Differences in Acquirer Motivations, Announcement Effects, Target Characteristics,

and Financing in Private versus Public Acquisitions: The Case of REITs

by David C. Ling and Milena Petrova

 

22

Background and MotivationBackground and MotivationBackground and MotivationBackground and Motivation Large body of theoretical & empirical research on 

corporate M&As, most of which is focused on shareholder wealth effects Most event studies conclude mergers tend to create shareholder 

value, with most of the gains accruing to target shareholders  However, empirical research on several important M&A 

topics  is much less developed (1)What causes some firms to become target?(2)Why are some M&A deals “going-private” transactions; others 

“staying public”? (3)Do the objectives of private bidders differ from those of public 

bidders?

33

Why REITs?Why REITs?Why REITs?Why REITs? First… Existing literature documents that mergers occur in waves 

with significant clustering by industry (Mitchell & Mulherin, 1996, Andrade, Mitchell, & Stafford, 2001)

This clustering suggests M&As may result from unexpected shocks to the structure & regulation of particular industries

These predominate industry effects may explain why predicting takeover targets using firm-level data from multiple industries has produced mixed results

To help isolate firm-level determinates of M&A bids, we focus on the REIT industry  

44

Why REITs?Why REITs?Why REITs?Why REITs? Second… Recent years have witnessed an increased number of 

“going-private” REIT transactions Blackstone’s acquisition of EOP in 2006 

Our examination of these going private REIT acquisitions allows us to contribute to the literature on the causes & consequences of going private transactions relative to public-to-public deals

55

What Questions Do We Address? What Questions Do We Address? What Questions Do We Address? What Questions Do We Address? 1. What REIT characteristics are associated with an increased 

probability of becoming a M&A target? Not explored with one exception; Eichholtz and Kok (2008) examines the 

characteristics of targets in 122 takeover acquisitions, of which only 31 involved U.S. firms. The authors conclude that mergers involving real estate firms and assets are driven by diversification and operational synergy motivations.

2. Conditional on being a target, are REITs purchased by private firms similar to those acquired by public firms? has not been examined in the RE literature

3. Do target shareholder wealth effects differ in going-private (GP) deals vs. public-to-public (PTP) transactions?

4. What factors explain the variation in abnormal returns in both GP & PTP transactions? 

66

Data & SourcesData & SourcesData & SourcesData & Sources Announcements of REIT M&As for U.S. obtained from FactSet for 

years 1994-2007 Final M&A sample: 161 bids; 39 GP deals; 122 PTP deals   Obtained additional accounting data for target firms from 

COMPUSTAT database UpREIT data from SNL and NAREIT Institutional ownership data from Thomson Financial REIT type and property concentration data from CRSP Ziman  Governance Data from Risk Metrics (governance results not 

reported in the paper, due to limited sample size) Corresponding data also collected annually for each firm in 

NAREIT universe that did not receive a bid 

Distribution of M&A Bids by Announcement Year: 1994-2007

Distribution of M&A Bids by Announcement Year: 1994-2007

Year Obs Mean Median Min Max Obs Mean Median Min Max1994 1 110 110 110 110 6 42 17 7 1431995 2 23 23 22 24 11 70 24 11 3021996 1 122 122 122 122 8 364 314 23 1,4301997 1 33 33 33 33 10 600 343 110 3,2571998 1 543 543 543 543 16 436 381 5 1,2911999 5 419 489 76 592 8 312 264 23 6222000 4 246 184 22 593 6 937 902 208 2,4632001 2 536 536 82 990 8 1,185 976 61 4,0092002 4 87 84 23 157 7 557 520 216 1,0312003 4 321 285 185 5302004 2 478 478 252 705 7 1,814 729 159 7,0002005 3 1,815 2,115 896 2,436 7 1,808 1,273 346 3,8192006 7 3,657 750 195 19,332 18 1,167 407 215 3,9292007 6 744 630 161 1,654 6 3,685 1,805 435 13,586Total 39 1,072 412 22 19,332 122 887 381 5 13,586

