Takeovers
Tuesday, 11 February 2020 13:51
Topics
- Evidence of value creation in takeovers:
○ Where do synergies (gains from takeovers) come from (Devos et al,
2009)
○ Risk of large falls in value (Moeller et al, 2005)
- Evidence that acquirers gain if they acquire when overvalued (Savor & Lu,
2009)
- Evidence on what types of companies make acquisitions (Arikan & Stulz,
2016)
Brief overview
- Gain from takeover and offer premium
○ Offer price is negotiated between acquirer and target
○ Offer will provide a premium to pre-announcement market value of
target (if listed) or estimated stand-alone value (if unlisted)
○ Premium paid by acquirer should not exceed value of gain
○ If premium > gain, acquirer will lose
Means of payment
- Cash
○ Target's shareholders receive cash for their shares
○ Cash fixes value of offer
○ Majority of takeovers are funded by cash, especially smaller ones
- Shares
○ Target's shareholders receive newly issued shares in acquiring company
○ Acquirer does a share issue as well as a takeover
○ Value of offer depends on acquiring company's share price
Motives for takeovers
1. Synergies. E.g.:
a. Cost reductions (economies of scale, vertical integration, remove
excess capacity)
b. Complementary skills (R&D + marketing)
c. Access to new markets
, 1. Synergies. E.g.:
a. Cost reductions (economies of scale, vertical integration, remove
excess capacity)
b. Complementary skills (R&D + marketing)
c. Access to new markets
2. Better management. Management of acquirer will improve profitability of
target.
3. Target can be bought at a favourable (undervalued) price
4. Financial motives. E.g.:
a. Acquirer's shares are overvalued
b. Target has 'tax losses'. Can be used to save tax for acquirer
c. Increase bidder's 'debt capacity' (optimum gearing ratio)
Diversification itself is not viewed as a sound motive
Summary of evidence on gains from takeovers
- Takeovers probably add value
○ Event studies find an increase in market value on announcement, on
average, for bidder and target combined
- But all of the gains on average go to targets' shareholders
○ Acquirers' shareholders break even or slightly better, at best
○ Average premium is about 40%
○ Bidders beware
- There are negative long-run average abnormal returns for merged groups
○ Evidence on impact of takeovers on operating performance is mixed
○ Companies tend to be overvalued when they carry out takeovers
- Despite lack of clear gains to buyers, takeovers are common among listed
companies
○ They are a major part of life for many successful companies
How Do Mergers Create Value?
Devos, Kadapakkam & Krishnamurthy, Review of Financial Studies 22, 2008
- They study three possible sources of gain:
○ Improvements in operating performance;
○ Tax benefits;
○ Increased market power.
Method
- Use value line (analysts') forecasts of accounting variables for up to five years
from takeover announcement, for acquirer, target and merged group:
○ Less biased than management forecasts;
Tuesday, 11 February 2020 13:51
Topics
- Evidence of value creation in takeovers:
○ Where do synergies (gains from takeovers) come from (Devos et al,
2009)
○ Risk of large falls in value (Moeller et al, 2005)
- Evidence that acquirers gain if they acquire when overvalued (Savor & Lu,
2009)
- Evidence on what types of companies make acquisitions (Arikan & Stulz,
2016)
Brief overview
- Gain from takeover and offer premium
○ Offer price is negotiated between acquirer and target
○ Offer will provide a premium to pre-announcement market value of
target (if listed) or estimated stand-alone value (if unlisted)
○ Premium paid by acquirer should not exceed value of gain
○ If premium > gain, acquirer will lose
Means of payment
- Cash
○ Target's shareholders receive cash for their shares
○ Cash fixes value of offer
○ Majority of takeovers are funded by cash, especially smaller ones
- Shares
○ Target's shareholders receive newly issued shares in acquiring company
○ Acquirer does a share issue as well as a takeover
○ Value of offer depends on acquiring company's share price
Motives for takeovers
1. Synergies. E.g.:
a. Cost reductions (economies of scale, vertical integration, remove
excess capacity)
b. Complementary skills (R&D + marketing)
c. Access to new markets
, 1. Synergies. E.g.:
a. Cost reductions (economies of scale, vertical integration, remove
excess capacity)
b. Complementary skills (R&D + marketing)
c. Access to new markets
2. Better management. Management of acquirer will improve profitability of
target.
3. Target can be bought at a favourable (undervalued) price
4. Financial motives. E.g.:
a. Acquirer's shares are overvalued
b. Target has 'tax losses'. Can be used to save tax for acquirer
c. Increase bidder's 'debt capacity' (optimum gearing ratio)
Diversification itself is not viewed as a sound motive
Summary of evidence on gains from takeovers
- Takeovers probably add value
○ Event studies find an increase in market value on announcement, on
average, for bidder and target combined
- But all of the gains on average go to targets' shareholders
○ Acquirers' shareholders break even or slightly better, at best
○ Average premium is about 40%
○ Bidders beware
- There are negative long-run average abnormal returns for merged groups
○ Evidence on impact of takeovers on operating performance is mixed
○ Companies tend to be overvalued when they carry out takeovers
- Despite lack of clear gains to buyers, takeovers are common among listed
companies
○ They are a major part of life for many successful companies
How Do Mergers Create Value?
Devos, Kadapakkam & Krishnamurthy, Review of Financial Studies 22, 2008
- They study three possible sources of gain:
○ Improvements in operating performance;
○ Tax benefits;
○ Increased market power.
Method
- Use value line (analysts') forecasts of accounting variables for up to five years
from takeover announcement, for acquirer, target and merged group:
○ Less biased than management forecasts;
