Public Versus Private Acquisitions, Information Asymmetry and Bidder Gains

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MSc Accounting & finance 2008

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MSc Program: Accounting and Finance

Module Name: Dissertation

Assignment Tutor: Mr Leonidas Barbopoulos

Module Code: ECON 43015

Assignment Description: Summative Assignment

Student Anonymous Number: Z0507577

Submission Time and Date: 5 p.m on Friday 5th September 2008

Title: Public versus Private Acquisitions, Information asymmetry and bidder gains

School of Economics, Finance and Business

September 2008


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Public versus Private Acquisitions, Information Asymmetry and Bidder Gains

Abstract

In this study we examine the announcement share returns of UK acquirers in almost 4,000

domestic acquisitions of public, private and subsidiaries targets over the period 1996 to 2007.

Results indicate that overall acquirers experience significant returns at the announcement of a

takeover proposal irrespectively of the target status and the method of payment. Public

acquisitions are not necessarily non-value increasing in the UK market, although the gains are

dependant on mean of payment. Acquirers of unlisted targets earn a significant average abnormal

return of 1.48% when they use stock, while acquirers of listed targets lose 0.36%. Moreover our

analysis confirms the existence of a size effect in acquisitions returns, with small acquirers to enjoy

higher returns than large acquirers.

Keywords: acquisitions; target status; information asymmetry; bid-ask spread

Word count: 8838 words

ByZ0507577

Finance DissertationSchool of Economics, Finance and Business

September 2008

Public versus Private Acquisitions, Information asymmetry and bidder gains


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Executive Summary

The primary aim of corporate governance and the objective of a company is to manage its

resources as efficiently as possible in order to maximize its log-run market value. That is

translated into maximizing the value of the shareholders, since the value of debt is

protected contractually, and therefore the goal is to maximize the share price. Corporate

finance offers powerful tools to the managers that help them make decisions of interest for

the firm.As equity prices have been growing rapidly the last years, investors are keen to

see top-line growth, which the companies find difficult to deliver organically. Consequently,

mergers and acquisitions (thereafter M&As) are employed as a quick means to increase

the value of a company and also signal positive messages to the market. (Bradley et al

1983, 1988).

However, it has been well supported that in the announcement period of a takeover, M&As

are not necessarily wealth-increasing. On average, bidders experience positive abnormal

returns in private held acquisitions, while when firms acquire public targets then the

acquirer, on average, will experience losses. These results have been well documented in

the US and UK and characterise these competitive markets.

Takeovers of privately held firms are a prevalent phenomenon in mergers and

acquisitions, as they represent more than 70% of all transactions. However very few

papers, so far, have examined the wealth implication of acquiring firms from unlisted

targets acquisitions.The aim of this project is to make a comparative analysis of public

versus private target in order to examine if acquisitions of private targets create more

value to acquiring firm than acquisitions of public targets. Moreover In this study it isanalysed the mode of payment and acquirer size and other factors that driving

shareholders wealth effect.

Our evidence shows that acquirer experience significant gains in private target takeovers

using stock as method of payment, which contrasts with the negative abnormal return

bidders experience in public acquisitions in stock offers. Further our results confirm the

superiority of small size acquirers against the large one and finally based on our bid ask


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spread results we document that in private acquisitions shareholders wealth is highly

dependant on the information asymmetry of the bidding firm. The more wide the bid ask

spread the lower the return for the bidding firm.


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Acknowledgments

I would like to thank my family for the economically and psychological support they

provided me through my entire life.I would like to express my gratitude to my supervisor,

Mr. Leonidas Barbopoulos, whose expertise, understanding, and patience, added

considerably to my graduate experience. I appreciate his vast knowledge and skill in many

areas and his assistance in writing this dissertation.


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TABLE OF CONTENTS

Abstract .................................................................................................................................... 2

Executive Summary .................................................................................................................. 3

Acknowledgments .................................................................................................................... 5

1. Introduction .......................................................................................................................... 7

2. Literature Review ................................................................................................................. 9

2.1 The impact of Target Status and method of payment ................................................... 9

2.2 Acquirers size ............................................................................................................... 13

2.2.1 Value Vs Glamour acquirers ..................................................................................14

2.3 Bid- ask spread-Asymmetric Information..................................................................... 14

3. Hypothesis development ................................................................................................ 15

3.1 Controls based on previous research ........................................................................... 164. Data and Methodology.......................................................................................................17

4.1 Sample .......................................................................................................................... 17

4.1.2 Measurement of abnormal returns .......................................................................18

4.2 Sample statistics ........................................................................................................... 18

5. Empirical Results................................................................................................................20

5.1 Gains to Acquirers by Payment Method and Target Type ........................................... 20

5.2 Information Asymmetry and bidder gains ................................................................... 22

5.3 Acquirer size and bidder gains ..................................................................................... 24

5.4 Value Vs Glamour and bidder gains ............................................................................. 25

6. Summary and Conclusions .................................................................................................27

7. References ..........................................................................................................................29

8. Figures and Tables ..............................................................................................................33


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1. Introduction

Corporate restructuring contains various activities including changes in ownership and

control, asset restructure, and/or the capital structure of a company. Accordingly, anyvalue-maximising firm would engage in activities that will increase firms market value,

earnings, market share and most importantly shareholders wealth. Since 1960s, engaging

in mergers and acquisitions (hereafter M&As) has become an increasingly important mean

of reallocating resources both in the domestic and in the global economy . The pure

motivation under the M&As activity is the creation of value in favour of the firms

shareholders. The majority of the studies1 support almost unanimously that takeovers

create wealth to the targets shareholders but no substantive loss to the shareholders of

bidding firms.

Acquisitions of private firm according to existing literature2 represent the majority of

takeovers. However only few studies had examined if private acquisitions create value on

bidding firms, as a result the available evidence related to private transactions and their

involvement in acquisitions are very scarce. These studies tried to compare the

announcement period and post-acquisition abnormal return of bidders acquiring private

target firms with the abnormal return of listed targets firms. Along the same lines Chang

(1998), Ang and Kohers (2001), and Fuller et al. (2002) based on US market suggest that

that takeovers of privately held targets generate positive abnormal returns irrespective of

the method of payment while acquisitions of listed targets suffer a loss and their gains

depend on the method of payment. Draper and Paudyal suggest that this is due to the

information asymmetry proposed by Myers and Majluf (1984), where private firms with

close ownership have more incentives to examine thoroughly biddings firm stock, thus if

they finally accept it, this will signal to the market that the stock is not overvalued. Thus

information asymmetry can be mitigated in the private firms takeovers. Besides another

factor is that managers-owners of private firms (a small number of shareholders or a

1 Conran and Niden (1992) for the USA, Cheung and Shum (1993 for Hong Kong), Draper and Paudyal

(1999) for UK market2Faccio and Masulis (2005) report that approximately 90% of UK (and Irish) acquisitions involve unlistedtarget firms; Draper and Paudyal (2006) report approximately 87% of the UK acquisitions involved privatelyheld targets. However, Moeller et al., (2005) show that approximately 53% of US acquisitions involve

unlisted targets.


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family) have significant bargaining strength, so they can receive a better price for their

company. Another benefit for private firms acquisition is the limited competition, which

increases the likelihood of underpayment leading to higher returns (Chang, 1998).3

Targets status and method of payment are major factors of gains to acquiring firms around

acquisition announcements, as they convey information about the target. Travlos (1988)

suggest that financing the takeover with different methods of payment, bidders experience

different returns. For public acquisitions its more profitable to use cash as mean of

payment than equities. Among the same line Draper and Paudyal (1999) document that

the method of payment conveys useful information to the market as this reflects managers

views of their company. A stock exchange offer, suggests that at least acquirer firmsshare is not undervalued. Chang (1998) based on three hypotheses4 report that stock

exchange creates value for acquirer shareholders in private acquisitions.