Announced Deal Size in $MillionsPublic-to-Private Bids

Anounced Deal Size in $MillionsPublic-to-Public Bids

Distribution of Acquirer Financing by Type and Year

Distribution of Acquirer Financing by Type and Year

Cash only Stock only Both Cash only Stock only Both

1994 0.00 0.00 1.00 0.00 0.67 0.33

1995 0.00 0.00 1.00 0.00 0.71 0.29

1996 1.00 0.00 0.00 0.13 0.63 0.25

1997 1.00 0.00 0.00 0.00 0.50 0.50

1998 1.00 0.00 0.00 0.00 0.33 0.58

1999 1.00 0.00 0.00 0.25 0.50 0.25

2000 0.75 0.00 0.25 0.33 0.33 0.33

2001 1.00 0.00 0.00 0.33 0.17 0.50

2002 0.75 0.00 0.25 0.29 0.43 0.29

2003 1.00 0.00 0.00 0.40 0.40 0.20

2004 1.00 0.00 0.00 0.50 0.00 0.50

2005 1.00 0.00 0.00 0.73 0.18 0.09

2006 1.00 0.00 0.00 0.55 0.15 0.30

2007 1.00 0.00 0.00 0.83 0.00 0.17

Public AcquirerPrivate Acquirer

99

Analysis: Two-Stage Estimation Analysis: Two-Stage Estimation ApproachApproach

Analysis: Two-Stage Estimation Analysis: Two-Stage Estimation ApproachApproach

1. We estimate pooled logistic regressions, with clustered standard errors in which dependent variable (BID) is set =1 if REIT was a M&A target, and zero otherwise   Sample of 161 mergers is “treatment” group Remainder of REITs at beginning of each year is control group

Firms are excluded from control sample (comparison group) if they received a bid in year t-3, t-2, t-1         t+1, t+2, t+3

2. We estimate standard logit model in which dependent variable (PRIVATE) is set =1 if bidder is private firm Firm-level predicted probabilities of being a target from first stage logits are 

used as explanatory variables to control for sample selectivity bias Use characteristics of targeted REITs to explain why bidding entity is a private 

firm versus a public firm   

1010

Alternative Approach: A Multinomial Alternative Approach: A Multinomial ModelModel

Alternative Approach: A Multinomial Alternative Approach: A Multinomial ModelModel

An alternative framework is to assume that public and private bidders identify a company before it becomes an acquisition target and bid to acquire it. 

In this framework, the outcomes or choice variables can be modeled with multinomial logistic regression, following the methodology presented in Shumway (2001). 

We estimate multinomial logit model has the following form where the dependent variable, MPRIVATEit, is a dummy variable equal to zero if the bidder is a public firm; 1 if the bidder is a private firm; and 2 if the REIT received no acquisition bid in calendar year t; 

1111

Event StudyEvent StudyEvent StudyEvent Study Use standard event study methodology to examine 

whether target stock price announcement effects differ in GP deals relative to PTP transactions

Use standard regression analysis to determine whether factors driving target announcement effects in GP transactions differ from those in PTP deals

  

1212

Empirical Results – Two-Stage ApproachEmpirical Results – Two-Stage ApproachEmpirical Results – Two-Stage ApproachEmpirical Results – Two-Stage ApproachModel 1 Model 2 Model 3 Model 4

Dependent Variable= BidCoef. Z-stat

Coef. Z-stat

Coef. Z-stat

Coef. Z-stat

Constant -2.334 *** -2.261 *** -2.051 *** -2.336 ***-4.58 -4.44 -3.54 -3.99

Total assets -0.0001 ** -0.0001 ** -0.0001 * -0.0001 **-2.21 -2.16 -1.88 -2.36

EBIT/Total assets -2.922 -2.886 -2.586 -3.261-0.96 -0.98 -0.80 -1.00

Total debt/total assets -0.123 -0.146 0.012 0.041-0.27 -0.32 0.02 0.08

Dividend Yield 1.444 1.354 1.872 * 2.439 **1.39 1.31 1.80 2.25

Cash/total assets -3.201 * -3.513 * -3.219 * -3.063-1.81 -1.91 -1.64 -1.56

UPREIT -0.331 * -0.489 ** -0.703 ***-1.78 -2.37 -3.14

Prop Type Unknown -0.066 0.001-0.14 0.00

Diversified -0.617 -0.446-1.46 -1.06

Health Care -0.924 * -0.975 *-1.69 -1.72

Ind/Office -0.163 -0.225-0.51 -0.70

Lodging /Resorts -0.618 -0.591-1.33 -1.27

Mortgage REIT -0.829 * -0.769 *-1.84 -1.71

Retail -0.307 -0.263-1.04 -0.89

Self Storage -0.165 0.020-0.35 0.04

Inst. Ownership 1.074 ***2.85

Year fixed effects Yes Yes Yes Yes

Number of observationsClustersPseudo R-Squared

1313

First Stage Empirical Results SummaryFirst Stage Empirical Results SummaryFirst Stage Empirical Results SummaryFirst Stage Empirical Results Summary The coefficient on total assets is negative and significant, indicating that larger 

REITs are less likely to become merger or acquisition targets.  The coefficient on dividend yield is positive and significant in Models 3 and 4; this 

supports the notion that higher dividend paying firms may be an attractive acquisition target to bidders. 

