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Corporate Restructuring and Governance > 10. Takeovers M&A's Consequences > Flashcards

10. Takeovers M&A's Consequences Flashcards

1
Q

Theoretical Predictions: Market for Corporate Control

A
  • Targets are under performing
  • Post-takeover performance of targets improves.
  • Turnover of senior executives of target post-takeover.
  • Stock prices of target declines after failed takeover attempt.
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2
Q

Theoretical Predictions: Synergies, Scale/Scope Economies, Market Power

A
  • Post-takeover performance of target and acquirer improves.
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3
Q

Theoretical Predictions: Managerial Objectives

A
  • Decline in Post-Takeover performance of target and acquirer improves.
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4
Q

Event Studies: Learning Objs

A
  • Explain why event studies are used.
  • Explain event study approach.
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5
Q

Event Studies: Why use?

A
  • Measure effect of an event or announcement (takeover, M&A)
  • Share price is appropriate measure of gains and losses because it reflects shareholders’ interests (assume stock market is efficient)
  • Accounting based measured used to assess real performance gains or losses.
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6
Q

Event Studies: What is it? (Timeline)

A
  • t-time = pre-event
  • t=0 = event date
  • t+time = post event
  • Share price studies examine short periods around the event using daily data.
  • Accounting data studies examine longer periods using annual data.
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7
Q

Share Price Studies: Components

A
  • Measuring shareholder returns
  • Pre-Bid Evidence
  • Post-bid evidence
  • Problems with Share Price Studies
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8
Q

Share Price Studies: Measuring Shareholder Returns (Abnormal Return Formula)

A

Abnormal Return = Actual Return - Expected (Normal Return
- See book for notation

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9
Q

Share Price Studies: Cumulative Abnormal Return

A
  • Sum of abnormal returns over a ‘window’ (j to k)
  • See notation in book
  • Analyse various windows to determine if the event is having an effect and how long the effect last.
  • Notation for window covering period 5 days before the event and 5 days after is -(5,5)
  • Negative sign indicates before, positive after
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10
Q

Share Price Studies: Cumulative Average Normal Return

A
  • Recall the abnormal return equation
  • Work out the average abnormal return for each day in the event window
  • CAAR is the sum of all the AARs over the T days of the event window.
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11
Q

Share Price Studies: Pre-Bid Evidence

A
  • Pre-bid-window sits between t-n and t-1.
  • There is no evidence of under-performance prior to bid announcement (O’Sullivan and Wong, 2005)
  • Not consistent with market for corporate control theory.
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12
Q

Share Price Studies: Post-Bid Evidence

A
  • Post-bid window is between t+1 and t+n
  • Post-bid study benchmarking against t-1 before the transaction
  • Post-bid window is the period after the bid announcement.
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13
Q

Share Price Studies: Pre-Bid Evidence (Target Firms)

A
  • Little evidence of poor performance in target firm prior to bid (Franks and Mayer 1996; Agrawal and Jaffe, 2003)
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14
Q

Share Price Studies: Post-Bid Evidence (Target)

A
  • Takeover announcements generate positive abnormal returns.
  • Offer premium between about 10%-50%
  • Hostile bids are associated with higher abnormal returns, which suggests managers in targets are extracting a higher bid premium from the bidder.
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15
Q

Post-Bid Evidence (Acquirer)

A
  • Evidence is mixed. Effects either insignificant or small positive effects in the short term.
  • Hostile bids generally produce negative abnormal returns (about -3% to 5%)
  • Longer-term effects (3 to 5 years after event) are generally negative
  • Total (target and acquirer) shareholder gains are positive on average
  • O’Sullivan and Wong 2005, Eckbo 2009, Renneboog 2011
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16
Q

Share Price Studies: Problems with Share Price Studies

A
  • Share prices do not always reflect firm performance.
  • Incapable of identifying sources of shareholder gains or losses.
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17
Q

Share Price Studies: Theoretical Predictions and Evidence (Market for Corporate Control)

A
  • Targets are under-performing (No)
  • Post-announcement performance of targets improves (Yes)
18
Q

Share Price Studies: Theoretical Predictions and Evidence for Synergies, Scale/Scope Economies, Market Power

A
  • Post-takeover performance of target and acquirer improves - longer-term evidence generally not supportive.
19
Q

Share Price Studies: Managerial Objectives

A
  • Decline in post-takeover performance of target and acquirer (Negative return with this)
20
Q

Accounting Data Studies: LOs

A
  • Explain findings of accounting data studies
21
Q

Accounting Data Studies: Evidence

A
  • Underlying performance of firms should be reflected in firms accounts (ROCE, ROA, Productivity)
22
Q

