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Extraordinary Acquirers

Extraordinary Acquirers. Alfred Yawson The University of Adelaide Huizhong (Jodie) Zhang The University of Adelaide. Motivation. The e fficiency based theory proposed by Demsetz (1973 ) explains heterogeneous rates of return earned by firms within and across industries.

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Extraordinary Acquirers

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  1. Extraordinary Acquirers Alfred Yawson The University of Adelaide Huizhong (Jodie) Zhang The University of Adelaide

  2. Motivation • The efficiency based theory proposed by Demsetz (1973) explains heterogeneous rates of return earned by firms within and across industries. • Heterogeneous rates of return is possible because firms differ in their efficiency in exploiting profitable opportunities • Firms demonstrate superiority in generating economic rents

  3. Motivation • Heterogeneous rates of return exist in corporate takeovers (Acquirers) • Prior studies (both theoretical and empirical) have primarily focused on the negative tail of bidder return distribution (e.g., Moeller, Schlingemann and Stultz (2005); Masulis, Wang and Xie (2007); Harford, Humphery-Jenner and Powell (2012)) • CEO hubris resulting in overpayment for the target (Roll (1986) • The agency cost of free cash flow theory (Jensen, 1986) • Managerial entrenchment resulting from poor corporate governance structures – anti-takeover provisions (Masulis, et al. (2007) • Entrenched managers avoidance of private targets (Harford, et al. (2012) • To our knowledge there is no evidence on acquirers who persistently create value in acquisitions

  4. Key Research questions • Are there any acquirers who persistently create value in acquisitions? • If yes, what explains the existence of such acquirers? • How do they generate persistent acquisition gains?

  5. Key Research questions • We address these questions focusing on acquirers who have completed at least three acquisitions in a three year window (Fuller, Netter & Stegemoller, 2002). • We partition these acquirers into ‘extraordinary’ and ‘normal’ • Extraordinary acquirers are those who generate positive CARs in all their transactions three years before the announcement date • All other serial acquirers are classified as normal

  6. Do extraordinary acquirers exist?

  7. Why do extraordinary acquirers exist? • “[In rare cases of finding value-enhancing targets] extraordinary managers exist who can achieve the difficult feat of identifying underperforming business, and apply extraordinary talent to unlock hidden value.” - Warren E. Buffett, 1998

  8. Applying the efficiency based theory to takeovers Superior top management team talent drives the existence of extraordinary acquirers

  9. Predicting extraordinary acquirers Top Management Team Talent

  10. Predicting extraordinary acquirers Control variables

  11. Data • US acquirers data sourced from SDC 1990 to 2011 • The bidder must be a US publicly listed company with accounting data stored on Compustat and stock data on CRSP for 300 trading days prior to the announcement. • The acquisition must be completed. • The acquirer must own less than 50% of the target stock before the acquisition and achieve 100% after. • The transaction must be at least 1% of the acquirer’s market capitalization 11 days before the announcement and also exceeds $1 million. • The acquirer must have successfully completed three or more targets in a period of three years

  12. Multivariate Analysis of Being Extraordinary Acquirers 0.020** (0.037) 0.097** (0.037) 0.002* (0.095) 0.014** (0.043) 0.068*** (0.006) 0.338*** (0.004) 0.012 (0.208) 0.002 (0.218)

  13. Maintaining Extraordinary Acquirer Status over Extended Periods

  14. Probit Results of Changes in Acquirer Status

  15. How do extraordinary acquirers create value • In the M&A context, value creation can be reflected in: • Target selection • Payment methods • Negotiation skills • Given that a firm is classified as an extraordinary acquirer, will the subsequent deal reflect a choice that is value enhancing to shareholders?

  16. Post-Heckman Results for Bidding Strategies

  17. OLS Regression Results for Synergies and BSOS 1.435*** 1.903*** 1.280*** 1.951***

  18. Conclusion • We depart from the traditional focus on value destruction by acquiring firms and instead examine acquirers who consistently earn positive takeover announcement CAR • We show that extraordinary acquirers exist • We find that the achievement and maintenance of an extraordinary acquirer status is driven by top management team talent. • Normal acquirers can achieve extraordinary status by improving their top management team talent.

  19. Conclusion • Extraordinary acquirers create value by • Selecting subsidiary targets • Using cash and avoiding stocks to finance acquisitions • Appropriating a larger proportion of synergy gains in public bids • Overall, our results suggest superior top management team talent is essential in creating persistent value in acquisitions

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