Can Investors Anticipate Post-IPO Mergers and Acquisitions?
61 Pages Posted: 22 Feb 2017 Last revised: 18 Sep 2017
Date Written: February 1, 2017
Given the frequency and its important value implication of post-IPO M&A activity, we investigate empirically whether investors can utilize information based on IPO deal structure to predict merger and acquisition activity among newly public firms. Consistent with the hypothesis that some firms conduct IPOs to facilitate future M&A activity, we find that whether a newly public firm subsequently becomes a bidder or target is predicted by aspects of IPO deal structure. These characteristics include underwriter quality, promotional activity, pricing, proceeds, ownership structure, and issuance activity suggestive of market timing. Investors appear to rely on these observable aspects of a firm’s going public process to anticipate the implications of M&A activity for security valuation. Specifically, when newly public firms with IPO deal structures predictive of acquisition activity announce an acquisition their stock returns are indistinguishable from zero. In contrast, abnormal returns to acquisition announcements by unlikely or surprise bidders are positive on average. These results suggest that the going public process has important implications for future M&A activity and valuation.
Keywords: Initial public offerings (IPOs), mergers and acquisitions (M&A), deal structure, merger anticipation
JEL Classification: G14, G24, G32, G34
Suggested Citation: Suggested Citation