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Summary mandatory papers Corporate Valuation, Restructuring and M&As
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For the MSc Finance course: Corporate Valuation, Restructuring and M&As. Summary of all the mandatory papers discussed in class.
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Summary papers by Stijn van den BergTopic 1:M&A literature review
Short- and long-run stock returns and operating performance:
Short run:
• Takeovers are on average expected to create value as reflected in the weighted average of
the announcement returns of bidders and targets, but the bulk of the returns accrue to the
target shareholders who hold most of the bargaining power in the takeover negotiations.
• Returns differ over time and across takeover waves;
o 6% two-day CARs for US targets in 1960s and 70s
o 16% for European targets in 1990s
o 24% for US targets in 2000s
o 29% for US targets in 2010s
• Announcement returns for acquirer shareholders are either close to zero or indistinguishable
form zero
• Short-run returns to bidders and targets are generally higher in tender offers relative to
friendly merger negotiations. Tender offers are associated with higher and faster completion
rates, but also higher premiums, which is consistent with tender offers signalling a higher
degree of confidence in the deal.
• Tender offers are often hostile in attitude with generally higher premiums, this is even more
so when the target board rejects the offer. As the market expects upward bid revisions.
• All cash bids typically result in higher announcement returns for both bidder and target than
all equity bids. Acquirer’s undervaluation -> Cash and Overvaluation -> Equity.
Long run:
• At the very least, M&As do not increase the acquiring/combined firm’s performance.
Rather negative returns.
• Transaction characteristics which have predictive power for long-turn returns are: Means of
payment, Deal attitude, and the Public status of the target firm.
• Long run studies concentrating on the deal’s attitude find mixed results.
• Acquisition of public firms have higher long-run bidder returns than private firms.
• Cash-financed deals earn significantly higher returns than equity financed.
• 3 theoretical explanations why bidders have negative long-term abnormal returns:
o Market slowly adjusts to takeover news, long term reflects true acquisition value that
had not been captured by the announcement returns.
o Earnings per share Myopia hypothesis; managers are more likely to overpay for an
acquisition if this increases the EPS in the short run. When overvaluation happens,
the market will correct this in the long run. Also another explanation:
o Performance extrapolation: Growth firms are initially overvalued which induces
negative long-run post-acquisition returns.
o Differences between outcomes is due to methodological issues, overall the only
robust predictors for long-run performance appear to be the means of payment and
the target’s public status.
What lead to success or failure in M&As?
Serial acquirers
, • One-off acquirers are virtually inexistent, therefore it is hard to isolate the takeover effect
from other factors affecting the firm when measuring long-run returns.
• The performance of serially acquiring firms is on average declining from deal to deal, both at
the firm and CEO level.
• Short-run announcement returns gradually decline for acquirers becoming insignificantly
different from zero. Also the long-run performance diminishes with each acquisition.
• Serial acquirers’ underperformance does not depend on the event window or
methodology; returns consistently decrease after each deal.
Hubris, overconfidence, and narcissism
• Overconfidence can lead to declining returns due to the acquirers’ inability to negotiate
better prices and create synergies. Overconfidence hypothesis does not coincide with the
empire-building hypothesis as the CEO believes that he acts in the best interest of the
shareholders.
• Acquisitions by overconfident CEOs generate lower announcement returns than deals by
CEOs not subject to overconfidence. Also when the CEO gets a confidence-boosting
(Manager of the year award) event returns are lower.
• When both, bidder and target, CEOs are overconfident, the acquirer announcement returns
are lower relative to deals where only one, or neither is overconfident.
• CEO’s narcissism is negatively related to merger announcement returns, positively to deal
completion probability, and negatively to the length of the takeover process.
CEO and organizational learning
• CEOs bid more aggressively following positive announcement market reactions and overbid
in subsequent deals which decreases the announcement acquirer returns of later deals, but
they overbid less for subsequent deals if previous market reactions were negative. Contrast
with view that overconfident CEOs experience a decline in performance from deal to deal.
• Deals by CEOs who were successful acquirers in the past trigger higher CARs than deals by
CEOs with a less successful acquisition history.
• Acquisition experience leads to superior performance provided that the experience is applied
to acquire similar target firms.
Diminishing attractiveness of opportunity set
• Serial acquisitions may reduce the firm’s investment opportunity set, especially for within-
industry deals. This induces gradually lower long-run stock and operating performance as the
opportunity set gets smaller.
Target Acquisitiveness
• Acquirer’s announcement returns are lower when they acquire acquisitive targets. This is a
defensive nature to not be acquired themselves, and hence destroys value.
CEO Incentives and Compensation
• Higher level of equity-based compensation is associated with positive long-run returns and
vice versa.
• CEOs who receive high equity-based compensation pay lower premiums for target firms and
earn higher short-run announcements returns.
, • Too high, read excess, levels of CEO compensation can blur fair managerial corporate
investment judgments, and may constitute an agency problem. Taking more risk to receive
more pay.
• An alternative to equity-based is debt-like compensation, such as pension benefits or
deferred compensation packages, as these better align managers’ interests with external
debtholders, reducing risky actions.
• Higher inside debt holdings by CEOs result in less risky M&As, resulting in higher bond
returns and long-run operating performance at announcement, but lower short-run stock
returns.
• Acquirers whose executives have more liability insurance, read protection against fines and
other personal liabilities, have significantly worse post-takeover long-term ROA and asset
turnover performance.
CEO and director connections and networks
• Professional and social networks enable connected CEOs and directors to get easier and less
costly access to information which can improve decision making, but they may also reflect
managerial power that entrenches managers when engaging in value-destroying behaviour.
• Long-run ROA increases for deals with a first-degree common director between target and
acquirer relative to second or higher degree.
• Deals between connected firms are more likely to be completed, also faster and more likely
to be financed with equity, which reflects trust. There is however no significant
announcement effect in the bidders’ share prices.
• CEOs are more likely to acquire targets in states where they obtained their degree and these
deals also earn higher short-run stock returns.
• High CEO network centrality results in lower acquirer announcement returns.
• The inefficient retention of target’s management and board in well-connected firms, result in
a decrease in post-acquisition ROA and an increase in the likelihood of divestiture following
disappointing dela performance.
• Deals with interlocked board directors result in negative announcement effects.
• Professional and social board connections are ultimately good or bad for deal performance
depending on the firm’s individual needs. Positive returns when value of board advice is high,
but negative when monitoring needs are high.
• Both the information-gathering hypothesis and the entrenchment hypothesis receive strong
support in the literature, particularly when considering short-run announcement CARs and
long-run operating performance.
Board characteristics
• Multiple directorships decrease short-run announcement returns and long-run operating
performance when the number of outside board seats exceeds a certain threshold.
• Reputational effects of having outside directors and directors with multiple directorships
improves short-run stock performance an long-run profitability, as long as directors are not
limited in their monitoring and advisory roles due to busyness or geographical distance.
• Directors with investment banking experience make better acquisitions by identifying
suitable merger targets, negotiating better takeover prices, and by lowering advisory fees.
• Acquirer announcement returns are 2% higher for deals conducted by female executives,
hinting in more empire-building and overconfidence for male executives.
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