The purpose of this study is to examine whether UK listed targets outperform unlisted

targets. Accordingly this project analyzes several issues pertinent to acquisitions involved

listed and unlisted targets, such as: (a) Do bidding firms shareholders enjoy higher

positive announcement period returns when targets are unlisted? (b) What is the role of

the method of payment in acquiring private and public firms? (c) Do the gains from unlisted

target acquisitions vary with the level of information asymmetry? (d)Do value acquirers

outperform the glamour one over the short run period? (e) What is the role of acquirer size

in short-run gains to acquiring firms shareholders?

The remainder of this chapter is organized as follows: Section (2) two reviews the literature

and lays the theoretical ground for the study, section (3) develops the hypotheses I test,

section (4) describes the sample and discusses the methodology used in estimating the

excess returns of bidding firms, section (5) I report the empirical evidence and the

interpretations of the results. Finally, section (6) concludes the study.

3A possible reason for the limited competition regarding privately held firms, as proposed by the same author, is the

high information search cost given the sacristy of public available information for this type of firms.4monitoring hypothesis, the limited competition hypothesis and the information hypothesis


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2. Literature Review

This section reviews the literature which is closely related to the main research framework

of this investigation. I mainly focus on earlier studies that investigate the role of the target

status, payment method and relative size in shaping the gains to acquisitions bidding for

private versus private target firms. Moreover, I review the literature based on the existing

theoretical framework of the bid-ask spread while I describe to which extent it captures the

level of firms information asymmetry.

2.1 The impact of Target Status and m ethod of paym ent

Existing research has shown that the bidders abnormal returns form acquisitions are

heavily dependent on target status and method of payment. The status of the acquiring

firm is one of the most extensively examined determinants of gains to acquiring firms. The

impact that target status has on gains to acquiring firms heavily depends on the method of

payment used in the transaction and therefore it wouldnt be rational to analyse these

under a separate framework. Existing research classifies target firms into private, public

and subsidiary.5

Almost all the studies unanimously have suggested that the acquisitions create positive

gains to the target firms shareholders and no essential loss to the bidding firms

shareholders6. The results of the majority of the studies revealed that public acquisitions

destroy value in the short run.7 Hansen and Lott (1996) based on a sample of 252

acquisitions of public and private companies over the period 1985-1991 in US market

investigate that acquirers gain a 2% higher return when purchasing privately owned

targets than public one. Thus happen because private targets have more freedom in

determining their auction methods as competitive as they prefer, instead of listed targets

5Existing empirical work that examines gains to acquisitions of subsidiary targets such as Fuller, Netter andStegemoller (2002) includes in this portfolio only subsidiaries that are not listed.6See for example Conrad and Niden(1992) for the USA, Cheung and Shum (1993) for Hong Kong, Draper

and Paudyal (1999) for the UK. More recent studies such as Goergen and Ronneboog (2004) for Europeancountries) have come to confirm this finding.7See for example Firth (1980), Asquith (1983), Travlos (1987) and Limmack (1991). More recent studies

such as Andrade, Mitchell and Stafford (2001), Fuller, Netter and Stegemoller (2002), Moeller, Schlingemannand Stulz (2004) and Faccio, McConnell and Stolin (2006) have come to confirm this finding.


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which are restricted because of legal requirements. Moreover perfectly diversified

shareholders are uninterested for the way the gains are divided in the case of public

acquisitions as they will have shares in both firms, something that will not be happened in

the case of private acquisitions.

Chang (1998) examines acquirer firms stock reaction using a sample of 285 acquisitions

of private targets between 1981 and 1992 in US market. Their evidence shows zero

(negative) abnormal returns for acquisitions of private (public) targets paid for with cash

and positive abnormal returns for acquisitions of unlisted firms in stock offers. The

explanation he offers is that the acquisitions of unlisted firms through stock exchange tend

to create large block holders. The existence of such large block holders give benefits fromtheir increased monitoring of the activities of the acquiring firm. Moreover their results are

according to Hertzel and Smith (1993) that if well informed investors take large position in

a firm this will transfer well information about the firm (monitoring hypothesis). Like Hansen

and Lott (1996) and Chang (1998) Fuller, Netter, and Stegemoller (2002) with a more

extensive sample of 3,135 acquisitions of private and public targets between 1990 and

2000 for US market document that acquirers of public targets lose and acquirers of private

target firms gain. However their results show that bidder gain, in the case of privately held

targets, even for cash payments. Furthermore their evidence shows that when the target

firm is larger and the mode of payment is stock the gain is greater. The explanation they

give is that in an illiquid market (private, subsidiary firms),where the information availability

for the targets is poor and the competition weak, bidders do not pay as high a price as in a

liquid market (private firm),where information is available and buyers can compete for

control. Thus there is a discount for illiquidity which they present results in a higher return

to acquirers (liquidity hypothesis).

Subsequent studies such as Ang and Kohers (2001) and Moeller et al. (2004) posit

significant positive abnormal returns in cash stock and mix offers for acquirers of privately

held targets for the US market with share bidders gaining the largest abnormal return. On

the other hand the abnormal returns for acquirers of listed targets depend on the mean of

payment with those of paying with shares to suffer a loss. Ang and Kohers (2001) argue

that buyers have to pay higher premiums for private targets than for publicly targets. This

is consistent with the strong bargaining power and timing option of privately held firms. In


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unlisted targets there is lack of agency problem due to very concentrated ownership form,

which gives them the opportunity to decide how, when and to whom they would prefer to

sell (bargaining power hypothesis).

Da Silva Rosa, Limmack, Supriadi, and Woodliff (2001) for Australia, respectively confirm

that acquirers of privately held targets achieve a significant positive excess return, a result

which is in contrast with the insignificant findings based on bids for public targets.

Contrary to Chang (1998) in Australia market most of acquisitions of private targets are

financed by cash and this create higher positive returns than when the mean of payment is

stock. They comment that these results are accordant with the explanation that the lower

competition for private targets in Australian market permits acquires to cover more of theeconomic rent from acquisitions by offering cash than stock.

Draper and Paudyal (2006) for the UK market using a very large sample of 8597

acquisitions of listed and privately held targets between 1981 and 2001 document that

bidder of listed targets do not recognise any substantial loss during the period surrounding

of the announcement. In contrast acquirers of privately held targets experience significant

positive returns. More specific bidders for private firms using stock as method of payment

earn the largest abnormal return while bidders for listed firms paying in shares lose.

Furthermore acquirers of public targets paying in cash do not experience any substantial

loss, compared with bidders for private targets who earn significant excess returns for

cash deals. Their results are consistent with the monitoring and liquidity hypotheses which

are analysed above and also are accordant to asymmetric information hypothesisof Myers

and Majluf (1984). In a word of asymmetric information the method of payment signals

valuable information to the market. Managers of the private own targets have incentives to

asses thoroughly the value of the bidding firm, especially in the case of stock payment.

This close examination decreases information asymmetry. Subsequent if they finally

accept to hold a large block of shares in a merged firm, this will convey favorable

information for the bidding firms stock in the market.

In a more recent study relative to information asymmetry, Draper and Paudyal (2008)

argue that undervalued bidders with high information asymmetry experience higher

earnings than other bidders. This happens because managers of undervalued firms with


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high information asymmetry between the company and investors announce takeover bid

with the aim to be revalued from investors and analyst and through this to increase their

stock price.

A more general hypothesis offered by Draper and Paudyal (2006) in order to explain why

bidders for private targets earn more than bidders for listed targets is the managerial

motive hypothesis. They comment that when managers are willingness to acquire a small

and unknown private firm this means that they are motivated more from potential

synergies from the acquisition rather than from their private benefits. Moreover they argue

that small private firms can be integrated easier from the acquiring firm rather than large

listed firm.

