The influence of bid hostility on US listed target firms’ abnormal
returns
Abstract
This paper studies the influence of a hostile takeover announcement on the target firm’s abnormal returns. There are opposing views on the influence of bid hostility on the target firm’s abnormal returns. Hostility triggers higher merger premiums offered by the bidding firm, which have a positive effect on the abnormal return. On the other hand, hostile bids have a lower probability to succeed. The lower probability of success has a negative influence on the abnormal return. This paper concludes that hostility seems to trigger higher abnormal returns. The explanation for a higher abnormal return is a higher merger premium offered when de takeover announcement is hostile. The probability of success does not have a significant effect on the abnormal return.
Author: Ike D. de Waard
Date: June 2015
Student number: 10420932
University: University of Amsterdam
Study: Bachelor Economics and Business
Track: Economics and Finance
Statement of Originality
This document is written by Student Ike Delano de Waard who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of Contents
1.
Introduction ... 4
2.
Literature Review ... 5
2.1 The reaction of stock prices to the announcement ... 5
2.2 Bid Hostility ... 6
2.3 Other variables that influence the target firm’s abnormal return ... 7
3.
Methodology and regression model ... 8
3.1 Methodology ... 8
3.2 Regression Models ... 9
3.3 Hypotheses ... 11
3.4 Data ... 11
4
Results ... 14
4.1 The influence of bid hostility on the CAR [-2,2] ... 14
4.2 The influence of bid hostility on the CAR [-20,20] ... 16
4.3 Hostility Premium ... 19
4.4 The success probability of hostile takeover announcements ... 21
5
Conclusion and discussion ... 22
References ... 24
Appendix ... 26
1. Introduction
The main purpose of friendly mergers is to create synergies state Madura and Ngo (2008) recently. Friendly mergers tend to make both firms better off. The researchers state that the takeover premium is a proxy for the expected synergies. Hostile mergers are considered as a threat for at least some of the stakeholders of the target firm. Takeover defense strategies are the result of the hostile behavior of the target firm (Schwert, 1999). The purpose of these defense strategies is to prevent the firm from a takeover. These defense strategies may have a negative influence on the abnormal return.
Mulherin and Boone (2000) argue that the announcement of a takeover attempt triggers a significant positive abnormal return. The researchers find a US target abnormal return of 21%, but they make no distinction between hostile and non-hostile takeover announcement in their study. Goergen and Rennenboog (2004) conclude that hostility has a positive influence on the abnormal return. However, the academics only include successful takeovers in their sample. Hostile announcements are less likely to succeed due to Schwert (1999). In addition, the researcher states that the announcement effect of unsuccessful takeovers is smaller than successful takeovers. In contrast, DeAngelo and Rice (1983) argue that hostile behavior can be part of the negotiation strategy. The scientists state that negotiation is a strategy to trigger a higher merger premium, which has a positive effect on the abnormal return. On the on hand triggers bid hostility a higher merger premium that might have a positive effect on the target firm’s abnormal return. On the other hand declines the probability of success when the takeover announcement is hostile. Considering these opposing opinions about the effect of a hostile takeover announcement on the target firm’s shares brings us to the following question: What is the influence of bid hostility on US listed target firm’s abnormal returns?
This thesis describes the influence of bid hostility on the target firm’s abnormal returns. Goergen en Rennenboog (2004) define the abnormal return as the return that shareholders earn in addition to what they should have earned without the event. The short term abnormal return of a hostile takeover announcement will be compared to the short term return of a non-hostile takeover announcement. The positive difference can be explained by the higher premium that the acquiring firm has to pay with a hostile takeover bid. The lower probability of success can explain the negative effect on the abnormal return when the announcement is hostile. The empirical research measures the influence of bid hostility by the effect on the cumulative abnormal return of the target firm. After computing the influence on the cumulative abnormal return, the effect of hostility on the merger premium is estimated. Finally, the influence of hostility on the ratio of success of the announcement is calculated.
This paper describes the effect of a hostile takeover announcement on the target firm’s abnormal returns. This paper includes only US public target firms. The paper is organized as follows:
section 2 describes the main findings in prior literature about the effect of a takeover announcement on the abnormal return of the target firm. Section 3 describes the methodology and the dataset used in the empirical research. Section 4 describes the dataset restrictions and provides a summary of the data. Section 5 describes the results of the empirical research. Section 5 contains a discussion and the conclusion based on the findings in the empirical research.
