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Mergers and Acquisitions

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Harbor A
Hosted By: American Finance Association
  • Chair: Isil Erel, Ohio State University

Inside the “Black Box” of Private Merger Negotiations

Tingting Liu
,
Iowa State University
Micah Officer
,
Loyola Marymount University

Abstract

This paper enables a detailed look inside the “black box” of merger and acquisition (M&A) negotiations before the first public bid is announced. We find that bid revisions are very common in the pre-public phase of a deal, and that price revisions during the private negotiation window are associated with changes in the public-market values of the acquisition target. We also investigate whether the nature of the bid process has an impact on pre-public takeover price revisions and examine the strategic difference in biding in deals that are initiated privately by a bidder other than the winning bidder. We interpret our results as consistent with the notion that the behavior of target managers in the private negotiation window appears congruent with shareholder wealth maximization.

Build or Buy? Human Capital and Corporate Diversification

Paul Beaumont
,
Paris Dauphine University
Camille Hebert
,
University of Toronto
Victor Lyonnet
,
Ohio State University

Abstract

Why do some firms enter a new sector by acquiring an existing company (“buy”), while others do so using their existing resources (“build”)? Using a novel dataset constructed by merging French employer payrolls with commercial M&A datasets, we show that firms are more likely to buy when their existing workforce does not include skills needed in the sector of entry. This relationship is more pronounced when labor market frictions make it difficult to hire key workers. Firms that enter by building realize lower entry sales when their existing workforce is not adapted to the sector of entry, especially in the presence of labor market frictions. Our results suggest that firms buy to acquire their target’s human capital when adapting their existing workforce is too costly.

Activism Pressure and the Market for Corporate Assets

Ulrich Hege
,
Toulouse School of Economics and ECGI
Yifei Zhang
,
Toulouse School of Economics and Yale University

Abstract

We investigate the impact of hedge fund activism on corporate transaction markets. We find that activism targets as well as firms exposed to hedge fund threats receive more merger bids, increase divestitures and make fewer acquisitions, with the acquisition effect concentrated among large firms. We document that the majority of activist campaigns are clustered by industry, and estimate that the simultaneous increase in asset sales and decrease in acquisitions in such activism clusters reduce real asset liquidity for asset sellers by about 35\%. The liquidity squeeze produces two effects: transaction prices are reduced, and industry outsiders provide liquidity by purchasing more industry assets. Looking at short-term price pressure and long-run performance, we present evidence that transactions by activist targets are less affected by the reduced asset liquidity than those of other firms.

Are Acquisitions of Intangibles Less Subject to Agency Problems?

William Mann
,
University of California-Los Angeles
Syed Walid Reza
,
State University of New York-Binghamton
Rong Guo
,
State University of New York-Binghamton

Abstract

Across several measures, we find that acquisitions exhibit less evidence of agency problems when the acquired assets are more intangible. Acquisitions of intangible assets are associated with higher announcement returns, less free-cash flow availability, and superior post-acquisition operating performance, all of which contradict empire-building concerns. They are also associated with greater stock volatility and distress risk, contradicting quiet-life concerns. Our evidence suggests that the managerial rents that lead to value-destroying acquisitions are mainly associated with tangible assets. Intangible acquisitions best fit the “like buys like” theory, in which firms acquire targets with similar investment opportunities and complement subsequent R&D expenses with targets’ technology.
Discussant(s)
David Becher
,
Drexel University
Paige Ouimet
,
University of North Carolina-Chapel Hill
Alex Edmans
,
London Business School
Kai Li
,
University of British Columbia
JEL Classifications
  • G3 - Corporate Finance and Governance