Many researches find that the decision about method of payment is consistent with large

differences in outcomes. Travlos (1987) examine to which extent different methods of

payment results in different returns. The author document when acquirers use stock to

acquire a private company, the announcement returns are significantly positive on

average, whereas exactly the opposite applies in case of publicly traded targets. Besides

the acquirer announcement returns are affected by the method of payment only when the

target is private and difficult to value, as the use of stock-swap can mitigate the information

asymmetry about the private firm (Hansen, 1987). Furthermore he emphasizes that except

of investors interpretation equity and cash offers have different tax implications. Cash

offers generates in general tax obligations for the firm stockholders instead of stock

exchange offers which are tax-free until the stock is sold. Consequently if a firm makes

cash offer should also pay a higher premium to offset the tax obligation of the selling

stockholders.

It becomes obvious from the discussion above that acquirers buying unlisted targets will

outperform those buying listed targets, irrespective of the method of payment used in the

transaction in most cases.


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2.2 Acquirerssize

The firm size (market capitalisation) of the target has been recently recognised as a major

determinant of short-run gains to acquiring firms shareholders. Moeller, Schlingemann

and Stulz (2004), using a comprehensive sample of 12,023 acquisitions from 1980 to 2001

in US market, shown that small firms8 outperform large firms by 2.24% percentage point.

More specific irrespective of the method of payment large firms experience significant

negative abnormal returns when they acquire public firms, while even in the case of

acquisitions of listed targets, small acquires experience significant gains (0.92%). Authors

offered several explanations for this size effect as determinant of the difference in

shareholders wealth between small acquirers and large acquirers. First small firms andlarge firms have different characteristics, according to Lang et al. (1991) and Servaes

(1991) acquirers with high q-ratio experience higher gains for public firmsacquisitions and

Maloney et al. (1993) show that high leverage firms recognize higher returns. Second Roll

(1986) mentioned that managers who suffer of hubris overpay, and Demsetz and Lehn

(1985) observe that large firms managers suffer more form hubris than small firms

managers, as large firms have more available resources to make acquisitions and

generally investments and are covered more by media. Third large firms are more possible

to be overvalued and to have exhausted its growth opportunities thus, conveying negative

signals about the acquirers price.Finally, arbitrageurs are likely to use their resources in

small firms acquirers and according toMitchell et al. (2004), in the case of stock payment

in acquisitions; there is a downward price pressure on the stock price of the bidder caused

by arbitrageursactivities. (The arbitrageur hypothesis).

A more recent study from Rhodes Kropf and Robinson (2008) offers another possible

explanation of why small acquirers outperform large acquirers. The conventional wisdom

suggests that high asset value firms buy low asset value firms; while they show that a

more appropriate interpretation is that firms with similar asset valuations purchase one

another. As a resultit is more likely that large firms acquire large, public firms. Given that it

is more profitable for acquirers to acquire private, as opposed to public targets then this

can be a reason why small acquirers gain more.

8

The authors classify small acquirers as firms whose capitalization falls below the 25th percentile of NYSEfirms at the year of the acquisition announcement. All remaining bidders are in the large subset.


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2.2.1 Value Vs Glamour acquirers

Glamour firms are firms which have high stock market prices relative to an accounting-

based measure of firm worth (e.g., high Market/book ratios). In contrast, value firms arethose which have low stock market prices. Rau and Vermaelen (1998) for the US market,

using as proxies firm size and MTBV, they document that irrespective from the mean of

payment value acquirers enjoy significantly lower announcement period returns (short run

period) but much higher post acquisitions returns (long run period) over three years than

glamour acquirers. Further they notice that glamour acquirers are prone to use their own

stock in order to finance the acquisition. Along the same lines Sudarsanam and Mahate

(2003), for the UK market confirm that value acquirers outperform the glamours one in thelong run performance. They support also the argument that glamour acquirers exhib it a

tendency to finance the merger using stock in contrast with value acquirers who are more

likely to use cash since they believe that their stock is undervalued.9However, they also

suggest that value acquirers outperform the glamour one even in the short run period.

2.3 Bid- ask spread-Asymmetr ic Informat ion

Bid ask spread is the amount by which the ask price quoted by a dealer exceeds the bid

price by a dealer at a point in time. This is essentially the difference in price between the

highest price that a buyer is willing to pay for an asset and the lowest price for which a

seller is willing to sell it. Current literature implies that the bid ask spread has three

components: the information asymmetry cost, the processing orders cost and the

inventory cost. Bagehot (1971) was the first among others who mentioned that dealers

lose when they transact with traders with superior information. Further analysis of the roleof the asymmetric information is given by Copeland and Galai (1983), Glosten and

Milgrom (1985), and Easley and O'Hara (1987). Stoll (1989)10document that the bid ask

may be decomposed into the following components : 43% information asymmetry cost,

47% order processing cost and 10% inventory holding cost and the components seem to

be a stable proportion of the quoted spread. He succeeded to decompose the

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Sudarsanam and Manhate, (2003)10Using data on the transaction prices and price quotations for NASDAQ/NMS stocks


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components of bid ask spread by using a covariance model to calculate the realised

spread attributable to order processing and inventory holding cost and then he estimate

the information asymmetry cost by subtracting one from the realised spread. Menyah and

Paudyal (2000) using Stolls (1989) model verify that London Stock Exchange (LSE)

spreads include all the three cost components identified by the literature. Their results

suggest that on average 30% of the spread is the order processing cost, 23% is inventory

cost and 47% is the asymmetric information cost.

.The asymmetric information cost component varies inversely with the size of the realised

spread. This suggests that during trading periods, market makers earn smaller spreads as

a result of losses to informed traders.

Venkatesh and Chiang (1986)posit that the dealer should widen the bid-ask spread when

he or she suspects that the information asymmetry has increased. Bid ask spreads are

changed in a similar way to reflect the information conveyed by the transactions. In the

light of the above, in this paper we will use bid ask spreads in order to estimate the

existence of information asymmetry and its influence on bidder gains and on the method of

payment.

3. Hypoth esis development

Based on the above analysis we will develop three hypotheses that will be tested:

a) The asymmetric information hypothesis

Myers and Majluf (1984) propose a theoretical framework in which when acquirers employ

common equity to buy listed firms, they signal to market participants that their stock is

overvalued (information asymmetry). Existing evidence document that in public

acquisitions, acquiring firms returns suffer more when the method of payment is stock

than cash11. On the other hand when firms use stock to acquire private firms with, join

positive returns as this conveys favorable information to the market about the bidding firm.

This happens because closely ownership firms are highly motivated to assess the bidding

11See for instance Chang (1998), Draper and Paudyal (1999)


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firms stock closely and they accept stock only when that is at least, not overvalued, as at

the end they will hold a substantial part of the bidding firms stock. This suggests the

following testable proposition: bidders for private targets paying with shares receive a

positive return while bidders for listed targets paying with shares suffer a loss.

b) Bid ask Spread

Stolls (1989) and Menyah and Paudyal (2000) suggest that on average almost 50% of the

bid ask spread is the asymmetric information cost. Further Venkatesh and Chiang (1986)

suggest that when the information asymmetry increase the bid ask spread should widen.

Moreover Chang (1998) document that in private acquisitions financed by stock acquirersenjoy a positive abnormal return, which contrasts the negative abnormal return found for

bidders acquiring a listed target. This is due to monitoring activities by target shareholders

and, to an extent reduced information asymmetries. This suggests the following

proposition: Bidders subject to low Information Asymmetry (i.e. low bid ask spread) using

common equity to finance acquisitions enjoy higher returns than bidders subject to high

Information Asymmetry (i.e. high bid ask spread).

