This paper discusses sources of value in acquisitions. Using the discounted cash-flow valuation method, we develop a model that explains sources of economic gains that can be attained through mergers. The model identifies three major sources of value in mergers, each of which can reduce or contribute to the combined wealth effect of a takeover deal. The overall value of the deal is a sum of the impacts of these factors on the combined value. The main contribution of this study is to highlight the role of the difference between the combined firm’s weighted average cost of capital and that of the acquirer and the target in value creation through mergers. The model suggests that this difference, along with the operating synergies, can explain total value effects of mergers.
{"title":"Net Present Value of Acquisitions","authors":"R. Yaghoubi, S. Locke, Jenny Gibb","doi":"10.2139/ssrn.2139966","DOIUrl":"https://doi.org/10.2139/ssrn.2139966","url":null,"abstract":"This paper discusses sources of value in acquisitions. Using the discounted cash-flow valuation method, we develop a model that explains sources of economic gains that can be attained through mergers. The model identifies three major sources of value in mergers, each of which can reduce or contribute to the combined wealth effect of a takeover deal. The overall value of the deal is a sum of the impacts of these factors on the combined value. The main contribution of this study is to highlight the role of the difference between the combined firm’s weighted average cost of capital and that of the acquirer and the target in value creation through mergers. The model suggests that this difference, along with the operating synergies, can explain total value effects of mergers.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120851925","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In various industries end-product manufacturers acquire core subsystems from upstream technology provider firms and focus primarily on efficient end-product integration. We examine the strategic interactions between a technology firm that introduces a new subsystem and the respective end-product manufacturers “integrators”. We analyze how the fraction of end-product functionalities prepackaged into the subsystem impacts the optimal introduction strategy and the relative value appropriation power across the industries. Offering a subsystem that performs many end-product functions has a dual effect on the provider's profits. On the positive side, the provider extracts a higher ease-of-use rent from the integrators because of the easier/cheaper integration. On the negative side, such subsystems may curtail the adopters' ability for competitive differentiation and render adoption less valuable. We discuss the role of subsystem functionality in value appropriation in technology markets, and we highlight the perils of subsystem overintegration. This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.
{"title":"The Pitfalls of Subsystem Integration: When Less is More","authors":"Sanjiv Erat, Stylianos Kavadias, C. Gaimon","doi":"10.2139/ssrn.1381624","DOIUrl":"https://doi.org/10.2139/ssrn.1381624","url":null,"abstract":"In various industries end-product manufacturers acquire core subsystems from upstream technology provider firms and focus primarily on efficient end-product integration. We examine the strategic interactions between a technology firm that introduces a new subsystem and the respective end-product manufacturers “integrators”. We analyze how the fraction of end-product functionalities prepackaged into the subsystem impacts the optimal introduction strategy and the relative value appropriation power across the industries. Offering a subsystem that performs many end-product functions has a dual effect on the provider's profits. On the positive side, the provider extracts a higher ease-of-use rent from the integrators because of the easier/cheaper integration. On the negative side, such subsystems may curtail the adopters' ability for competitive differentiation and render adoption less valuable. We discuss the role of subsystem functionality in value appropriation in technology markets, and we highlight the perils of subsystem overintegration. \u0000 \u0000This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-05-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126724908","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I empirically examine the impact of the 1948 Paramount antitrust case on ticket prices using a unique dataset collected from Variety magazine issues between 1945 and 1955. With information on prices, revenues, and theater ownership for an unbalanced panel of 393 theaters in 26 cities, I find that vertically integrated theaters charged lower prices and sold more admission tickets than nonintegrated theaters. I also find that the rate at which prices increased in theaters was slower while integrated than after vertical divestiture. These findings together with institutional details are consistent with the prediction that vertical integration lowers prices through the elimination of double marginalization. (JEL G34, K21, L11, L22, L42, L82)
{"title":"Does Vertical Integration Decrease Prices? Evidence from Paramount Antitrust Case of 1948","authors":"Ricard Gil","doi":"10.2139/ssrn.1960171","DOIUrl":"https://doi.org/10.2139/ssrn.1960171","url":null,"abstract":"I empirically examine the impact of the 1948 Paramount antitrust case on ticket prices using a unique dataset collected from Variety magazine issues between 1945 and 1955. With information on prices, revenues, and theater ownership for an unbalanced panel of 393 theaters in 26 cities, I find that vertically integrated theaters charged lower prices and sold more admission tickets than nonintegrated theaters. I also find that the rate at which prices increased in theaters was slower while integrated than after vertical divestiture. These findings together with institutional details are consistent with the prediction that vertical integration lowers prices through the elimination of double marginalization. (JEL G34, K21, L11, L22, L42, L82)","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"22 16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130503798","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Cross border M&As have increasingly become a major component of total FDI flows in both developing and developed economies. In this paper, we investigate the relationship between financial markets and cross border M&A activity on the African continent. We focus on cross border M&A transactions where the equity stake acquired is equal to or exceeds 10% of the voting equity of the target firm. Our sample consists of a maximum of 14 African countries with data covering the period 1993-2008. We use panel data techniques and estimate our empirical models via a Feasible Generalized Least Squares (FGLS) estimation which corrects for heteroskedasticity and autocorrelation. Our findings suggest that banking sector development promotes cross border M&A activity on the African continent. We do not find strong and compelling evidence that stock market development promotes cross border M&A activity. We also provide new and exciting evidence that cross border M&A activity promotes both stock market development and banking sector development in the African context.
