1932

Abstract

I review recent takeover research that advances our understanding of “who buys who” in the drive for productive efficiency. This research provides detailed information on text-based definitions of product market links between bidders and targets, the role of the supply chain and industrial networks in driving takeovers, target plant efficiency, and pre- and post-takeover investment in product innovation. Moreover, recent evidence adds to our understanding of “how firms are sold” (transaction efficiency). Almost half of takeovers involving public targets are initiated by the seller and not by the buyer. Targets are strongly averse to bidder toeholds, and the merger negotiation process strongly protects proprietary information. Takeover premiums leave traces of rational bidding strategies, including bid preemption and winner’s curse avoidance. Recent tests employing exogenous instrumentation of bidder valuations reject that bidder shares are systematically overpriced in all-stock bids and suggest that bidder synergy gains are much larger than previously thought.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110112-120938
2014-12-01
2024-04-19
Loading full text...

Full text loading...

/deliver/fulltext/financial/6/1/annurev-financial-110112-120938.html?itemId=/content/journals/10.1146/annurev-financial-110112-120938&mimeType=html&fmt=ahah

Literature Cited

  1. Agrawal A, Cooper T, Lian Q, Wang Q. 2013. Common advisors in mergers and acquisitions: determinants and consequences. J. Law Econ. 56:691–740 [Google Scholar]
  2. Ahern KR, Harford J. 2014. The importance of industry links in merger waves. J. Finance 69:2527–76 [Google Scholar]
  3. Akdogu E. 2011. Value-maximizing managers, value-increasing mergers, and overbidding. J. Financ. Quant. Anal. 46:183–110 [Google Scholar]
  4. Andrade G, Mitchell M, Stafford E. 2001. New evidence and perspectives on mergers. J. Econ. Perspect. 15:103–20 [Google Scholar]
  5. Atanassov J. 2013. Do hostile takeovers stifle innovation? Evidence from antitakeover legislation and corporate patenting. J. Finance 68:31097–131 [Google Scholar]
  6. Atkas N, de Bodt E, Roll R. 2004. Market response to European regulation of business combinations. J. Financ. Quant. Anal. 39:731–57 [Google Scholar]
  7. Atkas N, de Bodt E, Roll R. 2007. Is European M&A regulation protectionist?. Econ. J. 117:1096–121 [Google Scholar]
  8. Atkas N, de Bodt E, Roll R. 2010. Negotiations under the threat of an auction. J. Financ. Econ. 98:241–55 [Google Scholar]
  9. Baker M, Pan X, Wurgler J. 2012. The effect of reference point prices on mergers and acquisitions. J. Financ. Econ. 106:49–71 [Google Scholar]
  10. Bao J, Edmans A. 2011. Do investment banks matter for M&A returns?. Rev. Financ. Stud. 24:2286–315 [Google Scholar]
  11. Bargeron L. 2012. Do shareholder tender agreements inform or expropriate shareholders?. J. Corp. Finance 18:373–88 [Google Scholar]
  12. Bates TH, Lemmon ML. 2003. Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes. J. Financ. Econ. 69:460–504 [Google Scholar]
  13. Bates TW, Lemmon ML, Linck JS. 2006. Shareholder wealth effects and bid negotiation in freeze-out deals: Are minority shareholders left out in the cold?. J. Financ. Econ. 81:681–708 [Google Scholar]
  14. Becher DA, Mulherin JH, Walkling RA. 2012. Sources of gains in corporate mergers: refined tests from a neglected industry. J. Financ. Quant. Anal. 47:57–89 [Google Scholar]
  15. Becht M, Bolton P, Roell A. 2003. Corporate governance and control. Handbook of the Economics of Finance, Vol. 1A: Corporate Finance Constantinides G, Harris M, Stulz R. 1–109 Amsterdam: North-Holland [Google Scholar]
  16. Ben-David I, Drake MS, Roulstone DT. 2014. Acquirer valuation and acquisition decisions: identifying mispricing using short interest. J. Financ. Quant. Anal. Forthcoming [Google Scholar]