2. Literature Review
This section provides an overview of earlier research concerning the influence of bid hostility on the abnormal returns for the target firm’s shareholders. The first paragraph describes the reaction of the target firm’s stock prices on the takeover announcement. The second paragraph describes influence of hostility on the target firms share prices. The last section provides an overview of other influences on the abnormal return.
2.1 The reaction of stock prices to the announcement
Schwert (1996) describes the process of a takeover. Considering figure 1 in the appendix might be useful to understand the process of a takeover. Boone and Mulherin (2007) state that the takeover process starts with a private takeover process. Schwert (1996) calls this period the pre-bid runup. The takeover offer becomes publicly known at the time of the announcement. The announcement effect is a term for the initial share price change at time of the takeover announcement. Rosen (2006) states that rational investors should react immediately to the merger announcement. The researcher states that share prices adjust immediate to new information. Figure 2 in de appendix illustrates this initial reaction. This statement is in line with the theory of Malkiel (1973). The researcher argues that news announcements are by definition unpredictable. Share prices have to react immediately to the announcement of a merger due to the economist.
The literature is unanimous about the abnormal return of the target firm. Mulherin and Boone (2000) find short-term abnormal returns of 21% for US based target firms after a takeover announcement. The researchers’ sample contains US target firms in the 1990s. In addition Jarrell and Poulsen (1989), Servaes (1991), and Kaplan and Weisbach (1992) find significant abnormal returns of US target firms in earlier research. Overall, there seems to exist a significant positive influence of a takeover announcement on the target firm’s stock prices. Target firm’s shareholders earn an abnormal return during the time of the takeover announcement. A possible explanation for the increase in the target firm’s share price is the merger premium offered by the acquiring firm. Goergen and Rennenbood (2004) find large merger premiums in their study. The researchers find merger premiums between 20% and 40%. Roll (1986) argues that the initial increase in the target firms share price is the effect of the transfer of the merger premium.
Schwert (1996) says that at the time of the announcement the probability of success is not sure. He states that the efficient market hypothesis holds in the stock market after a takeover announcement. There is evidence that stock prices tend to raise at the day of the first bid of successful takeovers. But these stock prices fall if the bid is withdrawn. If investors can predict the outcome of the announcement ex ante, than this might have an influence on the abnormal returns in the period of the announcement. However, it is difficult to calculate the probability of success ex-ante. The success probability success of the takeover is an important driver for the abnormal return besides the merger premium.
Fama (1970) describes three forms of the efficient market hypothesis. The first form is the weak form where share prices are based on historical information. The second form is the semi-strong form, where share prices adjust to publicly available information. In this form no investor can make excess return based on public information. In the third form, the strong form, share prices adjust immediately to all available information. In this form nobody is able to make excess return. Schwert (1996) finds evidence of abnormal returns for the target firm’s shareholders in the period before the public takeover announcement. Investors seem to know private information during this period. Insider trading seems to exist and therefore this paper includes the period before the announcement effect. Therefore the empirical research includes a period with a time window of 20 days before the announcement till 20 days after the announcement.
2.2 Bid Hostility
A hostile bid is defined as bid that is initially rejected by the target firm’s board and the target firm tries to avoid the takeover aggressively with takeover defense strategies (Niden, 1993). Schwert (1999) says that the initial rejection and aggressive statement by the target firm’s board can be part of the negotiations. Therefore it is hard to distinguish a hostile takeover from a non-hostile takeover. This paper measures a hostile bid as follows: the target firm rejects the initial offer immediately and makes this clear in a public statement.