The coefficient on cash as a percentage of total assets is negative and significant in all but Model 4. That is, more liquid REITs are less likely to become targets, all else equal. 

The estimated coefficient on UPREIT is negative and statistically significant, which is consistent with our hypothesis that UPREITs are less attractive acquisition targets due to the complexity of their organizational structure. 

The degree of institutional ownership is significantly and positively associated with the acquisition probability, which supports our expectation. 

Stage Two: Logistic Models Explaining Probability of Private Acquirer

Stage Two: Logistic Models Explaining Probability of Private Acquirer

Dependent Var = Private Z Z Z

Constant 2.646 1.58 3.536 ** 1.82 3.750 * 1.7

Deal size in $millions -0.0001 -0.55 -0.0001 -0.52 0.0000 -0.13

Total debt/total assets -4.455 ** -2.56 -5.475 *** -2.63 -5.276 ** -2.39

Interest coverage ratio -0.097 *** -3.32 -0.107 *** -3.16 -0.112 *** -2.99

Dividend yield 8.614 ** 2.06 7.505 * 1.69

EBIT/total assets -11.919 * -1.67 -9.299 -1.06

Tobin's q -0.134 -0.1

UPREIT (yes=1) 0.211 0.32

Percentage of Inst. Ownership -1.390 -1.17

Predicted prob. of being a target -1.386 -0.33 -4.356 -1.00 -0.352 -0.06

Year Fixed Effects

Pseudo R-squared

Model 1 Model 2 Model 3

Coefficient Coefficient Coefficient

0.16 0.18 0.19

Yes Yes Yes

Stage Two Regression Results Stage Two Regression Results SummarySummary

Stage Two Regression Results Stage Two Regression Results SummarySummary

Total leverage and the interest coverage ratio are negatively and significantly related to the probability of receiving a bid from a private firm. 

This is consistent with our prediction that REITs more likely to be acquired by private firms have lower leverage and lower profitability. 

1616

Multinomial Logistic Model ResultsMultinomial Logistic Model ResultsMultinomial Logistic Model ResultsMultinomial Logistic Model ResultsPublic Private Public Private Public PrivateBidder Bidder Bidder Bidder Bidder Bidder

Dependent Var = MPRIVATE

Coef. Z-stat

Coef. Z-stat

Coef. Z-stat

Coef. Z-stat

Coef. Z-stat

Coef. Z-stat

Constant -2.819 *** -4.042 *** -2.687 *** -4.101 *** -2.830 *** -3.774 ***-6.48 -4.16 -5.18 -2.99 -4.41 -2.55

Total Assets -0.0001 *** -0.0001 -0.0001 ** -0.0001 -0.0001 ** -0.0001-2.63 -0.86 -2.49 -0.82 -2.29 -0.89

EBIT/Total Assets -1.591 -7.374 -1.379 -5.303 -0.974 -6.502-0.48 -1.20 -0.38 -0.79 -0.26 -0.93

Total Debt/Total Assets -0.019 -0.017 0.288 -0.137 0.483 -0.917-0.04 -0.02 0.54 -0.15 0.84 -0.84

Dividend Yield 0.541 3.419 * 1.299 3.206 ** 1.752 2.9920.43 1.74 0.99 1.70 1.38 1.55

Cash/TA -3.051 -3.818 -2.624 -3.791 -2.271 -4.303-1.35 -1.26 -1.04 -1.18 -0.96 -1.21

UPREIT (yes=1) -0.647 *** -0.405 -0.838 *** -0.489 -0.802 *** -0.530-2.64 -0.91 -3.16 -0.96 -3.02 -1.00

Inst. Ownership % 1.401 *** 1.366 * 1.480 *** 1.239 1.334 *** 0.8793.36 1.67 3.47 1.44 3.19 1.08