Accounting Data Studies: Evidence in Target Firms

A
  • Threat of takeover declines with higher profitability (Dickerson et al 2002)
  • Higher dividend payment associated with lower takeover risk (Dickerson et al. 1998)
  • Evidence consistent with market for corporate control.
23
Q

Accounting Data Studies: Evidence for Acquirer Firm

A
  • Most studies show post-acquisition performance declines (O’Sullivan and Wong, 2005 / Martynova and Renneboog, 2008)
24
Q

Accounting Data Studies: Evidence of Combined post-acquisition performance

A
  • Negative impact on profitability (Dickerson et al, 1997)
  • Related acquisitions have a positive effect on performance, unrelated acquisitions have no effect (Conyon et al 2004)
25
Q

Problems with Accounting Data Studies

A
  • Might be difficult to compare pre- and post-takeover pre and post takeover performance
  • Accounting conventions might change (rate of depreciation of capital)
  • Asset prices might be written up as an ex post justification to a big premium being paid.
26
Q

Accounting Data Studies: Theoretical Predictions and Evidence for Market for Corporate Control

A
  • Targets are under-performing: evidence consistent with that
  • Post-takeover performance of targets improves (not in all cases)
27
Q

Accounting Data Studies: Theoretical and Evidence for Synergies, Scale/Scope Economies, Market Power

A
  • Post-takeover performance of target and acquirer improves: related acquisitions have a positive effect.
28
Q

Accounting Data Studies: Theoretical Predictions and Evidence for Managerial Objectives

A
  • Decline in post takeover performance of target and acquirer - evidence generally supports this.
29
Q

Failed Takeovers: Objectives

A
  • Study share price effects of failed takeovers.
  • Explain managerial hubris hypothesis and look at the evidence.
30
Q

Impact on Share Price: Definition

A
  • Both market for corporate control hypothesis and business motivations for takeovers would predict a decline in stock price after a failed answer.
31
Q

Impact on Share Price: Bid cancelled by target

A
  • Abnormal returns remain positive (Dodd, 1980)
  • Reflects revaluation of firm because firm was previously undervalued.
32
Q

Impact on Share Price: Bid Cancelled by Bidder

A
  • Target abnormal returns return to pre-bid levels (Dodd, 1980)
  • Higher share price reflects expectation of business benefits or under-performing managers removal, which cannot be achieved if the bidder cancels bid.
33
Q

Managerial Hubris: Hubris hypothesis

A
  • Roll 1986
  • ## Managers overestimate their abilities to generate shareholder returns from targets’ assets and over-pay target shareholders for control.
34
Q

Managerial Hubris: What does it help to answer?

A
  • Why in takeovers still occur given evidence they destroy shareholder value in acquiring firms in the longer term and do not increase profitability?
35
Q

Managerial Hubris: Sources of Hubris

A
  • Being attributed with prior firm success and favourable media coverage.
36
Q

Managerial Hubris: Evidence

A
  • CEO associated with higher bid premiums and with greater losses to acquiring firms’ shareholders (Hayward and Hambrick 1997)
  • Overconfident CEOs associated with takeover odds being 65% higher and a more negative market reaction to takeover announcements (Malmendier and Tate, 2008)
37
Q

Managerial Hubris: Theoretical Predictions and Evidence for Market for Corporate Control

A
  • Stock price of target declines after failed takeover attempt: Depends on why it failed
38
Q

Managerial Hubris: Theoretical Predictions and Evidence for Managerial Objectives

A
  • Decline in post-takeover performance of target and acquirer: Evidence supporting hubris hypothesis supports this.
39
Q

Consequences of Takeovers for Execs and Employees: LOs

A

Examine evidence of takeover consequences for execs

40
Q

Consequences of Takeovers for Execs and Employees: Managerial Turnover in Target

A
  • If takeovers take a governance role, expect to see managers in target firms replaced.
  • Evidence suggests turnover of management after the takeover.
  • Is higher in target firms if bid is hostile, target under-performing pre-bid, bid resisted by mgmt (O’Sullivan and Wong 2005)
41
Q

Consequences of Takeovers for Execs and Employees: Managerial Takeover in Target (2)

A
  • Turnover of mgmt after takeover has changed over time (Kini et al 2004)
  • 1979-1988, hostile takeovers result in CEO turnover in underperforming targets.
  • 1989-1998, decline in hostile takeovers and no relation between CEO turnover and pre-takeover performance in target
  • Kini et al 2004 argues findings in later period could reflect improved internal governance.
42
Q

Consequences of Takeovers for Execs and Employees: Managerical Turnover Target Evidence for Market for Corporate Control

A
  • Turnover of senior execs of target post-takeover - yes and it is linked to target under performance, but relationship between management turnover and under-performance might have weakened over time,

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