There are opposing views on the effect of hostility on the target firm’s abnormal retun. Bradley, Desai, and Kim (1983) conclude that target firm’s shareholders earn a significant higher abnormal return when the takeover attempt is hostile. In addition, Goergen and Renneboog (2004) find significant abnormal returns in a short-term period for European firms. Note that Goergen and Rennenboog (2004) only include successful takeover announcements in their sample. Adding unsuccessful takeovers might result in a lower abnormal return. Loughran and Vijh (1997) conclude that shareholders of the target firm with a hostile bid earn a significant abnormal return in the long term when the takeover succeed, but if the takeover is unsuccessful the abnormal returns are wiped out. In contrast, Huang and Walkling (1987) study the difference between hostile offers and non-hostile offers. The researchers find insignificant higher returns concerning a non-hostile takeover offer. In
more recent literature, Schwert (1999) concludes that the probability of a successful takeover is lower when the bid is hostile. The researcher states that the lower success probability has a negative effect on the target firm’s abnormal returns.
Schwert (1999) argues that hostility leads to a higher merger premium offered by the acquiring firm. The hostile behavior of the target firm’s board may be part of the negotiation strategy. DeAngelo and Rice (1983) agree that hostility is part of the negotiation strategy. The researchers state that the target firm’s board act in the interest of their shareholders. The economists argue that hostility comes from promoting the interest of shareholders by raising takeover premiums, improving management, and protecting the firm’s long term strategy. A higher merger premium might lead to a higher abnormal return for the target firm’s shareholders. Roll (1986) says that the initial increase in the target firms share price is the effect of the transfer of the merger premium. It is likely that the abnormal returns increase when hostile mergers trigger a higher merger premium.
In contrast, Shleifer and Vishny (1988) conclude that a hostile merger is the most effective way is for shareholders to get rid of non-value maximizing executives. Byrd and Stammerjohann (1997) argue that executives are acting in self-interest and not in the interest of the shareholders. The target firm’s board may block a good takeover offer if managers act in their self-interest. Franks and Mayer (1996) provide an explanation for acting in self-interest. The researches find that 90% of the executive board resigns after a hostile deal, comparing to 50% after a non-hostile deal. This means that the managers’ positions are not secure after the merger. The academics state that managers are trying to protect their position by defense strategies.
Pearce and Robinson (2004) summarize earlier literature. The researchers state that on the one hand the target firm’s shareholders benefit from hostility due to an increase in de premium. But hostility by the target firm’s board may reduce stock prices due to uncertainty and speculation about the future.
2.3 Other variables that influence the target firm’s abnormal return
Huang and Walkling (1987) find significant evidence that hostile offers are more likely to be offered in cash rather than equity. Moreover the payment method seems to have an influence on the abnormal return. Goergen and Rennenboog (2004) state that cash payments triggers a higher abnormal return on the target firm’s shares. Hansen (1987) provides an answer for a higher abnormal return for the target firm’s shareholders. He argues that a payment by equity is a form of sharing by the bidder of overpaying. The share prices of the bidding firm will decrease if the bidding firm is paying too much. By pay by its own stock, the target firm’s shareholders share the risk of a decrease of the bidding firm’s share prices due to overpaying. The abnormal return of the target firm’s shares should therefore be lower when an equity payment is announced.
Bhagat et al. (2005) find evidence that the abnormal returns for the target firm’s shareholders is higher in periods of economic recovery. Shleifer and Vishny (1991) state that hostile mergers increase in times of economic growth and recovery. Rhodes-Kropf and Viswanathan (2004) argue that merger waves exist when stocks are overvalued. This is in line with the conclusion from Goergen and Rennenboog (2004). Overvaluation of stock exists in economic growth and economic bubbles. Shareholders and investors might overestimate the benefit of the takeover announcement in economic recovery. This results in a higher abnormal return for the target firm’s shareholders in this period.
Comment and Schwert (1995) find that the size of the target firm is negatively related to the success probability of the takeover. Moreover the researches state that size is positively related to hostility. Thus if the target firm is bigger, the probability of resistance of the target firm’s board is higher compared with a small firm. In addition, the probability of a successful takeover is lower at bigger target firms.
3. Methodology and regression model
3.1 Methodology
The methodology of an event study is based on the theory that stock prices are the representation of discounted future cash flows due to Duso et al (2010). This means that an event can change this stream of future cash flows. The actual returns during the event are compared to the returns that it would be earned without the event in an event study. The market model estimates the ‘normal’ returns that the target firm’s shareholders would have earned without the event. The estimated returns are:
(1) 𝐸(𝑟!,!) = 𝛼!+ 𝛽! ∗ 𝑟!,!!"#
Where 𝐸(𝑟!,!) is the expected daily return of firm 𝑖, and 𝑟!,!!"# is the market return (return on the S&P
500). This paper drops the 𝛼! in further calculations of the abnormal returns because the alpha is
insignificant in all cases. The abnormal return during the event can be calculated when the expected normal returns is known. The abnormal return is the difference between the actual return and the daily-expected normal return.
