Deal Characteristics affect to Mergers and Acquisitions Premium: Evidence in Asia
Khanita Juratsakcharoen
ID 5602042128
A project proposal submitted in partial fulfillment of the requirements
for the Degree of Master of Science (Finance)
Faculty of Commerce and Accountancy, Thammasat University
On December, 2014
Approved by:
Advisor: ……………………………………
(Prof. Dr. Seksak Jumreornvong)
Deal Characteristics affect to Mergers and Acquisitions Premium: Evidence in Asia
According to global economy is changing rapidly and Thailand is entering to ASEAN
Economic Community: AEC. This is an opportunity and challenge for business. Thus creating a
strong business is essential and the business strategies for sustainable growth are Mergers and
Acquisition (M&A). Furthermore, organic growth is not enough for highly competitive business
therefore inorganic growth is the optional strategy for business expansion because firm able to
dramatically grow in vertical, horizontal or even across industries. Both of business partners, target
and acquirer will get satisfiable benefits such as economy of scale, reduce competitor, increase market
share, technology transfer, reduce production cost, value added products, expand new business and
diversification. However, the acquisitions take place under the uncertain condition even if the acquirer
had to put effort to achieve successful in acquisitions but just a few cases are able to successful.
Consequently, there are several studies try to find the reasons that explain why acquisitions are
successful or failure that measure by acquisition premium and shareholder gains.
There are the empirical evidences found the deal characteristics have directly affect to
acquisition premium. Many researchers show that larger acquisitions destroy more value for
shareholders of acquiring company. Business Week (2002) reports that 61% of merger deals worth at
least $500 million end up costing shareholders. The main reasons that mega mergers destroy more
value are managers are too confident and pay too much. On the other hand, there are many evidences
show and explain why acquirers in large target tend to offer lower premium. Alexandidis (2011)
argues that valuations for large firm can also be more accurate due to greater information availability.
Therefore, not surprisingly that acquirer would like to hire more reputation underwriters to advice and
negotiate better deal. Furthermore, business scale comes together with the complexity. For the
example, manager often pay too high premium when target is small firm because of acquirers are
overconfidence in their management team. For the large target firm, acquirer often pay lower
premium because of the complexity of the business that can make the synergies form the combination
harder to achieve.
There are many factors and characteristics that probable affect bidding premium such as firm
size, book to market ratio, deal value and deal characteristics (tender offer vs. merger, method of
payment : cash vs. stock or mixed, hostile vs. friendly, multiple bidders vs. single bidder, private vs.
public and etc. This paper tries to investigate the relationship between deal characteristics and bidding
premium. Specifically, this paper seeks to address the following questions.
1) What are deal characteristics determine the bidding premium?
2) How does the each deal characteristics effect on bidding premium?
3) Which deal characteristic is the most influence on higher bidding premium?
This study contributes to the literature in several ways. This is the first study that presents
empirical evidence on the effect of deal size on bidding premium in mergers and acquisitions in the
Asia market. The result may be a useful for estimating the tendency of bidding premium in future
mergers and acquisitions activities that may be occur merger wave when we enter to AEC
Literature Review
There are many studies about bidding premium in mergers and acquisitions in order to find
the factors which affect to bidding premium. Alexandidis et al. (2013) examine the relationship
between target size and the premium paid in acquisition. He found that target size and the premium
paid in acquisition have robust negative relation. He used OLS regression estimates of acquisition
premium on the natural logarithm of market relative target size and other deal, firm and market
characteristics. The evidence suggests that large deals are more complex and destroy more value for
acquiring shareholders lead to lower bidding premium.
Antoniou et al. (2008) examined whether high premium paid in mergers and acquisitions is a
cause of acquirer’s post-merger underperformance. The research is motivate by the concern of high
premium destroy more acquirer shareholders value and acquirer underperformance in the long run
because of they unable to achieve the synergies. They find no evidence that high premiums paid are in
fact responsible for this long-run underperformance. However, their short run analysis suggested that
merger premium may well proxy for synergies between target and acquirer in the eyes of market.
B. Espen Eckbo (2009) study about how acquirer, target and deal characteristics effect on
biding premium. The evidence suggests that multiple bidder and horizontal takeover are unaffected
offer premium. Offer premiums (both initial and final) are grater for public than for the private
acquirers. Payment method has also effect on bidding premium, the premiums are greater in all cash
offers than all stock offer.
