Determinants of premiums in acquisition transactions (original) (raw)

Does overvaluation of bidder stock drive acquisitions? The case of public and private targets

International Journal of Banking, Accounting and Finance, 2013

We test the implications of the misvaluation hypothesis for a large sample of acquirers of private and public target firms. Consistent with the misvaluation hypothesis we find that acquirers are overvalued. The overvaluation is higher for stock acquisitions of private targets. We find that the announcement period returns are lower for firms that are overvalued at the time of acquisition. Announcement period returns are lower for larger acquisitions of public targets and higher for larger acquisitions of private targets. We also examine the factors that determine stock as the method of payment. Consistent with the misvaluation hypothesis we find that firms that have higher valuation measures at the time of acquisition tend to use stock. Acquirers of public targets tend to use stock more frequently.

Identifying the Sources of Gains From Takeovers

Accounting Forum, 2000

Nevertheless, the usual caveat applies. This study was partially funded by the The Chartered Association of Certified Accountants (ACCA). 1 There is some evidence of negative share price reactions for the acquirer firm over the same period but the bulk of the evidence on the acquirer points to a zero reaction in general. 2 As is probably well known, there is some concern over the rationality of the market's assessments of the value creating aspects of mergers. In particular, in the USA, a literature exists which examines the market performance of acquirers subsequent to the takeovers and finds that there is some (disputed) evidence of poor performance in this period (see, for example, Ruback 1988 and Aggrawal, Jaffe and Mandelker 1992 on the one hand and Langetieg 1978 and Franks, Harris and Titman 1991 on the other).

Investor valuation of corporate acquisitions as joint investment and financing decisions

Announcements of mergers and acquisitions simultaneously reveal an investment decision and a financing decision by the bidder. For this reason, we focus our analysis of investor reaction to such transactions on both post-merger operating performance and form of payment. Consistent with previous research, we find that mergers generate gains in operating performance. However, we show that while announcement returns anticipate post-acquisition changes in operating performance, form of payment and mode of acquisition contain incremental value-relevant information. Furthermore, we show that the success of mergers varies by form of payment. Because acquisition financing often involves a security issue, investor reaction to acquisition announcements may incorporate reactions to anticipated security issuance. Once we control for the security issuance decision, we find that cash and mixed forms of payment are no longer incrementally informative but that stock payment contains negative information. In stock-financed acquisitions, we find that acquirer industry rivals suffer negative abnormal returns upon the announcement of the acquisition. This leads us to conclude that the negative reaction to stock-financed acquisitions is investment rather than financing related. 1 While many corporate announcements contain both investment and financing dimensions, takeovers, due to their large size, generate significant investor response when they are announced.

Agency problems in stock market‐driven acquisitions

Review of Accounting and Finance, 2009

Purpose-The purpose of this paper is to examine the ways in which stock market valuation and managerial incentives jointly affect merger and acquisition (M&A) decisions and post-M&A performance, and to provide new evidence on the agency implications where such acquisitions are driven by the stock market. Design/methodology/approach-Utilizing all publicly-traded US firms in the NYSE, AMEX and NASDAQ during the period from 1992 to 2005 (excluding financial and utility firms), obtained from COMPUSTAT, CRSP, I/B/E/S, and the M&A database provided by SDC Platinum, this paper adopts a two-stage approach: the first stage, predicts the probability of an M&A based on the market valuation variables; the second stage, regresses the post-M&A firm performance on the predicted probability of a merger or acquisition from the first stage and other control variables. Findings-Market valuation has a significant influence on corporate acquisition decisions, particularly for those firms whose compensation packages include less managerial equity ownership, more executive stock options and no long-term incentive plans, and in those firms where CEOs are serving on the board of directors. The value-destroying acquisitions made by these types of managers are likely to be financed using the firms' stocks, executed with high premiums and undertaken during periods of high market valuation. Originality/value-The main finding suggests that market-driven acquisitions could be value destroying when managers engage in opportunistic acquisitions for reasons of self-interest. Managerial myopia, overconfidence, misaligned incentives, empire-building motives and poor corporate governance can all exacerbate the agency problem of market-driven acquisitions.

How Much Is Too Much: Are Merger Premiums Too High?

European Financial Management, 2008

Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long-run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long-run post merger underperformance.

Corporate takeovers, bargaining and managers' incentives to invest

Managerial and Decision Economics, 2000

This paper analyzes the impact of potential takeovers on the investment decisions of managers. The takeover involves bargaining over the potential surplus between the acquiring …rm, the target manager, and shareholders of the target …rm. The anticipation of future takeover gains will in ‡uence the decision makers to invest exante. Interestingly, both over-and underinvestment might prevail, depending on the relative bargaining powers of the parties. The model encompasses speci…c cases documented in the empirical literature and M&A practice. It is therefore particularly suited to focus on the desirability of antitakeover legislation.

Financial Characteristics of Acquiring Firms: An Industry Specific Approach

Review of Financial Economics, 1992

This paper examines the sources of value to acquiring firms to expand the understanding of mergers and acquisitions. The firmspecific rationale that motivate firms to acquire other firms are examined, along with how these rationale impact the shareholder wealth of acquiring firms when the acquisitions are announced. A logit regression model is utilized to compare financial characteristics of acquiring firms to those of non-acquiring firms. The relation of these characteristics to the shareholder wealth effects experienced by acquiring firms when they announce acquisitions is also examined. The results support hypotheses that firm size and cashflow payout impact the decision to acquire. Capital structure, management performance, and cash-flow payout are related to the wealth effects of acquisition announcements. Better fitting models result when industry effects are controlled by measuring firm characteristics as relative deviations from industry values.

Why Pay More - World Evidence on M&A Bid Premium Determinants

2019

Corporate mergers and acquisitions represent one of the most dynamic fields in the world of the business finance. These remarkably complex transactions success may vary depending on the economic and institutional environments in which the transactions are performed. This paper investigates the information content of the bid premium determined in the MA (2) current equity market trends (3) institutional environments and the degree of the economic development of the countries in which the transaction participants operate; and (4) selected payment method and motive for entering the transaction in regard to space and time dimensions of bid premium. Examining the sample of 783 merger and acquisition transactions at the global economy level, the research explores the importance and range of time and space determinants of bid premiums in M&A transactions. Our results confirm that bid premium carries significant information and that is highly dependent on the observed timeframe, i.e. we fin...