{"title":"Financial Markets and Cross Border Mergers and Acquisitions in Africa","authors":"E. Agbloyor","doi":"10.2139/ssrn.1914478","DOIUrl":"https://doi.org/10.2139/ssrn.1914478","url":null,"abstract":"Cross border M&As have increasingly become a major component of total FDI flows in both developing and developed economies. In this paper, we investigate the relationship between financial markets and cross border M&A activity on the African continent. We focus on cross border M&A transactions where the equity stake acquired is equal to or exceeds 10% of the voting equity of the target firm. Our sample consists of a maximum of 14 African countries with data covering the period 1993-2008. We use panel data techniques and estimate our empirical models via a Feasible Generalized Least Squares (FGLS) estimation which corrects for heteroskedasticity and autocorrelation. Our findings suggest that banking sector development promotes cross border M&A activity on the African continent. We do not find strong and compelling evidence that stock market development promotes cross border M&A activity. We also provide new and exciting evidence that cross border M&A activity promotes both stock market development and banking sector development in the African context.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125710606","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This document is a quantitative analysis of risk arbitrage strategy across a sample of 1,911 M&A deals announced between January 1998 and September 2010 in the US and Canada. The study highlights the macroeconomic factors that might affect the risk/yield calculation for a risk arbitrage position. The main factors are: US unemployment, the investor confidence indicator, the investment grade credit spread, P/E and price on the S&P 500, short term interest rates and the yield curve. Ultimately, it is hoped that this document will provide managers with an interpretation of the mergers & acquisitions market as well as a decision-making tool to complement traditional qualitative analysis.
{"title":"Macroeconomic Drivers Behind Risk Arbitrage Strategy","authors":"Stephane Dieudonne, S. Bouacha, F. Cretin","doi":"10.2139/ssrn.1705548","DOIUrl":"https://doi.org/10.2139/ssrn.1705548","url":null,"abstract":"This document is a quantitative analysis of risk arbitrage strategy across a sample of 1,911 M&A deals announced between January 1998 and September 2010 in the US and Canada. The study highlights the macroeconomic factors that might affect the risk/yield calculation for a risk arbitrage position. The main factors are: US unemployment, the investor confidence indicator, the investment grade credit spread, P/E and price on the S&P 500, short term interest rates and the yield curve. Ultimately, it is hoped that this document will provide managers with an interpretation of the mergers & acquisitions market as well as a decision-making tool to complement traditional qualitative analysis.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116433306","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper aims at testing the structure-performance hypotheses in the context of Nepalese banking industry for the period of 2001-2009 under the Berger and Hannan (1993) empirical framework. The empirical results suggest that traditional structure-conduct-performance hypothesis and quit life hypothesis are at work in explaining concentration-profitability relation and there are weak supports for efficiency structure hypotheses. The results of this study hold significant policy and managerial implications.
{"title":"Structure-Performance Relation in Nepalese Banking Industry","authors":"Dinesh Gajurel","doi":"10.2139/ssrn.1665132","DOIUrl":"https://doi.org/10.2139/ssrn.1665132","url":null,"abstract":"This paper aims at testing the structure-performance hypotheses in the context of Nepalese banking industry for the period of 2001-2009 under the Berger and Hannan (1993) empirical framework. The empirical results suggest that traditional structure-conduct-performance hypothesis and quit life hypothesis are at work in explaining concentration-profitability relation and there are weak supports for efficiency structure hypotheses. The results of this study hold significant policy and managerial implications.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127902518","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mehrez Ben Slama, Dhafer Saidane, Hassouna Fedhila
During these last decades, the European banking system witnessed deep changes. They were manifest in operations of Merger and Acquisition (M&A). The available studies prove that the rate of failure of theses M&A is relatively high. The cross-border operations are more exposed at this risk. The reasons of failure are due to the cultural and contextual differences between the actors, making the process of integration particularly difficult. Thus, the success of M&A is tributary with the choice of the adequate targets. It constitutes the main challenge which the leaders must take up. The aim of this paper is thus to determine the factors which make possible to identify targets and buyers. Our contribution compared to former works is that we study M&A and the identification of targets and buyers by line of bank’s activities. On the basis of sample made up of 1054 European banks between 2000 and 2006, and M&A operation released between 2000 and 2006, we estimate a Logit Multinomial Model. Our main results show that that the probability of fusion increases with size. The rigidity of the regulatory environment promotes profile "buyer". Banks with this profile, approaching the model of universal banking, try to consolidate abroad their core business of intermediation.
