The Determinants and Consequences of Abandoned Takeovers (original) (raw)

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Do Takeover Targets Underperform? Evidence from Operating and Stock Returns

The Journal of Financial and Quantitative Analysis, 2003

Financial economists seem to believe that takeovers are partly motivated by the desire to improve poorly performing firms. However, prior empirical evidence in support of this inefficient management hypothesis is rather weak. We provide a detailed re-examination of this hypothesis in a large scale empirical study. We find little evidence that target firms were performing poorly before acquisition, using either operating or stock returns. This result holds both for the sample as a whole and for subsamples of takeovers that are more likely to be disciplinary. We conclude that the conventional view that targets perform poorly is not supported by the data. (the referee), and Ralph Walkling (associate editor and referee) for useful comments. Part of this research was conducted while Agrawal was visiting at the Wharton School. Financial support from the William A. Powell, Jr. Chair of Finance and Banking (Agrawal) and a Geewax-Terker grant from the Rodney L. White Center for Financial Research (Jaffe) are gratefully acknowledged. Earlier versions of this paper were entitled "The Pre-Acquisition Performance of Target Firms: A Re-examination of the Inefficient Management Hypothesis." 721 722 Journal of Financial and Quantitative Analysis determination to force painful cuts or realignment of the company's operations." While all firms, even those with good management, can theoretically be improved by better management, the potential for improvement is clearly greater in firms that are performing poorly. Therefore, as Brealey and Myers note, "If this motive is important, one would expect that firms that perform poorly tend to be targets for acquisition." Financial economists seem to accept this notion, which is often referred to as the disciplinary motive for takeovers or the inefficient management hypothesis.

Hostile Takeovers in the 1980s: The Return to Corporate Specialization

Brookings Papers on Economic Activity. Microeconomics, 1990

We examine the sample of all 62 hostile takeover contests between 1984 and 1986 that involved a purchase price of $50 million or more. In these contests, 50 targets were acquired and 12 remained independent. We use a sample of hostile takeovers exclusively to avoid using evidence from friendly acquisitions to judge hostile ones, as many studies have done. We examine such post-takeover operational changes as divestitures, layoffs, tax savings, and investment cuts to understand how the bidding firm could justify paying the takeover premium. We also examine the possibility of wealth losses by bidding firms' stockholders as the explanation for target shareholder gains.

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).

Do Wealth Creating Mergers and Acquisitions Really Hurt Bidder Shareholders?

We examine the expected economic benefits of mergers and acquisitions. We conclude that both signaling and revelation biases are responsible for the commonly reported finding that on average takeovers are harmful to acquirer shareholder wealth. After accounting for these two biases that lead to a price fall on announcement of 18.9% ($563.9 million), we demonstrate that acquirers generally benefit from takeovers with an average 81% share of the economic gains from the transaction. By studying bids that fail for exogenous reasons, which are largely free of signaling and revelation biases, we confirm the neoclassical view that takeovers are positive NPV projects for a typical acquirer, which produce a sizeable return on capital of 21% to the acquirer ($626.6 million) and 21.2% ($772.2 million) to the combined acquirer-target. This conclusion is based on two important findings. First, on a failed acquisition announcement, the combined acquirer and target value on average falls, where both target and acquirer suffer significant negative abnormal returns. Second, acquirers share in a significant portion of the economic benefits of a successful acquisition, reflected in a significantly positive relationship between acquirer and target stock returns utilizing a 60-day initial bid announcement window and a 100-day period following the termination announcement. Over the same window, exogenously failed cash bidders significantly underperform successful cash bidders by 10.7% and exogenously failed stock bidders significantly underperform successful stock bidders by a further 15.5% making a total differential of 26.2%. Moreover, in the long term, stock-funded targets typically only receive half the premium of cash targets.

Do takeovers create value? : an intervention approach

Social Science Research Network, 1996

An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, thi...

Do Wealth Creating Mergers and Acquisitions Really Hurt Acquirer Shareholders?

2011

We examine the expected economic benefits of mergers and acquisitions. We conclude that both signaling and revelation biases are responsible for the commonly reported finding that on average takeovers are harmful to acquirer shareholder wealth. After accounting for these two biases that lead to a price fall on announcement of 18.9% ($563.9 million), we demonstrate that acquirers generally benefit from takeovers with an average 81% share of the economic gains from the transaction. By studying bids that fail for exogenous reasons, which are largely free of signaling and revelation biases, we confirm the neoclassical view that takeovers are positive NPV projects for a typical acquirer, which produce a sizeable return on capital of 21% to the acquirer ($626.6 million) and 21.2% ($772.2 million) to the combined acquirer-target. This conclusion is based on two important findings. First, on a failed acquisition announcement, the combined acquirer and target value on average falls, where both target and acquirer suffer significant negative abnormal returns. Second, acquirers share in a significant portion of the economic benefits of a successful acquisition, reflected in a significantly positive relationship between acquirer and target stock returns utilizing a 60-day initial bid announcement window and a 100-day period following the termination announcement. Over the same window, exogenously failed cash bidders significantly underperform successful cash bidders by 10.7% and exogenously failed stock bidders significantly underperform successful stock bidders by a further 15.5% making a total differential of 26.2%. Moreover, in the long term, stock-funded targets typically only receive half the premium of cash targets.

Do Target Firms Always Gain? The Determinants of Target Firms Loss in Us Takeovers

Corporate Ownership and Control, 2012

Studies that examine the profitability of mergers and acquisitions document that a considerable proportion (15-20%) of target firms earn negative returns. This study examines why the share price of the target firm reacts negatively to the announcement of some merger deals, while it reacts positively to others. We find that target firms that earn negative returns are less efficient, less profitable, receive a lower premium, are more likely to be paid with stocks, and attract less efficient acquirers than target firms that earn positive returns. The logistic regressions indicate that high relative size, low premium, higher target leverage, equity exchange offers, and mixed payment deals are associated with a higher likelihood of loss for the target firm. Fewer anti-takeover provisions for target firms are associated with a higher probability of loss, because such target firms, if necessary, are more likely to be disciplined by the market and be paid a low premium. Meanwhile, a high G-...

Failed takeover attempts, corporate governance and refocusing

Strategic Management Journal, 2003

Hostile takeover attempts oftentimes signal that a target firm has an over-diversified and ineffective corporate strategy. What does this signal mean when takeover attempts fail? Drawing from agency theory, we argue that target firms managed by independent directory boards are likely to ignore the takeover attempt and not refocus their firms' strategy. Conversely, target firms managed by nonindependent boards are more likely to view the failed takeover attempt as a 'wake-up call' and will refocus their firms' strategy so as to preserve the firm's survival. These arguments are tested using a sample of 76 firms that were targets of failed hostile takeover attempts. Logistic regression analyses confirm the predictions. This study suggests that in the aftermath of a failed takeover attempt board of director characteristics can help predict changes in corporate strategies.

Financial risk assessment in takeover: the effect of bidder firm shareholders' wealth

International Journal of Risk Assessment and Management, 2003

Motive studies investigate takeover rationale and the wealth effect on bidder shareholders, but with mixed results. Assuming semi-strong efficiency, this paper argues that ambiguities result from the ignorance of the distortion effects of distressed acquirers in a sample. Event studies that monitor market reaction to takeover news allow the examination of relative wealth effects, when non-distressed and distressed bidders are properly separated. Results strongly suggest that the market differentiates between good and bad bidders effectively, despite the noise that frequently accompanies takeover activity.