Misadventure and the Form of Payment in Corporate Acquisitions

MGSM Working Paper No. 2006-11

19 Pages Posted: 14 Oct 2006

See all articles by Tyrone M. Carlin

Tyrone M. Carlin

Southern Cross University; The University of Sydney Business School

Guy Ford

Macquarie University - Graduate School of Management

Nigel Finch

Saki Partners

Date Written: October 2006

Abstract

The event of a rising share price for a firm following the announcement of its intentions to acquire another firm is generally recognised as a sign of market support for the deal. If the price continues to rise over the offer period, as the market fully digests various items of information related to the transaction, it can be interpreted that the market confidently expects the present value of synergies and other benefits to exceed the premium paid to acquire the target. In a transaction involving the exchange of a fixed number of shares in the acquiring firm as part or full consideration for the target, it seems often overlooked that a rising share price for the acquiring firm also impacts on the size of the premium paid to target shareholders. If the market overvalues expected synergies - or more specifically, if those structuring the deal set the share-exchange ratio at a level that underestimates the reaction of the market - it may be the case that the deal will destroy value for acquiring shareholders. We examine this issue within the context of a large corporate acquisition in Australia: the acquisition of Howard Smith Limited by Wesfarmers Limited.

Keywords: share-exchange, acquisition, transaction risk

JEL Classification: G34, M40, M41

Suggested Citation

Carlin, Tyrone M. and Ford, Guy and Finch, Nigel, Misadventure and the Form of Payment in Corporate Acquisitions (October 2006). Available at SSRN: https://ssrn.com/abstract=937251 or http://dx.doi.org/10.2139/ssrn.937251

Tyrone M. Carlin

Southern Cross University ( email )

Lismore, New South Wales 2480
Australia

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Guy Ford (Contact Author)

Macquarie University - Graduate School of Management ( email )

99 Talavera Road
Sydney, NSW 2113
Australia
+61-2-9850-7813 (Phone)
+61-2-9850-9019 (Fax)

Nigel Finch

Saki Partners ( email )

Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
419
Abstract Views
1,586
rank
71,845
PlumX Metrics