Acquirer type, agency monitoring and post-acquisition performance : an empirical investigation
The vast literature in finance examining the impact of takeovers on the share price of the bidder and target firms finds conclusive results for targets and inconclusive results for bidders. For both the UK and the US, previous studies show target firms to experience large positive abnormal returns at the time of the bid-announcement while bidder firm shareholders experience small abnormal gains as well as losses. Previous studies also show that approximately half the acquirers experience positive post-acquisition performance. There exists a serious gap in extant knowledge on what factors lead some acquirers to experience a positive post-acquisition performance while other acquirers experience a decline in their wealth. In this study we examine whether target firm managerial resistance to a takeover may be one factor which can affect the post-acquisition performance of acquirers. By segregating our sample of acquirers by the target firm management response to a takeover we are able to examine the post-acquisition performance of different acquirer types. This study attempts to fill the gaps in our knowledge regarding the relative performance of different acquirer types by addressing three research questions: i) what is the relative post-acquisition performance of different acquirer types? ii) what are the sources of long run post-acquisition value creation for each acquirer type? how effective are the agency monitoring mechanisms in determining the long run postacquisition performance for each acquirer type? In attempting to address the above questions we also examine a number of subsidiary issues that arise in the context of the relative post-acquisition performance of different acquirer types defined in terms of their financial profile. The subsidiary issues are: i) whether the acquirer firm size affects the long run post-acquisition performance? whether the acquirer's profile as a glamour or value stock, measured by the market to book value, affects the long run post-acquisition performance? whether the acquirer's profile as a glamour or value stock, measured by the price to earnings ratio, affects the long run post-acquisition performance? We use a sample of 547 acquirers, consisting of friendly, single hostile, multiple hostile and white knights, in takeovers completed between the period 1983 to 1995 to generate wealth gains. Wealth gains are measured in the form of abnormal returns and estimated by event study methodology using five different benchmark models (i.e. Fama and French Three Factor, market to book value, size, mean and market adjusted models). Then we use multiple regression analysis to test a range of hypothesis based on previous literature in finance with respect to our research questions. Our results show that single hostile acquirers outperform all other acquirer types in each of our three long run event windows. White knights tend to have a higher postacquisition performance than either multiple hostile and friendly acquirers. Friendly acquirers tend to have the worst post-acquisition performance compared to other acquirer types. We find differences in the impact of the sources of value creation and agency monitoring mechanisms on different acquirer types. Consistent with previous studies we find that shareholders of value acquirers (based on the PE ratio and market to book value) experience greater wealth gains than shareholders of glamour acquirers. We also find that shareholders of large acquirers tend to experience greater wealth gains than shareholders of smaller acquirers.