Riding the Merger Wave: Uncertainty, Reduced

Transcription

1 Riding the Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions RAN DUCHIN BRENO SCHMIDT JFE, 2013 Hypothesis Quality of Analysis 1 Th lit f l i f d ith th b f 1. The quality of analysis of any merger may decrease with the number of mergers. 2. Prior and contemporary deals provide valuable information, which may in turn increase the accuracy of analysts 1

2 Hypothesis Quality of Analysis 1. The quality of analysis of any merger may decrease with the number of mergers. 2. Prior and contemporary deals provide valuable information, which may in turn increase the accuracy of analysts Whether the managers are more likely to be favorably evaluated ex post if their ex ante behavior was similar to that of other managers. To investigate this the authors investigate whether the positive relation between bad mergers and turnover is weaker when mergers are initiated insider waves. Authors argue that if managers are indeed intentionally initiating bad mergers during waves, we should observe poorer governance for in-wave acquirers relative to out-wave acquirers. Hypothesis Quality of Analysis 1. The quality of analysis of any merger may decrease with the number of mergers. 2. Prior and contemporary deals provide valuable information, which may in turn increase the accuracy of analysts Whether the managers are more likely to be favorably evaluated ex post if their ex ante behavior was similar to that of other managers. To investigate this the authors investigate whether the positive relation between bad mergers and turnover is weaker when mergers are initiated inside the waves. Authors argue that if managers are indeed intentionally initiating bad mergers during waves, we should observe poorer governance for in-wave acquirers relative to out-wave acquirers. Authors consider the possibility that our results are driven by inherent differences between in- and out-wave mergers 2

3 Preliminary Findings in-wave acquirers have annualized buy-and-hold abnormal returns that are on average 4.65 to 6.25 percentage points lower than other acquirers the two-year post-merger change in Return On Assets (ROA) of in-wave acquirers is 0.75 to 2.14 percentage points lower than that of out-wave acquirers Preliminary Findings in-wave acquirers have annualized buy-and-hold abnormal returns that are on average 4.65 to 6.25 percentage points lower than other acquirers the two-year post-merger change in Return On Assets (ROA) of in-wave acquirers is 0.75 to 2.14 percentage points lower than that of out-wave acquirers Two biggest merger waves Banking industry computer software industry

4 Preliminary Findings in-wave acquirers have annualized buy-and-hold abnormal returns that are on average 4.65 to 6.25 percentage points lower than other acquirers the two-year post-merger change in Return On Assets (ROA) of in-wave acquirers is 0.75 to 2.14 percentage points lower than that of out-wave acquirers Two biggest merger waves Banking industry The Gramm Leach Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999 computer software industry IT Bubble 2000 Data Securities Data Company (SDC) & Center for Research in Security Prices (CRSP) The acquirer is a nonutility, publicly traded company The acquirer gained control over the target company Deal value more than $10 million The deal was completed Compustat data was available for fiscal year preceding the merger 4

5 Data Securities Data Company (SDC) & Center for Research in Security Prices (CRSP) The acquirer is a nonutility, publicly traded company The acquirer gained control over the target company Deal value more than $10 million The deal was completed Compustat data was available for fiscal year preceding the merger 9,854 Acquisition in 30 years. 5

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7 authors calculated 77 merger waves during the sample period. There are 38 industries with merger waves in at least one decade, 28 industries with waves in two decades or more, and 11 industries with waves in all three decades. The average (median) number of mergers per wave is 50 (31). Performance measurement The idea is to compare the benchmark-adjusted performance of in-wave and out-wave acquirers. Two different tbenchmark portfolio 1. Weighted Average of two industry 2. Comprises propensity score-matched nonacquirers 7

8 Performance measurement The idea is to compare the benchmark-adjusted performance of in-wave and out-wave acquirers. Two different tbenchmark portfolio 1. Weighted Average of two industry 2. Comprises propensity score-matched nonacquirers Two measures of long term abnormal performance 1. Buy and Hold Abnormal Returns (BHAR) 2. The intercept of a factor model applied to a Calendar time portfolio The Quality of Analysis To Study the quality of analysis, authors compared the analysts forecasts and announcement returns inside and outside the merger waves. 8

9 The Quality of Analysis To Study the quality of analysis, authors compared the analysts forecasts and announcement returns inside and outside the merger waves returns inside and outside the merger waves. The Quality of Analysis To Study the quality of analysis, authors compared the analysts forecasts and announcement returns inside and outside the merger waves. 9

10 and Uncertainty To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measures. Implied Volatility from option prices GARCH-based estimates and Uncertainty To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measures. Implied Volatility from option prices GARCH-based estimates 10

11 and Uncertainty To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measures. Implied Volatility from option prices GARCH-based estimates and Uncertainty To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measures. Implied Volatility from option prices GARCH-based estimates 11

12 and Uncertainty CEO turnover measured by computing the pre-merger BHAR and post-merger BHAR. 12

13 CEO turnover measured by computing the pre-merger BHAR and post-merger BHAR. Results The direct effect of post-merger BHAR on CEO turnover is negative. The interaction between post-merger performance and the merger intensity measures is positive. During Periods of intensified merger activity, the sensitivity of CEO turnover to post-merger performance is weaker. 13

14 Performance and Corporate Governance Long Term Performance 14

15 Performance and Corporate Governance Long Term Performance Performance and Corporate Governance Long Term Performance 15

16 Operating Performance Operating Performance 16

17 Governance During Merger Waves Governance During Merger Waves 17

18 Mergers of Necessity Mergers of Necessity 18

19 New idea? The waves are different Relative Acquisition iti Size M&A value compared to the industry Distribution of mergers New idea? The waves are different Relative Acquisition iti Size M&A value compared to the industry Distribution of mergers The quality of analysis 19

20 New idea? CEO perspective Overvalued dindustry\ Overvalued dcompanies Higher volatility Gambling Portfolio of the industry before\in\after the wave Market-to-Book ratio and anomalies New idea? CEO perspective Overvalued dindustry\ Overvalued dcompanies Higher volatility Gambling Portfolio of the industry before\in\after the wave Market-to-Book ratio and anomalies Is the trigger a sudden shock? 20