(2) 𝐴𝑅!,! = 𝑟!− 𝐸(𝑟!,!)
After calculating the daily abnormal return, the cumulative abnormal return for the period is calculated. The formula for the cumulative abnormal return is the sum of each daily abnormal return:
(3) 𝐶𝐴𝑅!,! = ! 𝐴𝑅!,!
!!!
The CAR becomes the independent variable in the first regression model. The CAR is calculated for two time windows. The first CAR is for a time window from two days before the announcement and two days after the announcement [−2,2]. The Second CAR is for a time window of twenty days before the announcement and twenty days after the announcement [−20,20]. The day of the takeover announcement is set a day zero (𝑡 = 0). The event window [-2,2] tests whether target firm’s shareholders earn an abnormal return at time of the announcement. The even window [-20,20] includes the findings of Schwert (1996), who states that target firm’s shareholders earn an abnormal return before the announcement, and the findings of Malkiel (2003), who find evidence that the target firm’s share prices are in a momentum after the announcement. This means that share prices increases even more in the period after the announcement.
3.2 Regression Models
This paper contains four regression models. The first two models test the effect of hostility on the abnormal return. The abnormal return is taken as the dependent variable. The first regression is for the CAR with the time window [-2,2]. The second regression model is for the CAR with the time window [-20,20]. The following regression model will estimate the abnormal return:
𝐶𝐴𝑅!,! = 𝛼!+ 𝛽!∗ 𝐻𝑂𝑆!,!+ 𝛽!∗ 𝐶𝐴𝑆𝐻!,!+ 𝛽!∗ 𝐹𝐼𝑁𝐶𝑅𝐼𝑆𝐼𝑆!,!+ 𝛽!∗ 𝐼𝑁𝑇𝐶𝑅𝐼𝑆𝐼𝑆!,!+ 𝛽!
∗ 𝑃𝑅𝐸𝑀𝐼𝑈𝑀!,!+ 𝛽!∗ ln 𝐴𝑆𝑆𝐸𝑇𝑆 !,!+ 𝛽!∗ ln 𝐷𝐸𝐴𝐿 !,!+ 𝛽!∗ 𝑆𝑈𝐶𝐶𝐸𝑆𝑆!,!+ 𝛽!
∗ 𝐴𝐺𝑅 + 𝛽!"∗ 𝑀𝐼𝑁𝐶𝑂𝑁𝑆 + 𝛽!!∗ 𝑀𝐴𝑁 + 𝛽!"∗ 𝑇𝑅𝐴𝑁𝑆 + 𝛽!"∗ 𝑇𝑅𝐴𝐷𝐸 + 𝛽!"
∗ 𝐹𝐼𝑁 + 𝛽!"∗ 𝑆𝐸𝑅𝑉 + 𝜀!
Where, 𝛼! is the constant factor for target firm i, and 𝜀! is the standard error with an average of zero
and a variance of 𝜎!. Table 1 presents a definition and the expected signs for the variables.
A higher merger premium with a hostile bid can be an explanation for higher abnormal returns. In the second regression model dummy variable HOS is regressed on PREMIUM to research if the bidding firm pays a higher premium in a hostile takeover announcement. The following model will estimate the premium:
𝑃𝑅𝐸𝑀𝐼𝑈𝑀!,! = 𝜑!+ 𝛾!∗ 𝐻𝑂𝑆!,!+ 𝛾!∗ 𝐶𝐴𝑆𝐻!,!∗ 𝛾!∗ 𝐹𝐼𝑁𝐶𝑅𝐼𝑆𝐼𝑆!,!+ 𝛾!∗ 𝐼𝑁𝑇𝐶𝑅𝐼𝑆𝐼𝑆!,!+ 𝛾! ∗ ln 𝐴𝑆𝑆𝐸𝑇𝑆 !,!+ 𝛾!∗ ln 𝐷𝐸𝐴𝐿 !,!+ 𝛾!∗ 𝐴𝐺𝑅 + 𝛾!∗ 𝑀𝐼𝑁𝐶𝑂𝑁𝑆 + 𝛾!∗ 𝑀𝐴𝑁
Where, 𝜑! is the constant factor for target firm i, and 𝜉! is the standard error with an average of zero
and a variance of 𝜎!. The expected sign of the variable HOS is positive.