3.1 Contr ols based on previou s research

c) Value Vs Glamour

A number of studies have find evidence which support that over the announcement period,

glamour bidders experience higher return than value one. However, Sudarsanam and

Mahate (2003) for the UK market observe that value acquirers outperform the glamour one

even in the short run period. Further major of the studies12used MTBV as a proxy as they

have recognized its ability to capture and explain stock return. This suggests the following

proposition: Low MTBV bidders gain higher returns in comparison to those with high

MTBV.

12

Fama and French, (1992), (1996) ; Pontiff and Schall (1998); Rau and Vermalen (1998), Lakomishek andothers (1994)


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.

d) Acquirers size

The firm size (market capitalisation) of the target has been recently recognised as a major

determinant of short-run gains to acquiring firms shareholders. Most of the studies agree

that irrespective of the method of payment small firms outperform large firms when they

acquire firms, due to the reasons we analyzed in the literature review. This suggests the

following proposition: Small acquirers outperform large acquirers in the sort run period.

4. Data and Methodology

4.1 Sample

The sample of acquisitions is from Thomson Financial SDC global mergers and

acquisitions database. The sample is included only completed, domestic transactions

those take place during the period 1996-2007 and recorded by the Security Data

Corporation (SDC). The acquirer is always listed while the target is public, private or

subsidiary. All subsidiaries in the sample are not listed. The method of payment could be

cash when bidders are paid only by cash, stock when their bid is based 100% on stock

and mix when target shareholders are paid by a mixture of cash and stock. The choice of

sample period is guided by the comprehensiveness of records in SDC and available at the

time of data collection. SDC records 21,714 cases of M&A deals involving UK bidders

within the sample period. For a deal to remain in the sample it should meet several criteria:

First of all acquirer should be a UK company traded in the London Stock Exchange.

Second the deal value and the market value of the acquirer a month prior to the

announcement of the deal should be at least 1 million13 in order to eliminate outliers.

Third the acquirer is always listed while the target is public, private or subsidiary. All

subsidiaries in the sample are not listed. Further to avoid the implications of multiple bids

multiple deals announced within 5 days (t-2, t+2) surrounding a bid are excluded. Finally I

require that all successive transactions have payment method data available and that all

acquirers have share price data available from Thomson Financial Datastream. Deals with

no return to index (RI), market capitalization (MV), and market-to-book value (MTBV) data

13We follow Fuller, Netter, and Stegemoller (2002), Moeller, Schlingemann, and Stulz (2004), and Moeller

and Schlingemann (2005) and employ a one million pounds cut-off to avoid results being driven by verysmall deals.


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available from Thomson Financial DataStream database and deals with negative MTBV,

and negative or MV (as in Lyon et al., 1999) are excluded.

We finally obtain a sample of 3,924 UK acquisitions deals survive the criteria. This sample

comprises only domestic bids.

4.1.2 Measurement of abnormal returns

We estimate the announcement period abnormal return with a modified market model

(equation 1) as in many recent studies (see, for example, Fuller et al., 2002, Faccio et al.,

2006) that encounter similar problems.

)1(mii

RRAR

Where ,i tAR is the excess return of bidder i on day t; ,i tR is the return of bidder i on day t

measured as the percentage change in return index (inclusive of dividends) of bidder i ;

,m tR is the market return defined as the percentage change in FT-All Share index (value

weighted) on day t. The announcement period cumulative excess returns (CARi) is thesum of the abnormal returns of 5 days (-2 to +2) surrounding the day of the announcement

of the bid as defined in equation (2).i

R and mR are defined in equation (1).

2

2

t

i i m t

t

CAR R R

(2)

4.2 Samp le statist ics

A description of the sample and of selected features of the transactions is provided In

Table 1. It presents acquisition activity and statistics per year using for our final sample

that consists of 3,924 transactions. The total value paid for targets in domestic

transactions during the sample period is nearly 400 million pounds. The number of the

acquisitions is very high during the period 1998-2000, where was the period of the fifth

merger wave. It then decreases sharply and reaches its lowest level on 2003. Finally on


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2006 where we have the sixth merger wave the number of sample cases increases again

on 304 activities. The average value of a transaction is 105 million while the market value

of acquirers is 708 million suggesting that the average size of bidders is over 11 times

larger than the size of the transaction.

Moving on, Table-2 it can be observed that the most common target is the private one

(52%), followed by the subsidiaries (26%) and the public (22%). This is consistent with

current studies14which notice that in the most of takeovers privately held firms are the

targets. However, from 2002 onwards the takeover activity has directed towards different

preferences with most of the bidders to be prepared to acquire more listed than unlisted

target firms. In fact, within 2006 and 2007 takeovers of public targets represent more than36% of all acquisitions and subsidiaries only 14%. On the other hand, within 2001

acquisitions of public targets represent no more than 13% of all transactions while

subsidiaries about 35%. The main explanation why public acquisitions are become more

attractive year to year because is because from year 2002 until now they have started

creating value to the bidders shareholders with a significant average abnormal return of

up to 8%. In contrast with public and subsidiaries targets firms the percentage of the

private acquisitions is almost constant around 50%. Figure 2 confirms the above findings.

From table 3 we can notice that the bidders for listed targets are almost three times larger

than the bidders for private targets while the value of the public acquisition is thirty times

greater than for private acquisitions.

Further by examining the method of payment (Table-4) can be noticed that acquirers pay

for 45.61% of the acquisitions with pure cash, with a mixture of cash and stock for the

44.52% of the acquisitions, and finally bidders pay on the 9.87% on the cases with stock.

The above results come in contrast to those found in other studies examine the UK

market15.where mixed is the most common method of payment followed by cash and

stock. According to target status, private acquisitions are more common to use as mean

of payment cash with 54.98%, then equity with 26.21% and lastly mix payment with

18.81%. On the other hand bidders for private targets prefer to use mixed payment

(62.69%), then cash with 31.13% and only 6.18% of the acquisitions is financed by stock.

14

See for instance Draper and Paudyal (2006)15Sudarsanam and Salami (2001)


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Finally when bidders acquire subsidiaries Cash and stock offers represent the 63.16% and

6.57% of the total sample respectively, while the remaining 30.27% is the mix of cash and

stock deals. The above results (see figures 3, 4 and 5) clearly indicate that despite in

private and subsidiaries acquisitions bidders use diachronically the different methods of

payment in the same proportion, in public acquisitions from 2001 it is noticed an increase

in cash offers. As a result during the period 1996-2007 in the UK market the predominant

method of payment for the acquisitions is cash. Another possible explanation is that in UK

bidders who want to acquire more than 30% of a target are obliged to have a mandatory

bid offer with cash.

5. Empirical Results

5.1 Gains to Acq uirers by Payment Method and Target Type

The main aim of this study is to examine bidder gains involved in private and public

acquisitions across the UK market during the period 1996 - 2007. In order to examine our

first hypothesis we split our complete sample into three; public (833) private (2056) and

subsidiaries (1035) targets and then we split it again into three subgroups based on the

method of payment (cash, stock, mix). Table 5 presents cumulative abnormal returns to

acquirers by target status and payment method, during the 5 days surrounding the

announcement. Results are reported for all, public and private deals and individually for

all-cash (Cash), all-stock (Stock) deals and mixed deals. Means are reported first, second

the t-test and third the sample size. The table also reports differentials between public and

private acquisitions in each case using one sample t-test for means. A general remark at

first sight is that overall bidders join significant positive returns (Table-5, all) 2.33%,

irrespective of the method of payment. This is in contrast with the previous literature that

the announcement of a takeover generates no abnormal returns to the shareholders of

bidding firms. Companies that make bids for listed firms experience significant gains of

4.61%, while acquirers of private firms join significant positive abnormal return up to

1.84%. The difference between public and private abnormal return is 2.78% and significant


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at the 1% level (t= 6.46). Our results are not consistent with current literature16and cannot

support the bargaining power hypothesis, analyzed in the literature review, offered by Ang

and Cohers (2001). Further analysis shows that our results are consistent with the

literature until 2001. This maybe due to the market timing we had an increase of public

acquisitions with cash offers, and public acquisitions created value to bidders

shareholders.

