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Public and Private Takeover Markets: an Empirical Analysis

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Public and Private Takeover Markets: an Empirical Analysis PUBLIC AND PRIVATE TAKEOVER MARKETS: AN EMPIRICAL ANALYSIS by MICHAEL A. STEGEMOLLER (Under the direction of Annette B. Poulsen) ABSTRACT An unparalleled $2.7 trillion worth of merger and acquisition activity occurred in the 1990s. These mergers resulted in the combination of firms that were able to combine rapidly changing technologies in new ways. Despite the large amount of merger activity in this period, there is relatively little research studying these mergers and the financial markets that facilitated them. My research addresses the following basic questions about takeovers. The first is whether mergers and acquisitions facilitate economic growth, and the second examines why private firms sell-out to public companies instead of undertaking an initial public offering. I find that acquisitions create tremendous value for those firms utilizing them as a means of corporate change. Frequent acquirers outperform non-frequent acquirers using both economic and accounting measures of performance. Additionally, the level of over-performance is positively influenced by the relative size of the acquisition program of the acquirer. I also examine the transition from private to public ownership by private owners selling their business to a public corporation. I compare these transactions to initial public offerings to better compare the characteristics that influence the decision to be acquired versus “go public.” My results suggest that private firms seeking to transition to public ownership choose an acquisition as the means of transition based on firm-specific characteristics such as growth rates, insider ownership, leverage, and profitability. INDEX WORDS: Takeovers, Mergers, Acquisitions, Long-run performance, Private, IPO, Corporate governance, Ownership PUBLIC AND PRIVATE TAKEOVER MARKETS: AN EMPIRICAL ANALYSIS by MICHAEL A. STEGEMOLLER B.S., Abilene Christian University, 1996 M.B.A., Baylor University, 1998 A Dissertation Submitted to the Graduate Faculty of The University of Georgia in Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY ATHENS, GEORGIA 2002 © 2002 Michael A. Stegemoller All Rights Reserved PUBLIC AND PRIVATE TAKEOVER MARKETS: AN EMPIRICAL ANALYSIS by MICHAEL A. STEGEMOLLER Approved: Major Professor: Annette B. Poulsen Committee: Kathleen Fuller Jim Linck David Mustard Jeffry Netter Electronic Version Approved: Gordhan L. Patel Dean of Graduate School The University of Georgia May 2002 DEDICATION To my firstborn, Adeline Jane: your birth is a reminder of what is important and joyous. iv ACKNOWLEDGEMENTS This work is possible only through the love and encouragement of my wife Ashlie. Without her steadfastness and companionship these last four years would have been misery, somehow she has made them gold. If anyone deserves credit for this work, it is she. My parents Mike and Betty Stegemoller contributed vastly through their years of nurturing and unlimited belief - it seems to me - in my abilities. They are pillars of faith, patience, and hard work. Tim and Melissa Stegemoller have influenced me in monumentally positive ways that only a brother and sister can. Bill Petty and Jack Griggs must be thanked as they have mentored and blessed me in ways I hope to replicate. Annette Poulsen and Jeff Netter have displayed tremendous support and patience through my time at the university. They have never failed to surprise me in their generosity and patience. Barrett Coffman and Todd Stancil are brothers and friends that provided joy, laughter and deepening. Finally, and of utmost importance, I thank the Lord my God within whom I live, breathe, and have my being. The goodness done to me by others has come only through Him. Thank you Father for granting me success on every side and blessing me with your unmovable and guiding presence. If You were not, I would not want to be. v TABLE OF CONTENTS Page ACKNOWLEDGEMENTS............................................................................................................. v CHAPTER 1 INTRODUCTION ......................................................................................................... 1 2 LITERATURE REVIEW.............................................................................................. 3 3 THE PERFORMANCE OF FREQUENT ACQUIRERS.............................................. 5 3.1 Introduction........................................................................................................ 5 3.2 Prior research ................................................................................................... 10 3.3 Data and methodologies................................................................................... 13 3.4 Results.............................................................................................................. 25 3.5 Conclusion ....................................................................................................... 48 4 TRANSISTIONS: FROM PRIVATE TO PUBLIC OWNERSHIP ............................ 50 4.1 Introduction...................................................................................................... 50 4.2 Prior research ................................................................................................... 54 4.3 Data and methodology ..................................................................................... 59 4.4 Theory of influencing firm characteristics....................................................... 70 4.5 Results.............................................................................................................. 79 4.6 Conclusion ..................................................................................................... 106 5 CONCLUSION.......................................................................................................... 108 REFERENCES ............................................................................................................................ 109 vi CHAPTER 1 INTRODUCTION I examine the merger and acquisition boom in the 1990s. While many observers believe that merger activity declined in the 1990s relative to the 1980s, in actuality a record breaking $2.7 trillion worth of merger and acquisition activity occurred in the past decade. Mergers and acquisitions in the 1990s were also fundamentally different from any earlier period. These mergers resulted in the combination of firms that were able to combine rapidly changing technologies in new ways. Despite the large amount of merger activity in this period, there is relatively little research studying these mergers and the financial markets that facilitated these mergers. I believe that my research on this topic will be both socially and economically significant. My research addresses the following two basic questions about takeovers. I first study whether mergers and acquisitions facilitate economic growth. I compare the performance of companies that acquire five or more private and public companies with a matched set of companies that are not acquiring other firms. I compare both stock price performance of the companies and actual changes in earnings and other measures of operating performance over one- and three-year periods. The relative performance of multiple acquisition firms helps to determine whether acquiring firms is an efficient means for companies to expand. In short, this paper is designed to answer the economic question, "Are acquisitions an efficient method of corporate growth?" In my second study, I analyze the acquisition of companies that are not traded in the public stock market by firms that are public. I contrast these transactions to initial public share offerings (IPOs). These transactions are similar in that they both give the company founders the opportunity to sell their assets in the company and provide the opportunity to raise large amounts 1 of capital. However, they are different in that in the first case the company is purchased by another company, with no separately trading stock, but in the latter there is a public market for the shares of stock. While there is abundant academic literature on the IPO process, there is essentially no research on private-firm acquisitions. These private-firm acquisitions account for more than twice the dollar value of IPOs. 2 CHAPTER 2 LITERATURE REVIEW The overall literature relevant to the following studies of private and public takeover markets is diverse and beyond the scope of this analysis. However, there is a basic literature that is helpful in understanding the intersection of the following two studies. A few works best summarize the literature on takeovers. Jensen and Ruback (1983), Jarrell, Brickley and Netter (1988) and Mulherin and Boone (2000) present evidence on public takeovers for the 60s and 70s, the 80s, and the 90s, respectively. These studies suggest target shareholders gain significantly around the announcement of a takeover. The acquirers in these transactions experience small gains in the 60s and 70s, dwindling down to small losses in the 80s and 90s according to Bradley, Desai and Kim (1988) and Mulherin and Boone (2000). These papers also find the combined return of target and acquiring shareholders to be positive. The positive returns of public takeovers are attributed most frequently to synergies created by the combining of complementary firms. This combining allows for efficiencies of scale, reduction in middle management, the sharing of technologies, and the elimination of duplicative processes. Thus, the literature
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