  17. Bena J, Li K. 2013. Corporate innovations and mergers and acquisitions. J. Finance 69:1923–60 [Google Scholar]
  18. Betton S, Eckbo BE. 2000. Toeholds, bid jumps, and expected payoff in takeovers. Rev. Financ. Stud. 13:841–82 [Google Scholar]
  19. Betton S, Eckbo BE, Thompson R, Thorburn KS. 2014. Merger negotiations with stock market feedback. J. Finance 69:1705–45 [Google Scholar]
  20. Betton S, Eckbo BE, Thorburn KS. 2008. Corporate takeovers. Handbook of Corporate Finance, Vol. 2: Empirical Corporate Finance Eckbo BE. 291–430 Amsterdam: North-Holland [Google Scholar]
  21. Betton S, Eckbo BE, Thorburn KS. 2009. Merger negotiations and the toehold puzzle. J. Financ. Econ. 91:158–78 [Google Scholar]
  22. Bhattacharyya S, Nain A. 2011. Horizontal acquisitions and buying power: a product market analysis. J. Financ. Econ. 99:97–115 [Google Scholar]
  23. Boone AL, Mulherin JH. 2000. Comparing acquisitions and divestitures. J. Corp. Finance 6:117–39 [Google Scholar]
  24. Boone AL, Mulherin JH. 2007. How are firms sold?. J. Finance 62:847–75 [Google Scholar]
  25. Boone AL, Mulherin JH. 2008. Do auctions induce a winner’s curse? New evidence from the corporate takeover market. J. Financ. Econ. 89:1–19 [Google Scholar]
  26. Bradley M, Desai A, Kim EH. 1983. The rationale behind interfirm tender offers: Information or synergy?. J. Financ. Econ. 11:141–53 [Google Scholar]
  27. Bulow J, Huang M, Klemperer P. 1999. Toeholds and takeovers. J. Polit. Econ. 107:427–54 [Google Scholar]
  28. Burch T. 2001. Locking out rival bidders: the use of lockup options in corporate mergers. J. Financ. Econ. 60:103–41 [Google Scholar]
  29. Burkart M. 1995. Initial shareholdings and overbidding in takeover contests. J. Finance 50:1491–515 [Google Scholar]
  30. Burkart M, Gromb D, Panunzi F. 2000. Agency conflicts in public and negotiated transfers of corporate control. J. Finance 55:647–77 [Google Scholar]
  31. Cai J, Song MH, Walkling RA. 2011. Anticipation, acquisitions, and bidder returns: industry shocks and the transfer of information across rivals. Rev. Financ. Stud. 27:2242–85 [Google Scholar]
  32. Cain MD, Denis DJ. 2013. Information production by investment banks: evidence from fairness opinions. J. Law Econ. 56:245–80 [Google Scholar]
  33. Cain MD, Denis D. 2011. Earnouts: a study of financial contracting in acquisition agreements. J. Account. Econ. 51:151–70 [Google Scholar]
  34. Coval J, Stafford E. 2007. Asset fire sales (and purchases) in equity markets. J. Financ. Econ. 86:479–512 [Google Scholar]
  35. Cremers KJM, Nair VB, John K. 2008. Takeovers and the cross-section of returns. Rev. Financ. Stud. 22:1409–45 [Google Scholar]
  36. David J. 2011. The aggregate implications of mergers and acquisitions. Work. Pap., Univ. South. Calif.
  37. Denis DJ, Macias A. 2013. Material adverse change clauses and acquisition dynamics. J. Financ. Quant. Anal. Forthcoming [Google Scholar]
  38. Dimopoulos T, Sacchetto S. 2013. Merger activity in industry equilibrium. Work. Pap., Swiss Finance Inst.
  39. Dong M, Hisrshleifer D, Richardson S, Teoh SH. 2006. Does investor misvaluation drive the takeover market?. J. Finance 61:725–62 [Google Scholar]
  40. Eckbo BE. 1983. Horizontal mergers, collusion, and stockholder wealth. J. Financ. Econ. 11:241–72 [Google Scholar]
  41. Eckbo BE. 1985. Mergers and the market concentration doctrine: evidence from the capital market. J. Bus. 58:325–49 [Google Scholar]
  42. Eckbo BE. 1992. Mergers and the value of antitrust deterrence. J. Finance 47:1005–29 [Google Scholar]
  43. Eckbo BE. 2009. Bidding strategies and takeover premiums. J. Corp. Finance 15:149–78 [Google Scholar]
  44. Eckbo BE, Giammarino RM, Heinkel RL. 1990. Asymmetric information and the medium of exchange in takeovers: theory and tests. Rev. Financ. Stud. 3:651–75 [Google Scholar]