Table 1: Regression variables on the CAR
This table provides information about the variables in the first regression model on the cumulative abnormal return. The third column discloses the expected sign of the variable. The fourth column provides a briefly definition of the variable.
Variable Type Expected value Definition
CAR Continuous Positive Cumulative abnormal return (%) for the the
event window
HOS Dummy Zero 1 = Hostile bid, and 0 = non-hostile bid
CASH Dummy Positive 1 = Cash payment (at least 60% of the offer
financed by cash or debt), 0 = stock payment FINCRISIS* Dummy Negative 1 = Financial crisis, and 0 = no financial crisis INTCRISIS** Dummy Negative 1 = Internet crisis, and 0 = no internet crisis ln (ASSETS) Continuous Positive Natural logarithm of the target firm’s total
asset
ln (DEAL) Continuous Positive Natural logarithm of the total deal value
PREMIUM Continuous Positive Percentage of the premium offered to the target
firm’s shareholders at the initial offer
SUCCESS Dummy Positive 1 = Successful announcement, and 0 =
unsuccessful announcement
AGR Dummy 1 = Agricultural, and 0 ≠ Agricultural
MINCONS Dummy 1 = Mining or Construction, and 0 ≠ Mining or
Construction
MAN Dummy 1 = Manufacturing, and 0 ≠ Manufacturing
TRANS Dummy 1 = Transport, and 0 ≠ Transport
TRADE Dummy 1 = Wholesale- or retail trade, and 0 ≠
Wholesale- or retail trade
FIN Dummy 1 = Finance, and 0 ≠ Finance
SERV Dummy 1 = Services, and 0 ≠ Services
The industry public administration is the reference point and is not included in the regression.
* The financial crisis started at September 14 2007 when Lehman Brothers filed their bankruptcy. At March 21 2011 the financial crisis came when the Treasury Department released this news.
The lower probability of success when the bid is hostile can be an explanation for a lower abnormal return when the bid is hostile. The second model regresses the variable SUCCESS on hostility in a probit model. This model tests if the probability of success is lower when the takeover bid is hostile. If a lower success ratio triggers a lower abnormal return and the probability of success is lower when the bid is hostile, it is likely to assume that the lower probability of success when the bid is hostile has a negative influence on the abnormal return. The following model estimates the probit regression model:
𝑆𝑈𝐶𝐶𝐸𝑆𝑆! = 𝛿!+ 𝜃!∗ 𝐻𝑂𝑆!+ 𝜃!∗ 𝐹𝐼𝑁𝐶𝑅𝐼𝑆𝐼𝑆!+ 𝜃!∗ 𝐼𝑁𝑇𝐶𝑅𝐼𝑆𝐼𝑆!+ 𝜃!∗ ln 𝐴𝑆𝑆𝐸𝑇𝑆 !+ 𝜃!
∗ ln 𝐷𝐸𝐴𝐿 !+ 𝜃!+ 𝐶𝐴𝑆𝐻!+ 𝜃!∗ 𝐴𝐺𝑅 + 𝜃!∗ 𝑀𝐼𝑁𝐶𝑂𝑁𝑆 + 𝜃!∗ 𝑀𝐴𝑁 + 𝜃!" ∗ 𝑇𝑅𝐴𝑁𝑆 + 𝜃!!∗ 𝑇𝑅𝐴𝐷𝐸 + 𝜃!"∗ 𝐹𝐼𝑁 + 𝜃!"∗ 𝑆𝐸𝑅𝑉 + 𝜁!