Gary Gorton et al. (2009) This paper argues that firm size is importance of merger and
acquisition activity. There are two major reasons that firm engage in race for size. First, manager tries
to be an acquirer while unprofitable because they want to increase firm’s size and reduce the
possibility that they become target. Mergers and Acquisitions are the strategies for preserve private
benefit of control. Alternatively, firm may want to engage in acquisitions for increase firm value even
if they will be a target firm. After the deal, target firm always get a positive return hence manager they
position themselves as more attractive takeover targets. Moreover, firm size is the importance variable
of acquisition profitability. The study result shown that large acquirers overpay while small acquirers
tend to engage in profitable acquisitions. The result of intermediate size firms are uncertainty.
H. Nejat Seyhun (1990) This article examined the trading patterns of top managers in bidder
firms around the announcement of mergers and acquisitions attempts to gain insights into managerial
information and intentions. The result does not appear to support the hypothesis that, because top
managers knowingly pay too much for target firms. Overall, the data show small increases in insider’s
stock purchases and decreases an insider’s stock sales for their personal accounts prior to the takeover
announcement. Therefore extreme hubris is not the overriding motivation for corporate takeovers.
Moreover, the deal transaction shows the manager optimistic in deal achievement. Paying with stock
is a good signal that manager confident that their shares are overvalue but they are not totally
confident about the success of the deal.
Leonce L. Bargeron (2008) This paper find that target shareholders earn higher premiums if a
public firm make acquisition rather than a private firm. The high managerial ownership of private
equity firms and public firms have no significant difference premiums. The difference in abnormal
returns is highest between acquisitions made by private equity firms and those by public acquirers
with low managerial ownership. They also find that high target managerial and ownership have a
positive relationship with higher premiums for acquisitions by public firms but not for private firms,
suggesting that private firm acquisitions are more likely to involve cooperation by managers to
facilitate the acquisition.
Nikhil P. Varaiya and Kenneth R. Ferris (1987).The results of this paper presented the
average winning takeover premium significantly over-states the expected takeover gain. Equivalently,
the average cumulative excess return to the winning bidder is significantly negative. Furthermore, the
takeover premium increases with an increase in both the degree of competition and the dispersion of
opinions about the size of the takeover gains amongst prospective bidders seeking control of the target
company.
Paper
Topic
Model
Result
 Negative relationship between target size and acquisition premium
Alexandridis, G.,
 Acquirers of large targets pay significantly lower premiums
Deal size, acquisition
Fuller, K. P., Terhaar,
premia and shareholder
OLS
 Large(small) targets continue to generate negative(positive) abnormal return in long run
L., & Travlos, N. G.
 Suggest that large deal are complexity can make it more unlikely that they offer any
gains
(2013)
economic benefits despite the fact they are associated with lower premium
How Much Is Too Much:
Calendar-Time
Are Merger Premiums
Portfolio Regression
Too High?
(CTPR)
 High premium paid are not responsible for long run underperformance
Antoniou, A., Arbour,
P., & Zhao, H. (2008)
 In short run, high merger premium can make better synergies between targets and acquirers
 Bidders of operating companies pay more for acquisitions because they expect to benefit
Bargeron, L. L.,
Why do private acquirers
Schlingemann, F. P.,
t-Test,
from synergies
pay so little compared to
Stulz, R. M., & Zutter,
Wilcoxon Test
 High target managerial and institutional ownership are associated with higher premiums for
public acquirers?
C. J. (2008)
acquisitions by public firms
 The offer premium are higher when bidder is public company, when bidding is all cash
offer and the higher the pre-bid target run up
 The offer premium are lower when the target’s book to market ratio exceed the industry
Bidding strategies and
Eckbo, B. E. (2009)
takeover premiums : A
review
OLS
median book to market ratio, when the initial bid is tender offer, when the initial bidder has
a positive toehold
 The offer premium are unaffected by the presence of a target poison pill(target hostility to
the initial bid), when has multiple bidders
Paper
Topic
Model
Result
 The profitability of acquisitions tend to decrease in the acquirer’s size – larger acquirers
Gorton, G., Kahl,
Eat or Be Eaten : A
M.,& Rosen, R. J.
