Why Do Firms Sell Out? Separating Targets’ Motives from Bidders’ Selection of Targets in M&A

Zha Giedt, Jenny (2017): Why Do Firms Sell Out? Separating Targets’ Motives from Bidders’ Selection of Targets in M&A.

Abstract

This paper explores why firms seek strategic alternatives, effectively putting themselves up for sale in the market for corporate control. Using a sample of firms that are observed to be exploring strategic alternatives, I model (1) the self-selection of firms to become potential takeover targets, which is distinct from (2) the selection of targets by bidders. The findings suggest that firms seek strategic alternatives because they are performing poorly and face financial constraints, yet corporate governance mechanisms prompt the disruptive attempt to maximize shareholder value. In contrast, the subset of firms that actually receive bids have relatively better growth prospects and performance, and lower market risk – which suggests that bidders do not prefer under-performing targets, contrary to conventional thought. The largely contrasting profiles of firms that are volitionally supplied by sellers versus demanded by bidders modify our conventional understanding of target firms’ motives and target selection in M&A.

• Item Type: MPRA Paper
• Language: English
• Keywords: strategic alternatives; mergers and acquisitions; target motives; takeover prediction; financial constraints; deal initiation; voluntary disclosure; media leaks
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G3 - Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics

References

Agrawal, A. and J.F. Jaffe. 2003. Do takeover targets underperform? Evidence from operating and stock returns. Journal of Financial and Quantitative Analysis 38 (4), 721-746.

Aktas, N., E. de Bodt and R. Roll. 2010. Negotiations under the threat of an auction. Journal of Financial Economics 98: 241-255.

Ali, A., T. Kravet, and B. Li. 2016. Accounting profitability and takeover likelihood. Working paper.

Ambrose, B.W. and W.L. Megginson. 1992. The role of asset structure, ownership structure, and takeover defenses in determining acquisition likelihood. Journal of Finance & Quantitative Analysis 27, 575–589.

Amit, R., J. Livnat, and P. Zarowin. 1989. A classification of mergers and acquisitions by motives: Analysis of market responses. Contemporary Accounting Research 6 (1), 143-158.

Andrade, G., M. Mitchell, and E. Stafford. 2001. New evidence and perspectives on mergers. Journal of Economic Perspectives 15 (2), 103-120.

Asquith, P. 1983. Merger bids, uncertainty, and stockholder returns. Journal of Financial Economics 11, 51-83.

Berger, P.G., E. Ofek, and D.L. Yermack. 1997. Managerial entrenchment and capital structure decisisons. The Journal of Finance 52 (4), 1411-1438.

Brav, A. W. Jiang, F. Partnoy, and R. Thomas. 2008. Hedge fund activism, corporate governance, and firm performance. The Journal of Finance 63 (4), 1729-1775.

Boone, A.L. and J.H. Mulherin. 2007. How are firms sold? Journal of Finance 62 (2), 847-875.

Boone, A.L. and J.H. Mulherin. 2008. Do auctions induce a winner's curse? New evidence from the corporate takeover market. Journal of Financial Economics 89 (1), 1-19.

Cornett, M.M., B. Tanyeri, and H. Tehranian. 2011. The effect of merger anticipation on bidder and target firm announcement period returns. Journal of Corporate Finance 17, 595-611.

Cremers, K.J.M., V.B. Nair, and K. John. 2009. Takeovers and the cross-section of returns. The Review of Financial Studies 22 (4), 1409-1445.

Edmans, A. 2014. Blockholders and corporate governance. Annual Review of Financial Economics 6, 23-50.

Fidrmuc, J.P. and C. Xia. 2017. M&A deal initiation and managerial motivation. Journal of Corporate Finance 46, in press.

Hainmueller, J. 2012. Entropy balancing for causal effects: A multivariate reweighting method to produce balanced samples in observational studies. Political Analysis 20 (1), 25–46.

Hainmueller, J. and Y. Xu. 2013. Ebalance: A Stata package for entropy balancing. Journal of Statistical Software 54 (7).

Harris, M. and A. Raviv A. 1988. Corporate control contests and capital structure. Journal of Financial Economics 20, 55-86.

Hasbrouck, J. 1985. The characteristics of takeover targets q and other measures. Journal of Banking and Finance 9, 351-362.

Healy, P.M., A.P. Hutton, and K.G. Palepu. 1999. Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemporary Accounting Research 16 (3), 485-520.

Holmstrom, B. and S.N. Kaplan. 2001. Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s. Journal of Economic Perspectives 15 (2), 121-144.

Jensen, M.C. 1986. Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review Proceedings 76 (2), 323-329.

Jensen, M.C. and W.H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3, 305-360.

Malmendier, U., M.M. Opp, and F. Saidi. 2016. Target revaluation after failed takeover attempts: Cash versus stock. Journal of Financial Economics 119 (1), 92-106.

Marquardt, C. and E. Zur. 2015. The role of accounting quality in the M&A market. Management Science 61 (3), 604-623.

Morck, R., A. Shleifer, and R.W. Vishny. 1988. Characteristics of hostile and friendly takeovers. In Auerbach, A.J., ed. Corporate Takeovers: Causes and Consequences. Chicago: University of Chicago Press.

Morck, R., A. Shleifer, and R.W. Vishny. 1989. Alternative mechanisms for corporate control. The American Economic Review 79 (4), 842-852.

Palepu, K. 1986. Predicting takeover targets: A methodological and empirical analysis. Journal of Accounting and Economics 8, 3-35.

Pastena, V. and W. Ruland. 1986. The merger/bankruptcy alternative. The Accounting Review 61 (2), 288-301.

Powell, R.G. 1997. Modelling takeover likelihood. Journal of Business Finance & Accounting 24 (7-8), 1009-1030.

Ravenscraft, D.J. and F.M. Scherer. 1987. Mergers, Sell-offs and Economic Efficiency. Washington, DC: The Brookings Institution.

Rhodes-Kropf, M. and D.T. Robinson. 2008. The market for mergers and the boundaries of the firm. The Journal of Finance 63 (3), 1169-1211.

Shleifer, A. and R.W. Vishny. 1986. Large shareholders and corporate control. Journal of Political Economy 94 (3), 461-488.

Shleifer, A. and R.W. Vishny. 1988. Value-maximization and the acquisition process. Journal of Economic Perspectives 2, 7-20.

Wong, P. and N. O’Sullivan. 2001. The determinants and consequences of abandoned takeovers. Journal of Economic Surveys 15 (2), 145-186.

Zha, J. 2016. Voluntary disclosure of strategic alternatives: A cost-benefit analysis. Doctoral dissertation, University of California, Berkeley.

Zha Giedt, J. 2017. Economic consequences of announcing strategic alternatives. George Washington University, working paper.