Where SUCCESS = 1 is a successful takeover announcement and SUCCESS = 0 is an unsuccessful takeover announcement. 𝛿! is the constant of the probit regression model and 𝜁! is the standard error
with an expected value of zero and a variance of 𝜎!. 3.3 Hypotheses
This paper describes the influence of bid hostility on the target firm’s abnormal returns. An explanation for higher abnormal returns when the bid is hostile is the higher merger premium offered. An explanation for lower abnormal returns when the bid is hostile is the lower probability of a successful takeover. This paper expects a trade-off between the higher merger premium and the lower probability of success. This paper tests three hypotheses. The first hypothesis is that there is no difference in abnormal returns comparing a hostile bid with a non-hostile bid. This hypothesis comes from the conclusion of Huang and Walkling (1987). The researchers find insignificant evidence that the abnormal returns are higher when de bid is hostile. The second hypothesis is that the merger premium offered when the bid is hostile is higher comparing a non-hostile bid. This hypothesis comes from the conclusions of DeAngelo and Rice (1983), and Roll (1986). DeAngelo and Rice (1983) state that hostility may be part of the negotiation strategy to increase the merger premium offered. In addition, Roll (1986) states that a higher merger premium offered results in a higher abnormal return. The last hypothesis is that the probability of success is lower when the bid is hostile. Schwert (1999) states that lower abnormal returns are the result of a lower probability of success.
3.4 Data
This thesis contains only takeover announcements in a period from January 1998 till December 2014. The target firm has to be a United States company, and its shares have to be traded publicly. For
estimating the normal returns per firm, we use the S&P 500 index as benchmark for the market returns. The S&P 500 index is used because the S&P 500 is a weighted proxy for the United Stated public companies.
The sample of the takeover announcements is selected in the database “Zephyr”. To find data of the takeover announcements the following restrictions are used: the acquisition announcement has to be for at least 50% of the target firm’s shares, the minimum offered deal value has to be at least 1 million US dollar, and all financial information from 540 days before the announcement has to be available. Zephyr classifies two types of hostile announcements. The first type of hostile announcement is classified as ‘hostile’, and the second type is classified as ‘recommended initially became hostile’. The variable ‘hostile’ must comply with the following: the target firm has takeover defense strategies prior the takeover announcement, and the target firm’s board initially rejects the first offer. The variable ‘recommended initially became hostile’ must comply with the following: the target firm has no takeover defense strategies, and the target firm’s board rejects the initial offer and tries to avoid the takeover with takeover defenses.
These restrictions result in 82 hostile announcement and 1473 non-hostile announcements. 42 of the 82 hostile announcements are useful. Not all financial information of the target firms is available. To create an equal sample of non-hostile announcements, 42 non-hostile announcements were selected randomly, using the random function in Excel. “Zephyr” provides the following information: the announcement date, total deal value, the target firm, total assets of the target firm, the takeover premium, and the success of the announcement. Table 2 and table 3 provide a summary of the variable statistics.
Table 2: Summary dummy variables This table summarizes the data of the dummy variables.
Hostile Non-hostile Number of announcements 42 42 Successful attempts 1 2 Cash payments 32 23 Financial crisis* 17 12 Internet crisis** 3 8
* The financial crisis started at September 14 2007 when Lehman Brothers filed their bankruptcy. At March 21 2011 the financial crisis came when the Treasury Department released this news.
Table 3: Summary continuous variables
This table shows the average cumulative abnormal returns measured for different time windows. This table provides in addition the average deal value and the average total assets of the target firm.
Hostile Non-hostile
Average St. Dev Min Max Average St. Dev Min Max
CAR (-2:2) 22.78% 0.2111 -3.83% 98.89% 12.69% 0.2258 -15.40% 125.70%
CAR (-20:20) 28.19% 0.2904 -16.30% 152.49% 13.02% 0.2648 -34.41% 130.90%
Deal Value* 4989.10 12,174.1881 14.23 66,040.00 3689.85 7139.2442 6.28 40,000
Total Assets** 4798.34 12,777.1964 5.90 81,345.09 29,032.24 148,368.77 9.38 960,461.50
Premium 34.47% 0.3780 -55.00% 154.00% 17.77% 0.4094 -95% 172.00%
*Deal value in million US dollars
4 Results
4.1 The influence of bid hostility on the CAR [-2,2]
Two time windows for the abnormal returns are tested. The regression models in table 4 summarize the coefficients of the variables that might have an influence on the abnormal return. The time window in the table runs from two days before the announcement till two days after the announcement date. The announcement date is set at 𝑡 = 0. The even window contains five days.