Theory of Mergers and
(2009)
Firm Size
overpay while small acquirers tend to engage in profitable acquisitions but firm
OLS
intermediate size, the results are uncertain
 The acquisitions are more profitable in industries in which the acquirer firm is larger
relative to the other firms
 The top bidder managers knowingly pay too much for target firm
Randomization
Do Bidder Managers
Test,
Seyhun, H. N. (1990)
 The data show small increases in insiders' stock purchases and decreases in insiders' stock
t-Test,
Knowingly Pay Too
sales for their personal accounts prior to the takeover announcement
Mann-Whitney Sum
Much for Target Firms?
 Insiders are more optimistic in all cash offer subsample than in equity offer subsample
of the Ranks Test
 The extreme hubris is not the overriding motivation for corporate takeovers.
 The winning takeover premium significantly over-states the expected takeover gain
Overpaying in Corporate
Varaiya, N. P., &
Takeovers : The Winner’s
Ferris, K. R. (1987)
Curse
Regression Equation
 The average cumulative excess return to the winning bidder is significantly negative
Theoretical Framework
Mergers and acquisitions are one type of corporate restructuring and making the bigger firms
by consolidation of two companies. The reasoning of mergers and acquisitions is to create shareholder
value over the sum of two companies. Two companies together are more valuable than two separate
companies like a word as “one plus one make three”.
There are varieties types of business combination. The term of chosen to make a deal depend
on economic function, purpose of the business transaction and he relationship between two companies
that could be classified into five types as following.
1)
Conglomerate Integration: A combination between two companies that are not totally
unrelated business activities. There are two types of conglomerate mergers, pure and mixed.
Pure conglomerate mergers involve firms with nothing in common, while mixed
conglomerate mergers involve firms that are looking for product extensions or market
extensions. Example; The merger between the Walt Disney Company and the American
Broadcasting Company.
2)
Horizontal Integration: A merger occurring between companies in the same industry
often as competitors offering the same good or service. The goal of a horizontal merger is to
create a new, larger organization with more market share and opportunities to join the
common operation, manufacturing that can make cost reduction. Example; The merger
between Coca Cola and Pepsi
3)
Market Extension Integration: A merger between two companies that provide same
product or service in different market in order to make the merger companies can get access
to a bigger market and that ensures a bigger client base.
4)
Product Extension Integration: A product extension merger takes place between two
business organizations that deal in products that are related to each other and operate in the
same market. This merger allows the merging companies to group together their products and
get access to a bigger set of consumers. This ensures that they earn higher profits.
5)
Vertical Integration: A vertical merger occurring when two firms which produce
different goods or service but within the same industry. Two firms are operated in different
levels within an industry's supply chain. One firm often is the supplier of another firm. This
type of merger increase synergies and lead to more efficient operating.
Many articles always mention mergers and acquisitions at the same time. Actually there is a
subtle difference between the two concepts. In the case of a merger, two firm are form a new
company. Separately owned companies become jointly owned companies. When two firms merge,
stocks of both are surrendered and new stocks of new combination firms are issued. However in the
case of acquisition, one firm takes over another firm and establishes new single company. Generally
the firm which takes over is bigger and stronger one. Unlike the merger, stocks of the acquired firm
are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the
stock market.
Another difference is how the deal made, friendly or hostile. It is typically proclaim that the
deal which made by hostility is acquisition. In unfriendly deal the acquirer swallows target firm even
if the target firm not willing to be purchases. Therefore mergers and acquisitions are synonymous
because many bigger firms who buy out the relatively less powerful one always announce the deal is
merger in order to avoid negative impression.
Over the decade, mergers and acquisitions have dramatically become one of the most
attractive and populous strategies for business expansion as show in Figure 1.
[Insert Figure 1 here]
The key driver behind mergers and acquisitions transaction is “synergy”. Synergy is the
cooperation between two companies that enhanced cost efficiencies of new business. Synergies take
the form of revenue increasing and cost reduction. The following benefits will magnify synergy
meaning.
 Cost saving: The cost saved from the reducing the number of staff member from
accounting, marketing and other departments even CEO members, who typically
leaves with a compensation package.

Economy of scale: The bigger company able to bigger order of raw material for
production that can save cost per unit. Bigger companies are greater ability to
negotiate prices with their suppliers.

Acquiring new technology: Companies need to be leaders of technology
developments that can make their business are competitive. Sometime unique
technique comes from company which smaller one.

