Sandra Betton

Chapter 15 – Corporate Takeovers*

This chapter surveys the recent empirical literature and adds to the evidence on takeover bids for U.S. targets, 1980–2005. The availability of machine readable transaction databases have allowed empirical tests based on unprecedented sample sizes and detail. We review both aggregate takeover activity and the takeover process itself as it evolves from the initial bid through the final contest outcome. The evidence includes determinants of strategic choices such as the takeover method (merger v. tender offer), the size of opening bids and bid jumps, the payment method, toehold acquisition, the response to target defensive tactics, and regulatory intervention (antitrust), and it offers links to executive compensation. The data provides fertile grounds for tests of everything ranging from signaling theories under asymmetric information to strategic competition in product markets and to issues of agency and control. The evidence is supportive of neoclassical merger theories. For example, regulatory and technological changes, and shocks to aggregate liquidity, appear to drive out market-to-book ratios as fundamental drivers of merger waves. Despite the market boom in the second half of the 1990s, the proportion of all-stock offers in more than 13,000 merger bids did not change from the first half of the decade. While some bidders experience large losses (particularly in the years 1999 and 2000), combined value-weighted announcement-period returns to bidders and targets are significantly positive on average. Long-run post-takeover abnormal stock returns are not significantly different from zero when using a performance measure that replicates a feasible portfolio trading strategy. There are unresolved econometric issues of endogeneity and self-selection.

Markup Pricing Revisited

We examine whether pre-bid target stock price runups lower bidder takeover gains and deter short-term toehold purchases in the runup period. A dollar increase in the runup raises the initial offer price by

Option Premia in Acquisitions

0.80 (markup pricing). Bidder gains, while decreasing in offer price markups, are increasing in runups, suggesting that runups are interpreted by the negotiating parties as reflecting increases in target stand-alone values. We also show that short-term toehold purchases increase runups. However, when purchased by the initial bidder (as opposed to by other investors), short-term toeholds lower markups, possibly because they provide evidence to the target that the runup anticipates the pending offer premium (supporting substitution between the runup and the markup). We conclude that markup pricing per se is unlikely to deter short-term toehold aquisitions.

Toeholds, Bid Jumps, and Expected Payoffs in Takeovers

In this paper we develop and test a theoretical framework that models the negotiation and timing processes of corporate acquisitions. The acquisition timing is modelled using real options techniques, and the negotiation process between target and bidder firms is assumed to be a Stackelberg (leader-follower) game with complete information. From the equilibrium strategies, we obtain testable implications for the determinants of the offer premia based on the characteristics of both the bidder and target firms. The three hypotheses related to acquisition premium are tested in a sample of 228 U.S. target firms using an event study methodology and cross sectional regressions. Consistent with the predictions in the model, we find that target volatility and market to book ratios are important determinants of the offer premium. Our findings relating target volatility and target premium are important since these determinants do not arise in existing models of takeovers.