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Mergers and Acquisitions

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, Grand Ballroom C
Hosted By: American Finance Association
  • Chair: Jun-Koo Kang, Nanyang Technological University

M&As and the Value of Control

Massimo Massa
,
INSEAD
Hong Zhang
,
Tsinghua University
Weikang Zhu
,
Tsinghua University

Abstract

We propose a novel approach to study the value of corporate control based on the M&A of firms across business groups. Particularly, business groups often use some central firms to retain the control of others. When central firms become an M&A target, however, the buying business group may not obtain a same value of assets through control (VoC) as the selling group does. Based on a new dataset of worldwide ownership of private and publicly listed firms for the 2000-2010 period, we show that the buyer typically pays an acquisition premium when the VoC of the seller exceeds that of the buyer. The stock market, however, responds negatively to this VoC gap. The market is correct: M&As involving high VoC gap typically exhibit poorer long-term performance, suggesting that the buyer pays a price to buy out the control of the seller while failing to create a same degree of benefit for the target. Overall, our results confirm that corporate control is priced in M&As, whereas the transfer of control may not be value creating.

Merger Waves and Innovation Cycles: Evidence from Patent Expirations

Matthew Denes
,
Carnegie Mellon University
Ran Duchin
,
University of Washington
Jarrad Harford
,
University of Washington

Abstract

We investigate the link between innovation cycles and aggregate merger activity using data on patent expirations. To isolate the treatment effect of patent expirations, we focus on term expirations, which mandatorily occur at a pre-specified date. We find strong clustering in industry patent expirations (“patent expiration waves”). These patent waves trigger industry merger waves with lower announcement returns and worse long-term performance for acquirers, but higher announcement returns and larger premiums for targets. Acquirers also experience declines in profit margins, cash holdings and investment opportunities, while cutting costs in the year prior to a merger. Overall, we put forth a possible link, unexplored in the literature, between merger waves and patenting activity.

Product Market Dynamics and Mergers and Acquisitions: Insights from the USPTO Trademark Data

Po-Hsuan Hsu
,
University of Hong Kong
Kai Li
,
University of British Columbia
Xing Liu
,
University of British Columbia
Yunan Liu
,
University of Hong Kong
Hong Wu
,
Hong Kong Polytechnic University

Abstract

This paper is one of the first to employ novel trademark data to shed light on whether and how M&As shape acquirers’ new product development and affect acquirers’ and target firms’ product offerings. Using a large and unique trademark-merger dataset over the period 1983-2016, we first show that companies with larger trademark portfolios, newer trademarks, and faster growth in trademarks are more likely to be acquirers, whereas companies with smaller trademark portfolios, and newer and more focused trademarks are more likely to be target firms. Further, firms with overlapping product lines are more likely to merge. Post-merger, compared to their non-acquiring peers, acquirers register fewer new trademarks, especially in classes common to both acquirers and targets, and in classes unique to target firms. Moreover, acquirers discontinue more acquirers’ and targets’ trademarks in common classes and classes unique to themselves, whereas discontinue fewer trademarks in classes unique to target firms. Finally, acquirers with a greater overlap in product lines to their target firms register even fewer trademarks in common classes and discontinue even more targets’ trademarks in common classes. We conclude that M&As provide an opportunity for acquirers to gain access to different products and to reduce overlapping product offerings.

M&A(dvertising)

Alexander Hillert
,
Goethe University Frankfurt
Anja Kunzmann
,
University of Mannheim
Stefan Ruenzi
,
University of Mannheim

Abstract

We investigate the advertising strategies of firms in mergers and acquisitions. Target firms increase their advertising expenses, on average, by 50% in the quarter before the announcement of a stock deal. Higher offer prices for high-advertising target firms suggest product advertising being a tool to attract investors’ attention, which may result in tem-porarily increased stock prices. For acquiring firms, we observe no increase in advertising before but a significant increase in the week after the announcement of a stock deal. The positive relation between acquirer advertising and the probability of deal completion indi-cates that advertising can positively influence target shareholders’ attitude towards the deal. Overall, our findings support the role of product market advertising as a strategic tool to affect the outcomes of M&As.
Discussant(s)
Mara Faccio
,
Purdue University
Isil Erel
,
Ohio State University
Gordon Phillips
,
Dartmouth College
Charles Hadlock
,
Michigan State University
JEL Classifications
  • G3 - Corporate Finance and Governance