  45. Eckbo BE, Makaew T, Thorburn KS. 2013. Are stock-financed takeovers opportunistic? Work. Pap., Dartmouth Coll.
  46. Eckbo BE, Norli O, Thorburn KS. 2013. Seller-initiated takeovers. Work. Pap., Dartmouth Coll.
  47. Eckbo BE, Thorburn KS. 2000. Gains to bidder firms revisited: domestic and foreign acquisitions in Canada. J. Financ. Quant. Anal. 35:1–25 [Google Scholar]
  48. Eckbo BE, Thorburn KS. 2009. Creditor financing and overbidding in bankruptcy auctions. J. Corp. Finance 15:10–29 [Google Scholar]
  49. Eckbo BE, Thorburn KS. 2013. Corporate restructuring. Found. Trends Finance 7:1–132 [Google Scholar]
  50. Edmans A, Goldstein I, Jiang W. 2012. The real effects of financial markets: the impact of prices on takeovers. J. Finance 67:933–71 [Google Scholar]
  51. Erel I, Liao RC, Weisbach MS. 2012. Determinants of cross-border mergers and acquisitions. J. Finance 67:1045–82 [Google Scholar]
  52. Fan JPH, Goyal V. 2006. On the patterns and wealth effects of vertical mergers. J. Bus. 79:877–902 [Google Scholar]
  53. Fee CE, Thomas S. 2004. Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms. J. Financ. Econ. 74:423–60 [Google Scholar]
  54. Fich EM, Cai J, Tran AL. 2011. Stock option grants to target CEOs during private merger negotiations. J. Financ. Econ. 101:413–30 [Google Scholar]
  55. Fishman MJ. 1988. A theory of preemptive takeover bidding. Rand J. Econ. 19:88–101 [Google Scholar]
  56. Fishman MJ. 1989. Preemptive bidding and the role of the medium of exchange in acquisitions. J. Finance 44:41–57 [Google Scholar]
  57. Fresard L, Hoberg G, Phillips GM. 2012. The incentives for vertical mergers and vertical integration. Work. Pap., Univ. Md.
  58. Fu F, Lin L, Officer MS. 2013. Acquisitions driven by stock overvaluation: Are they good deals?. J. Financ. Econ. 109:24–39 [Google Scholar]
  59. Fulghieri P, Sevilir M. 2009. Organization and financing of innovation, and the choice between corporate and independent venture capital. J. Financ. Quant. Anal. 44:601–44 [Google Scholar]
  60. Fuller K, Netter J, Stegemoller M. 2002. What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. J. Finance 57:1763–93 [Google Scholar]
  61. Gaughan PA. 2011. Mergers, Acquisitions, and Corporate Restructurings Hoboken, NJ: Wiley, 5th ed.
  62. Giuli AD. 2012. The effect of stock misvaluation and investment opportunities on the method of payment in mergers. Work. Pap., ESCP Eur.
  63. Golubov A, Petmezas D, Travlos NG. 2012. When it pays to pay your investment banker: new evidence on the role of financial advisors in M&As. J. Finance 67:271–311 [Google Scholar]
  64. Gomes J, Livdan D. 2004. Optimal diversification: reconciling theory and evidence. J. Finance 59:507–35 [Google Scholar]
  65. Gorbenko A, Malenko A. 2014. Strategic and financial bidders in takeover auctions. J. Finance. Forthcoming [Google Scholar]
  66. Gorbenko A, Malenko A. 2013. A theory of initiations of takeover contests. Work. Pap., Lond. Bus. Sch.
  67. Gort M. 1969. An economic disturbance theory of mergers. Q. J. Econ. 83:624–42 [Google Scholar]
  68. Grossman SJ, Hart OD. 1986. The cost and benefits of ownership: a theory of vertical and lateral integration. J. Polit. Econ. 94:691–719 [Google Scholar]
  69. Hansen RS. 1986. Evaluating the costs of a new equity issue. Midland Corp. Finance J. Spring:42–55 [Google Scholar]
  70. Hansen RS. 2001. Do investment banks compete in IPOs? The advent for the 7% plus contract. J. Financ. Econ. 59:313–46 [Google Scholar]
  71. Harford J. 2005. What drives merger waves?. J. Financ. Econ. 77:529–60 [Google Scholar]
  72. Hart OD. 1995. Firms Contracts and Financial Structure Oxford, UK: Univ. Press
  73. Heitzman S. 2011. Equity grants to target CEOs during deal negotiations. J. Financ. Econ. 102:251–71 [Google Scholar]
  74. Hirshleifer D, Png IPL. 1989. Facilitation of competing bids and the price of a takeover target. Rev. Financ. Stud. 2:587–606 [Google Scholar]
  75. Hoberg G, Phillips GM. 2010. Product market synergies and competition in mergers and acquisitions: a text-based analysis. Rev. Financ. Stud. 23:3773–811 [Google Scholar]
  76. Jain BA, Kini O, Shenoy J. 2011. Vertical divestitures through equity carve-outs and spin-offs: a product markets perspective. J. Financ. Econ. 100:594–615 [Google Scholar]
  77. Jensen MC. 1986. Agency costs of free cash flow, corporate finance and takeovers. Am. Econ. Rev. 76:323–29 [Google Scholar]
  78. Jensen MC. 1993. The modern industrial revolution, exit, and the failure of internal control systems. J. Finance 48:831–80 [Google Scholar]
