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Abstract:
We examine whether, and how, leveraged buyouts from the most recent wave of public to private transactions created value. For a sample of 192 buyouts completed between 1990 and 2006, we show that these deals are somewhat more conservatively priced and less levered than their predecessors from the 1980s. For the subsample of deals with post-buyout data available, median market and risk adjusted returns to pre- (post-) buyout capital invested are 72.5% (40.9%). In contrast, gains in operating performance are either comparable to or slightly exceed those observed for benchmark firms. Increases in industry valuation multiples and realized tax benefits from increasing leverage while private are each economically as important as operating gains in explaining realized returns.

leverage buyouts, value creation

Abstract:
We examine whether, and how, leveraged buyouts from the most recent wave of public to private transactions created value. For a sample of 192 buyouts completed between 1990 and 2006, we show that these deals are somewhat more conservatively priced and less levered than their predecessors from the 1980s. For the subsample of deals with post-buyout data available, median market and risk adjusted returns to pre- (post-) buyout capital invested are 72.5% (40.9%). In contrast, gains in operating performance are either comparable to or slightly exceed those observed for benchmark firms. Increases in industry valuation multiples and realized tax benefits from increasing leverage while private are each economically as important as operating gains in explaining realized returns.

leveraged buyout, private equity

Abstract:
From 1994 to 2003, 80% of targets and 37% of acquirers obtain a third-party assessment of the fairness of a merger or acquisition. These fairness opinions do not affect deal outcomes when used by targets, but they affect deal outcomes when used by acquirers. The deal premium is lower in transactions if the acquirer obtains a fairness opinion, and further reduced if multiple advisors provide that opinion. However, the acquirer's announcement period return is 2.3% lower if the acquirer has a fairness opinion, especially if the acquirer pays a high premium, indicating that investors are skeptical of these transactions.

Fairness opinion, merger, conflict of interest, deal premium, announcement return.

Abstract:
Using managers' personal trading decisions as a window into their belief on firm's valuations, this paper directly examines whether overvaluation is a motive for acquisitions and provides evidence on the consequences of overvalued equity. My findings show a sharp contrast in the behavior of acquirer's insiders between the earlier period and the 'hot market' period of the late 1990s. Moreover, the strong relation between insider trading patterns prior to the acquisition announcement and long-run post-acquisition performance in the later period suggests that acquisitions by overvalued companies are value-destroying and the poor subsequent stock performance is not only a correction of overvaluation.

Overvaluation, bad merger, agency costs, insider trading, and long-term stock performance

Abstract:
This paper documents that acquiring firms are more likely than non-acquiring firms to split their common stocks before making acquisition announcements, especially when the acquisition is financed by stock and when the deal is large. We investigate possible reasons for this pattern and find very little evidence supporting signaling theory and some evidence supporting the trading range hypothesis. Our results strongly support the hypothesis that some, though not all, acquiring firms use stock splits to inflate their equity value before acquisition announcements. Splitting acquirers experience more negative abnormal returns upon acquisition announcements and lower operating performance following the acquisitions compared with non-splitting acquirers. Furthermore, among splitting acquirers, the ones that are more likely to use stock splits to manipulate their stock values have lower operating performance and lower stock returns subsequent to the completion of acquisitions, especially when the deal is financed by equity.

Stock Splits, Mergers and Acquisitions, Signaling, Optimal Trading Range, and Value Manipulation

Abstract:
This paper examines the contracting and negotiation process in mergers using an incomplete contracts framework. Our multi-period model allows for the arrival of new information and renegotiation subsequent to the signing of an initial merger agreement but prior to deal completion or termination. We show that a properly designed initial contract solves the holdup problem during renegotiation and induces higher deal-specific effort that increases expected payoffs from the merger. The contract grants an option to the target to terminate the merger, while the strike on the option compensates the acquirer's effort without imposing excessive costs on the target for pursuing non-merger alternatives. The option strike can be implemented by the use of deal protection devices, such as a target termination fee or an acquirer lockup. Employing a large sample of stock mergers, we find evidence supporting model predictions for the renegotiation of contracts, deal outcomes, and the use of deal protection devices.

Holdup, renegotiation, merger, deal protection, termination fee, lockup.

Abstract:
Over the period of 1995-2006, about 19% of acquirers and 25% of targets hire boutique banks as their M&A advisors. The expertise of boutique advisors in M&A advisory services may identify them as niche players in the industry. This paper is the first to investigate how merging firms choose between boutique and full service advisors and how this choice affects deal outcomes in M&A transactions. Firms are more likely to choose boutique advisors when facing a deal with greater complexity. After controlling for the endogenous choice of advisors by merging firms, we find that the deal premium paid in mergers is lower if boutique advisors are used on the acquirer side, indicating that acquirers’ shareholders benefit from the expertise of boutique advisors. On the other hand, we do not find that boutique advisors charge higher advisors fees, suggesting that boutique players are pressured by fierce competition from full service banks for market share.

Financial advisor, Boutique, Full service, Mergers and Acquisitions

Abstract:
We examine contracts used in mergers from the announcement of initial definitive agreement to the completion or termination of the deal, and the renegotiation process in between. We build a model that allows for renegotiation following the arrival of new information, and demonstrate that a properly designed contract solves the holdup problem and induces higher deal-specific efforts that increase the synergy of the merger. The contract grants an option to the target to terminate the merger, while the strike price can be regarded as the "termination fee" paid by the target. The optimal target termination fee compensates the acquirer's deal-specific effort without imposing excessive costs on the target for pursuing non-merger alternatives. With a sample of stock mergers from 1994 to 1999 we find: 1) termination fees are used more frequently on the target side than on the acquirer side because the target's holdup problem is more severe; 2) an acquirer's lockup option or a toehold are also devices to solve target's holdup problem; 3) target termination fee increases when measures of acquirer's deal-specific effort increase, but it decreases when measures of the target's non-merger alternatives increase; and 4) renegotiation of the initial agreement ensures that the merger decision is efficient at the time of merger completion or termination.

Holdup, renegotiation, merger, termination fee, lockup, toehold

Abstract:
We document that acquiring firms are more likely than non-acquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long-run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock-swap acquisitions. This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.

stock splits, mergers and acquisitions, and value manipulation

Abstract:
We document that acquiring firms are more likely than non-acquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long-run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock-swap acquisitions (Erickson and Wang, 1999; Louis, 2004). This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.

stock splits, mergers and acquisitions, and value manipulation

Abstract:
This paper examines whether, and how, leveraged buyouts from the most recent wave of public to private transactions created value. For a sample of 192 buyouts completed between 1990 and 2006, we show that these deals are somewhat more conservatively priced and lower levered than their predecessors from the 1980s. For the subsample of deals with post-buyout data available, median market adjusted returns to pre- and post-buyout capital invested are 78% and 36%, respectively. In contrast, gains in operating performance are either comparable to or slightly exceed those observed for benchmark firms. We examine the relative contribution of several potential determinants of returns; in addition to gains in operating performance, returns are strongly related to increases in industry valuation multiples. Overall, our results provide insights into how transactions from the most recent wave of leveraged buyouts created value.