The Selection and Consequences of Selling Processes in Takeovers: Evidence from the U.S. and U.K. Takeover Markets

Abstract

There are various selling mechanisms applied to facilitate takeovers. What determines a seller’s choice of a specific selling mechanism? And what are the consequences of selecting a particular mechanism on takeover outcomes? These are important questions, both theoretically and practically. This thesis investigates two important datasets from the U.K. and U.S. markets, respectively.

The first empirical chapter examines two important selling processes in the U.K. market: tender offers and schemes of arrangement. Under tender offer, an acquirer purchases the shares of a target firm directly from the market, without the need of approval from the target’s board. A scheme of arrangement is a court-approved agreement between a company and its shareholders/creditors on the takeover by a potential acquirer. Scheme of arrangement require 75% approval from target’s shareholders with voting powers. Compared with tender offers, schemes are a relatively safe, yet prolonged, way to implement takeovers.

This thesis attempts to answer the two questions raised above. To correctly identify the treatment effect of selecting a specific selling process, the selection bias problem need to be addressed. Here the propensity score of matching (PSM) has been adopted to deal with the consequences of self-selection problem into the group that choose scheme of arrangement. Using a sample from takeovers within the U.K. market between 1995 and 2015, this study shows that deals structured through tender offers generate significantly higher premiums for the target’s shareholders in comparison to those structured through schemes. The logit regression results show that the probability of choosing schemes increases if the target firm is larger and more established, or if the target’s termination fees increase, and so on. The results of this study were found to be stable after various robustness tests.

The second empirical chapter investigates the two selling mechanisms of auction and negotiation on takeovers using data from the U.S. market. Auction has an obvious advantage in terms of increasing competition when compared to one-on-one negotiation processes. And, therefore, auction is more attractive for a seller; competition between bidders may require the winning bidder to effectively overpay for the target —a phenomenon known as the ‘winner’s curse’. This second chapter investigates the existence of the ‘winner’s curse’ in the context of the U.S. takeover market, with the PSM method applied. Using a sample from the U.S. takeover market during the period between 1984 and 2014, the auction process was found to have a negative impact on bidder returns during the short-event period in comparison to takeovers structured through negotiations. Therefore, the empirical results support the theoretical prediction that the “winner’s curse” exists within U.S. takeover markets. However, the overbidding results become less clear when examined over the long-event period. The logit regression results collected show that the probability of a firm choosing an auction transaction increases if the target initiates the deal, has higher levels of leverage, more tangible assets, faces bankruptcy, or if the bidder already has a ‘toehold’ stake in the target firm.
In summary, this thesis studies the determinants of selecting different selling mechanisms in takeovers within U.S. and U.K. markets, and it evaluates the exact effects of selecting a specific mechanism on the outcomes of a takeover by using PSM method to control the self-selection problem.