Can Stock Liquidity be Transferred and Upgraded in Acquisitions? Option-Adjusted Evidence from Liquidity Synergies in US Freeze-Outs
Posted: 18 Apr 2016 Last revised: 25 Apr 2018
Date Written: January 1, 2016
This paper investigates the value successful bidders generate from acquiring less liquid targets. This synergy is traced with both theoretical and empirical evidence from the squeeze-out stage of going private transactions, when bidders hold sizeable toeholds in target shares. On one side, via liquidity transferring, acquirers can effectively transfer their thinner liquidity discount on the valuation of their toeholds in fully acquired target assets. On the other, their long-run stock liquidity can improve following the removal of their targets from the exchange. Using a sample of US delisted targets from globally listed acquirers during the last 25 years and in line with our theoretical analysis a nonlinear relation is evidenced between the expected added value from liquidity transfer and illiquidity differences. After adjusting target market prices for the attached option to participate in the bid in a stochastic volatility framework, acquirers with higher liquidity differences from their targets are revealed to capture a disproportional share of the deal-generated economic rents for two reasons. First, because bidder negative abnormal returns are mitigated for deals promising a higher value of liquidity transfer and, second, due to a witnessed improvement in acquirer stock liquidity subsequent to the full acquisition of its target, which is more intensive for stock offers.
Keywords: liquidity; going private; squeeze out; freeze out
JEL Classification: G34, G14, G32
Suggested Citation: Suggested Citation