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Tag: Merger waves

The Real Effects of Uncertainty on Merger Activity

Posted by Robert A. Dam, University of Colorado at Boulder, on Sunday, August 21,

2016

Acquisitions, Bidders, Deal certainty, Deal protection, Decision making, Firm

valuation, Information environment, Merger waves, Mergers & acquisitions, Risk,
Target firms

More from: Jarrad Harford, Robert Dam, Vineet Bhagwat

Robert A. Dam is Assistant Professor of Finance at University of Colorado at Boulder

Leeds School of Business. This post is based on a forthcoming article by Professor
Dam; Vineet Bhagwat, Assistant Professor of Finance at University of Oregon
Lundquist College of Business; and Jarrad Harford, Professor of Finance at University
of Washington Foster School of Business.

Imagine you are in the market for a new car. You find exactly the car you want, and
agree to the price and financing conditions, but there is a twist. In this alternate
universe, you cant actually pick up your car for several months, and during this
time the actual value of your car is likely to have changed by 20% or more. Even
worse, when the car has increased in value, the dealer can back out of your
agreement, while you are likely stuck with the original terms if the cars value has
dropped. Are you still ready to sign on the dotted line?

In our article, The Real Effects of Uncertainty on Merger Activity, forthcoming in the
Review of Financial Studies, we suggest acquirers face a reality not unlike our
hypothetical car buyer, and as a result defer acquisitions when uncertainty is high.
While the bidder and target agree to the terms of the deal up front, in our sample it
takes an average of 126 days until deals for publicly-traded firms are completed.
During the delay, we estimate that the targets standalone value changes by over
10% in two-thirds of the deals, and by more than 20% over half of the time.
Completing our analogy, we reference earlier works in the legal literature that argue
targets retainvia proxy votes and share tendersan easy out when it suits their
interests, while bidders are far more likely to be held to the deal. [1]

READ MORE

Mergers and Acquisitions, Technological Change, and Inequality

Posted by Elena Simintzi, University of British Columbia, on Wednesday, August 10,

2016

Capital allocation, Capital formation, Efficiency, Innovation, Merger announcements,

Merger waves, Mergers & acquisitions, Reorganizations, Target firms

More from: Elena Simintzi, Paige Ouimet, Wenting Ma

Elena Simintzi is Assistant Professor of Finance at University of British Columbia

Sauder School of Business. This post is based on a recent paper by Professor
Simintzi; Paige Ouimet, Associate Professor of Finance at the Finance Department at
the University of North Carolina at Chapel Hill; and Wenting Ma.

A substantial rise in wage inequality in the United States and other developed
countries has garnered significant attention in the media and among policy circles.
Economists have argued that rising inequality is a consequence of technology
adoption. Technology may be skill-biased enhancing the productivity of high-skill
labor (Katz and Autor, 1999) or routine-biased enabling firms to automate routine
tasks replacing middle-skill workers (Autor, Levy, and Murnane, 2003; Acemoglu and
Autor, 2011; Autor and Dorn, 2013). But what drives technology adoption? In recent
research, we argue firm reorganization, in the form of M&As, acts as a catalyst for
the adoption of both skill-biased and routine-biased technology. Considering the
large scale of M&A activity, with over 4 $trillion in activity in 2015 alone, it is
plausible to expect M&A activity may have economically important effects on
increased income inequality and other changes in labor demand.

READ MORE

Whats Behind the All-Time High in M&A?

Posted by Emily Liner, Third Way, on Wednesday, March 16, 2016

Acquisitions, Arbitrage, China, Cross-border transactions, Emerging markets,
International governance, Inversions, Leveraged acquisitions, Merger waves,
Mergers & acquisitions, Private equity, Spinoffs, Strategic buyers, Tax avoidance,
Taxation

More from: Emily Liner, Third Way

Emily Liner is a Policy Advisor at Third Way. This post is based on a Third Way
publication. The complete publication, including footnotes, is available here.

Headlines over the past year have been filled with news of mega-mergers. Big
companies across numerous sectors and continents have been joining forces at
record rates. Last years $5 trillion worth of deals worldwide was more than a one-
third increase over 2014 and set a new high. Why the surge in M&A, and what does
it mean for the broader economy?

