merger negotiations with stock market...
TRANSCRIPT
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Merger Negotiations with Stock MarketFeedback
Merger Negotiations with Stock Market Feedback
Sandra Betton, Concordia UniversityB. Espen Eckbo, Dartmouth College
Rex Thompson, Southern Methodist UniversityKarin Thorburn, Norwegian School of Economics
Third Paris Spring Corporate Finance Conference, May 20, 2011
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 1: Information arrival process in event time.
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5.00
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-45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15
Targ
et P
erce
ntag
e C
umul
ativ
e A
bnor
mal
Ret
urns
Days Relative to Day of Initial Takeover Bid announcement
Pre-runup period: < day -42Synergies in takeoverperceived as negligibleby the market
Runup period: day -42 to -2.Market receive a signal, s, of synergy gains and revisesprobability ¶ of takeover, creating a target stock price runup of VR
Bid event: day -1 and +1.Target receives initial bid.Market revalues target to reflect the expectedfinal bid premium VP, creating a markup ofVP - VR
Sample averagetarget runup=9%
Sample averagemarkup = 34%
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Information environment
Information environment
• Market receives signal s about synergy gains S .
• S known to bidder and target. Market knows only thedistribution over S given the signal.
• Negotiations establishes a sharing rule θ for S and γ forbidding cost C .
• Rational bidding threshold: K = γCθ .
• Target benefit function: B(S ,C ) (= 0 when S < K ).
• Prior takeover probability π(0) and prior target stock pricenormalized to zero.
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Model
Rational market pricing conditional on the rumor s:
• Target runup prior to the first bid announcement:
VR = π(s)Es [B(S ,C )|s, bid ] =
∫ ∞
KB(S ,C )g(S |s)dS (1)
• Expected final offer and markup at first bid announcement:
VP = Es [B(S ,C )|s, bid ] =1
π(s)VR (2)
VP − VR =1− π(s)
π(s)VR (3)
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 2A: Target revaluations under deal anticipation.
get V
alua
tion
V(P)
V(P) ‐ V(R)
V(R)
Expected change in target valuations during the runup (VR), throughout the entire bid process (VP), and the expected markup ( VP ‐ VR)
Benefit function has target and bidder equally sharing synergy gainss. Bidder bears a larger share of bid costs. Uncertainty in the signal, s, is uniform. Expected markup hits zero when deal is perfectly anticipated.
Revision
in Targ
Synergy signal s in the runup period
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 2B: Markup projections under deal anticipation.
V P‐V
R
Projection of Vp‐VR on VR
Theoretical fit of V(P)‐V(R ) on V(R )
Benefit function has target and bidder equally sharing synergy gainss. Bidder bears a larger share of bid costs.Uncertaintly in the signal, s, is uniform. Projection hits zero when deal is perfectly anticipated.
V
VR
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Model
Adding a known target stand-alone value change T
• Target runup:
VRT = π(s)Es [B(S ,C )+T |s, bid ]+[1−π(s)]T = VR+T (4)
• Expected final offer and markup at first bid announcement:
VPT = Es [B(S ,C ) + T |s, bid ] = VP + T (5)
VPT − VRT =1− π(s)
π(s)[VRT − T ] (6)
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 3: Markup projections with stand-alone change T inrunup. Solid line (Avg.): vertical markup summation acrossdifferent Ts
Mar
kup
VPT
-VR
T
Target runnup VRT
With T = 1
Avg. V(P)-V(R )
With T = 0
Π(s) = 1
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 4B: Markup projections with runup feedback
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Prob
abili
ty o
f bid
Rev
isio
ns in
targ
et V
alua
tions
s
Synergy signal s
B: Valuation changes with transfer of runup
V(P)*
V(P)* - V(R)*
V(R)*
Prob of bidΠ(s) = 1.
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
proposition 3 (2)
Deal anticipation with runup fed back into the offer price
Proposition 3: The hypothesis that runups caused by dealanticipation are transferred from bidders to targets is rejected by azero or negative average relation between markups and runups.
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Table 3: Nonlinear projections
Markup measure Runup measure Linear projection Linear res. Nonlinear res.VP − VR VR VP − VR = a+ bVR ser. corr. ser. corr.