The evidence from table 5 reveals significant differences in bidders gains between cash

and stock offers. As shown in this table, for public acquisitions cash offers are associated

with high significant returns up to 7.63%, while stock offers are associated with negative

abnormal returns (-0.36%) with significance at 10% level. This confirms Travlos (1988)

finding that on the cash financing acquirers earn at the announcement period while on the

stock financing experience significant losses. On the other hand in private acquisitions

when the method of payment is stock bidders returns are higher (1.56%) than when the

method of payment is cash (1.48%). The difference between private and public firm in

stock offers is 1.86%. This is consistent with Chang (1998) that the acquisitions of unlisted

firms through stock exchange tend to create large block holders. The existence of such

large block holders give benefits from their increased monitoring of the activities of the

acquiring firm. This evidence is consistent with the argument that if well informed investors

take large position in a firm this will transfer well information about the firm (monitoring

hypothesis). Accordingly the evidence that public acquisitions lose in stock offers can lend

support to the asymmetric information hypothesis developed by Myers and Majluf (1984)

that issuing equity to the public conveys bad news to the market for the acquiring firms

stock. Moreover from table 5 we can report that private firms takeovers create wealth to

the bidders irrespective of methods of payment. This reconfirms the prediction on

managerial motive hypothesis and the liquidity hypothesis analysed in the literature review.

Further it can be observed that mixed offers create always significant excess returns for

the acquirers and irrespective of target status. An explanation to why mixed payments are

higher than pure cash or stock is suggested by Eckbo,Espen,Giammarino, and Heinkel,

(1990) were the authors explain that these offers are consisted of both synergy revaluation

16

Chang (1998), Drapper and Paudyal (2006), Conn, Cosh and others document that bidder returns inprivate acquisition will be higher than in public deals.


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benefits (the markets anticipation about the gains of the synergy) and the signalling effect

(bidders information conveyed by the method of payment).

The estimates17 (Table 5) confirm our first hypothesis that bidders for private targets

paying with shares receive a positive return while bidders for listed targets paying with

shares suffer a loss.

5.2 Informat ion A symm etry and bidder gains

By trying to test our second hypothesis and whether they hold or not, we come across

table-9. In order to measure information asymmetry we use the bid ask spread as poxy

based on Stolls (1989) and Menyah findings that on average almost 50% of the bid ask

spread is the asymmetric information cost. The construction of table-9 is the union of five

panels. Initially we split the sample into three groups according to the size of bid ask

spread (high, medium, low). Further working among the same lines, the second part of

table-8 provides information based on the target status (public, private, and subsidiary)

and the mean of payment (cash, stock, mix).

Panel A examine the overall performance of bidders in different situation of information

asymmetry. In general bidders earn significant excess returns at the announcement of a

takeover proposal irrespectively of the information asymmetry. Only in the case of stock

offer in a high information asymmetry environment, bidders detect a loss. However this

result cannot considered as reliable since it is not statistically significant. From table-9 we

can suggest that when bid ask spread is low, bidders earn higher significant returns up to

1.18% than when bid ask spread is high, irrespectively of the method of payment. In stock

offers is reported the higher difference in abnormal returns (2.90) for bidder shareholders

between low and high bid ask spread. The difference is significant in 10%. This is

consistent with the current literature that in high information asymmetry, where managers

have superior information, an announcement of acquisition with stock offer conveys bad

news to the market for the biddings form stock. Hence, the market reaction to the takeover

proposal will be negative. Findings for mix and cash offers are confirming the previous

17 If the target is listed the dummy variable takes the value 1, if it is private 2 and if it is subsidiary 3.


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results but with lower difference between high and low bid ask spread (-0.87% and -0.90%

respectively). The results of Table 9, panel A confirm our second hypothesis that bidders

subject to low Information Asymmetry (i.e. low bid ask spread) using common equity to

finance acquisitions enjoy higher returns than bidders subject to high Information

Asymmetry (i.e. high bid ask spread).

The results illustrated in Panel B (public acquisitions) reveal that bidders earn higher

significant abnormal returns (2.34 %) when the bid ask spread is low irrespectively of the

method of payment. Further it can be observed that in cash offers both in low and high bid

ask spread acquirers detect significant abnormal return. In addition in low information

asymmetry acquirers of private targets can have an insignificant gain even if they usestock as method of payment. Another interesting result is that in case of high information

asymmetry bidders use more often their stock as method of payment than in case of low

information asymmetry. This could be a signal that their stock is overvalued, as buyers

tend to offer stock when they believe that their shares are overvalued especial in case of

high information asymmetry, where managers of the company know something that the

market does not (Ang and Cheng, 2003).

Panel C presents the abnormal returns of private firms. Acquirers earn almost the same

significant abnormal returns in the case of low and high information asymmetry when they

offer cash. When the method of payment is stock the differentials between high and low

bid ask spread are insignificant using t-test, maybe due to the small size of the sample.

However in contrast with public targets, bidders acquiring private firms with stock in the

case of low information asymmetry gain 2.99% with 10% significance using t-test. This

happens as private firms with very close ownership have more incentives to examine

bidders stock, as at the end they will hold a large block of shares in a merged firm.

Subsequent if they finally accept the offer this will convey favorable information for the

bidding firms stock in the market.

Moving on to panel D which cooperates with subsidiaries we can report that in the case of

stock payment we have the biggest significant (at 5%) difference (6.53%) between low and

high bid ask spread. Finally panel E reports differentials between public and private

acquisitions in each case using one sample t-test for mean. A general remark at first sight


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is that bidders enjoy higher abnormal return in low bid ask spread than in high one,

irrespective of the method of payment and of the target status. Moreover it can be

observed that for both bid ask spread size the overall abnormal returns to bidders of

private targets paying with stock is higher than the excess returns to acquirers of listed

targets. However in cash offers acquisitions of public firms offer higher returns to the

shareholders of acquiring firm than acquisitions of private firms. These results offer a

support to the monitoring hypothesis and the bargaining power hypothesis but they reject

the managerial motive hypothesis.

5.3 Acquirer size and b idder gains

Previous literature has pointed to the role of acquirer size in determining gains to

acquirers. These are discussed in the literature section. Our aim is to investigate the

distinctive roles of acquirers size and acquirers market-to-book value (MTBV).

In order to examine whether low acquirers outperform high acquirers we will take in

consideration the market value of the acquirers one month prior to the bid announcement.

We divide our sample of 3924 acquirers into three equally sized portfolios high, medium

and low. From these three portfolios will be used only the two of them; the high MV and

the low MV. We discuss the relation between acquirer MV, target status and method of

payment. For each of the portfolios, we report abnormal returns for the period: from day -2

to day +2, where the bid announcement day is day 0. This period is referred as the

announcement period.

Table 7 reports short-run abnormal returns to bidders per acquirer characteristics (MV)

subsets. Starting with panel A which contains the entire portfolio can be observed that

overall, irrespective of the target status and method of payment, low acquirers outperform

high with a significant at 1% difference up to 1.03%. This is related to the existing

literature18. Cash offer support the same results with a significant difference between high

and low acquirers of -2.66%. In contrast with cash offers when acquirers use stock as

18 See for instance Moeller et al. (2004) report that small acquirers outperform large by a statisticallysignificant margin of 2.3%, Rhodes, Kropf and Robinson (2008) confirm the previous result.


