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Abstract: A previous study assessed stock market returns (ex ante expectations), and this study examines the actual operating performance (ex post-operating performances) of the mergers and acquisitions (M&A) observed during [...]

A study is presented on the effects of acquirers' high free cash flow on long-run business performance. It is concluded that buyers with excess cash flow are not prone to mismanage funds and that companies with high free cash flow perform better than companies with low free cash flow.

We study the profitability of horizontal mergers in a dynamic competition context with sticky prices. It is shown that, when firms use open-loop strategies, a merger is profitable only if the share of the market that merges is significant enough. In the case where firms use closed-loop strategies we provide a method to conduct analytically the study of the profitability of horizontal mergers. We first prove the existence of an equilibrium of the game when a subset of firms merges. When firms use feedback strategies, mergers are profitable even when the share of the market that merges is arbitrarily small. JEL Classification: D4, L13

The circumstances in which stockholders of a firm that is acquiring another firm would see other than an average return are examined.

Mergers and acquisitions accounted for several hundred billion dollars in transactions in the US and Canada in 1999 (Irving Levin Associates, 2000). In the health care sector and in general, [...]

A comparison between internally- and externally-financed corporate acquisitions in US and UK is offered. Additional information on the impact of acquisition financing source on corporate profitability and managers' use of internal funds is also included.

Cannibalization of positive cash flows in some projects by negative cash flows in others may partly explain observations that mergers and subsequent diversification result in value loss while splitting up an existing firm results in value gain. The value loss is known to be higher when a firm diversifies into unrelated industries, and the cannibalization issue may explain why value and riskiness of an identical project can vary according to firms' in-place assets and why stand-alone project value can be irrelevant for investment decisions. Mathematical formulae are presented showing how limited liability can backfire during mergers.

Byline: Norvald Instefjord (1) Keywords: Agency paradigm; market for corporate control; mergers and acquisitions; takeovers Abstract: The paper analyzes the role of agency driven takeover activity. The analysis shows that takeovers can play an important role in reducing agency costs even though the gains from the corporate restructuring that follows the takeovers are zero, which counters existing models of agency driven takeover activity. The model can therefore form the basis for deriving empirical predictions which discriminate between the 'agency paradigm' and the 'corporate restructuring paradigm' of takeover activity. Negative post-merger performance (Agrawal et al., 1992), which is inconsistent with corporate restructuring is consistent with this model, and that takeover targets' investment levels are below or at the average (Servaes 1994), which is inconsistent with the free cash flow theory is also consistent with this model. Author Affiliation: (1) Department of Economics, Birkbeck College, University of London, 7--15 Gresse Street, London, W1P 2LL Tel. Article History: Registration Date: 02/10/2004

In this article, the author provides an overview of some of the factors that parties to a merger & acquisition transaction must consider that affect the pricing of the deal.

In this article, the author provides an overview of some of the factors that parties to a merger and acquisition transaction must consider that affect the pricing of the deal.

We examine the use of debt in the payment package employed by bidding firms for corporate acquisitions. While the use of cash and stock has been extensively investigated in the literature, the use of debt has been largely ignored. In addressing this shortcoming, we examine the decision to use debt and other factors that affect the bidding firm's stock price reaction. The evidence indicates that the bidder's stock price reaction is associated with the riskiness of the debt, the ability to benefit from the tax shield afforded by the interest payments, and the amount of stock included in the offer together with the debt. The results are consistent with the explanations offered by Myers and Majluf (1984) and also with the notion of an optimal risk sharing/capital structure realignment by bidding firms., INTRODUCTION It is well documented in the literature (Weston, Chung, and Hoag, 1990) that the medium of payment used in corporate acquisitions has an impact on the stock price of [...]

Byline: ATUL GUPTA (1), RICHARD L. B. LECOMPTE (2), LALATENDU MISRA (3) Abstract: This paper examines the wealth impact of acquiring mutual thrifts in merger conversions. We find that these transactions produced wealth gains both before and after the passage of FIRREA. These gains, however, are statistically significant only in the post-FIRREA period, indicating that regulatory changes resulting from FIRREA made such mergers more appealing. Cross-sectional analyses indicate that merger conversions enhance value by providing an opportunity to expand into potentially lucrative markets. Acquisitions of mutuals that present substantial opportunities for branch closings lead to larger gains. In addition, acquirer gains increase with the relative size of the transaction and are larger for acquisitions in markets served by competing firms that are small relative to the merged entity. Contrary to popular belief, variations in bidder gains appear to be unrelated to changes in the regulatory capital position resulting from the merger conversion. Author Affiliation: (1) Department of Finance, Bentley College, Waltham, MA (2) Wichita State University, Wichita, Kansas (3) University of Texas, San Antonio Article History: Registration Date: 29/09/2004

UK takeovers starting 1985 posted substantial profits with the introduction of the write-off accounting system. Under this system, firms enjoyed wider latitude in the valuation of assets affecting future profits, despite the absence of change in performance. During the 1977-1984 period, takeovers did not have significant change in profitability. This implies that the type of accounting system can greatly distort traditional measures of profitability.

Leveraged buyouts (LBOs) have acquired a negative image as a result of highly-publicized bankruptcies in the 1980s, but the image is a distorted one. LBOs are still being conducted in the mid-1990s and are developing to the point where they may well become an established part of corporate financial considerations. LBOs offer an alternative form of corporate ownership and, under the right circumstances, can result in improved long-term management. A survey of LBO activities at the firm of Clayton, Dubilier and Rice is recounted.

This article shows that some of the wealth gains from financial decisions involving changes in security form occur on preditable ex dates. For a sample of 113 spinoffs during 1964 to 90. we document an average excess return of 3.0 percent on ex dates, roughly the same magnitude as the average announcement-date return. We conjecture that the spinoffs ex-date return arises because the parent and subsidiary stocks attract different investors who prefer to buy the separated shares after the ex date. We also document that, on average, the target shareholders in stock-for-stock mergers earn an excess return of 1.5 percent on mergers ex dates. (Reprinted by permission of the publisher.)

A model of determining merger exchange ratios has been developed by Larson and Gonedes, and applied to UK takeovers where exchanges of shares are involved. Price earnings ratios are used to achieve consistency with practical valuation approaches, and the model has been applied to cash and share offers, and those where cash is offered as an alternative to shares. The Larson-Gonedes model appears to fit data for the UK better than is has been found to fit data for the US in research carried out by Conn and Nielsen.

In a takeover contest, the presence of bidders' existing debtholders, if they can be expropriated by issuing new debt with equal or senior priority, allows bidders to commit to bid more than their valuation of the target. Such commitment can be beneficial because it deters potential entry by subsequent bidders and may allow a first bidder to acquire the target at a bargain price. The cost is that if entry by subsequent bidders does nevertheless take place, because the first bidder has committed himself to bid high premia, a bidding war ensues resulting in offers that may involve excessive premia, i.e., bids that are larger than the bidders' valuation of the target. (Reprinted by permission of the publisher.)