READ MORE

Predicting Future Merger Activity

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Wednesday, November
6, 2013

Merger waves

More from: Martin Lipton, Wachtell Lipton

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in
mergers and acquisitions and matters affecting corporate policy and strategy. This
post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The October 29, 2013 New York Times Deal Book article, Frenzy of Deals, Once
Expected, Seems to Fizzle, has resulted in a number of requests for me to discuss
merger activity and predict the level of future merger activity. In the course of a
long career of advising on mergers, Ive identified many of the factors that
determine merger activity, but a complete catalog is beyond me and I am not able
to predict even near-term levels of merger activity. Since the 1980s, Ive written and
lectured extensively on this and the history of merger waves, and I regularly revise
an outline of the factors that I believe are the most significant that influence
mergers. This is a condensed version of the outline:
First, it is recognized that mergers are an integral part of market capitalism,
including the types that are practiced in Brazil, China, India and Russia. Mergers are
an element in the Schumpeterian theory of creation and destruction of companies
that characterizes market capitalism.

Second, the autogenous factors, not in the order of importance, are relatively few
and straight forward:

READ MORE

Predicting Future Merger Activity

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Friday, March 16, 2012

Merger waves

More from: Martin Lipton, Wachtell Lipton

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in
mergers and acquisitions and matters affecting corporate policy and strategy. This
post is based on a Wachtell Lipton memorandum by Mr. Lipton.

Im frequently asked to explain merger activity and to predict the level of future
merger activity. In part in response to these requests and in part as the
consequence of a long career of advising as to mergers, Ive identified many of the
factors that determine merger activity, but a complete catalog is beyond me and I
am not able to predict even near-term levels of activity. Ive written and lectured
extensively on this and the history of merger waves since the 1880s. In preparation
for work on a revision of my merger waves studies, I made an outline of the factors
that I believe are the most significant that affect mergers. I thought it might be
interesting to share a condensed version and that as an ancillary benefit of doing
so, readers might favor me with comments and suggestions.

First, it is recognized that mergers are an integral part of market capitalism,

including the types that are practiced in China, India and Russia. Mergers are an
agent of the Schumpeterian creation and destruction that characterizes market
capitalism.

READ MORE
The Real Effects of Financial Markets

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and

Financial Regulation, on Wednesday, February 8, 2012

Acquisition likelihood, Firm valuation, Merger waves, Takeovers

More from: Alex Edmans, Itay Goldstein, Wei Jiang

The following post comes to us from Alex Edmans and Itay Goldstein, both of the
Department of Finance at the University of Pennsylvania, and Wei Jiang, Professor of
Finance at Columbia University.

In our paper, The Real Effects of Financial Markets: The Impact of Prices on
Takeovers, forthcoming in the Journal of Finance, we provide evidence on the real
effect of financial markets. Using non-fundamental shocks to market prices
occurring due to non-discretionary trades by mutual funds that face liquidation
pressure from investors outflows as an instrumental variable, we show that
market prices affect takeover activity. A non-fundamental decrease in the stock
price creates a profit opportunity for acquirers, and increases the probability that
the firm will be taken over. Using an instrument for price changes is essential for
identifying this effect since market prices are endogenous and reflect the likelihood
of an upcoming acquisition. This may explain the weak relationship between prices
and takeover activity found by prior literature. By modeling the relationship
between prices and takeovers as a simultaneous system that accounts for
anticipation, and identifying using an instrument, we find a significantly stronger
effect of prices on takeovers than previous research.

READ MORE

Private and Public Merger Waves

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and

Financial Regulation, on Wednesday, August 4, 2010

Merger waves

More from: Gordon Phillips, Liu Yang, Vojislav Maksimovic

The following post comes to us from Vojislav Maksimovic, Professor of Finance at the
University of Maryland, Gordon Phillips, Professor of Finance at the University of
Maryland, and Liu Yang of the Finance Department at the University of California,
Los Angeles.

In our paper, Private and Public Merger Waves, which was recently made publicly
available on SSRN, we examine the participation of public and private firms in
merger waves. We find that public firms participate more in the market for assets,
especially during merger waves, than private firms. Acquisitions by public firms are
more likely to lead to an increase in productivity of acquired assets, especially when
the assets are acquired from other public firms. Public firms also acquire and sell
assets more when they are productive and when there is increased liquidity in the
financial market.

However, differences in participation are not just driven by liquidity and access to
capital market. First, we find that acquisition activity differs between public and
private firms because of their fundamentals differ. Larger and more productive firms
select public status, and these firms also engage in more acquisitions in the long
run, all other things being equal. Using initial productivity from over five and ten
years prior to the transaction, we show that better firms select to become public
and later participate more in acquisitions. Second, public status causes a differential
in response to measured firm fundamentals or macro-economic shocks. Public firms
participate more because they have the option to access public financial markets at
more favorable or easier terms than otherwise identical private firms. These effects
are reflected in the differences in the estimated coefficients between public and
private firms.

READ MORE

Do Envious CEOs Cause Merger Waves?