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method of payment then difference between large and small acquirers is positive 0.76 %.

However this result cannot provide us with useful evidence as it is not statistical significant.

Moving on to panel B and to public targets can be seen that findings are similar to those of

entire portfolio. At the bid announcement period (-2 to +2 days), low MV acquirers

experience higher abnormal returns than high MV acquirers. In the case of cash payment

High MV acquirers experience significant abnormal returns of 4.56% whereas acquirers of

low MV earn 9.23%. For stock and mix method of payment the reported differences are

not significant. Further panel C engages with private firms. Our findings posit the

superiority of small acquirers than the large one with a significant difference of 1.03%. The

differential is statistically significant at the 5% level. For all the three methods of payment

we find that low MV acquirers enjoy higher abnormal returns than high MV acquirers. LowMV acquirers experience abnormal returns ranging from 1.17% to 2.23% while abnormal

returns range from 0.16% to 1.12% for high MV acquirers. Moreover panel D cooperates

with subsidiaries targets. In this case for each method of payment individually the reported

differences are not significant. Finally in panel E we can observe the differentials between

public and private firms. The results document that the overall abnormal return to bidders

of listed targets remain higher than the abnormal return of unlisted targets for both relative

size groups. However in mix and stock offers the excess return of private firms

acquisitions is higher than those of public firms acquisitions but the results are

insignificant. Thus we can infer, after considering the relative size of the deal, that our

findings offer partial support to the validity of our first hypothesis.

Summing up, the general overview that is extracted from the use of MV as benchmark is

that overall our results are fairly consistent with previous US and UK studies that report

higher significant excess return from the low MV acquirers than high MV acquirers at the

time of the bid announcement. Consequently we can accept our third hypothesis.

5.4 Value Vs Glamour and bidd er gains

By following the same methodology that was applied in table 7, we proceed on by using

this time the MTBV as benchmark for the firm size. In table 8 we present the abnormal

returns for acquirers partitioned on the basis of their market to book value, target status

and finally method of payment. In panel A, at bid announcement (-2 to +2 days) we report


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that high MTBV, glamour acquirers experience abnormal returns in the range of 0.17% to

1.94%, while the returns are 1.39% to 3.90% for value acquirers. The differentials in mean

abnormal return between the two groups for all, cash, stock and mix method of payment

are -0.83%, -1.29% , -1.22%, -0.27 respectively. However only the differential of all and

cash method of payment is significant at 1% level. Based on panel A we can infer that low

MTBV acquirers outperform glamour acquirers. This is contrast with the results of Rau and

Vermalen (1998) that market favour acquirers with high MTBV at the time of the bid

announcement. Moving on, we are transferred to panel b which engages public targets.

Glamour bidders in private acquisitions earn statistically significant abnormal returns of

3.53% while value bidders earn 4.62%. In cash offers the difference between value and

growth bidders is higher with a differential of 2.47% at 5% significance level. In the case ofstock and mix payment the reported differences are not significant. Further, from panel c

which cooperates with private targets, it is observed that high MTBV bidders acquirers

experience abnormal returns in the range 1.04% of to2.06%, while the returns are 2.03%

to 2.6% for value acquirers. The differentials in mean abnormal return between the two

groups for all, cash, stock and mix method of payment are -0.64%, -0.99%, -0.50%,

-0.54% respectively. However only the differential of stock offer is significant at 10% level.

Moreover in panel D and subsidiaries the results provide us more evidence that value

acquirers outperform growth acquirers. In panel E we can observe the differentials

between public and private firms. The findings confirm that bidders financing by cash

detect higher abnormal returns in public acquisitions than in private with a significant level

of 1%. In contrast when the method of payment is stock, acquirers of public targets enjoy

lower insignificant returns than acquirers of private targets.

Finally from figures 7 and 8 we can observe that both value and glamour acquirers prefer

to use cash as method of payment than stock and mix. This is in contrast with the results

of Rau and Vermaelen (1998) for the US market, and Sudarsanam and Mahate (2003), for

the UK market that glamour acquirers exhibit a tendency to finance the merger using

stock in contrast with value acquirers who are more likely to use cash.

As a conclusion, overall based on MTBV as a benchmark for glamour/value we can

support the underperformance of glamour acquirers (our Hypothesis, H4). Our results are


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related with previous studies19which have noticed that low market to book value (value)

firms outperform (glamour) high market to book firms.

6. Summary and Conclusions

The aim of this study was by using a large data set of 3924 domestic acquisitions for the

UK market over the period 1996 to 2007, to examine bidders gainsinvolved in private and

public acquisitions. It also seeks to investigate the role of information asymmetry (bid ask

spread) in bidders abnormal return and finally toexamine to which extent bidders gain are

related to the relative size of the merger partners. Moreover we tried to identify by using

the MTBV as benchmark for the acquirers firm size,if value acquirers outperform glamour

acquirers in the short run period.

From our analysis several conclusions emerge. First bidders gains from takeovers depend

form the method of payment. In cash offers acquisition of public firms create higher

abnormal return to the shareholders of acquiring firm than acquisitions of private firms. In

contrast acquirers of private firms using stock enjoy positive abnormal returns whereas

acquirers of public firms by stock payment experience significant losses. The above results

confirm the managerial motive hypothesis, asymmetric information hypothesis andcorporate monitoring hypothesis. Second the return available to the shareholders of

acquirers are related to the information asymmetry (bid ask spread). Bidders subject to low

information asymmetry using common equity to finance acquisitions enjoy significant

higher return than bidders subject to high information asymmetry. Third the gain available

to the shareholders of bidding firms is consistent with the relative size of takeover partner.

By using the market value of the acquirers one month prior to the bid announcement we

confirm that small acquirers outperform large acquirers in a short event-period window

surrounding the announcement of bids. Finally by using the MTBV as benchmark for the

acquirers size we document that in the short run period low MTBV value acquirers earn

higher significant abnormal returns than high MTBV glamour acquirers.

19Fama and French (1992) and Barber and Lyon (1996).


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Overall, our findings suggest that acquirers gains are dependant on target status, method

of payment, information asymmetry and relative size of the partners in acquisitions. Finally

bidders gain higher abnormal return when acquire public targets than private targets with

payment by cash and/or mix, while they experience lower excess return when they acquire

public targets than private targets by stock.


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Draper, P. and Paudyal, K. (1999). Corporate takeovers: mode of payment, returns and

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and the Medium of Exchange in Takeovers: Theory and Tests The Review of FinancialStudies 3, pp. 651-675.

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8. Figures and Tables

Table 1

The sample consists of all transactions in Thomson Financial SDC mergers and acquisitions databasebetween 1996 and 2007 where the acquirer owns less than 10 percent of targets shares prior to thetransaction and ends up with more than 50 percent as a result of the deal. Acquisition activity is the totalnumber of transactions. Mean, median and total deal values are in UK pounds.

