The Performance of the European Market for Corporate Control: Evidence from the 5th Takeover Wave

For the 5th takeover wave, European M&As were expected to create significant takeover value: the announcement reactions were strongly positive for target shareholders (more than 35%) and the bidding shareholders also expected to gain a small though significant increase in market value of 0.5%.While, most of the expected takeover synergies are captured by the target firm shareholders, The combined value creation is significantly positive.However, the expected value strongly depends on the wave pattern, with optimistic expectations at the climax of the wave and a more pessimistic outlook at the decline.We establish that the characteristics of the target and bidding firms and of the bid itself have a significant impact on takeover returns.While some of our results have been documented for other markets of corporate control (e.g.US), a comparison of the UK and Continental European M&A markets reveals that the corporate environment is an important factor affecting the market reaction to takeovers: (i) In case a UK firm is taken over, the abnormal returns exceed those in bids involving a Continental European target.(ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on the takeover returns in the UK and a negative one in Continental Europe.(iii) Weak investor protection and low disclosure environment in Continental Europe enable bidding firms to invent takeover strategies that allow them to act opportunistically towards target firm's incumbent shareholders; more specifically, partial acquisitions and acquisitions with undisclosed terms of transaction.takeovers;mergers and acquisitions;diversification;hostile takeover;means of payment;cross-border acquisitions;private target;partial acquisitions

Mergers and Acquisitions in Europe

This paper provides a comprehensive overview of the European takeover market.We characterize the main features of the domestic and cross-border corporate takeovers involving European companies in the period 1993-2001.We provide detailed and comparable information on the size and dynamics of takeover activity in 28 Continental European countries, the UK and Ireland.The data is supplemented with the characteristics of takeover transactions, including the type of takeovers (negotiated acquisition or tender offer), bid attitude (friendly or hostile), payment method (all-cash, all-equity, or mixed deals), legal status of the target firm (public or private), takeover strategy (focus or diversification), amongst other factors.In addition, we investigate the shortterm wealth effects of 2,419 European mergers and acquisitions.We find announcement effects of 9% for target firms compared to a statistically significant announcement effect of only 0.5% for the bidders.Including the price run-up, the share price reaction amounts to 21% for the targets and 0.9% for the bidders.We show that the estimated shareholder wealth effect strongly depends on the different attributes of the takeovers.The type of takeover bid has a large impact on the short-term wealth effects for the target firm shareholders with hostile takeovers triggering substantially larger price reactions than friendly transactions.When a UK target is involved, the abnormal returns are higher than those of bids involving a Continental European target.There is strong evidence that the means of payment has a large impact on the share prices of both bidder and target.takeovers;mergers and acquisitions;diversification;takeover waves;means of payment

What Determines the Financing Decision in Corporate Takeovers: Cost of Capital, Agency Problems or the Means of Payment?

While the means of payment in takeovers has been a focal point in the takeover literature, what has largely been ignored is the analysis of how the takeover bid is financed and what its impact is on the expected value creation of the takeover. This paper investigates the sources of transaction financing in European corporate takeovers launched during the period 1993- 2001 (the fifth takeover wave). Using a unique dataset, we show that the external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are quite distinct. For instance, a significantly negative price revision following the announcement of a takeover is not unique to the equity-paid M&As; it is also observed in any other deals that involve equity financing (including cash-paid and mixed-paid M&As). Also, acquisitions financed with internally generated funds significantly underperform those financed with debt. Our multinomial logit and nested logit analyses show that the takeover financing decision is influenced by the bidder’s pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. There is also evidence that the choice of equity versus internal cash or debt financing is influenced by the bidder’s strategic preferences with respect to the means of payment. We find no evidence of financing decisions driven by agency conflicts between managers and shareholders or between shareholders and creditors.mergers and acquisitions;takeovers;means of payment;financing decision;cost of capital;agency problem;pecking order;corporate governance regulation;nested logit

Spillover of Corporate Governance Standards in Cross-Border Mergers and Acquisitions

