Summary
Mergers and acquisitions (M&A) are important forms of investment made by firms and also transactions in the market of corporate control. Interestingly, these activities tend to cluster during periods of economic expansion. For example, we have observed the conglomerate merger wave of the 1960s, the refocusing wave of the 1980s, and the global wave of the 1990s. Researchers have discussed various potential drivers, like market overvaluation and managerial timing. We show that economies of scale can lead to merger waves during economic booms. We also model how the returns from merging are shared between the acquirer and the acquiree.
Researchers including us have also carefully examined the entire restructuring process, from the initial bidding to the post-merger performance. Our findings are summarised as follows. First before bidding, firms that recently filed financial restatements are less likely to become takeover targets than comparable non-restating firms. Besides, ahead of share for share bids, there is evidence that acquirers do earnings management. Creative accounting is also used by merging companies and we have discussed its consequences for economic efficiency. In addition, we show that bidding firms provide more voluntary earnings forecasts in stock-financed bids with high bidder valuations, and also when target shareholders are concerned about receiving overvalued shares. These forecasts are helpful to close the deal and lower the acquisition premium. Moreover, we find evidence of managerial over-optimism which is one source of management forecast error in takeover events.
In terms of payment method choice, by exploiting data on unsuccessful takeover bids, we find differences in revaluations between cash- and stock-financed takeover bids, and further exploration suggests the possibility of information effects. For the investment banks acting as advisors in mergers and tender offers, the finding is that, their market share is positively related to the contingent fee payments charged by the bank and to the percentage of deals completed in the past by the bank, but unrelated to the performance of the acquirers advised by the bank in the past.
Furthermore, we have examined firms’ post-merger performance. Contrary to the general findings of improvements in operating performance based on commonly used operating cash flow measures, a comprehensive set of earnings and cash flow measures suggest significant declines in the post-takeover operating performance. We also find that a post-merger increase in leverage for the acquiring firm is linked with higher growth options embedded in merging firms. Another line of our research examines how takeovers act as a device to discipline managers. We show that a hostile takeover can force managers to shut down unproductive assets at the efficient time. Financing the takeover by debt pre-commits the acquiring management to follow through with the shut-down ex-post, with surplus capital being returned to shareholders. Relatedly, one strand of our research examines the implications of a strengthened right to adopt a poison pill (ie a “shadow pill”) for the bargaining power of the target’s board. We find that firms with an actual poison pill in-place and incorporated in a US state that has adopted a poison pill law – that explicitly validates the use of the pill as a takeover defence – earn significantly higher takeover premiums in unsolicited takeover contests.
Cremers, K.J.M., Guernsey, S.B., Litov, L.P. and Sepe, S.M. (2019) “Shadow pills, actual pill policy, and firm value.” European Corporate Governance Institute (ECGI) Finance Working Papers, No.595/2019. Brussels: ECGI. (available online via the SSRN)
Amel-Zadeh, A. and Meeks, G. (2016) “Bidder earnings forecasts in mergers and acquisitions.” (DOI: 10.2139/ssrn.2198958)
Agliardi, E., Amel-Zadeh, A. and Koussis, N. (2015) “Leverage changes and growth options in mergers and acquisitions.” In: Midwest Finance Association Annual Meeting, 13-16 March 2013, Chicago, Illinois. (DOI: 10.2139/ssrn.2116335)
Amel-Zadeh, A. and Zhang, Y. (2015) “The economic consequences of financial restatements: evidence from the market for corporate control.” The Accounting Review, 90(1): 1-29 (DOI: 10.2308/accr-50869)
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Botsari, A. and Meeks, G. (2008) “Do acquirers manage earnings prior to a share for share bid?” Journal of Business Finance and Accounting, 35(5/6): 633–670 (DOI: 10.1111/j.1468-5957.2008.02091.x) (available online via the SSRN)
Lambrecht, B.M. and Myers, S.C. (2007) “A theory of takeovers and disinvestment.” Journal of Finance, 62(2): 809-845 (DOI: 10.1111/j.1540-6261.2007.01224.x) (available online via the SSRN) (Winner of an Emerald Citation of Excellence from Emerald Management Reviews)
Rau, P.R. (2005) “Investment bank market share, contingent fee payments, and the performance of acquiring firms.” Journal of Financial Economics, 56(2): 293-324 (available online via the SSRN)
Lambrecht, B.M. (2004) “The timing and terms of mergers motivated by economies of scale.” Journal of Financial Economics, 72(1): 41-62 (DOI: 10.1016/j.jfineco.2003.09.002) (available online via the SSRN)