Prop Type Unknown -0.163 0.373 -0.098 -0.013-0.30 0.38 -0.17 -0.01

Diversified -0.508 0.238 -0.532 0.004-1.11 0.25 -1.16 0.00

Health Care -1.119 * -0.825 -1.087 * -1.063-1.77 -0.59 -1.72 -0.73

Ind/Office -0.300 0.395 -0.304 0.230-0.83 0.54 -0.84 0.30

Lodging /Resorts -0.893 0.620 -0.874 0.366-1.34 0.75 -1.28 0.45

Mortgage REIT -0.946 * -0.060 -0.996 * -0.318-1.73 -0.06 -1.73 -0.34

Retail -0.255 0.014 -0.277 -0.098-0.82 0.02 -0.88 -0.12

Self Storage 0.236 . 0.286 .0.50 . 0.60 .

Year Fixed EffectsObservationsPseudo R SquaredNumber of Clusters

Model 1 Model 2 Model 3

Model 1 & 2 control for property type, Model 3 adds year fixed effectsEach model is based on 1995 obs (365 clusters).

1717

Empirical Results, Empirical Results, cont.cont.Empirical Results, Empirical Results, cont.cont.

Do target announcement effects differ in GP deals relative to PTP transactions?

 

Mean Median St. Dev. Mean Median St. Dev.

CAR(0,1) 10.23% 7.93% 15.89% 7.14% 5.93% 9.96% 3.09% 1.46

CAR(-1,1) 10.38% 7.88% 15.10% 7.70% 6.86% 9.87% 2.68% 1.30

CAR(-2,2) 10.63% 9.01% 14.93% 7.67% 6.95% 10.28% 2.95% 1.41

T-testPrivate Public Diff. of

Means

Table 9: Target Announcement Abnormal Returns by Acquirer Type: 1994 – 2007

1818

Empirical Results, Empirical Results, cont.cont.Empirical Results, Empirical Results, cont.cont.

3. Do target announcement effects differ in GP deals relative to PTP transactions? We observe target abnormal returns much higher than in previous 

REIT M&A studies McIntosh, Officer and Born (1989) find average CARs of 3% for targets 

in a one-day window before announcement Campbell, Ghosh and Sirmans (2001) also find target announcement 

effects of approximately 3% Target announcement returns are more similar to those reported for 

conventional firms Higher ARs associated with acquisitions by private bidders, as 

hypothesized

1919

Empirical Results, Empirical Results, cont.cont.Empirical Results, Empirical Results, cont.cont.

4. What factors drive announcement returns? Coefficient on deal size is positive & significant in PTP regressions, but insignificant 

in GP deals suggesting that public acquirers are interested in increasing scale economies; private acquirers are not

Cash/Total Assets – negative and significant in GP deals Buyer is a REIT – negative and significant in PTP deals – suggesting that REITs 

overpay for their targets

CAR(0,1) Coef T-stat Coef T-stat Coef T-stat Coef T-statConstant 0.064 * 1.69 0.075 0.43 0.091 * 2.19 0.217 1.65Deal size in $millions 0.000 1.30 0.000 -0.79 0.000 1.06 0.000 0.17EBIT/total assets -0.510 ** -2.36 0.295 0.99 -0.399 -1.57 -0.503 -0.71Cash/total assets -0.049 -0.20 -1.697 *** -3.93 -0.147 -0.62 -1.450 *** -2.82Total debt/total assets 0.059 1.60 0.281 0.86 0.009 0.25 -0.040 -0.22Tobin's q -0.002 -0.05 -0.098 * -1.75 0.012 0.37 -0.060 -1.08Buyer is a REIT -0.044 ** -2.14 0.018 0.41Mortgage REIT merger 0.061 1.30 0.375 1.58

Number of observationsR-squared

CAR(-1,1) Coef T-stat Coef T-stat Coef T-stat Coef T-statConstant 0.101 *** 2.77 0.090 0.54 0.124 *** 3.06 0.218 1.66Deal size in $millions 0.000 ** 2.23 0.000 -0.94 0.000 * 1.95 0.000 -0.18EBIT/total assets -0.461 ** -2.08 0.150 0.57 -0.374 -1.49 -0.574 -0.86Cash/total assets -0.044 -0.15 -1.685 *** -4.00 -0.127 -0.47 -1.463 *** -2.85Total debt/total assets 0.042 1.16 0.263 0.85 -0.007 -0.19 -0.028 -0.16Tobin's q -0.026 -0.85 -0.092 * -1.71 -0.011 -0.36 -0.058 -1.04Buyer is a REIT -0.038 * -1.83 0.017 0.42Mortgage REIT merger 0.069 1.49 0.340 1.50