Table 4: regressions on the CAR [-2,2]
This table shows five regressions on the cumulative abnormal return in the time window of two days for the announcement till two days after the announcement.
1 2 3 4 5 6 7 HOS 0.1008** 0.0889* 0.1093** 0.0857* 0.0472 0.0517 0.0585 (0.0477) (0.0472) (0.0455) (0.0456) (0.0418) (0.0409) (0437) FINCRISIS 0.1003** 0.1398*** 0.1571*** 0.1201*** 0.1273*** 0.1205*** (0.0496) (0.0491) (0.0486) (0.0443) (0.0431) (0.451) INTCRISIS 0.2105*** 0.2289*** 0.1558** 0.1559** 0.1600** (0.0697) (0.0683) (0.0632) (0.0616) (0.0641) CASH 0.1083** 0.0761* 0.0764* 0.0610 (0.0476) (0.0434) (0.0421) (0.0444) PREMIUM 0.2351*** 0.2024*** 0.1922*** (0.0525) (0.0526) (0.0540) ln (ASSETS) -0.0397* -0.0354* (0.0167) (0.0207) ln (DEAL) 0.0246 0.0188 (0.0160) (0.0194) SUCCESS -0.0097 (0.0773) Constant 0.1269*** 0.0982*** 0.0469 -0.0201 -0.0181 0.0982 0.1071 (0.0337) (0.0360) (0.0383) (0.0476) (0.0427) (0.0701) (0.1901)
Ind. Dummy No No No No No No Yes
𝑅! 0.0517 0.0972 0.1896 0.2394 0.3947 0.4436 0.4818
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑅! 0.0401 0.0750 0.1592 0.2009 0.3559 0.3924 0.3766
Observations 84 84 84 84 84 84 84
* Significant at the 10% level, ** significant at the 5% level, and *** significant at the 1% level Standard error displayed below the coefficients in the brackets
The target firm’s shareholders earn a 10.08% higher abnormal return when the offer by the bidding firm is hostile. This means that a hostile takeover announcement results in a 10.08% higher cumulative abnormal return comparing to a non-hostile takeover announcement and is significant at the 5% level. The adjusted R squared is equal to 0.0401. This means that the available independent variable explains 4.01% of the dependent variable (the CAR).
The second model contains the dummy variable for the financial crisis in addition. Hostility seems to affect the cumulative abnormal return with positively with 8.89%, and is significant at the 10% level. Also the financial crisis affects the cumulative abnormal return. Takeover announcements in the financial crisis result in a 10.03% higher cumulative abnormal return in event window [-2,2] and are significant at the 5% level. This means that hostile announcements during a crisis result in higher abnormal returns of 8.89% and 10.03% respectively. The adjusted R squared is 0.0750; this means 7.5% of the dependent variable is explained by the explanatory variables hostile and financial crisis.
The third regression includes the dummy variable for the internet crisis in addition. Both crises seem to have a positive effect on the cumulative abnormal return of 13.98% and 21.05% for the financial crisis and the internet crisis respectively. Both crises are significant at the 1% level. Hostility seems to have a positive influence on the CAR of 10.93% at the 5% significance level. These variables explain the CAR for 15.92% according to the adjusted R squared.
The fourth regression model contains the dummy variable for the cash payment is addition. The cash payment method seems to have a positive influence on the cumulative abnormal return in the event window [-2,2]. The CAR is likely to increase with 10.83% when the bid include the transaction payment ‘cash’ and is significant at the 1% level. Crises have a positive influence of 15.71% and 22.89% for the financial crisis and the internet crisis respectively. Both coefficients are significant at the 5% level. The cumulative abnormal returns for the target firm’s shareholders are 8.57% higher when the bid is hostile. This coefficient is significant at the 10% level. The explanatory variables in this model explain 20.09% of the outcome of the cumulative abnormal return.
