Antonio J. Macias

Material Adverse Change Clauses and Acquisition Dynamics

Material-Adverse-Change clauses (MACs) are present in over 90% of acquisition agreements. These clauses are the outcome of extensive negotiation and exhibit substantial cross-sectional variation in the number and types of events that are excluded from being ‘material adverse events’ (MAEs). MAEs are the underlying cause of more than 50% of acquisition terminations and 60% of acquisition renegotiations. Moreover, these renegotiations lead to substantial changes in the price offered to target shareholders (13-15%). We find that acquisitions with fewer MAE exclusions are characterized by wider arbitrage spreads (i.e., the difference between the price offered to target shareholders and the current market price of the target’s shares) during the acquisition period and are associated with higher offer premiums. We conclude that material adverse change clauses have an economically important impact on the dynamics of corporate acquisitions and stock prices during the acquisition period.

Broken Promises: The Role of Reputation in Private Equity Contracting and Strategic Default

This paper examines reputation and contract design in private equity acquisitions. We use a novel dataset of both completed and terminated private equity buyouts from 2004 through 2010. We find that private equity firms and targets rely on reputation to fill intentional contractual gaps. During the financial crisis private equity firms complete uneconomic, pre-agreed takeovers up to the point when estimated buyout losses rise to at least 7% of sponsors’ fund sizes, or

Shareholder Decision Rights in Acquisitions: Evidence from Tender Offers.

200 to

Overvaluation, Bidder Returns, and the Method of Payment in Acquisitions: Evidence from Serial Acquirers

400 million in nominal values. Target firms are willing to engage with defaulting private equity firms in future transactions but they penalize these firms by demanding significantly larger contract nonperformance penalties. We conclude that both reputation and explicit contracting can play important and interrelated roles in private equity and complex business relationships generally.To explore the relation between reputation and financial contracting, this paper examines the contracting structure in a novel dataset of 227 private equity buyouts of U.S. targets from 2004-2010. We note several provisions which allowed bidders to terminate contracts during the 2007-2008 financial crisis and show how contract structure is related to ex post litigation settlements. Consistent with economic theory, private equity firms were more likely to engage in contract nonperformance when default penalties were lower. Using details of target valuation changes and contract default penalties, we estimate the gains from backing out of these contracts. These gains approximate the values that bidders place on their reputations, which range from 5% to 9% of the sponsors’ fund sizes, or

Motivations for Material Adverse Change Clauses in Merger Agreements

180 million to

Buyer Beware: Ethics, Adverse Selection, and Target Method of Sale Strategies

2.5 billion in nominal dollars. We also document the reputational damage resulting from this wave of terminations and find that default penalties are about 115% higher in 2009-2010 than during the pre-financial crisis period. Ultimately, the results demonstrate that in even the most complex transactions subject to financial contracting, reputation and collective group behavior play an essential role in the negotiating process.

Changing Direction: Cross Border Acquisitions by Emerging Market Firms

Using a 2013 Delaware law that reduces the approval threshold from 90% to 50% to conduct a short-form merger after a tender offer, we investigate whether variation in the required level of shareholder support affects acquisition outcomes. We find that lower authorization requirements increase the use of tender offers relative to mergers for Delaware targets. Further, Delaware targets collectively receive greater acquisition premiums and returns after the passage of the new law relative to target firms incorporated other states. We do not find evidence that managers use the lower threshold to extract private benefits. Our results suggest that supermajority shareholder approval is unnecessary for tender offers and can increase the risk of holdup by activist investors.Using a 2013 Delaware law that reduces the authorization threshold for two-step tender-offers from 90% to 50%, we investigate whether variation in the required level of shareholder support affects acquisition outcomes. We find that lower authorization requirements increase the use of tender offers relative to mergers for Delaware targets. Though the new law removes target shareholders’ right to vote on certain deals, they do not appear to be harmed by the change. Indeed, Delaware targets received greater acquisition premiums and target cumulative abnormal returns after the passage of the new law relative to target firms incorporated in another state. Our results suggest that the supply of equity is not perfectly elastic and caution that supermajority approval requirements can increase the risk of shareholder holdup and lead to inefficient choice of deal structure.

Employees and the Market for Corporate Control

Serial acquirers conduct the vast majority of acquisitions in the U.S. Serial acquirers appear to strategically shift between methods of payment based on changes in their own characteristics, using overvalued stock in stock-financed acquisitions during short windows of opportunity. Acquirer overvaluation increases the speed to the next acquisition and the propensity to pay with stock. The market reacts positively to the initial stock-financed acquisitions by overvalued acquirers. As the overvaluation of stock acquirers declines while they complete more deals, they accelerate the speed to the next acquisition. Acquirers that pay with overvalued stock experience negative excess returns when the acquisition spree goes on too long.

BROKEN PROMISES: PRIVATE EQUITY BIDDING BEHAVIOR AND THE VALUE OF REPUTATION

Material Adverse Change (MAC) clauses play key roles in essentially all merger negotiations. Fewer exclusions in MAC clauses imply broader abandonment options for acquirers. We study the motivations for different scopes of acquirers’ abandonment options. In our comprehensive hand-collected sample, broader firm-specific abandonment options are associated with higher target announcement returns and higher combined acquirer and target announcement gains, lower probabilities of MAC occurrences, and lower conditional completion rates when MACs occur. They are also more prevalent in higher-quality firms with larger information asymmetries. Overall, the results indicate that targets credibly signal their higher values or greater synergies with broader abandonment options for acquirers.