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1、CORPORATE TAKEOVERS IN EUROPE: DO BIDDERS OVERPAY?Sergio Sanfilippo AzofraUniversity of CantabriaBeln Daz DazUniversity of CantabriaCarlos Lpez GutirrezUniversity of CantabriaCorresponding Author: Sergio Sanfilippo Azofra. Postal address: Business Administration Department; University of Cantabria;
2、Avda. de los Castros S/N; 39005 Santander (SPAIN); Phone Number: +34 942 202007; Fax: +34942 201890; e-mail: sanfilisunican.es.Corporate Takeovers In Europe: Do Bidders Overpay? ABSTRACTThe purpose of this research is to test whether the price paid for corporate takeovers in Europe is related to the
3、 synergies expected or whether bidders are overpaying for the acquisitions. In order to do this, we analysed the relationship between the premium paid in 147 M&A (Mergers and Acquisitions) and the bidders abnormal returns around the date of the operation from 1995 to 2004. We found that there is a q
4、uadratic relationship between premiums and returns. The premium begins having a positive influence on bidders returns thus supporting the synergy hypothesis. However, when the premium is too high (between 31% and 37%) there is a negative effect, as stated in the overpayment hypothesis.Keywords: Corp
5、orate takeovers, premium, overpayment hypothesis, synergy hypothesis.1. INTRODUCTIONThe success of a M&A is based not only on the future profits expected to be obtained but also on the capacity to complete the operation at a price that is not greater than the profits. In this regard, the premium (pr
6、ice offered above the market value of the targets shares) has awakened considerable interest as an explanatory factor of the returns obtained by the stockholders of the acquiring companies and acquired companies in mergers or acquisitions (Grullon et al., 1997; Hayward & Hambrick, 1997; Moeller et a
7、l., 2005; Mueller & Sirower, 2003).Existing literature has assumed that the premium has a positive influence on the abnormal returns obtained by the stockholders of the target organisation. However, there is no consensus regarding the relationship between premiums and bidders returns due to the exis
8、tence of two alternative hypotheses. On one hand, it is quite possible that merger premiums may proxy for the synergies between a bidder and its target, therefore, a positive relationship between premium and return is expected (Antoniou et al., 2007; Bradley et al., 1983). On the other hand, high pr
9、emiums may proxy for overpayments in mergers increasing the likelihood of a value destroying deal, which should lead to a negative relationship between the premium and return (Schwert, 2003; Sirower, 1997; Varaiya & Ferris, 1987). The lack of consensus regarding the existing relation between the pre
10、mium and the acquiring companies abnormal returns may be due to the fact that prior studies have considered the synergy and overpayment as alternative propositions. However, it is possible that this relationship depends on the magnitude of the premium in such a way that the premium would begin to ha
11、ve a positive influence on the abnormal returns of the acquiring institution, thus supporting the synergy hypothesis. However, if the premium were too high, the effect would be negative, as indicated in the overpayment hypothesis. If this were so, a quadratic relationship between the premium and the
12、 acquiring companys returns would be expected, and not a linear relationship as has been supposed by previous literature. In this sense, the works main contribution essentially consists of proposing the fulfilment of both hypotheses simultaneously. In this case, the relationship between abnormal per
13、formance and the premium would depend on the magnitude of the latter, whereby we would not be facing a lineal relationship between both variables, but rather the functional form would be quadratic.In order to do this, we used a sample of 147 non-financial European M&As between 1995 and 2004. Firstly
14、, we conducted an event study of the abnormal performance of the acquiring companies to later conduct a regression analysis on them. This research will be particularly useful for market analysts, investors, regulators and the scientific community in general, given that the existence of this quadrati
15、c relationship allows us to determine when the premium is considered too high and is negatively accepted by the market, thus producing a negative effect on acquirers returns. The results obtained from the event study show negative and significant abnormal returns, although small, for acquiring compa
16、nies. On the other hand, in the regression analysis, we found a quadratic relationship between premiums and acquirers returns. In fact, the results show a positive influence of the premium on returns until the premium is considered too high and the relationship becomes negative. Furthermore, in our