Year Acquisition

Activity Mean Meadian Total Mean Median Total Mean Meadian Total

1996 348 42.174526 4.31 14676.735 401.16822 77.735 139606.54 3.0770402 2.17 1070.81

1997 398 24.458014 4 8511.389 314.20621 67.29 109343.76 -0.0067816 1.7 1820.69

1998 411 41.314577 4.5 16980.291 436.63745 72.95 179457.99 5.2900973 2.12 2174.23

1999 409 184.39303 7 75416.75 748.71765 100.14 306225.52 2.9462347 1.57 1205.012000 434 63.710929 6.65 27650.543 1055.6104 123.615 458134.91 4.3967972 2.08 1908.21

2001 298 89.599413 5.052 26700.625 745.34503 72.18 222112.82 2.1257383 1.56 633.47

2002 296 65.167889 4.32 19289.695 471.43172 45.98 139543.79 2.3411486 1.5 692.98

2003 250 70.318356 6.3285 17579.589 709.58324 51.84 177395.81 2.1784 1.335 544.6

2004 269 79.675502 5 21432.71 903.81647 53.9 243126.63 2.031487 1.47 546.47

2005 277 85.123993 10 23579.346 629.15628 91.19 174276.29 0.5980144 0.65 165.65

2006 304 255.63435 11.1605 77712.843 869.02934 107.36 264184.92 1.7613816 1.83 535.46

2007 230 255.62021 14.169 58792.649 1221.0592 107.975 280843.61 2.9622609 2.36 681.32

Sum 3924 388323 2694253 11979

Deal Value () (000) Market Value Market to Book Value

Figure 1

Acquisition Activity

0100

200300400500

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Numb

erofDeals

Acquisition Activity


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Table 2

The sample consists of all transactions in Thomson Financial SDC mergers and acquisitions database between 1996and 2007 where the acquirer owns less than 10 percent of targets shares prior to the transaction and ends up with morethan 50 percent as a result of the deal. Acquisition activity is the total number of transactions. Mean, median and total

deal values are in UK pounds. Public target (%) is the percentage of transactions where the target is a public firm andPrivate target (%) represents the percentage of transactions where the target is unlisted. CAR is the acquirerspercentage market adjusted return for a five day window surrounding the acquisition announcement. Market adjustmentis performed by subtracting the corresponding market return from the acquirers return for each of the five days of theannouncement window. Mean CAR, the average CAR for all transactions in each country, is reported for all, public andprivate deals. The sample is winsorized to the top and bottom 1% CARs.

Year Acquisition Public Private Subsidiaries Mean Car % Mean Car % Mean Car %

Activity Public Private Subsidiaries

1996 348 12.07% 59.48% 27.01% 0.75% 1.92% 0.98%

1997 398 13.32% 55.78% 30.90% -0.66% 1.29% 2.20%

1998 411 13.38% 50.12% 36.25% 1.52% 2.15% 2.07%

1999 409 19.80% 50.61% 29.58% 0.90% 2.53% 1.95%

2000 434 14.75% 56.45% 28.80% -1.59% 1.09% 0.13%

2001 298 12.42% 52.68% 34.90% -2.39% 0.61% 0.44%

2002 296 22.97% 54.39% 22.64% 10.76% 1.84% 0.22%

2003 250 34.00% 40.80% 25.20% 6.39% 2.24% 2.99%

2004 269 23.42% 54.28% 22.30% 6.45% 2.24% 1.59%

2005 277 31.05% 55.60% 13.36% 5.70% 3.40% 2.85%

2006 304 36.18% 44.41% 19.41% 7.63% 1.70% 1.78%

2007 230 36.52% 49.57% 13.91% 10.47% 1.44% 1.92%

Average 22.49% 52.01% 25.36% 4.63% 1.84% 1.49%

Figure 2

Target Status

0.00%

20.00%

40.00%

60.00%

80.00%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Public

Private

Subsidiaries


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Table 3 SummaryStatistics (public Vs private targets)

Mean Median Stdev Mean Median Stdev

MV of Bidders (m) 1144.84 89.49 5390.19 408.31 68.87 2593.22

Value of the Deal (m) 371 40.06 1570.58 12.2 3.66 44.21

Event period Gross Return 4.63% 2.56% 0.12 1.84% 0.99% 0.075

(-2, 2 days)in %

Public Targets (N=833) Private Targets (N=2056)

Table 4

The sample consists of all transactions in Thomson Financial SDC mergers and acquisitions database between 1996and 2007 where the acquirer owns less than 10 percent of targets shares prior to the transact ion and ends up with morethan 50 percent as a result of the deal. The transaction value is above 1 million US dollars and the target-to-bidderrelative market value is above one percent. The acquirer has data available in Thomson Financial Datastream.

Acquisition activity is the total number of transactions. All-cash (%) is the percentage of deals financed with pure cashwhile all-stocks (%) is the percentage of deals financed with equity. Mixed (%) is the percentage of deals that are neitherfinanced with all-cash, nor all-shares

Year

Cash Stock Mix Cash Stock Mix Cash Stock Mix Cash Stock Mix

1996 38.22% 9.77% 52.01% 28.57% 42.86% 28.57% 26.57% 6.28% 67.15% 64.89% 3.19% 31.91%

1997 39.20% 10.30% 50.50% 41.51% 37.74% 20.75% 31.98% 4.95% 63.06% 51.22% 8.13% 40.65%

1998 48.91% 9.98% 41.12% 43.64% 34.55% 21.82% 37.38% 6.80% 55.83% 67.11% 5.37% 27.52%

1999 45.23% 9.78% 44.99% 38.27% 25.93% 35.80% 34.78% 5.31% 59.90% 67.77% 6.61% 25.62%

2000 33.64% 12.21% 54.15% 43.75% 37.50% 18.75% 19.59% 8.98% 71.43% 56.00% 5.60% 38.40%

2001 28.86% 14.43% 56.71% 37.84% 43.24% 18.92% 12.74% 9.55% 77.71% 50.00% 11.54% 38.46%

2002 53.38% 7.09% 39.53% 77.94% 7.35% 14.71% 35.40% 7.45% 57.14% 71.64% 5.97% 22.39%2003 55.60% 9.20% 35.20% 67.06% 17.65% 15.29% 38.24% 5.88% 55.88% 68.25% 3.17% 28.57%

2004 48.33% 8.55% 43.12% 66.67% 19.05% 14.29% 36.30% 5.48% 58.22% 58.33% 5.00% 36.67%

2005 48.01% 8.66% 43.32% 62.79% 17.44% 19.77% 33.77% 3.90% 62.34% 72.97% 8.11% 18.92%

2006 54.93% 8.88% 36.18% 79.09% 14.55% 6.36% 32.59% 5.19% 62.22% 61.02% 6.78% 32.20%

2007 53.04% 9.57% 37.39% 72.62% 16.67% 10.71% 34.21% 4.39% 61.40% 68.75% 9.38% 21.88%

Mean 45.61% 9.87% 44.52% 54.98% 26.21% 18.81% 31.13% 6.18% 62.69% 63.16% 6.57% 30.27%

All Public Private Subsidiaries

Figure 3

ALL

0.00%

20.00%

40.00%

60.00%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Cash

Cash

Stock

Mix


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36

Figure 4

Figure 5

Figure 6

Public

0.00%20.00%40.00%60.00%80.00%

100.00%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Cash

Stock

Mix

Private

0.00%

20.00%

40.00%60.00%

80.00%

100.00%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Cash

Stock

Mix

Mix

0.00%

20.00%

40.00%60.00%

80.00%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

CashStock

Mix


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Table 5 Short-run abnormal returns to acquirers

The sample consists of all transactions in Thomson Financial SDC global mergers and acquisitions databasebetween 1996 and 2007 where the acquirer owns less than 10 percent of targets shares prior to the transactionand ends up with more than 50 percent as a result of the deal. The transaction value is above 1 million UK pounds

and the target-to-bidder relative market value is above one percent. The acquirer has data available in ThomsonFinancial Datastream. Mean cumulative market adjusted returns (CARs) for a five day window surrounding theacquisition announcement are reported. Market adjustment is performed by subtracting the corresponding marketreturn from the acquirers return for each of the five days of the announcement window. The sample is winsorisedto the top and bottom 1% CARs. Results are reported for all, public, private and subsidiaries deals and individuallyfor all-cash (Cash), all-stock (Stock) deals and mixed deals which comprise all remaining offers. The table alsoreports differentials between public and private acquisitions in each case using sample t-tests for means. ***, **,and * denote statistical significance at the 1,5 and 10 percent level respectively. The sample size is reportedbelow t-test.