  79. Jensen MC. 2004. Agency costs of overvalued equity. Work. Pap., Eur. Corp. Gov. Inst.
  80. Jensen MC, Ruback RS. 1983. The market for corporate control. J. Financ. Econ. 11:5–50 [Google Scholar]
  81. Jovanovic B, Rousseau PL. 2002. The Q-theory of mergers. Am. Econ. Rev. 92:198–204 [Google Scholar]
  82. Jovanovic B, Rousseau PL. 2008. Mergers and reallocation. Rev. Econ. Stat. 90:765–76 [Google Scholar]
  83. Kale JR, Kini O, Ryan HE. 2003. Financial advisors and shareholder wealth gains in corporate takeovers. J. Financ. Quant. Anal. 38:475–501 [Google Scholar]
  84. Khan M, Kogan L, Serafeim G. 2012. Mutual fund trading pressure: firm-level stock price impact and timing of SEOs. J. Finance 67:1371–95 [Google Scholar]
  85. Kisgen DJ, Qian J, Song W. 2009. Are fairness opinions fair? The case of mergers and acquisitions. J. Financ. Econ. 91:79–207 [Google Scholar]
  86. Klein B, Crawford RG, Alchian AA. 1978. Vertical integration, appropriable rents, and the competitive contracting process. J. Law Econ. 21:297–326 [Google Scholar]
  87. Krishnan CNV, Masulis RW. 2013. Law firm expertise and merger and acquisition outcomes. J. Law Econ. 56:189–226 [Google Scholar]
  88. Lerner J, Sorenson M, Strömberg P. 2011. Private equity and long-run investment: the case of innovation. J. Finance 66:445–77 [Google Scholar]
  89. Levis M. 2011. The performance of private equity-backed IPOs. Financ. Manag. 40:253–77 [Google Scholar]
  90. Li X. 2013. Productivity, restructuring, and the gains from takeovers. J. Financ. Econ. 109:250–71 [Google Scholar]
  91. Makaew T. 2012. Waves of international mergers and acquisitions. Work. Pap., Univ. South Carolina
  92. Maksimovic V, Phillips GM. 1998. Asset efficiency and reallocation decisions of bankrupt firms. J. Finance 53:1495–532 [Google Scholar]
  93. Maksimovic V, Phillips GM. 2001. The market for corporate assets: Who engages in mergers and asset sales and are there efficiency gains?. J. Finance 56:2019–65 [Google Scholar]
  94. Maksimovic V, Phillips GM. 2002. Do conglomerate firms allocate resources inefficiently across industries?. J. Finance 57:721–68 [Google Scholar]
  95. Maksimovic V, Phillips GM, Prabhala NR. 2011. Post-merger restructuring and the boundaries of the firm. J. Financ. Econ. 102:317–43 [Google Scholar]
  96. Maksimovic V, Phillips GM, Yang L. 2013. Private and public merger waves. J. Finance 68:2177–217 [Google Scholar]
  97. Martos-Vila M, Rhodes-Kropf M, Harford J. 2013. Financial vs. strategic buyers. Work. Pap., UCLA
  98. Masulis RW, Simsir SA. 2013. Deal initiation in mergers and acquisitions. Work. Pap., Univ. New South Wales
  99. Masulis RW, Swan PL, Tobianski B. 2012. Do wealth creating mergers and acquisitions really hurt acquirer shareholders? Work. Pap., Univ. New South Wales
  100. McAfee P, McMillan D. 1987. Auctions and bidding. J. Econ. Lit. 25:699–738 [Google Scholar]
  101. McGuckin RH, Pascoe G. 1988. The longitudinal research database: status and research possibilities. Survey Curr. Bus. 68:30–37 [Google Scholar]
  102. Mitchell M, Mulherin JH. 1996. The impact of industry shocks on takeover and restructuring activity. J. Financ. Econ. 41:193–229 [Google Scholar]
  103. Moeller SB, Schlingemann FP, Stulz RM. 2004. Firm size and the gains from acquisitions. J. Financ. Econ. 73:201–28 [Google Scholar]
