Acquisitions Driven by Stock Overvaluation

Overvaluation might drive a firm to use its stock to acquire another firm whose stock is not as overpriced. Though hypothetically desirable, these acquisitions create little, if any, value for acquirer shareholders. Two factors impede value creation for acquirer stockholders from these transactions (despite large differences in relative overvaluation at announcement): acquirers paying large premiums to targets, and investors’ correction of acquirer overvaluation during the bid period. Furthermore, acquirer CEOs obtain a large amount of new stock and option grants after acquisitions and realize a net gain in wealth, further suggesting that equity overvaluation increases agency costs and the resulting actions benefit managers more than shareholders (Jensen (2005))

Location, Proximity, and M&A Transactions

In this paper, we examine how the geographic location of firms affects acquisition decisions and value creation for acquirers in takeover transactions. We find that firms located in an urban area are more likely to receive a takeover bid and complete a takeover transaction as a target than firms located in rural areas, and takeover deals involving an urban target are associated with higher acquirer announcement returns, after controlling for the proximity between the target and the acquirer. In addition, a target\u27s urban location significantly attenuates the negative effect of a long distance between the target and the acquirer on acquirer returns, a fact that is documented in the existing literature. Our findings reveal a previously underexplored force—firm location—that can affect takeover transactions, in addition to proximity. Our paper suggests that a firm\u27s location plays an important role in facilitating the dissemination of soft information and enhancing information-based synergies

Board connections and M&A transactions

We examine M&A transactions between firms with current board connections and find that acquirers obtain higher announcement returns in transactions with a first-degree connection where the acquirer and the target share a common director. Acquirer returns are also higher in transactions with a second-degree connection where one acquirer director and one target director serve on the same third board. Our results suggest that first-degree connections benefit acquirers with lower takeover premiums while second-degree connections benefit acquirers with greater value creation. Overall, we provide new evidence that board connectedness plays important roles in corporate investments and leads to greater value creation

The Effects of Private Equity-Backing in the European Acquisitions of Unlisted Companies.

Using a sample of acquisitions of unlisted firms completed by public companies from 17 Western European countries over the period 2003-2008, this study investigates whether private equity (PE)-backing of acquired firms has an impact on announcement period abnormal returns to acquirers. 12.5% of the unlisted targets are PE-backed. Acquisitions of PE-backed firms are more likely to involve larger acquirers, larger targets relative to acquirer size, and high-tech targets; they are more likely to occur in an unrelated industry and to be partially stock-financed. Of most importance for this study, I find that the presence of PE investors in the targets leads to significantly lower acquirer announcement returns. This effect remains after controlling for a large set of deal and acquirer characteristics. Moreover, these results are robust to the use of a propensity score matching method on multiple deal characteristics and suggest that PE investors increase the negotiating power of target shareholders.Private Equity; Acquisitions; Acquirer Returns; Unlisted Targets;

Interchange fee rate, merchant discount rate and retail prices in a credit card network: A game-theoretic analysis

We consider two game-theoretic settings to determine the optimal values of an issuer's interchange fee rate, an acquirer's merchant discount rate, and a merchant's retail price in a credit card network. In the first setting, we investigate a two-stage game problem in which the issuer and the acquirer first negotiate the interchange fee rate, and the acquirer and the retailer then determine their merchant discount rate and retail price, respectively. In the second setting, motivated by the recent US bill “H.R. 2695,” we develop a three-player cooperative game in which the issuer, the acquirer, and the merchant form a grand coalition and bargain over the interchange fee rate and the merchant discount rate. Following the cooperative game, the retailer makes its retail pricing decision. We derive both the Shapley value- and the nucleolus-characterized, and globally-optimal unique rates for the grand coalition. Comparing the two game settings, we find that the participation of the merchant in the negotiation process can result in the reduction of both rates. Moreover, the stability of the grand coalition in the cooperative game setting may require that the merchant should delegate the credit card business only to the issuer and the acquirer with sufficiently low operation costs. We also show that the grand coalition is more likely to be stable and the U.S. bill “H.R. 2695” is thus more effective, if the degree of division of labor in the credit card network is higher as the merchant, acquirer, and issuer are more specialized in the retailing, acquiring, and issuing operations, respectively. © 2012 Wiley Periodicals, Inc. Naval Research Logistics, 201