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and

Financial Regulation, on Monday, November 23, 2009

Bidders, Merger waves

More from: Anand Goel, Anjan Thakor

This post comes to us from Anand Goel, Assistant Professor of Finance at DePaul
University, and Anjan Thakor, the John E. Simon Professor of Finance and a Senior
Associate Dean at Washington University in St. Louis.

In our paper, Do Envious CEOs Cause Merger Waves?, which was recently accepted
for publication in the Review of Financial Studies, 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.

We start with a simple premise: CEOs have preferences defined over both absolute
and relative consumption, with relative-consumption preferences characterized by
envy. Whenever we refer to a CEO, we mean the CEO of a bidding firm, and by envy,
we mean that an individuals utility is increasing in the difference between his
consumption and that of the person he envies. There is now a large literature on the
biological, sociological, and economic foundations for envy-based preferences, and
substantial empirical evidence that preferences display envy. Assuming envy-based
preferences generates a simple yet powerful intuition for why mergers come in
waves. If CEOs envy each other based on relative compensation and CEOs of bigger
firms get paid more, then a merger in the industry that increases firm size for one
CEO will cause other envious CEOs to be tempted to undertake value-dissipating but
size-enhancing acquisitions, thereby starting a merger wave.

READ MORE

Patterns in Corporate Events

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and

Financial Regulation, on Monday, October 5, 2009

Event waves, Merger waves

More from: Aris Stouraitis, Raghavendra Rau

This post comes to us from Raghavendra Rau of Purdue University and Aris
Stouraitis of the City University of Hong Kong.

It has been extensively documented that corporate events occur in waves.

However, existing empirical studies have examined individual types of waves
separately. In our paper, Patterns in the timing of corporate event waves, which was
recently accepted for publication in the Journal of Financial and Quantitative
Analysis, we investigate whether a relation exists between the different types of
corporate events. Our analysis focuses on the timing of five different types of
corporate events (new issues both IPOs and SEOs, mergers both stock and cash-
financed, and share repurchases) using a comprehensive dataset of corporate
transactions over the 25-year period 1980-2004.

The starting point in our analysis is the observation that most corporate events are
combinations of two activities that have been central to corporate finance: financing
decisions and investment decisions. The academic literature has traditionally
argued that financing and investment decisions are driven by one of two
hypotheses: (1) The neoclassical efficiency hypothesis which suggests that
managers undertake corporate transactions for efficiency reasons, issuing equity or
buying targets to take advantage of growth opportunities or to invest in positive
NPV projects, and (2) the market misvaluation hypothesis which suggests that
rational managers take advantage of irrational market misvaluations by issuing
stock in exchange for cash or other firms.

What distinguishes the events we study is the extent to which they involve either
the financing decision or the investment decision. Theories that describe why firms
choose investment or financing decisions imply that related corporate events should
be affected by the same factors. If we consider pure financing decisions for
example, SEOs, IPOs, and stock repurchases are related, in that the former two both
involve firms issuing equity while the last involves buying back equity.

The first part of our analysis consists of three tests that explore the correlation
structure of event activity, that is, how activity in one type of event correlates with
activity in other events. First, we find strong positive correlations at the industry
level in contemporaneous activity within stock issuance events of different types
(SEOs, IPOs, stock-financed M&A), and negative correlations between all three stock
issuance events and stock repurchases. Second, we find that lagged SEO volume
predicts future IPO volume, and that lagged SEO and IPO volume both predict future
stock-financed M&A volume. Third, we show that waves of events follow the same
pattern. We find, therefore, a previously undocumented pattern in the timing of
corporate events.

The second part of our analysis involves regressions where we explain the likelihood
of different types of waves using explanatory variables that proxy for neoclassical
efficiency or misvaluation factors. Our analysis suggests that waves are driven by
both neoclassical and misvaluation factors and the relative importance of these
factors changes in different periods, leading to differing conclusions in the different
studies that look at this issue.
The full paper is available for download here.

Patterns in Corporate Events

(Editors Note: This post comes to us from Raghavendra Rau of Purdue University
and Aris Stouraitis of the City University of Hong Kong..)

It has been extensively documented that corporate events occur in waves.

However, existing empirical studies have examined individual types of waves
separately. In our paper, Patterns in the timing of corporate event waves, which was
recently accepted for publication in the Journal of Financial and Quantitative
Analysis, we investigate whether a relation exists between the different types of
corporate events. Our analysis focuses on the timing of five different types of
corporate events (new issues both IPOs and SEOs, mergers both stock and cash-
financed, and share repurchases) using a comprehensive dataset of corporate
transactions over the 25-year period 1980-2004.

