997 by American Finance Association.
The success of mergers in the 1920s: A stock market appraisal of the second merger wave
- Borg
Market valuation and merger waves
- Rhodes-Kropf
The tax-shopping backstory of the Medtronic-Covidien inversion
- H Gleckman