Do Acquirer Capabilities Affect Acquisition Performance? Examining Strategic and Effectiveness Capabilities in Acquirers

This paper examines acquisition performance from the perspective of acquirer capabilities. It argues that the strategic capabilities underpinning a firm’s competitive strategy can be utilized to create economic value in acquisitions. Acquirers with strong cost leadership capabilities are expected to leverage these capabilities to reduce post-acquisition costs as they integrate acquisition targets. Acquirers with strong differentiation capabilities are expected to utilize their strategic capabilities to increase post-acquisition revenues by improving branding, product design, sales, and services in their targets. We also explore the affect of an acquirer’s effectiveness capabilities on acquisition performance. Lastly, we examine how acquirer’s organize these capabilities, either at the business unit or corporate-level, in order to maximize their affect on acquisition performance. Based on a sample of 204 horizontal acquisitions occurring in the banking industry, we find support for the link between acquirer cost leadership capabilities and post-acquisition cost reduction. Acquirer effectiveness capabilities are associated with improvements in post-acquisition revenues and profitability. We conclude that a better understanding of the competitive capabilities of acquirers is important to understanding acquisition performance. This contributes directly to horizontal acquisition research, but can be extended to several areas of strategy research on M&As including: diversifying acquisitions, acquirer experience, and how acquirers can avoid “synergy traps”.Acquisitions ; Acquirer Capabilities ; Strategic Capabilities ; Effectiveness Capabilities ; Acquisition Performance

Outsourcing and acquisition models comparison related to IT supplier selection decision analysis

This paper presents a comparison of acquisition models related to decision analysis of IT supplier selection. The main standards are: Capability Maturity Model Integration for Acquisition (CMMI-ACQ), ISO / IEC 12207 Information Technology / Software Life Cycle Processes, IEEE 1062 Recommended Practice for Software Acquisition, the IT Infrastructure Library (ITIL) and the Project Management Body of Knowledge (PMBOK) guide. The objective of this paper is to compare the previous models to find the advantages and disadvantages of them for the future development of a decision model for IT supplier selection

Reducing Causal Ambiguity in Acquisition Integration: Intermediate Goals as Mediators of Integration Decisions and Acquisition Performance

Integration is a difficult process, but one that is vital to acquisition performance. One reason acquirers encounter difficulties is that the integration process exhibits high levels of intrafirm linkage ambiguity – a lack of clarity of the causal link between integration decisions and their performance outcomes. We introduce the construct of intermediate goals as a mechanism that reduces intrafirm linkage ambiguity. Our structural model results, based on a sample of 129 horizontal acquisitions, indicate that the achievement of two intermediate goals (internal reorganization and market expansion) fully mediates the relationships between four integration decisions and acquisition performance

Investment Bank Expertise in Cross-Border Mergers and Acquisitions

We study the influence of country expertise of investment banks in facilitating cross‐border merger deals by analyzing a large international sample of merger and acquisition (M&A) deals. We provide evidence that the geographical proximity, cultural affinity, and local experience of investment banks advising bidding firms on cross‐border M&A deals significantly increase the probability of completion of the deal, significantly decrease the time required to complete the deal, and significantly increase the operating performance of the acquiring firm after the deal. Our results are robust to firm, deal, country‐specific factors, and endogeneity concerns

Acquiring foreign firms far away might be hazardous to your share price: evidence from Germany

This paper examines shareholder wealth effects of cross-border acquisitions. In a sample of 155 large acquisitions by German corporations from 1985–2006 international transactions in total do not lead to significant announcement returns. Geography, however, makes a difference: Shareholders of acquiring firms gain 6.5% in cross-border transactions into countries that have a common border with Germany but lose 4.4% in other international transactions. We find proximity to be one of the most important success factors in cross-border mergers and acquisitions, even when we control for firm, deal and country characteristics