In cross-border acquisitions, the differences between the bidder and target corporate governance have an important impact on the takeover returns. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for this bootstrapping effect.takeovers;mergers and acquisitions;cross-border;takeover synergies;corporate governance regulation;contractual convergence;shareholder protection;creditor protection;minority shareholder protection;takeover regulation

A Corporate Governance Index: Convergence and Diversity of National Corporate Governance Regulations

The issue of appropriate corporate governance framework has been a focal point of recent reforms in many countries. This study provides a comprehensive comparative analysis of corporate governance regulatory systems and their evolution over the last 15 years in 30 European countries and the US. It proposes a methodology to create detailed corporate governance indices which capture the major features of capital market laws in the analysed countries. The indices indicate how the law in each country addresses various potential agency conflicts between corporate constituencies: namely, between shareholder and managers, between majority and minority shareholders, and between shareholders and bondholders. The analysis of regulatory provisions within the suggested framework enables us to understand better how corporate law works in a particular country and which strategies regulators adopt to achieve their goals. The 15-year time series of constructed indices and large country-coverage (30 European countries and the US) also allows us to draw conclusions about the convergence of corporate governance regimes across the countries. To our best knowledge, this is the first study that intends to address the convergence debate empirically. The analysis is based on a unique corporate governance database that comprises the main changes in corporate governance regulations in the US and all European countries between 1990-2005.governance regulation;convergence;corporate governance;agency problem;ownership and control;LLSV

Takeover Waves: Triggers, Performance and Motives

This paper reviews the vast academic literature on the market for corporate control.Our main focus is the cyclical wave pattern this market exhibits.From the perspective of takeover waves, we address questions such as: Why do mergers and acquisitions (M&As) occur?Does the ensuing transfer of control generate shareholder gains?What are the main profitability drivers in M&As by takeover wave?We find that the pattern of takeover activity and its profitability significantly vary across the various takeover waves.Despite such diversity, all waves have similarities: they are preceded by technological or industrial shocks, and occur in a positive economic and political environment, amidst rapid credit expansion and stock market booms.Takeovers towards the end of each wave are usually driven by non-rational, frequently selfinterested managerial decision-making.mergers;diversification;takeover waves

Corporate Governance Convergence: Evidence from Takeover Regulation Reforms in Europe

This paper contributes to the research on corporate governance by predicting the effects of European takeover regulation.In particular, we investigate whether the recent reforms of takeover regulation in Europe are leading to a harmonization of the national legislations.With the help of 150 corporate governance lawyers from 30 European countries, we collected the main changes in takeover regulation.We assess whether a process of convergence towards the Anglo-(American) corporate governance system has been started and we find that this is the case.We make predictions as to the consequences of the reforms for the ownership and control.However, we find that, while in some countries the adoption of a unified takeover code may result in dispersed ownership, in others it may further consolidate the blockholder-based system.takeover regulation;mergers and acquisitions;corporate governance;ownership and control;governance regulation;convergence

The Long-Term Operating Performance of European Mergers and Acquisitions

We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK.We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions.Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover.However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance.None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers.The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance.This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions.Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.takeovers;mergers and acquisitions;long-term operating performance;diversification;hostile takeovers;means of payment;cross-border acquisitions;private target

The Market for Corporate Control and Corporate Governance Regulation in Europe.

The two main constituents of any corporate governance system are corporate governance regulation and the market for corporate control. Their impact on economic growth, the development of markets, and the governance of firms has been widely studied both theoretically and empirically. However, empirical research in this field remains mostly confined to the UK and US and there is little known about the effects of takeover market and corporate legislation in Continental Europe. This dissertation provides a comprehensive overview of the market for corporate control and corporate governance regulation in European countries and documents their evolution during the past 15 years. The overview is complimented with the analysis of the impact of corporate takeovers and regulatory environment in European countries on companies’ profitability and the choice of financing sources. We show that there are substantial differences between Anglo-American and Continental European markets for corporate control and legal systems and these differences have significant impact on economic growth, the development of markets, and the governance of firms.