  104. Molnar J. 2008. Preemptive horizontal mergers: theory and evidence. Work. Pap., Bank Finl.
  105. Morellec E, Zhdanov A. 2005. The dynamics of mergers and acquisitions. J. Financ. Econ. 77:649–72 [Google Scholar]
  106. Nain A, Yao T. 2013. Mutual fund skill and the performance of corporate acquirers. J. Financ. Econ. 110:437–50 [Google Scholar]
  107. Officer MS. 2003. Termination fees in mergers and acquisitions. J. Financ. Econ. 69:431–67 [Google Scholar]
  108. Officer MS. 2004. Collars and renegotiations in mergers and acquisitions. J. Finance 59:2719–43 [Google Scholar]
  109. Ovtchinnikov AV. 2013. Merger waves following industry deregulation. J. Corp. Finance 21:51–76 [Google Scholar]
  110. Phillips GM, Zhdanov A. 2013. R&D and the incentives from merger and acquisition activity. Rev. Financ. Stud. 26:34–78 [Google Scholar]
  111. Powell R, Yawson A. 2005. Industry aspects of takeovers and divestitures: evidence from the UK. J. Bank. Finance 29:3015–40 [Google Scholar]
  112. Rhodes-Kropf M, Robinson DT. 2008. The market for mergers and the boundaries of the firm. J. Finance 63:1169–211 [Google Scholar]
  113. Rhodes-Kropf M, Robinson DT, Viswanathan S. 2005. Valuation waves and merger activity: the empirical evidence. J. Financ. Econ. 77:561–603 [Google Scholar]
  114. Rhodes-Kropf M, Viswanathan S. 2004. Market valuation and merger waves. J. Finance 59:2685–718 [Google Scholar]
  115. Samuelson P. 1970. Economics New York: McGraw-Hill
  116. Savor PG, Lu Q. 2009. Do stock mergers create value for acquirers?. J. Finance 64:1061–97 [Google Scholar]
  117. Schipper K, Thompson R. 1983. Evidence on the capitalized value of merger activity for acquiring firms. J. Financ. Econ. 11:85–119 [Google Scholar]
  118. Schwert GW. 1996. Markup pricing in mergers and acquisitions. J. Financ. Econ. 41:153–92 [Google Scholar]
  119. Seru A. 2014. Firm boundaries matter: evidence from conglomerates and R&D activity. J. Financ. Econ. 111:381–405 [Google Scholar]
  120. Shahrur H. 2005. Industry structure and horizontal takeovers: analysis of wealth effects on rivals, suppliers, and corporate customers. J. Financ. Econ. 76:61–98 [Google Scholar]
  121. Shenoy J. 2012. An examination of the efficiency, foreclosure, and collusion rationales for vertical mergers. Manag. Sci. 58:1482–501 [Google Scholar]
  122. Shleifer A, Summers LH. 1988. Breach of trust in hostile takeovers. Corporate Takeovers: Causes and Consequences Auerbach AJ. Cambridge, MA: NBER [Google Scholar]
  123. Shleifer A, Vishny R. 1997. A survey of corporate governance. J. Finance 52:737–82 [Google Scholar]
  124. Shleifer A, Vishny R. 2003. Stock market driven acquisitions. J. Financ. Econ. 70:295–311 [Google Scholar]
  125. Song MH, Walkling RA. 2000. Abnormal returns to rivals of acquisition targets: a test of the acquisition probability hypothesis. J. Financ. Econ. 55:143–72 [Google Scholar]
  126. Stein JC. 1988. Takeover threats and managerial myopia. J. Polit. Econ. 96:61–80 [Google Scholar]
  127. Wang W. 2013. Are takeovers truly bad deals for acquirers? Work. Pap., Indiana Univ.
  128. Williamson OE. 1985. The Economic Institutions of Capitalism New York: Free Press
  129. Yang L. 2008. The real determinants of asset sales. J. Finance 63:2231–62 [Google Scholar]
/content/journals/10.1146/annurev-financial-110112-120938
Loading
/content/journals/10.1146/annurev-financial-110112-120938
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error