Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions

Abstract

This paper first identifies the characteristics of publicly-traded REITs associated with an increased probability of becoming the target of an announced merger or acquisition bid. Second, conditional on being a target, we determine which target characteristics influence the probability of the bidder being a private versus a public firm. Third, we document the magnitude of the wealth effects that accrue to the shareholders of target REITs in both privatizations and public-to-public transactions and how these effects vary with the characteristics of the target firms. Finally, we investigate the extent to which privatizations differ from “staying public” acquisitions in the type of financing employed and the motivation of the two investor types. We find that REITs more likely to become acquisition targets are smaller and less liquid with higher dividend yields than non-targets. The existence of an umbrella partnership (UPREIT) structure reduces the probability of becoming a target. Private acquirers are more likely to bid on underleveraged REITs with poor operating performance. Conversely, public buyers are more focused on acquiring more highly levered REITs with greater institutional ownership and superior operating results. The determinants of abnormal returns also differ in privatizations and public-to-public deals.

Keywords: Mergers, Privatization, Corporate Control, Real Estate Investment Trusts

JEL Classification: G34, G29