17、sample, a premium which is between 31 and 37% begins to be considered too high by the market.The research is structured as follows: Section 2 reviews existing literature regarding value creation in M&As and the influence the premium could have on it. Section 3 describes the sample on which the empir
18、ical analysis will be performed, and shows the main results obtained in the analysis. Finally, we outline the main conclusions.2. MERGERS AND ACQUISITIONS, VALUE CREATION AND PREMIUMThe effect that M&As have on the market value of the organisations that participate in the operation has been an impor
19、tant research topic in merger and acquisition literature. In this regard, many research papers have studied the abnormal returns obtained by stockholders in response to the announcement of an operation (Bruner, 2004; Campa & Hernando, 2004; Datta et al., 1992; Rohades, 1994). Though the results of t
20、hese papers vary in terms of the sector being analyzed, the period of time considered and the studys target countries, the majority of them show that the stockholders of the acquired companies are benefited from the announcement of an operation obtaining positive abnormal returns which, on average,
21、are found to be between 20 and 30%. However, in the case of the acquiring companies, the results are mixed as there are studies which show certain earnings and others which observe negative and insignificant returns. In any event, the returns of acquiring companies stockholders, be they positive or
22、negative, tend to be small. Finally, when the acquiring and acquired companies are considered jointly, most of the studies show earnings, albeit of a reduced magnitude.Some authors have undertaken a more in-depth analysis of the abnormal returns derived from M&A operations and have studied the facto
23、rs that explain them through a regression analysis. Thus, it has often been stressed that the M&As leading to diversification, be it geographically or by activity, tend to have worse results than those which lead to concentration (Houston et al., 2001; Maquieira et al., 1998). Furthermore, the opera
24、tions financed in cash show higher abnormal returns (Hansen; 1987; Sudarsanam & Mahate, 2003). Those operations in which the size of the acquiring company is much greater than the acquired companys also show greater returns (Agrawal et al, 1992; Beitel et al., 2004). Moreover, the returns of the acq
25、uiring companies are positively related to many other factors such as ownership structure or the consideration of the operation as hostile (Desai et al., 2005; Goergen & Renneboog, 2004; Gregory 1997; Healy et al., 1997; Schwert, 2000; Walters et al., 2007).Along with these variables, the premium pa
26、id has also gained considerable relevance as an explanatory factor of the abnormal returns derived from the M&As (Antoniou et al., 2007; Hayward & Hambrick, 1997; Mueller & Sirower, 2003). In this work, we are going to focus our attention on this last variable since the earnings derived from a M&A d
27、o not depend solely on the expected results of the operation in terms of scale and scope economies, diversification, increase of market power or improvement of management, but also on the payment of an adequate amount for the acquired company (Flanagan & OShaughnessy, 2004; Porrini, 2006).The premiu
28、m refers to the price offered above the market value of the shares of the target in order to ensure the operations success and gain control over the acquired organisation. According to Greenfield (1992), the stockholders of the target organisation will demand a minimum price that will ensure them hi
29、gh profits so that the offer can be accepted, under which they would reject the operation in the hope that another company will make a new offer with a higher premium. In the case of the acquired company, the greater the premium offered, the greater the stockholders earnings. However, in the case of
30、 the acquiring company, there are as many works which show that the premium positively influences the abnormal returns as others, which, on the contrary, find a negative relationship. In both cases, the results obtained are based on one of the two existing alternative hypotheses: The synergy hypothe
31、sis which establishes a positive relationship between the premium and abnormal returns and the overpayment hypothesis which identifies a relationship in the other direction.With regard to the synergy hypothesis, the amount the acquirer will be willing to pay for a merger or acquisition will be highe
32、r the greater the value they expect to obtain from the operation (Bradley, et al., 1983; Slusky & Caves, 1991). According to this hypothesis, the premium could be a sign of the value the acquirer assigns to the M&A, and of the probability of obtaining synergies. Therefore, a positive relationship be
33、tween premiums and returns is expected. To this regard, Antoniou et al. (2007), based on a sample of 396 successful UK mergers in the industrial sector between 1985 and 2004, found that short term cumulative abnormal returns were positively correlated to the level of the premium paid by acquirers. T