Improved market penetration and industry visibility: A merge may expand two
companies marketing and distribution, giving them new sales opportunities.
The rising capital is easier for the bigger firms.
 Diversification: Conglomerate integration able to help business diversification and
reduce investment risk. As one expanding business can help balance one business in
the downturn.
Although there are many benefits from mergers and acquisitions but in many investors
opinion the most of business combinations are destroy value because of negative cumulative return of
pre-biding. Furthermore, acquirers tend to pay too high bidding premium in mergers and acquisitions
which is the main focus of this paper. The bidding premium in mergers and acquisitions is defined as
the difference between the offer price and the market price of target firm before the announcement of
transaction. There are empirical evidences from many papers shown that manager of acquirers are
overpayment that lead to destroy of firm value. The reasons for explain the value destruction as
following.
 Overestimate in target’s value: the root cause come from overestimate of growth rate
and market potential that are forecasting error problem.
 Overestimation of expected synergies: Acquirer firm cannot achieve synergy gain that
come from management and cooperation problem.
 Overbidding and overpayment: This problem comes from two main causes. First, the
hubris of acquirer manager. They are overconfidence in their performance. Second,
the intensity of bidding when there are several bidders competing in the bidding. This
intense competition gives the target more bargaining power to negotiate a higher
premium.
 Failure to undertake a thorough due diligence of the target.
 Failure to successfully integrate the target after the merger or the acquisition: This
failure always occur when target is large company which has complexity that harder
to completely integration.
The purpose of this paper is examined that how deal characteristics affect to bidding
premium. The variables and method of study as follow in methodology part.
Methodology
As the previous section mentioned about bidding premium and deal characteristics. This
paper will collect the related variables and examined the relationship between the variables and
bidding premium by estimates from OLS regression.
1. Definition of variables
This table provides the definitions of variables used in all regression.
Variable
Bidding Premium
Definition
The ratio of offer price to the target's share price one month prior to the
acquisition transaction
Acquirer Market Value
The market value of acquirers
Target Market Value
The market value of targets
Deal Value
The value of completed deal
Inside Ownership
The percentage ownership of the target's directors and executive at least 20%
before announcement date
Age
The age of target firm
Hostile vs. Friendly
The willingness of targets to be acquired transactions
Private vs. Public
The status of acquirer firms
Competing
The intense of bidding competing determined from number of bidders
Stock vs. Cash
The ratio of stock offer in payment method
Mean Premium
The mean premium paid for targets in the same industry
Overpay
The bidding premium minus mean premium
Diversification
Market Value
The diversification of business determines from SIC codes difference more
than 2 digits.
The market value during acquisition announcement
2. Bidding Premium
It become normal situation that acquirers have to pay the premium to target for compensate
the loss of control in business of target. The bidding premium is the additional amount an acquirer has
to offer to above the mean of premium in each industry in order to achieve in merger and acquisition.
The bidding premium more or less depends on target industry. For the example, technology industries
have higher bidding premium than agricultural industries. Therefore, the actual bidding premium
determine from the additional amount from mean premium of the target industry in year of
announcement date. The bidding premium can state as below equation.
Bidding Premium =
Offer Price
Target Share Price
- mean premium of each industry
The first term is the deal premium which is the ratio of offer price to target share price one
month prior to the acquisition announcement. The mean premium from the industry classification
which are based on the updated Fama and French 49 industries.
