Does the organisational form of the target influence market reaction to acquisition announcements? Australian evidence

Highlights

• Wealth effect of acquisition announcements depends on target's organisational form.

• Acquirers of private and subsidiary targets earn higher abnormal returns.

• Bid and firm characteristics systematically influence the market reaction.

• Influence of break fees on excess return differs across target categories.

• Acquisitions of private targets during GFC are rewarded by the capital market.

Abstract

Using public, private and subsidiary acquisitions, we examine whether abnormal returns to bidders depend on the organisational form of the target acquired. The evidence supports two main hypotheses: (i) bidders on private and subsidiary targets earn higher abnormal returns than bidders on public entities and (ii) bidders on private targets earn higher abnormal returns when the method of payment is stock. Acquisitions of unlisted public targets, privately negotiated acquisitions of private targets and acquisitions of subsidiaries from listed parents for cash are associated with higher abnormal returns.

Introduction

There have been an abundance of studies conducted across many markets examining the issue of whether acquiring firms earn abnormal returns around the announcement of a bid for a target (see, for example, Bruner, 2002, Bugeja and Walter, 1995, Casey et al., 1987, Gupta and Misra, 2007, Humphery-Jenner and Powell, 2011, Jensen and Ruback, 1983, Sudarsanam and Mahate, 2006). While this research has identified a number of bid and firm characteristics and other variables such as economic environment and takeover regulations that influence the returns generated by bidding firms, evidence of abnormal returns remains inconclusive.

More recently, studies from the US and the UK have brought a new dimension to this debate, mounting the argument that the market reaction to acquisition announcements is also influenced by the organisational form of the target; being a public or a private firm. The evidence suggests that bidding firms acquiring private targets outperform their counterparts who acquire public targets in a statistically significant fashion (Ang and Kohers, 2001, Chang, 1998, Conn et al., 2005, Draper and Paudyal, 2006, Faccio et al., 2006, Fuller et al., 2002).

In Australia, the acquisition market is dominated by publicly traded bidding firms acquiring private and subsidiary target firms. However, the question of how these bidding firms seeking an unlisted target perform around the announcement of the bid relative to those seeking a public target remains largely unexplored. Over an 11-year period from 2000 to 2010 inclusive, the Thomson Reuters SDC Platinum Mergers and Acquisitions database reported 8660 domestic acquisitions by public bidding firms in Australia, with a high proportion of these transactions (73.97%) being acquisitions of private and subsidiary targets. Fig. 1 plots the number of acquisitions in Australia categorised according to whether the target is a public, private or subsidiary company for the period 2000 to 2010 on a quarterly basis. Clearly the acquisition of private and subsidiary targets has outnumbered the acquisition of public targets in almost all quarters over the 11-year period. But as one would expect, the average annual deal value for acquisitions involving public targets is much higher than that for private and subsidiary targets (see Table 1, Panel B). This indicates that the acquisition of public targets plays an economically significant role in the Australian market. In this context, it is worthwhile examining whether Australian investors perceive a lower volume of economically significant acquisitions of public targets as value creating decisions or more frequent acquisitions of small scale private/subsidiary companies as value creating decisions.

To the knowledge of the authors, only one prior study has examined this issue in Australia. da Silva Rosa et al. (2004) analysed data for the period 1990 to 1998 and reported that listed firms bidding for a private target earn a significant abnormal return of 2.70% during the bid announcement period, while those bidding for a public target realise an insignificant return of 1.11%. However, their sample data contained only 140 acquisition events involving a private target, and their primary focus for the study was to investigate the monitoring hypothesis proposed by Chang (1998). In any event, no prior study has investigated the returns earned by firms bidding for a subsidiary target in the Australian market, despite subsidiary firms being more economically significant than private targets in terms of deal value.

In this study, we analyse the announcement period returns of public bidding firms using a large sample of Australian acquisition events, categorised by the organisational form of the target: being a public, private or subsidiary firm. The three types of target firms differ in their size, nature of ownership, liquidity, business risk, the level of information asymmetry, the premium paid in acquisitions and the regulatory frameworks related to their acquisition processes. Due to these differing characteristics, it is worthwhile to include the three types of target firms as part of the investigation of the announcement period performance of bidding firms, and to compare their performance in the Australian context. Hence, the main objectives of this study are to assess the relative abnormal returns of bidding firms acquiring targets with different organisational forms and to evaluate the impact of bid characteristics and firm characteristics.

Our study contributes to the literature in several ways. Firstly, it is the first study to use a large sample of Australian acquisition events to investigate whether firms bidding for a private or subsidiary target perform differently during the announcement period, compared to firms bidding for a public target. Second, the sample data is drawn from the period January 2000 to December 2010, which covers a complete business cycle and includes a fast growing period (2000 to mid-2007), a recessionary period (mid-2007 to end 2009) and a recovery period (2010). This facilitates an analysis of whether the economic environment has any effect on acquisition activities and bidding firm returns. Third, we examine and compare privately negotiated deals, the acquisition of unlisted public targets and the sale of a subsidiary by a listed parent company for cash. These aspects have not been investigated in prior studies. Finally, our study covers a period in which Australia experienced a noticeable rise in the number of acquisition deals to which break fees (either ‘target break fees’, ‘reverse/bidder break fees’ or both) are attached.¹ Curtis and Pinder (2007) found that the incidence of break fee agreements increased from 3.5% of the offers made in 2000 to 43.4% in 2006. Although the relationship between ‘target break fees’ and target shareholders' wealth has been examined in the Australian context (see, Chapple et al., 2007); the differential effects of ‘target break fees’ and ‘reverse break fees’ on bidders' return have not been analysed in this country.

The remainder of the paper is organised as follows: Section 2 discusses relevant literature and develops the hypotheses tested in the study; Section 3 outlines the Australian institutional setting that motivates this empirical investigation; Section 4 describes the data; Section 5 explains the empirical approach; Section 6 discusses the findings; and finally, Section 7 offers conclusions.