Total markup Total runup a = 0.36 0.030 0.015OPP−2
− 1P−2
P−42− 1 b=-0.24 (−11.9) (2.36) (1.15)
Total markup Total runup a = 0.36 0.045 0.027OPP−2
− 1P−2
P−42− 1 b = −0.22 (−10.1) (3.21) (2.19)
Expected markup Total runup a = 0.31 0.027 0.016
π[ OPP−2
− 1]P−2
P−42− 1 b = −0.17 (−9.5) (2.11) (1.25)
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 2B: Markup projections under deal anticipation.
V P‐V
R
Projection of Vp‐VR on VR
Theoretical fit of V(P)‐V(R ) on V(R )
Benefit function has target and bidder equally sharing synergy gainss. Bidder bears a larger share of bid costs.Uncertaintly in the signal, s, is uniform. Projection hits zero when deal is perfectly anticipated.
V
VR
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 5A: Empirical markup projections (using offer prices)
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0.8
A: Projections of total markup on total runup using offer prices:
Best Linear Fit
Best Fit of Flexible Form
0 4
0.5
0.6
0.7
mar
kup
Best Linear Fit
Best Fit of Flexible Form
Raw Data
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Tot
al m
arku
p
0
0.1
0.2
‐0.7 ‐0.5 ‐0.3 ‐0.1 0.1 0.3 0.5 0.7 0.9Total runup from day -42 to day -2
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 6A: Projections of bidder gains on target runupwithout feedback
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1
1.5
2
2.5
0 0.5 1 1.5 2 2.5 3 3.5
Bid
der e
xpec
ted
bene
fit, ν
P
Target Runup, VR
A: Bidder does not transfer runup VR to target
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 6B: Projections of bidder gains on target runup withfeedback and rational bidding
Bid
der e
xpec
ted
bene
fit, ν
P
Target Runup, VR
B: Bidder transfers VR to the target but bids only on beneficial deals (alters the bid threshold K)
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 6C: Projections of bidder gains on target runup withfeedback but not rational bidding
Bid
der e
xpec
ted
bene
fit, ν
P
Target Runup, VR
C: Bidder transfers VR to the target but does not alter the bid threshold K (suboptimal behavior).
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Table 6: Bidder regressions
Dep var: Bidder CAR[-42,1] (1) (2) (3) (4) (5) (6)
Intercept -0.116 -0.116 -0.110 -0.114 -0.097 -0.099(0.091) (0.102) (0.979) (0.102) (0.486) (0.288)
Total Target Runup 0.049 0.054
VR =P−2
P−42− 1 (0.006) (0.003)
Net Target Runup 0.078 0.082
VRT =P−2
P−42− M−2
M−42(0.000) (0.000)
Augmented Target Runup 0.049
VR = (P−2
P−42− 1) + R0 (0.006)
Market Model Target Runup 0.148VRT = CAR(−42, 2) (0.000)Control variables no yes no yes no noAdjusted R2 0.019 0.025 0.019 0.049 0.043 0.049
N 3,691 3,689 3,660 3,691 3,624 3,623
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 6A: Projections of bidder gains on target runupwithout feedback
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0.5
1
1.5
2
2.5
0 0.5 1 1.5 2 2.5 3 3.5
Bid
der e
xpec
ted
bene
fit, ν
P
Target Runup, VR
A: Bidder does not transfer runup VR to target
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Figure: Figure 7A: Bidder gain on target runup
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A: Projections of Bidder Market Model CAR(-42, 1) target runup
Best Linear Fit
Best Fit of Flexible Form
0
0.05
0.1
0.15
Mod
el C
AR
(-42
, 1)
Best Linear Fit
Best Fit of Flexible Form
Raw Data
‐0.15
‐0.1
‐0.05
0
‐0.7 ‐0.5 ‐0.3 ‐0.1 0.1 0.3 0.5 0.7 0.9
Bid
der
Mar
ket M
odel
C
‐0.2
‐0.15
Target Runup from day -42 to day -2
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback
Motivation Markup projections: Theory Markup projections: Evidence Bidder projections: Theory Bidder projections: Evidence
Conclusions
Conclusions: We show that...
• With deal anticipation, projection of markups on runups isnonlinear
• Empirical projections are nonlinear and consistent with dealanticipation in the runup
• Empirical projections are inconsistent with a transfer of thetarget runup to the target
• Projections of bidder gains on target runup yield positiveslope, as predicted under deal anticipation
• Bidders raise the offer price with the market runup prior tothe initial bid
• Toehold acquisitions in the runup period fuel runups butlowers offer premiums
Betton, Eckbo, Thompson and Thorburn (2011)
Merger Negotiations with Stock Market Feedback