Number of observationsR-squared

Model 1 Model 2

390.570.10

390.21

1220.15

122

Public Private Public Private

2020

What factors drive announcement returns?What factors drive announcement returns? Coefficient on EBIT/total assets is generally negative & significant 

in PTP transactions → increased target profitability (based on EBIT) decreases abnormal returns when bidder is public

Coefficient on Mortgage REIT merger is positive and significant in PTP deals – larger wealth effects for mortgage mergers

Coefficient on financing source cash is positive and significant; Consistent with many previous studies (e.g., Mitchell & Stafford, 2000, Campbell, Ghosh & Sirmans, 2001, 2005)

CAR(0,1) Coef T-stat Coef T-stat Coef T-stat Coef T-statConstant 0.086 ** 2.04 0.117 0.73 0.047 1.21 0.048 0.33Deal size in $millions 0.000 1.17 0.000 -1.46 0.000 0.79 0.000 -1.51EBIT/total assets -0.456 * -1.76 -0.931 -1.17 -0.382 * -1.84 -1.191 -1.32Cash/total assets -0.050 -0.20 -0.934 -1.49 -0.170 -0.59 -0.877 -1.30Total debt/total assets -0.003 -0.08 -0.025 -0.14 0.000 0.00 -0.018 -0.11Tobin's q 0.016 0.53 -0.040 -0.62 0.015 0.45 -0.078 -1.43Buyer is a REIT -0.041 ** -2.02 0.015 0.36 -0.006 -0.25 0.012 0.28Mortgage REIT merger 0.078 1.63 0.411 * 1.76 0.076 * 1.84 0.394 * 1.74UpREIT 0.029 1.49 0.056 1.38 0.015 0.75 0.037 0.98Inst. Ownership -0.013 -0.36 0.115 1.58 -0.014 -0.40 0.128 * 1.72Financing source cash (yes=1) 0.079 *** 3.38 0.133 ** 2.26Number of observationsR-squared

CAR(-1,1) Coef T-stat Coef T-stat Coef T-stat Coef T-statConstant 0.118 *** 2.90 0.137 0.85 0.077 ** 2.02 0.067 0.48Deal size in $millions 0.000 ** 2.13 0.000 -1.50 0.000 * 1.68 0.000 -1.57EBIT/total assets -0.450 * -1.73 -0.924 -1.21 -0.373 * -1.70 -1.190 -1.36Cash/total assets -0.022 -0.08 -1.040 -1.65 -0.147 -0.45 -0.982 -1.45Total debt/total assets -0.015 -0.36 -0.015 -0.09 -0.011 -0.28 -0.008 -0.05Tobin's q -0.004 -0.15 -0.044 -0.65 -0.006 -0.20 -0.083 -1.56Buyer is a REIT -0.034 * -1.67 0.015 0.37 0.004 0.18 0.011 0.29Mortgage REIT merger 0.085 * 1.82 0.367 1.63 0.083 ** 2.08 0.350 1.60UpREIT 0.031 1.65 0.044 1.10 0.016 0.87 0.024 0.68Inst. Ownership -0.026 -0.74 0.098 1.41 -0.027 -0.80 0.112 1.57Financing source cash (yes=1) 0.083 *** 3.85 0.136 ** 2.34Number of observationsR-squared

Model 3 Model 4

390.57

1220.16

390.60

1220.33

Private Public PrivatePublic

In SummaryIn SummaryIn SummaryIn Summary We find that REITs more likely to become acquisition targets 

are smaller, with no umbrella operating partnership, less liquidity, higher dividend yields and greater institutional ownership than non-targets. 

We document that targets of private acquirers have lower leverage, interest coverage ratios, and profitability. 

Although acquisitions by private buyers are always done with cash, there has been a shift toward the use of cash in public-to-public deals. 

In addition, the factors related to abnormal returns differ in public-to-public and public-to-private deals. 

Differences in Acquirer Motivations, Announcement Effects, Target Characteristics,

and Financing in Private versus Public Acquisitions: The Case of REITs

by David C. Ling and Milena Petrova