Target status and bidders’ gains

Abstract

The vast majority of the world's M&A activities are represented by takeovers ofprivately held targets. Yet, this sector of the market for corporate control has received very little attention from academic researchers. This thesis thus sets out to provide a comparative analysis, both theoretically and empirically, of gains to bidders of private targets in relation to gains to bidders of public targets. When targets are privately held as opposed to publicly held or listed, there are reasons to believe that bidders gamer material gains even with full competition. By recognising the possibility that the decision of the owners of a private target to agree to a takeover (i) represents the exit strategy or (ii) is reflective of the passage of the firm through its life cycle, this thesis provides a new perspective on the wealth consequences of private-firm takeovers on bidder shareholders. The empirical analyses in this thesis reveal that not only bidder gains, but also bidder characteristics, distinctly differ between private-firm takeovers and takeovers of public targets or divested subsidiaries. This thesis also provides evidence on the largely unexplored determinants of the choice of payment methods in private-firm takeovers. In several important aspects, the findings contribute to the extant evidence on determinants of payment methods in takeovers of public targets. Considering the costs known to be associated with the decision to go public facing the owners of a privately held company, acquisition by a listed bidder is potentially a costeffective means by which the firm owners can exit or the firm can gain access to funds necessary for financing the unexploited investment opportunities. The common knowledge of the cost savings arising from choosing the takeover route implies that a portion of these savings is also available to be garnered by bidders of private targets. On the other hand, these savings are either trivial or absent when targets already have access to the capital market (i.e., public targets and divested subsidiaries). Given that the bidder is willing to pay the acquisition price that fully reflects its valuation of its target, there is hence no guarantee that the bidder earns positive gains when acquiring a public target whereas the exit costs savings provide a source of ex ante gains to the bidder if it opts for a private target. Around the bid announcement, bidders of private targets are found to earn positive gains. In contrast, when taking into account the event windows leading up to the announcement date, evidence emerges that public-firm bidders experience losses and bidders of divested subsidiaries overall fare no better than breaking-even around the bid announcement. Also at variance with the experience of public-firm takeovers, this thesis documents that announcement-period gains to bidders of private targets are positive irrespective of the payment method and that equity financing in private-firm takeovers leads to larger bidder gains. This positive announcement-period effect of equity financing appears attributable to the positive information about the bidder's prospects rather than the expected performance monitoring by the target owners. Given the considerably small size and closely held ownership of private targets, which are in contrast with public targets and divested subsidiaries, bidders of private targets are unlikely to be motivated by the empire-building objectives. Instead, the characteristics of private targets imply that their bidders maximise the realisation of expected synergies rather than personal utility for the bidder managers. The closely held ownership and small size of private targets also imply that they are much easier to integratethan public targets or divested subsidiaries. The analysis of long-term bidder abnormalreturn reveals that while private-firm bidders breakeven during the post-acquisition period,11 there is evidence that public-finn bidders, and particularly bidders of divested subsidiaries, experience losses. The difference in ownership structure between private targets and public targets also leads to the difference in the change in ownership concentration in the bidders. While equity financing leads to a ceteris paribus increase in ownership concentration in privatefirm bidders, the opposite follows for public-firm bidders. The owners of a private target in an equity offer, as rational large shareholders, have economic incentives to monitor the performance of the bidder managers whereas atomistic shareholders of public targets in an equity offer do not. During the post-acquisition period, equity financing overall leads to a normal rate of return for private-firm bidders. This finding is consistent with the notion of rational pricing that the amount of compensation for the monitoring services by the target owners in equity offers reflects the incremental benefits of the services accruing to other bidder shareholders. In contrast, equity financing results in long-term losses for publicfirm bidders. Considering the differences in the wealth effects on bidder shareholders between private-firm takeovers and public-firm takeovers, this thesis also empirically explores two additional largely neglected issues. First, why do some bidders choose private targets and some others choose public targets or divested subsidiaries? Secondly, why equity financing rather than cash financing is used in some takeovers of private targets and not others (and vice versa)? In the main, the results of investigating the potential factors influencing bidders' target choice decision reveal the importance of managerial ism in the bidder and the pressure to improve growth prospects facing the bidder. However, hubris arising from past performance does not appear to affect bidders' target choice decision. Lll The analysis of the potential determinants of payment methods in private-firm takeovers shows that the level of informational asymmetry in private-firm takeovers is likely to be trivial. The analysis also provides evidence that the choice of payment methods in privatefirm takeovers is ceteris paribus endogenous to the investment objective(s) of the target owners and that agency conflicts in the bidder can deter the target owners who have the objective to hold equity stakes in the combined firm.