Frederik P. Schlingemann

Divestitures and the liquidity of the market for corporate assets

The liquidity of the market for corporate assets plays an important role in explaining whether a firm divests a business segment, which segment the firm divests, and whether it divests a core segment or an unrelated segment. Firms are more likely to divest segments from industries with a more liquid market for corporate assets, unrelated segments, poorly performing segments, and small segments. Strikingly, the segment with the least liquid market is less likely to be divested than the best-performing segment, while the worst-performing segment is less likely to be divested than the segment with the most liquid market. r 2002 Elsevier Science B.V. All rights reserved. JEL classificaion: G30; G34

Why do private acquirers pay so little compared to public acquirers

We find that the announcement gain to target shareholders from acquisitions is significantly lower if a private firm instead of a public firm makes the acquisition. Non-operating firms like private equity funds make the majority of private bidder acquisitions. On average, target shareholders receive 55% more if a public firm instead of a private equity fund makes the acquisition. There is no evidence that the difference in premiums is driven by observable differences in targets. We find that target shareholder gains depend critically on the managerial ownership of the bidder. In particular, there is no difference in target shareholder gains between acquisitions made by public bidders with high managerial ownership and by private bidders. Such evidence suggests that the differences in managerial incentives between private and public firms have an important impact on target shareholder gains from acquisitions and managers of firms with diffuse ownership may pay too much for acquisitions.

Why Do Private Acquirers Pay so Little Compared to Public Acquirers

We find that the announcement gain to target shareholders from acquisitions is significantly lower if a private firm instead of a public firm makes the acquisition. Non-operating firms like private equity funds make the majority of private bidder acquisitions. On average, target shareholders receive 55% more if a public firm instead of a private equity fund makes the acquisition. There is no evidence that the difference in premiums is driven by observable differences in targets. We find that target shareholder gains depend critically on the managerial ownership of the bidder. In particular, there is no difference in target shareholder gains between acquisitions made by public bidders with high managerial ownership and by private bidders. Such evidence suggests that the differences in managerial incentives between private and public firms have an important impact on target shareholder gains from acquisitions and managers of firms with diffuse ownership may pay too much for acquisitions.

Financing decisions and bidder gains

This paper analyzes the relation between bidder gains and the source of financing funds available. We document that after controlling for the form of payment, financing decisions during the year before a takeover play an important role in explaining the cross section of bidder gains. Bidder announcement period abnormal returns are positively and significantly related to the amount of ex ante equity financing. This relation is particularly strong for high q firms. We further report a negative and significant relation between bidder gains and free cash flow. This relation is particularly strong for firms classified as having poor investment opportunities. The amount of debt financing before a takeover announcement is not significantly related to bidder gains. Together, we take these findings as supportive of the pecking-order theory of financing and the free cash flow hypothesis.

Globalization, Governance, and the Returns to Cross-Border Acquisitions

Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirers industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.

Disagreement and the Informativeness of Stock Returns: The Case of Acquisition Announcements

We examine whether disagreement between managers and investors relates to the informativeness of bidder returns around acquisition announcements. We predict that greater disagreement about the merits of an acquisition creates uncertainty about investors’ revaluation of acquiring firms, making returns less informative. We document an inverse relation between bidder returns and the change in bidders’ implied volatility. This relation is only significant when there is more disagreement. Also, the relation between bidder returns and the likelihood of deal completion is stronger when announcement returns are more informative, suggesting managers “listen to the market�? more when the market response is more informative.

Does Target CEO Retention in Acquisitions Involving Private Equity Acquirers Harm Target Shareholders

While there is widespread concern that target CEO retention by the acquirer harms target shareholders when the acquirer is a private equity firm, CEO retention can also be valuable to private equity acquirers, and hence potentially benefit shareholders. We find that CEO retention does not harm target shareholders when the acquirer is a private equity firm. In fact, we show that, in acquisitions by private equity firms, better performing CEOs are more likely to be retained and target shareholders gain an additional 10% to 23% of pre-acquisition firm value when the CEO is retained compared to when the CEO is not retained. In contrast, shareholders of targets acquired by operating companies do not benefit from CEO retention. Finally, we find no evidence that the targets value is artificially depressed ahead of a private equity acquisition where the CEO is retained.

Determinants and Shareholder Wealth Effects of the Sales Method in M&A

We analyze the sales method for a sample of 575 acquisitions announced between 1998 and 2012 and find that targets choose auctions to maximize the target takeover premium through greater competition and to relax their financial constraints. Auctions, compared to negotiated deals, are associated with significantly higher target announcement returns, especially for relatively small targets. Bidder returns are positively related to auctions for bidders acquiring relatively small targets, not for the full sample. Taking into account size differences, we find that auctions, decrease target gains and increase bidder gains expressed in dollars.

The Real Effects of Credit Ratings: Evidence from Corporate Asset Sales

What is the relative contribution of credit rating downgrades on financial distress and managerial discipline? We find that firms are more likely to conduct asset sales following a credit rating downgrade, particularly so if firms indicate the purpose is to use the proceeds to pay down outstanding debt or to raise cash. We find a smaller or no effect if the sale is motivated by concentrating on core assets or involves the sale of a loss making or bankrupt operation. Shareholder wealth effects of the asset sale following a credit rating downgrade are consistent with the event being perceived by the market as a successful mechanism by the seller to mitigate financial distress caused by the downgrade and where buyers benefit from discounted fire-sale prices and when the assets have greater asset redeployability. Asset sales following a downgrade are more likely to involve segments that are the most liquid, generate the least current cash flows, and have the highest growth opportunities. Peer-based performance, intrafirm performance, or relatedness to core activities, do not explain the choice for which segments are divested. Our results suggest that firms respond to credit rating downgrades with asset sales in an attempt to reduce financial distress and that downgrades, at the margin, exacerbate financial distress rather than induce managerial discipline.

Governance, CEO Power, and Relative Performance Evaluation Effectiveness

We study whether changes in corporate governance and CEO power affect bonus-based implicit relative performance evaluation (RPE). We rely on a regression discontinuity design of shareholder proposals to proxy for shocks to CEO power. The effect of shareholder proposals on RPE is stronger under situations where shareholder proposals are expected to better capture changes in CEO power. We identify important real effects associated with the strengthening of RPE and find that idiosyncratic risk increases and co-movement decreases between firms and their peers in terms of changes in capital and inventory investment and changes in Tobin’s Q after a shareholder proposal is passed.