{"title":"Profiles of Targets and Acquirers: Empirical Evidence from European Banking System - Case of Cross-Border M&A Strategies by Line of Activities","authors":"Mehrez Ben Slama, Dhafer Saidane, Hassouna Fedhila","doi":"10.2139/ssrn.1584227","DOIUrl":"https://doi.org/10.2139/ssrn.1584227","url":null,"abstract":"During these last decades, the European banking system witnessed deep changes. They were manifest in operations of Merger and Acquisition (M&A). The available studies prove that the rate of failure of theses M&A is relatively high. The cross-border operations are more exposed at this risk. The reasons of failure are due to the cultural and contextual differences between the actors, making the process of integration particularly difficult. Thus, the success of M&A is tributary with the choice of the adequate targets. It constitutes the main challenge which the leaders must take up. The aim of this paper is thus to determine the factors which make possible to identify targets and buyers. Our contribution compared to former works is that we study M&A and the identification of targets and buyers by line of bank’s activities. On the basis of sample made up of 1054 European banks between 2000 and 2006, and M&A operation released between 2000 and 2006, we estimate a Logit Multinomial Model. Our main results show that that the probability of fusion increases with size. The rigidity of the regulatory environment promotes profile \"buyer\". Banks with this profile, approaching the model of universal banking, try to consolidate abroad their core business of intermediation.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-04-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121527878","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article addresses the question whether companies from emerging economies create shareholder value through foreign acquisitions. The popular business press usually views these foreign acquisitions very positively. The stock markets have often reacted negatively to the acquisitions. The management always claims that the acquisition is in the long term strategic interests of the firm. This article attempts to shed light on these conflicting positions: short term versus long term, and financial versus strategic logic. Using a mix of stock market reaction for a small sample and three in-depth case studies, I conclude that large foreign acquisitions from India have not created shareholder value. The causes of this under-performance are: too little integration, agency problems, and easy capital. Finally, I use a case study to illustrate a successful approach to foreign acquisitions: significant synergies, reasonable price, and deep integration.
{"title":"Dubious Value of International Acquisitions by Emerging Economy Firms: The Case of Indian Firms","authors":"Aneel G. Karnani","doi":"10.2139/ssrn.1586852","DOIUrl":"https://doi.org/10.2139/ssrn.1586852","url":null,"abstract":"This article addresses the question whether companies from emerging economies create shareholder value through foreign acquisitions. The popular business press usually views these foreign acquisitions very positively. The stock markets have often reacted negatively to the acquisitions. The management always claims that the acquisition is in the long term strategic interests of the firm. This article attempts to shed light on these conflicting positions: short term versus long term, and financial versus strategic logic. Using a mix of stock market reaction for a small sample and three in-depth case studies, I conclude that large foreign acquisitions from India have not created shareholder value. The causes of this under-performance are: too little integration, agency problems, and easy capital. Finally, I use a case study to illustrate a successful approach to foreign acquisitions: significant synergies, reasonable price, and deep integration.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130362167","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high.
{"title":"A Reference Point Theory of Mergers and Acquisitions","authors":"Malcolm P. Baker, Xin Pan, Jeffrey Wurgler","doi":"10.2139/ssrn.1364152","DOIUrl":"https://doi.org/10.2139/ssrn.1364152","url":null,"abstract":"The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128773473","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using mergers and acquisitions as a natural experiment, this paper analyzes how changes in workers?status in the workplace affect their turnover decisions. The evidence suggests that workers have different preferences for status depending on reference group. When compared with co-workers in the same occupation, workers positively value their status. However, when compared with workers in other occupations in the same firm, workers negatively value their status. Workers seem to give up absolute wage increase for higher status within occupation, which suggests that preference for status stems from status?social value, not from its instrumental value for future income.
{"title":"Status in the Workplace: Evidence from M&A","authors":"Illoong Kwon, Eva M. Meyersson Milgrom","doi":"10.2139/ssrn.1544547","DOIUrl":"https://doi.org/10.2139/ssrn.1544547","url":null,"abstract":"Using mergers and acquisitions as a natural experiment, this paper analyzes how changes in workers?status in the workplace affect their turnover decisions. The evidence suggests that workers have different preferences for status depending on reference group. When compared with co-workers in the same occupation, workers positively value their status. However, when compared with workers in other occupations in the same firm, workers negatively value their status. Workers seem to give up absolute wage increase for higher status within occupation, which suggests that preference for status stems from status?social value, not from its instrumental value for future income.","PeriodicalId":230377,"journal":{"name":"ERN: Integration (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129389007","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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