ALL Publ Priv Sub Priv Vs Publ

mean 2.33%*** 4.61%*** 1.84%*** 1.45%*** 2.78%***

All t-stat (17.26) (11.62) (11.1) (6.83) (6.46)

N 3924 833 2056 1035

mean 3.3%*** 7.63%*** 1.48%*** 1.68%*** 6.07%***

Cash t-stat (16.56) (14.87) (6.81) (6.68) (10.8)

N 1756 490 627 639

mean 0.75%* -0.36%* 1.56%* 2.59%** -1.86%

Stock t-stat (1.44) (-0.51) (1.57) (2.23) (-1.57)

N 392 195 130 67

mean 1.74%*** 1.25%** 2.1%*** 0.89%** -0.758%*

Mix t-stat (9.04) (1.42) (9.19) (2.14) (-0.83)

N 1776 148 1299 329


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Table 6

The sample consists of all transactions in Thomson Financial SDC global mergers and acquisitions database

between 1996 and 2007 where the acquirer owns less than 10 percent of targets shares prior to the transactionand ends up with more than 50 percent as a result of the deal. The transaction value is above 1 million UK poundsand the target-to-bidder relative market value is above one percent. The acquirer has data available in ThomsonFinancial DataStream. Acquirers are sorted in three subsets based on their relative size (large, medium and low)and target status (all, private, public, subsidiaries), and the method of payment (cash, stock, mix). Panel A reportsresults for all ragets, panel B for private targets, panel C for private targets, D for subsidiaries and E for differentialbetween public and private. Cumulative market adjusted returns (CARs) for a five day window surrounding theacquisition. Market adjustment is performed by subtracting the corresponding market return from the acquirersreturn for each of the five days of the announcement window. The sample is winsorised to the top and bottom 1%CARs. The table also reports differentials between public and private acquisitions in each case using sample t-tests for means. ***, **, and * denote statistical significance at the 1, 5 and 10 percent level respectively. Thesample size is reported below t-test.

Panel A

ALL ALL High Medium Low HML

mean 2.34%*** 4.22%*** 1.90%*** 0.90%*** 3.32%***

All t-stat (17.27) (13.88) (9.62) (5.26) (9.51)

N 3924 1308 1308 1308

mean 3.30%*** 8.06%*** 1.64%*** 0.98%*** 7.08%***

Cash t-stat (16.56) (17.03) (5.63) (0.00983) (13.78)

N 1756 524 543 689

mean 0.75% 0.68% 1.49% -0.14% 0.82%

Stock t-stat (1.48) (0.97) (1.58) (-0.13) (0.66)

N 392 237 95 60

mean 1.74%*** 2.06%*** 2.17%*** 0.91%*** 1.16%**

Mix t-stat (9.04) (4.8) (7.91) (0.00908) (2.21)

N 1776 547 670 559

Panel B

Publ ALL High Medium Low HML

mean 4.63%*** 5.89%*** 1.57%** -0.78% 6.67%***

All t-stat (11.64) (12.26) (1.97) (-0.98) (7.17)

N 833 627 137 69

mean 7.64%*** 10.10%*** 2.72%*** -0.31% 10.41%***

Cash t-stat (14.87) (16.33) (2.84) (-0.00311) (9.58)

N 490 349 86 55

mean -0.36% 0.20% -2.09% -3.19% 3.39%

Stock t-stat (-0.51) (0.26) (-1.1) (-1.31) (1.32)

N 195 152 33 10

mean 1.25% 1.11% 2.76% -1.18% 22.90%

Mix t-stat (1.42) (0.0111) (0.0276) (-0.01177) (1.94)

N 148 126 18 4

Panel C

Priv ALL High Medium Low HML

mean 1.84%*** 2.95%*** 2.15%*** 1.00%*** 1.96***%

All t-stat (11.1) (5.98) (8.51) (4.81) (3.65)

N 2056 437 762 857

mean 1.48%*** 5.16%*** 1.48%*** 0.91%*** 4.24%***

Cash t-stat (6.81) (5.43) (3.53) (0.00912) (4.31)

N 627 69 202 356

mean 1.56%* 1.54% 2.54%** 0.02% 1.51%

Stock t-stat (1.57) (0.92) (2.15) (0.01) (0.66)

N 130 62 38 30

mean 2.01%*** 2.74%*** 2.3%*** 1.12%*** 1.62%**

Mix t-stat

(9.19) (4.75) (7.45) (0.01123) (2.47)

N 1299 306 522 471

Relative size


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39

Table 6

Panel D

Sub ALL High Medium Low HML

mean 1.49%*** 2.17%*** 1.55%*** 0.98%*** 1.19%*

All t-stat (6.83) (4.02) (4.74) (3.03) (1.89)

N 1035 244 409 382

mean 1.68%*** 3.25%*** 1.41%*** 1.33%*** 1.93%**

Cash t-stat (6.68) (4.33) (3.41) (0.01329) (2.35)

N 639 106 255 278

mean 2.59%** 1.58% 4.75%*** 1.15% 0.43%

Stock t-stat (2.23) (0.61) (2.91) (0.72) (0.14)

N 67 23 24 20mean 0.89%** 1.30%* 1.25%* -0.20% 1.49%

Mix t-stat (2.14) (1.72) (2.25) (-0.00198) (1.24)

N 329 115 130 84

Panel E

Publ Vs Priv ALL High Medium Low

mean 2.79***% 2.94%*** -0.58% -1.78%**

All t-stat (6.48) (4.27) (-0.69) (-2.15)

N

mean 6.07%*** 4.94%*** 1.24% -1.22%

Cash t-stat (10.8) (4.36) (1.18) (-0.01223)

N

mean -1.84% -1.34% -4.63%** -3.21%

Stock t-stat (-1.57) (-0.72) (-2.07) (-1.1)

N

mean -0.76% -1.63% 0.39% -2.3%**

Mix t-stat (-0.83) (-1.4) (0.26) (-0.023)

N


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40

Table 7

The sample consists of all transactions in Thomson Financial SDC global mergers and acquisitions databasebetween 1996 and 2007 where the acquirer owns less than 10 percent of targets shares prior to the transactionand ends up with more than 50 percent as a result of the deal. The transaction value is above 1 million UK poundsand the target-to-bidder relative market value is above one percent. The acquirer has data available in ThomsonFinancial DataStream. Acquirers are sorted in three subsets based on their market value (large, medium and low)and target status (all, private, public, subsidiaries), and the method of payment (cash, stock, mix). Panel A reportsresults for all ragets, panel B for private targets, panel C for private targets, D for subsidiaries and E for differentialbetween public and private. Cumulative market adjusted returns (CARs) for a five day window surrounding theacquisition. Market adjustment is performed by subtracting the corresponding market return from the acquirersreturn for each of the five days of the announcement window. The sample is winsorised to the top and bottom 1%CARs. The table also reports differentials between public and private acquisitions in each case using sample t-tests for means. ***, **, and * denote statistical significance at the 1, 5 and 10 percent level respectively. Thesample size is reported below t-test.


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Market Value

Panel A

ALL ALL High Medium Low HML

mean 2.34%*** 1.7%*** 2.6%*** 2.7%*** -1.03%***

All t-stat (17.27) (8.42) (11.84) (9.89) (-3.02)

N 3924 1308 1308 1308mean 3.3%*** 1.98%*** 3.86%*** 4.63%*** -2.66%***

Cash t-stat (16.56) (7.71) (11.23) (9.95) (-5)

N 1756 717 562 477

mean 0.75% 1.46% 0.26% 0.72% 0.74%

Stock t-stat 1.48 1.58 0.32 0.82 0.58

N 392 97

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Public Versus Private Acquisitions, Information Asymmetry and Bidder Gains

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