The starting point in our analysis is the observation that most corporate events are
combinations of two activities that have been central to corporate finance: financing
decisions and investment decisions. The academic literature has traditionally
argued that financing and investment decisions are driven by one of two
hypotheses: (1) The neoclassical efficiency hypothesis which suggests that
managers undertake corporate transactions for efficiency reasons, issuing equity or
buying targets to take advantage of growth opportunities or to invest in positive
NPV projects, and (2) the market misvaluation hypothesis which suggests that
rational managers take advantage of irrational market misvaluations by issuing
stock in exchange for cash or other firms.

What distinguishes the events we study is the extent to which they involve either
the financing decision or the investment decision. Theories that describe why firms
choose investment or financing decisions imply that related corporate events should
be affected by the same factors. If we consider pure financing decisions for
example, SEOs, IPOs, and stock repurchases are related, in that the former two both
involve firms issuing equity while the last involves buying back equity.
The first part of our analysis consists of three tests that explore the correlation
structure of event activity, that is, how activity in one type of event correlates with
activity in other events. First, we find strong positive correlations at the industry
level in contemporaneous activity within stock issuance events of different types
(SEOs, IPOs, stock-financed M&A), and negative correlations between all three stock
issuance events and stock repurchases. Second, we find that lagged SEO volume
predicts future IPO volume, and that lagged SEO and IPO volume both predict future
stock-financed M&A volume. Third, we show that waves of events follow the same
pattern. We find, therefore, a previously undocumented pattern in the timing of
corporate events.

The second part of our analysis involves regressions where we explain the likelihood
of different types of waves using explanatory variables that proxy for neoclassical
efficiency or misvaluation factors. Our analysis suggests that waves are driven by
both neoclassical and misvaluation factors and the relative importance of these
factors changes in different periods, leading to differing conclusions in the different
studies that look at this issue.

The full paper is available for download here. [link to full paper on SSRN]

A Theory of Mergers

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and

Financial Regulation, on Thursday, April 2, 2009

Firm valuation, Managerial wealth, Merger waves, Takeovers

More from: Gary Gorton, Matthias Kahl, Richard Rosen

This post comes from Gary Gorton of Yale University, Matthias Kahl of the University
of North Carolina at Chapel Hill, and Richard J. Rosen from the Federal Reserve Bank
of Chicago.

In our forthcoming Journal of Finance article Eat or Be Eaten: A Theory of Mergers

and Firm Size we propose a theory of mergers that combines managerial merger
motives with an industry-level regime shift that may lead to value-increasing
merger opportunities. Two of the most important stylized facts about mergers are
the following: First, the stock price of the acquirer in a merger decreases on average
when the merger is announced. Second, mergers concentrate in industries that
have experienced regime shifts in technology or regulation. The view that mergers
are an efficient response to regime shifts by value-maximizing managers, the so-
called neoclassical merger theory, can explain this second stylized fact. However, it
has difficulties explaining negative abnormal returns to acquirers. Theories based on
managerial self-interest such as a desire for larger firm size and diversification can
explain negative acquirer returns. However, they cannot explain why mergers are
concentrated in industries undergoing a regime shift. Our theory of mergers is able
to reconcile both of these stylized facts.

The basic elements of our theory are as follows: First, we assume that managers
derive private benefits from operating a firm in addition to the value of any
ownership share of the firm they have. Second, we assume that there is a regime
shift that creates potential synergies. The regime shift makes it more likely that
some future mergers will create value, with larger targets being more attractive
merger partners due to economies of scale. Third, we assume that a firm can only
acquire a smaller firm, which is consistent with the majority of actual market
acquisitions.

In our models, the anticipation of potential mergers after the regime shift creates
incentives to engage in additional mergers. We show that a race to increase firm
size through mergers can ensue for either defensive or positioning reasons.
Defensive mergers occur because when managers care sufficiently about staying in
control, they may want to acquire other firms to avoid being acquired themselves.
By growing larger through acquisition, a firm is less likely to be acquired as it
becomes bigger than some rivals. This defensive merger motive is self-reinforcing
and hence gives rise to merger waves: one firms defensive acquisition makes other
firms more vulnerable as takeover targets, which induces them to make defensive
acquisitions themselves. This leads to an eat-or-be-eaten scenario, whereby
unprofitable defensive acquisitions preempt some or all profitable acquisitions. We
show that in industries in which many firms are of similar size to the largest firm,
defensive mergers are likely to occur.

A central implication of our models is that the firm size distribution in an industry
matters for merger dynamics. In particular, our models predict that acquisition
profitability is positively correlated with the ratio of the size of the largest firm in an
industry to the size of other firms in the industry. Additionally, it predicts that firms
in industries with more medium-sized firms have a higher probability of making
acquisitions. We use data on U.S. mergers during the period from 1982 to 2000 to
test these hypotheses and find support for them.
The full paper is available for download here.

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