American Finance Association Meetings, January 5, 2002
Discussion of
What Do Returns To Acquiring Firms Tell Us?
Evidence From Firms That Make Many Acquisitions
Kathleen Fuller, Jeffry Netter, Mike Stegemoller
University of Georgia
by
Sanjai Bhagat
University of Colorado
1
Major Finding : Table 3
Bidder Returns (%)
All
Cash
Stock
Public Targets
-1.00
0.34
-1.86
Private Targets
2.08
1.62
2.43
Innovation to extant literature:
Consider bidders that make multiple acquisitions.
Larger sample size.
Paper is well motivated and written. Empirical analysis is careful and
thorough.
2
Why are announcements of acquisitions of private targets
greeted more favorably by the market than that of public targets?
Bidder returns are a function of
• Merger synergy.
• Premium offered (how gains are shared).
• Revelation bias: revelation of bidder’s value unrelated to takeover.
Authors consider bidders that have acquired public and private targets.
This has the potential to control for revelation bias. However, control is
likely to be inadequate.
3
Why are announcements of acquisitions of private targets
greeted more favorably by the market than that of public targets?
Authors suggest bidders get a better price when they buy private targets
compared to public targets.
“This could be due to a liquidity effect.”
Shares of public companies are obviously more liquid than shares of
private companies. But the question is:
Is it easier to buy/sell (majority) control in a private or public
company?
Private firms: More likely to have large blockholders.
More difficult valuation.
4
Revelation Bias
Bidder’s return at the time of bid gives a wrong
estimate of the market’s valuation of the
bidder’s gain from takeover, because


Some bidders deliberately time bid announcement
with unrelated negative announcements. Wall
Street’s version of Wag the Dog (WSJ 12/18/98).
The form of the offer and the very fact of an offer may
convey information about the bidder’s stand-alone
value. Analysis of public and private acquisitions by
the same bidder, at least partially, addresses this
concern.
5
It's Wall Street's version of `Wag the Dog’
“Over the past week, both Mattel and CocaCola have announced acquisitions on the
same day they also issued warnings about
disappointing earnings. ... No one is
suggesting that either company unveiled its
acquisition solely to divert attention from its
problems... But it is also clear that the
acquisitions, like the [Iraq] bombings, helped
shift attention away from other less favorable
developments.''
WSJ, `Heard on the Street', 12/18/98, p. C1
6
Solution to Revelation Bias problems
Focuses on the returns to the bidder when
something happens (while the bid is
outstanding) that changes the probability
of success of the bidder.
7
What might change the probability of success of a bidder?
Litigation by target firm.
Arrival of other bidders.
Objection by a government regulatory
agency (FTC, Dept. of Justice).
Defensive measures by target (poison pill,
lock-up provision).
8
The Effect of Takeovers on Shareholder Value
Sanjai Bhagat
University of Colorado,
David Hirshleifer
Ohio State University,
Robert Noah
Analysis Group (Cambridge, MA)
http://leeds.colorado.edu/faculty/bhagat
9
In conclusion
Paper is well motivated and written.
Empirical analysis is careful and thorough.
Paper makes an important contribution.
Strongly recommend it to researchers interested in
corporate control.
10