Weitzel, Utz and Kling, Gerhard (2012): Sold below value? Why some targets accept very low and even negative takeover premiums.
This is the latest version of this item.
Download (602kB) | Preview
Although many studies acknowledge negative premiums, there exists no theoretical or dedicated empirical analysis of the phenomenon. In our sample of 1,937 US mergers (1995 to 2011), 8.4 percent of all targets received offers with negative premiums where the initial bid undercuts the pre-announcement market price. We theoretically show that target overvaluation, market liquidity and ‘hidden earnouts’, where target shareholders participate in the bidder’s share of joint synergies, can explain negative premiums. The theory for negative premiums also generalizes to very low premiums (VLPs), which include positive premiums. Empirical tests provide substantial support for explanations pertaining to overvaluation and hidden earnouts. As discriminating hypotheses we predict and confirm that target shareholders' market reaction to negative premiums with hidden earnouts (with overvaluation) is positive (negative). Relative size and method of payment play an important role. When a big target is paid with stock, a combination of hidden earnouts and VLPs can be the only way for the bidder to prevent loss of control. Our explanations for VLPs predict lower values for most premiums below the median and thus apply to a significant proportion of the takeover market.
|Item Type:||MPRA Paper|
|Original Title:||Sold below value? Why some targets accept very low and even negative takeover premiums.|
|Keywords:||mergers, acquisitions, premiums, overvaluation, hidden earnout, liquidity, takeovers|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Utz Weitzel|
|Date Deposited:||06. Dec 2012 13:48|
|Last Modified:||02. Mar 2013 17:37|
Viral V. Acharya, Sreedhar T. Bharath, and Anand Srinivasan. Does industrywide distress aect defaulted rms? evidence from creditor recoveries. Journal of Financial Economics, 85(3):787 821, 2007.
Nihat Aktas, Eric de Bodt, and Richard Roll. Negotiations under the threat of an auction. Journal of Financial Economics, 98(2):241255, November 2010.
Edward I. Altman, Robert G. Haldeman, and P. Narayanan. Zeta analysis: A new model to identify bankruptcy risk of corporations. Journal of Banking & Finance, 1(1):2954, 1977.
T. Amemiya. Advanced econometrics. Cambridge: Harvard University Press, 1985.
Y. Amihud. Illiquidity and stock returns: cross-section and time-series eects. Journal of Financial Markets, 5:3156, 2002.
Benjamin C. Ayers, Craig E. Lefanowicz, and John R. Robinson. Shareholder taxes in acquisition premiums: The eect of capital gains taxation. The Journal of Finance, 58(6):27832801, 2003.
Leonce L. Bargeron. Do shareholder tender agreements inform or expropriate shareholders? Journal of Corporate Finance, 18(2):373 388, 2012.
Leonce L. Bargeron, Frederik P. Schlingemann, Rene M. Stulz, and Chad J. Zutter. Why do private acquirers pay so little compared to public acquirers? Journal of Financial Economics, 89(3):375390, September 2008.
Leonce L. Bargeron, Frederik P. Schlingemann, Rene M. Stulz, and Chad J. Zutter. Do target ceos sell out their shareholders to keep their job in a merger? Working Paper 14724, National Bureau of Economic Research, February 2009.
T. W. Bates and M. L. Lemmon. Breaking up is hard to do? an analysis of termination fee provisions and merger outcomes. Journal of Financial Economics, 69:469504, 2003.
Thomas W. Bates, David A. Becher, and Michael L. Lemmon. Board classication and managerial entrenchment: Evidence from the market for corporate control. Journal of Financial Economics, 87(3):656677, 2008.
S. Betton and B.E. Eckbo. Toeholds, bid-jumps and expected payffos in takeovers. Review of Financial Studies, 13:841882, 2000.
S. Betton, B.E. Eckbo, and K.S. Thorburn. Corporate takeovers. In B. E. Eckbo, editor, Handbook of Corporate Finance: Empirical Corporate Finance, volume 2 of Handbook of Finance Series, chapter 15, pages 291430. Elsevier/North-Holland, Amsterdam, 2008a.
S. Betton, B.E. Eckbo, and K.S. Thorburn. Markup pricing revisited, 2008b.
Sandra Betton, B. Espen Eckbo, and Karin S. Thorburn. Merger negotiations and the toehold puzzle. Journal of Financial Economics, 91(2):158 178, 2009.
Audra L. Boone and J. Harold Mulherin. How are rms sold? The Journal of Finance, 62(2):847875, 2007.
Audra L. Boone and J. Harold Mulherin. Do auctions induce a winner's curse? new evidence from the corporate takeover market. Journal of Financial Economics, 89(1):1 19, 2008.