34、hey also found no evidence to suggest that acquirers paying high premiums underperform those paying relatively low premiums in the three years following mergers.With regard to the overpayment hypothesis, it is possible that the acquiring company would pay a premium higher than the profits expected b
35、y the market, which should lead to a negative relationship between the premiums and returns. In this regard, Grullon et al. (1997), Hayward & Hambrick (1997), Mueller & Sirower (2003) and Sirower (1997), observe a significant negative influence of the premium on the acquirers abnormal returns in Ame
36、rican M&As. Thus, the payment of a high premium can mean a transfer of wealth to the stockholders of the company acquired which would, at least partially, explain why the majority of empirical studies have found that, after an acquisition, the stockholders of the acquiring organisation are negativel
37、y affected, while the stockholders of the target organisation obtain extraordinarily positive returns (Becher, 2000; Goergen & Renneboog, 2003; Houston & Ryngaert, 1997).The overpayment hypothesis has been justified in existing literature using different arguments. In the first place, it has been pr
38、oposed that the managers of the acquiring company tend to overpay because they overestimate the future profits to be derived from the operation (Roll, 1986). Secondly, the existence of several acquiring companies that compete for the target company makes the premium go up as successive offers are ma
39、de and causes the company that finally gains control to pay an excessively high price (Ruback, 1982). Finally, the existence of agency problems could cause the managers to pay a high price for an operation because they seek their own personal gain without taking into account the profits to be derive
40、d from the operation (Shleifer & Vishny, 1997). In this case, a high premium would be a sign of the existence of agency problems, which would have a negative effect on the valuation the market makes of the operation.A common characteristic of previous studies which have analyzed the existing relatio
41、nship between the premium and abnormal returns is that they have considered the synergy and overpayment hypotheses as alternative propositions. However, it is possible for both hypotheses to be fulfilled simultaneously, which would cause that relationship to depend on the magnitude of the premium. U
42、nder these circumstances, the market would begin considering the premium as a sign of greater earnings expected from the operation, therefore the premium would start having a positive influence on the acquiring firms abnormal returns as proposed by the synergy hypothesis. Nevertheless, if the market
43、 assumes that the premium is too high, the effect becomes negative, thereby following the postulates of the overpayment hypothesis. Thus, the two hypotheses would be fulfilled at the same time, leading to the prediction of a quadratic relationship between the premium and the acquiring companys abnor
44、mal returns, and not a linear relationship as has been assumed in previous literature. In this regard, the existence of a non-linear relationship as a result of the simultaneous fulfilment of both hypotheses could also explain why some works have found that the relationship between the premium and t
45、he acquiring companys abnormal returns is not significant (Bharadwaj & Shivdasani, 2003; Moeller et al., 2005).Thus, the aim of this work consists of analyzing whether the premiums influence over the acquiring companys abnormal returns depends on the magnitude of the premium and, therefore, whether
46、there is a quadratic relationship between both variables. This relationship, as far as we know, has not been researched in previous studies. 3. EMPIRICAL ANALYSIS3.1.- DataThe empirical analysis was performed for a sample of M&As undertaken among non-financial companies from Western Europe during th
47、e 1995-2004 period. The sources of information used in this study are: Thomson OneBanker, which provides information on the characteristics of M&A operations; Datastream, which provides information on the companies daily stock quotes and on profit and loss accounts and balance sheets of the companie
48、s.In order to identify the operations, we used the Thomson OneBanker database, and the following criteria were applied: 1) Both the acquirer and the acquired company must be listed on an European Stock Exchange; 2) The acquirer must go from possessing less than 50% to more than 50% of the acquired c
49、ompany, with the objective that all operations analyzed imply a change of control, given that the theory justifies the existence of abnormal returns only in this case and not when there is only a financial objective pursued (Beitel et al., 2004); 3). As the works objective consists of studying the premium, there must be information on the bid made; 4) Furthermore, we eliminated those operations in which there was insufficient data in the estimation period as well as in the events
