10. Takeovers M&A's Consequences Flashcards
Theoretical Predictions: Market for Corporate Control
- 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.
Theoretical Predictions: Synergies, Scale/Scope Economies, Market Power
- Post-takeover performance of target and acquirer improves.
Theoretical Predictions: Managerial Objectives
- Decline in Post-Takeover performance of target and acquirer improves.
Event Studies: Learning Objs
- Explain why event studies are used.
- Explain event study approach.
Event Studies: Why use?
- 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.
Event Studies: What is it? (Timeline)
- 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.
Share Price Studies: Components
- Measuring shareholder returns
- Pre-Bid Evidence
- Post-bid evidence
- Problems with Share Price Studies
Share Price Studies: Measuring Shareholder Returns (Abnormal Return Formula)
Abnormal Return = Actual Return - Expected (Normal Return
- See book for notation
Share Price Studies: Cumulative Abnormal Return
- 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
Share Price Studies: Cumulative Average Normal Return
- 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.
Share Price Studies: Pre-Bid Evidence
- 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.
Share Price Studies: Post-Bid Evidence
- 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.
Share Price Studies: Pre-Bid Evidence (Target Firms)
- Little evidence of poor performance in target firm prior to bid (Franks and Mayer 1996; Agrawal and Jaffe, 2003)
Share Price Studies: Post-Bid Evidence (Target)
- 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.
Post-Bid Evidence (Acquirer)
- 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
Share Price Studies: Problems with Share Price Studies
- Share prices do not always reflect firm performance.
- Incapable of identifying sources of shareholder gains or losses.
Share Price Studies: Theoretical Predictions and Evidence (Market for Corporate Control)
- Targets are under-performing (No)
- Post-announcement performance of targets improves (Yes)
Share Price Studies: Theoretical Predictions and Evidence for Synergies, Scale/Scope Economies, Market Power
- Post-takeover performance of target and acquirer improves - longer-term evidence generally not supportive.
Share Price Studies: Managerial Objectives
- Decline in post-takeover performance of target and acquirer (Negative return with this)
Accounting Data Studies: LOs
- Explain findings of accounting data studies
Accounting Data Studies: Evidence
- Underlying performance of firms should be reflected in firms accounts (ROCE, ROA, Productivity)
Accounting Data Studies: Evidence in Target Firms
- 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.
Accounting Data Studies: Evidence for Acquirer Firm
- Most studies show post-acquisition performance declines (O’Sullivan and Wong, 2005 / Martynova and Renneboog, 2008)
Accounting Data Studies: Evidence of Combined post-acquisition performance
- 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)
Problems with Accounting Data Studies
- 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.
Accounting Data Studies: Theoretical Predictions and Evidence for Market for Corporate Control
- Targets are under-performing: evidence consistent with that
- Post-takeover performance of targets improves (not in all cases)
Accounting Data Studies: Theoretical and Evidence for Synergies, Scale/Scope Economies, Market Power
- Post-takeover performance of target and acquirer improves: related acquisitions have a positive effect.
Accounting Data Studies: Theoretical Predictions and Evidence for Managerial Objectives
- Decline in post takeover performance of target and acquirer - evidence generally supports this.
Failed Takeovers: Objectives
- Study share price effects of failed takeovers.
- Explain managerial hubris hypothesis and look at the evidence.
Impact on Share Price: Definition
- Both market for corporate control hypothesis and business motivations for takeovers would predict a decline in stock price after a failed answer.
Impact on Share Price: Bid cancelled by target
- Abnormal returns remain positive (Dodd, 1980)
- Reflects revaluation of firm because firm was previously undervalued.
Impact on Share Price: Bid Cancelled by Bidder
- 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.
Managerial Hubris: Hubris hypothesis
- Roll 1986
- ## Managers overestimate their abilities to generate shareholder returns from targets’ assets and over-pay target shareholders for control.
Managerial Hubris: What does it help to answer?
- Why in takeovers still occur given evidence they destroy shareholder value in acquiring firms in the longer term and do not increase profitability?
Managerial Hubris: Sources of Hubris
- Being attributed with prior firm success and favourable media coverage.
Managerial Hubris: Evidence
- 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)
Managerial Hubris: Theoretical Predictions and Evidence for Market for Corporate Control
- Stock price of target declines after failed takeover attempt: Depends on why it failed
Managerial Hubris: Theoretical Predictions and Evidence for Managerial Objectives
- Decline in post-takeover performance of target and acquirer: Evidence supporting hubris hypothesis supports this.
Consequences of Takeovers for Execs and Employees: LOs
Examine evidence of takeover consequences for execs
Consequences of Takeovers for Execs and Employees: Managerial Turnover in Target
- 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)
Consequences of Takeovers for Execs and Employees: Managerial Takeover in Target (2)
- 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.
Consequences of Takeovers for Execs and Employees: Managerical Turnover Target Evidence for Market for Corporate Control
- 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,