Michael Bradley. Interrm tender oers and the market for corporate control. The Journal of Business, 53(4):345376, 1980.
Richard A. Brealey, Stewart C. Myers, and F. Allen. Principles of Corporate Finance. McGraw-Hill, New York, NY, USA, 10 edition, 2011.
S. J. Brown and J. B. Warner. Using daily stock returns: The case of event studies. Journal of Financial Economics, 14:331, 1985.
T. R. Burch. Locking out rival bidders: The use of lockup options in corporate mergers. Journal of Financial Economics, 60:103141, 2001.
K.H. Chung and K.Y. Lee. Liquidity and shareholder return in the market for corporate control. 2011.
Matthew J. Clayton and S. Abraham Ravid. The eect of leverage on bidding behavior: Theory and evidence from the fcc auctions. Review of Financial Studies, 15(3):723750, 2002.
D. M. DePamphilis. Mergers, Acquisitions, and Other Restructuring Activities. Elsevier Academic Press, Burlington, MA, USA, 4 edition, 2008.
R. DMello and P.K. Shro. Equity undervaluation and decisions related to repurchase tender offers: An empirical investigation. Journal of Finance, 55: 23992424, 2000.
M. Dong, D. Hirschleifer, S. Richardson, and S. H. Teoh. Does investor misevaluation drive the takeover market? Journal of Finance, 61(2):725762, 2006.
B. Espen Eckbo. Bidding strategies and takeover premiums: A review. Journal of Corporate Finance, 15(1):149 178, 2009.
Espen B. Eckbo and S. Karin Thorburn. Automatic bankruptcy auctions and re-sales. Journal of Financial Economics, 89(3):404422, September 2008.
Alex Edmans, Itay Goldstein, and Wei Jiang. The real eects of nancial markets: The impact of prices on takeovers. The Journal of Finance, 67(3): 933971, 2012.
M. J. Fishman. A theory of preemptive takeover bidding. RAND Journal of Economics, 19:88101, 1988.
K. Fuller, J. Netter, and M. Stegemoller. What do returns to acquiring rms tellus? evidence from rms that make many acquisitions. Journal of Finance, 57(4):17631793, 2002.
Kimberly C. Gleason, Leonard Rosenthal, and Roy A. III Wiggins. Backing into being public: an exploratory analysis of reverse takeovers. Journal of Corporate Finance, 12(1):5479, 2005.
Sanford J. Grossman and Oliver D. Hart. Takeover bids, the free-rider problem, and the theory of the corporation. The Bell Journal of Economics, 11(1): 4264, Spring 1980.
J. Hartzell, E. Ofek, and D. Yermack. What's in it for me? personal benefits obtained by CEOs whose rms are acquired. Review of Financial Studies, 17: 3761, 2004.
Carla Hayn. Tax attributes as determinants of shareholder gains in corporate acquisitions. Journal of Financial Economics, 23(1):121153, June 1989.
Jean Helwege, Christo Pirinsky, and Rene M. Stulz. Why do rms become widely held? an analysis of the dynamics of corporate ownership. The Journal of Finance, 62(3):9951028, 2007.
D. Hirshleifer, K. Hou, S.H. Teoh, and Y. Zhang. Do investors overvalue firms with bloated balance sheets? Journal of Accounting and Economics, 38: 297331, 2004.
E. S. Hotchkiss, K. John, R. Mooradian, and K. S. Thorburn. Bankruptcy and the resolution of nancial distress. In B. E. Eckbo, editor, Handbook of Corporate Finance: Empirical Corporate Finance, volume 2 of Handbook of Finance Series, chapter 14. Elsevier/North-Holland, Amsterdam, 2008.
Yen-Sheng Huang and Ralph A. Walkling. Target abnormal returns associated with acquisition announcements: Payment, acquisition form, and managerial resistance. Journal of Financial Economics, 19(2):329349, December 1987.
Gregg A. Jarrell and Annette B. Poulsen. Stock trading before the announcement of tender oers: Insider trading or market anticipation? Journal of Law, Economics, & Organization, 5(2):225248, October 1989.
M. C. Jensen. Agency costs of free cash ow, corporate nance, and takeovers. American Economic Review, 76(2):323329, 1986.
Michael C. Jensen. Corporate control and the politics of nance. Journal of Applied Corporate Finance, 4(2):1334, 1991.
Boyan Jovanovic and Peter L. Rousseau. The q-theory of mergers. American Economic Review, 92(2):198204, 2002.
S. Kothari, J. Sabino, and Z. Zach. Implications of data restrictions on performance measurement and tests of rational pricing. Journal of Accounting and Economics, 39:129161, 2005.
