Ninon Kohers

The Value Creation Potential of High-Tech Mergers

The distinctive high-growth, high-risk nature of technology-based industries raises important questions about the creation of wealth in high-tech takeovers. Do investors perceive acquisitions of high-tech targets to have strong potential for value creation? Or, given the large degree of uncertainty associated with many high-tech companies, is the market skeptical of the potential benefits of high-tech acquisitions? Our results show that acquirers of high-tech targets experience significantly positive abnormal returns, regardless of whether the merger is financed with cash or stock. Factors influencing bidder returns are the time period in which the merger occurs, the ownership structure of the acquirer, the high-tech affiliation of acquirers, and the ownership status of the target. High-tech companies have emerged as leaders in the economy through their technological advancements, job growth creation, and efficiency gains. This article provides important information to the investment analyst who is charged with valuing mergers and acquisitions in these distinctively high-growth/high-risk industries. The rapid growth of technology-based industries suggests that targets from these sectors may be able to provide greater shareholder wealth benefits for acquiring companies than slower-growth target companies. In addition to their high-growth potential, however, another feature of high-tech industries is the uncertainty associated with any company whose value relies on future outcomes or developments in unproven, uncharted fields. For example, the value of a biotechnology company may depend on the success or failure of a single new drug or medical device. Furthermore, some high-tech companies are not expected to generate any cash flow in the near future, which makes the valuation process notably riskier for the bidder in a high-tech valuation. Thus, from the perspective of a bidders shareholders, the attractive growth prospects offered by a high-tech target may come with a high price tag. Given such risk factors, we expected that the bidders that engage in these transactions would have confidence in their ability to successfully manage the acquisition. Furthermore, these acquirers would need to instill such confidence in their investors. To find out, we studied 1,634 mergers in the various high-tech areas that occurred from January 1987 through April 1996. We found that the average performance of the acquirers prior to the merger was significantly higher than that of their industry-matched competitors, which would help to convince investors that these acquirers are capable of creating value through the acquisition. Moreover, considering the high premiums acquirers have been willing to pay for these high-risk investments, we also investigated whether shareholders in bidder companies perceive the deals favorably. Are investors generally optimistic about the potential synergies of acquiring high-tech targets? Our results show that acquirers of high-tech targets experience significantly positive abnormal returns at the time of the merger announcement—regardless of whether the merger was financed with cash or stock. This finding, together with the relatively high premiums that high-tech targets receive, suggests that the market is optimistic about the future benefits of high-tech mergers. The wealth gains to acquirers indicate that high-tech acquisitions are value enhancing in the short run. The finding that the use of stock to finance the merger or acquisition did not result, on average, in significantly negative excess returns for the acquiring company suggests that investors consider the nature of the investment for which the financing is being used rather than simply react to the financing decision by assuming that stock offerings imply overvaluation. We found that the factors that influenced bidder returns in the study are as follows: the time period in which the merger was announced (with higher abnormal returns in more recent acquisitions); the high-tech affiliation of the acquirer; the growth stage of the target (with takeovers of private targets generating higher bidder abnormal returns than takeovers of public targets); the bidder ownership structure (with moderate levels of insider ownership having a positive relationship and institutional ownership having a negative relationship with bidder returns); and the size of the transaction relative to the bidder (with larger transactions associated with larger bidder returns).

Earnouts in Mergers: Agreeing to Disagree and Agreeing to Stay

We examine a large sample of mergers involving earnout payments made by bidders to target shareholders. Our findings suggest that earnouts serve two not mutually exclusive functions: as risk reduction mechanisms against misvaluation of high asymmetric information targets, and as retention bonuses for target human capital in mergers with feasible contract implementation. Around the merger announcement, bidder shareholders show significant positive responses, which are not reversed over the subsequent 3 years. In the postmerger period, the frequency of earnout payment and the percentage of target managers staying beyond the earnout period are high, supporting the use of earnouts as retention bonuses. Copyright 2000 by University of Chicago Press.

Takeovers of Technology Firms: Expectations vs. Reality

The distinctive high-growth, high-risk nature of technology-based industries raises important questions about the creation of wealth in takeovers of technology firms. Although acquiring firm shareholders respond favorably to high-tech takeover announcements, these acquirers generally underperform industry-matched benchmarks and size- and book-to-market matched control portfolios in the long run. A key factor related to poor post-merger performance is a low bidder book-to-market ratio, especially when combined with a bidder ownership structure with high potential for agency problems. These findings suggest that the market tends to exhibit excess enthusiasm about the expected benefits of certain high-tech acquisitions.

The disappearing day-of-the-week effect in the world's largest equity markets

The well-documented day-of-the-week effect has shown that stock returns on some days of the week are often significantly higher than on other days. To investigate whether improvements in market efficiency may have caused this anomaly to disappear over time, this study examines the day-of-the-week effect in the worlds largest developed equity markets over the last 22 years. The results indicate that, during the 1980s, this anomaly was clearly evident in the vast majority of developed markets, but it appears to have faded away in the 1990s. The implications of these findings are that long-run improvements in market efficiency may have diminished the effects of certain anomalies in recent periods.

The risk and return characteristics of developed and emerging stock markets: the recent evidence

Finance theory suggests that the higher volatility typically associated with emerging stock market returns translates into higher expected returns in those markets. This study compares the risk and return profile of emerging and developed stock markets over the period from 1988 through April 2003. Specifically, this study investigates whether a difference in risk characteristics exists between the two markets and whether the realized rates of return in these two types of markets reflect these risk characteristics. The results show that the risk associated with emerging markets, as measured by the standard deviation of returns, is higher than the risk in developed markets in most periods. Also, the returns in emerging markets have been higher than those in developed markets for most of the time frames examined. The findings suggest that risk-averse investors seeking higher returns in emerging markets have been compensated for assuming the higher risk associated with these markets.

Acquisitions of private targets: the unique shareholder wealth implications

Acquisitions of privately-held targets provide unique shareholder wealth implications which prior studies have not addressed. This study provides a comparative analysis of private versus public target takeovers, including differences in merger motivations, method of payment inferences, shareholder wealth effects, and the factors driving these wealth changes. The results show that acquirer wealth gains in private target takeovers exceed those in public target takeovers, with large private targets being the key contributors to wealth gains. Acquirer gains do not appear to come at the expense of private target gains. These findings highlight the importance of target ownership in influencing the shareholder wealth changes in takeovers.

Private placements of common equity and the industry rival response

This study examines the intra-industry signalling effects of private equity issue announcements. The results show that the average industry reaction to a private equity announcement is negative. However, evidence of a contagion effect also exists. Specifically, the competitive response among industry rivals is significantly stronger for private equity issues during bear stock markets. In fact, the industry rival reaction for nonhigh-tech firms is significantly negative during bear markets only, while it is significantly positive during bull markets. These findings highlight the importance of stock market conditions in influencing the signals sent by private equity issues and the resulting shareholder wealth effects.