As the bidding premium hypothesis, this able to apply to bidding premium hypothesis as
follows:
BiddingPremiumi = αi + βi,1 (Acquirer Market Value)i,1 + βi,2 (Target Market Value)t,2 +
βi,3 (Deal Value)i,3 + βi,4 (Inside Ownership)t,4 + βi,5 (Age)t,5 + βi,6 (Hostile)t,6 +
βi,7 (Acquirer Status)t,7 + βi,8 (Competing)t,8 + βi,9 (Payment Method)t,9 +
βi,10 (Diversification)t,10 + βi,11 (Market Value)t,11
For dummy variables, where:
Acquirer Status
= 1 for public firm and 0 for private firm
Hostile
= 1 for hostile and 0 for friendly
Inside Ownership
= 1 for more than 20% ownership and 0 for other
Diversification
= 1 for diversification and 0 for other
Each variable in the hypothesis may has positive or negative relationship with bidding
premium. Those relationships are the main objective of this study that would like to know how each
deals characteristic impact on bidding premium in mergers and acquisitions. Due to the many
researches about bidding premium got the result in the similar direction with difference reasons so the
summary result and reason from literature review is importance to predict the expected result from the
testing. The expected result as follows:
Expected
Variable
relationship with
Expected reason
bidding premium
Acquirer Market Value
Positive
Manager of big firms are more hubris
Target Market Value
Negative
The complexity of business destroy synergy gain
Deal Value
Negative
Big target company is hard to completely integration
Negative
Big business is tend to face the control problem
Inside Ownership
Positive
High managerial ownership tend to have more agency cost
Age
Positive
Old firm tend to preserve benefit of control
Hostile
Positive
Managerial defensive of target rising bidding premium
Private status of acquirer
Negative
Competing
Positive
The intensity of competition leads to higher bidding premium
Stock
Positive
Overvalue of stock leads to over payment
Mean Premium
Positive
Diversification
Negative
Market Value
Positive
Market Relative Target
Size
Limited capital for acquiring effect to more concern about
transaction value
Bidding premium of each deal will in line with mean
premium of each industry
Diversify business destroy acquirer's manager hubris
Better market potential leads to overestimate of business
growth rate
Data
The sample of mergers and acquisitions are from Datastream which is the financial
transactions database. The sample includes Asia completed deals announced between 1990 and 2013,
where the target is public firm and the acquirer is either public or private firm. The other type of
mergers and acquisitions such as spin-offs, recapitalizations, self-tenders, repurchases, minority stake
purchases, acquisitions of remaining interest, exchange offers, privatizations and joint venture are
excluded from the study scope. The transaction value is more than $1 million.
The period for collecting the data to study determine from the merger wave of Asia.
Martynova et al.(2008) study the merger wave since 1890s to present. They separated sub-period for
each merger wave by M&A outcome and give the reason that all waves have some common factors,
for instance, they are preceded by technological or industrial shocks, and occur in a positive economic
and political environment, rapid credit expansion and stock market booms. The period for study of
this paper cover the two latest merger waves of Asia market which are wave 5 and new wave. The
detail of each mergers wave as the follow table
[Insert Table 1 here]
Moreover, the merger waves after 1980s come from the economic recovery after recession
and then entry to economic and financial market boom in 1993 – 2001. There are many changes in
technology, economic and financial market after 1980s that lead to highly competitive in business.
The major changes in business world are anti-trust policy, the deregulation of the financial services
sector, new financial instruments and markets such as junk bonds, the technology progression and
privatization. Figure 3 present the trend of worldwide mergers volume that continuously increasing
especially Asia M&A market.
[Insert Figure 2 here]
Appendix
Figure 1 – Announced Mergers & Acquisitions: Worldwide, 1985 - 2013
Source: Thomsan Financial, Institute of Mergers, Acquisitions and Alliances (IMAA) analysis
Figure 2 – Total number of deals of worldwide merger waves since 1985
Source: Thomson Financial Securities Data.
Table 1 – Summary of merger waves
Period
Wave 1
Wave 2
Wave 3
Wave 4
Wave 5
New Wave (6?)
1890s - 1903
1910s - 1929
1950s - 1973
1981 - 1989
1993 - 2001
2003 - present
US, UK, Europe,
US, UK, Europe,
US, UK, Europe,
US
US
US, UK, Europe
Asia
Asia
Asia
Geographical
scope
Adjustment to
Formation of
Formation of
Growth through
Elimination of
monopolies
oligopolies
diversifications
inefficiencies
globalization
M&A Outcome
Global expansion
processes
Petrochemicals,
Hydraulic power,
Electricity,
Steam engines,
Industry
textiles industry,
chemicals,
steel, railways
iron industry
Communications/
aviation, electronics,
information
communications
combustion engines
technology
technology
N.A.
References
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shareholder gains. Journal of Corporate Finance,20, 1-13.
Antoniou, A., Arbour, P., & Zhao, H. (2008). How much is too much: are merger premiums too
high?. European Financial Management, 14(2), 268-287.
Bargeron, L. L., Schlingemann, F. P., Stulz, R. M., & Zutter, C. J. (2008). Why do private acquirers
pay so little compared to public acquirers?. Journal of Financial Economics, 89(3), 375-390.
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