H. A. Krishnan, M. A. Hitt, and D. Park. Acquisition premiums, subsequent workforce reductions and post-acquisition performance. Journal of Management Studies, 44(5):709732, 2007.
A. Kyle. Continuous auctions and insider trading. Econometrica, 53:13141335, 1985.
Larry H.P. Lang and Rene M. Stulz. Contagion and competitive intra-industry effects of bankruptcy announcements: An empirical analysis. Journal of Financial Economics, 32(1):4560, 1992.
D. Lesmond, J. Ogden, and C. Trzcinka. A new estimate of transaction costs. Review of Financial Studies, 12:11131141, 1999.
T. F. Liao. Interpreting probability models: Logit, probit, and other generalized linear models. Thousand Oaks, CA: Sage, 1994.
M. Massa and M. Xu. The value of (stock) liquidity in the market for mergers and acquisitions. 2011.
Ronald W. Masulis, Cong Wang, and Fei Xie. Corporate governance and acquirer returns. The Journal of Finance, 62(4):18511889, 2007.
Sarah B. Moeller, Frederik P. Schlingemann, and Rene M. Stulz. Firm size and the gains from acquisitions. Journal of Financial Economics, 73(201):228, 2004.
T. Moeller. Let's make a deal! how shareholder control impacts merger payos. Journal of Financial Economics, 76:167190, 2005.
D. Nagakura and M. Kobayashi. Testing the sequential logit model against the nested logit model. 2007.
Micah S. Officer. Termination fees in mergers and acquisitions. Journal of Financial Economics, 69:431467, 2003.
Micah S. Officer. Collars and renegotiation in mergers and acquisitions. The Journal of Finance, 59(6):27192743, 2004.
Micah S. Officer. The market pricing of implicit options in merger collars. The Journal of Business, 79(1):115136, January 2006.
Micah S. Officer. The price of corporate liquidity: Acquisition discounts for unlisted targets. Journal of Financial Economics, 83:571598, 2007.
J.A. Ohlson. Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11:661687, 1995.
James A. Ohlson. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research, 18(1):109131, 1980.
Todd C. Pulvino. Do asset re sales exist? an empirical investigation of commercial aircraft transactions. The Journal of Finance, 53(3):939978, 1998.
Todd C. Pulvino. Effects of bankruptcy court protection on asset sales. Journal of Financial Economics, 52(2):151 186, 1999.
V.A. Ramey and M.D. Shapiro. Displaced capital: A study of aerospace plant closings. Journal of Political Economy, 109(5):958992, 2001.
Matthew Rhodes-Kropf and S. Viswanathan. Market valuation and merger waves. Journal of Finance, LIX:26852718, December 2004.
R. Roll. A simple implicit measure of the eective bid ask spread in an efficient market. Journal of Finance, 39:11271139, 1984.
J. Sawicki. Overvalued equity and the accruals anomaly: Evidence from insider trades. 2011.
Julia Sawicki and Keshab Shrestha. Insider trading and earnings management. Journal of Business Finance & Accounting, 35(3-4):331346, 2008.
F.P. Schlingemann, R.M. Stulz, and R.A. Walkling. Divestitures and the liquidity of the market for corporate assets. Journal of Financial Economics, 64:117144, 2002.
Frederik Schlingemann. Financing decisions and bidder gains. Journal of Corporate Finance, 10:683701, 2004.
G. W. Schwert. Markup pricing in mergers and acquisitions. Journal of Financial Economics, 41(2):153162, 1996.
G. W. Schwert. Hostility in takeovers: In the eyes of the beholder? The Journal of Finance, 55(6):25992640, 2000.
A. Shleifer and R. W. Vishny. Liquidation values and debt capacity: A market equilibrium approach. The Journal of Finance, 47(4):13431366, 1992.
Andrei Shleifer and Robert W. Vishny. Stock market driven acquisitions. Journal of Financial Economics, 70:295311, 2003.
R.G. Sloan. Do stock prices fully reect information in accruals and cash flows about future earnings? The Accounting Review, 71:289315, 1996.
Karin S. Thorburn. Bankruptcy auctions: costs, debt recovery, and firm survival. Journal of Financial Economics, 58(3):337 368, 2000.
Ralph A. Walkling and Robert O. Edmister. Determinants of tender oer premiums. Financial Analysts Journal, 41(1):2737, January 1985.
Available Versions of this Item
Sold below value? Why some targets accept very low and even negative takeover premiums. (deposited 27. Nov 2012 13:30)
- Sold below value? Why some targets accept very low and even negative takeover premiums. (deposited 06. Dec 2012 13:48) [Currently Displayed]