riding the merger wave: uncertainty, reduced ...schwert.ssb.rochester.edu/f423/mergerwave.pdf ·...

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Riding the Merger Wave: Uncertainty, ReducedMonitoring and BadMonitoring, and Bad Acquisitions

RAN DUCHINRAN  DUCHIN

BRENO  SCHMIDT

JFE,  2013

Hypothesis• Quality of Analysis

1 Th lit f l i f d ith th b f1. The quality of analysis of any merger may decrease with the number of mergers.

2. Prior and contemporary deals provide valuable information, which may in turn increase the accuracy of analysts

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Hypothesis• Quality of Analysis

1 Th lit f l i f d ith th b f1. The quality of analysis of any merger may decrease with the number of mergers.

2. Prior and contemporary deals provide valuable information, which may in turn increase the accuracy of analysts

• Whether the managers are more likely to be favorably evaluated ex post if their ex ante behavior was similar to that of other managers.• To investigate this the authors investigate whether the positive relation between bad mergers and turnover

is weaker when mergers are initiated insider waves.

• Authors argue that if managers are indeed intentionally initiating bad mergers during waves we shouldAuthors argue that if managers are indeed intentionally initiating bad mergers during waves, we should observe poorer governance for in-wave acquirers relative to out-wave acquirers.

Hypothesis• Quality of Analysis

1 The quality of analysis of any merger may decrease with the number of mergers1. The quality of analysis of any merger may decrease with the number of mergers.2. Prior and contemporary deals provide valuable information, which may in turn increase the accuracy of

analysts

• Whether the managers are more likely to be favorably evaluated ex post if their ex ante behavior was similar to that of other managers.• To investigate this the authors investigate whether the positive relation between bad mergers and turnover is

weaker when mergers are initiated inside the waves.• Authors argue that if managers are indeed intentionally initiating bad mergers during waves, we should observe

poorer governance for in-wave acquirers relative to out-wave acquirers.

• Authors consider the possibility that our results are driven by inherent differences between in- and out-wave mergers

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Preliminary Findings• in-wave acquirers have annualized buy-and-hold abnormal returns that are on average 4.65 to 6.25

i l h h ipercentage points lower than other acquirers

• the two-year post-merger change in Return On Assets (ROA) of in-wave acquirers is 0.75 to 2.14 percentage points lower than that of out-wave acquirers

Preliminary Findings• in-wave acquirers have annualized buy-and-hold abnormal returns that are on average 4.65 to 6.25

i l h h ipercentage points lower than other acquirers

• the two-year post-merger change in Return On Assets (ROA) of in-wave acquirers is 0.75 to 2.14 percentage points lower than that of out-wave acquirers

• Two biggest merger waves• Banking industry 1996-1998

• computer software industry 1997-1999p y

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Preliminary Findings• in-wave acquirers have annualized buy-and-hold abnormal returns that are on average 4.65 to 6.25

i l h h ipercentage points lower than other acquirers

• the two-year post-merger change in Return On Assets (ROA) of in-wave acquirers is 0.75 to 2.14 percentage points lower than that of out-wave acquirers

• Two biggest merger waves• Banking industry 1996-1998 The Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999

• computer software industry 1997-1999 IT Bubble 2000

Data• Securities Data Company (SDC) & Center for Research in Security Prices (CRSP) 1980-2009

• The acquirer is a nonutility, publicly traded company

• The acquirer gained control over the target company

• Deal value more than $10 million

• The deal was completed

• Compustat data was available for fiscal year preceding the merger

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Data• Securities Data Company (SDC) & Center for Research in Security Prices (CRSP) 1980-2009

• The acquirer is a nonutility, publicly traded company

• The acquirer gained control over the target company

• Deal value more than $10 million

• The deal was completed

• Compustat data was available for fiscal year preceding the merger

9,854 Acquisition in 30 years.

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• authors calculated 77 merger waves during the sample period. There are 38 industries with merger waves in at least one decade, 28 industries with waves in two decades or more, and 11 industries with waves in all three decades. The average (median) number of mergers per wave is 50 (31).

Performance measurement• The idea is to compare the benchmark-adjusted performance of in-wave and out-wave acquirers.

T diff t b h k tf li• Two different benchmark portfolio1. Weighted Average of two industry

2. Comprises propensity score-matched nonacquirers

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Performance measurement• The idea is to compare the benchmark-adjusted performance of in-wave and out-wave acquirers.

T diff t b h k tf li• Two different benchmark portfolio1. Weighted Average of two industry

2. Comprises propensity score-matched nonacquirers

• Two measures of long term abnormal performance1. Buy and Hold Abnormal Returns (BHAR)

2. The intercept of a factor model applied to a Calendar time portfolio

The Quality of Analysis• To Study the quality of analysis, authors compared the analysts’ forecasts and announcement returns inside and outside the merger wavesreturns inside and outside the merger waves.

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The Quality of Analysis• To Study the quality of analysis, authors compared the analysts’ forecasts and announcement returns inside and outside the merger wavesreturns inside and outside the merger waves.

The Quality of Analysis• To Study the quality of analysis, authors compared the analysts’ forecasts and announcement returns inside and outside the merger wavesreturns inside and outside the merger waves.

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and Uncertainty• To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measuresused a number of stock return volatility measures.• Implied Volatility from option prices

• GARCH-based estimates

and Uncertainty• To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measuresused a number of stock return volatility measures.• Implied Volatility from option prices

• GARCH-based estimates

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and Uncertainty• To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measuresused a number of stock return volatility measures.• Implied Volatility from option prices

• GARCH-based estimates

and Uncertainty• To test whether merger waves are indeed accompanied by elevated levels of uncertainty. Authors used a number of stock return volatility measuresused a number of stock return volatility measures.• Implied Volatility from option prices

• GARCH-based estimates

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and Uncertainty

CEO turnover• measured by computing the pre-merger BHAR and post-merger BHAR.

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CEO turnover• measured by computing the pre-merger BHAR and post-merger BHAR.

• Results The direct effect of post-merger BHAR on CEO turnover is negative.

The interaction between post-merger performance and the merger intensity measures is positive.

During Periods of intensified merger activity, the sensitivity of CEO turnover to post-merger performance is weaker.p

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Performance and Corporate Governance• Long Term Performance

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Performance and Corporate Governance• Long Term Performance

Performance and Corporate Governance• Long Term Performance

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Operating Performance

Operating Performance

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Governance During Merger Waves

Governance During Merger Waves

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Mergers of Necessity

Mergers of Necessity

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New idea?• The waves are different R l ti A i iti Si Relative Acquisition Size

M&A value compared to the industry

Distribution of mergers

New idea?• The waves are different R l ti A i iti Si Relative Acquisition Size

M&A value compared to the industry

Distribution of mergers

•The quality of analysis

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New idea?• CEO perspective O l d I d t \ O l d C i Overvalued Industry\ Overvalued Companies

Higher volatility

Gambling

Portfolio of the industry before\in\after the wave

Market-to-Book ratio and anomalies

New idea?• CEO perspective O l d I d t \ O l d C i Overvalued Industry\ Overvalued Companies

Higher volatility

Gambling

Portfolio of the industry before\in\after the wave

Market-to-Book ratio and anomalies

• Is the trigger a sudden shock?