The fifth regression model includes the variable PREMIUM in addition. The merger premium has as expected a positive effect on the CAR. The regression model confirms this expectation. The CAR rises with 0.2351% when the premium goes up by 1%. The coefficient for the merger premium is significant at the 1% level. The coefficient of hostility is insignificant in this regression model. The financial crisis has a positive effect of 12.01% on the cumulative abnormal return and is significant at the 1% level. The internet crisis has a positive effect of 15.58% on the CAR and is significant at the 5% level. Cash payment affects the CAR positively with 7.61% and is significant at the 10% level. 35.59% of the CAR is explained by the variables in the model.
The last model contains the logarithms of the variables ASSETS and DEALVALUE in addition. In this model the coefficient for hostility is 0.0517, although the coefficient of hostility is insignificant. The financial crisis and the merger premium have both a significant positive influence
on the cumulative abnormal return with 12.73% and 20.24% respectively. Both variables are significant at the 1% level. The internet crisis seems to have a positive influence on the cumulative abnormal return of 15.94% and is significant at the 5% level. The model has an adjusted R squared of 0.3854.
The last regression model includes the dummy variable SUCCESS and the dummy variables for the industries in addition. The coefficient of hostility is 0.0585 but is insignificant. Again the financial crisis and the merger premium are significant at the 1% level with coefficients of 0.1205 and 0.1922 respectively. The coefficient for the dummy variable internet crisis has a positive effect on the cumulative abnormal return 16% and is significant at the 5% level. The variable ln(ASSETS) seems to have a negative effect on the cumulative abnormal return. The coefficient is -3.54% and is significant at the 10% level. The coefficient of success is -0.0097 but does not have a significant effect on the cumulative abnormal return. The regression has an adjusted R squared of 0.3677.
4.2 The influence of bid hostility on the CAR [-20,20]
Table 5 summarizes the coefficients of the variables that might have an influence on the abnormal return. The time window in the table is from twenty days before the announcement till twenty days after the announcement date. The announcement date is set at 𝑡 = 0. The even window contains 41 days.
Table 5: regressions on CAR [-20,20]
This table shows five regressions on the cumulative abnormal return in the time window of twenty days before the announcement till twenty days after the announcement.
1 2 3 4 5 6 7 HOS 0.1517** 0.1290** 0.1565*** 0.1374** 0.0877* 0.1009** 0.1047* (0.0606) (0.0581) (0.0533) (0.0564) (0.0512) (0.0482) (0.0526) FINCRISIS 0.1907*** 0.2441*** 0.2582*** 0.2104*** 0.2239*** 0.2281*** (0.0611) (0.0597) (0.0560) (0.0542) (0.0508) (0.0544) INTCRISIS 0.2849*** 0.2966*** 0.2074*** 0.2132*** 0.1985** (0.0848) (0.0845) (0.0774) (0.0725) (0.0772) CASH 0.0880 0.0464 0.0462 0.0462 (0.0590) (0.0531) (0.0496) (0.0535) PREMIUM 0.3035*** 0.2515*** 0.2434*** (0.0643) (0.0619) (0.0651) ln (ASSETS) -0.0561*** -0.0669*** (0.0197) (0.0250) ln (DEAL) 0.0241 0.0315 (0.0188) (0.0233) SUCCESS 0.0326 (0.0932) Constant 0.1321*** 0.0757* 0.0062 -0.0482 -0.0457 0.1820** 0.1682 (0.0429) (0.0443) (0.0466) (0.0589) (0.0523) (0.0824) (0.2290)
Ind. Dummy No No No No No No Yes
𝑅! 0.0709 0.1707 0.2732 0.2932 0.4501 0.5330 0.5440
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑅! 0.0596 0.1502 0.2460 0.2574 0.4149 0.4900 0.4514
Observations 84 84 84 84 84 84 84
* Significant at the 10% level, ** significant at the 5% level, and *** significant at the 1% level Standard error displayed below the coefficients in the brackets
The target firm’s shareholders gain a 15.17% higher cumulative abnormal return when the bid is hostile. The coefficient of hostility is significant at the 5% level. There seems to be evidence that the abnormal return for the target firm is higher when the bid is hostile. The adjusted R squared of the regression model is 0.0596.
The dummy variable for the financial crisis is added in the second regression model. HOSTILE has a positive influence of 12.90% on the cumulative abnormal return and is significant at the 5% level. Also the financial crisis has a positive influence on the cumulative abnormal return with 19.07% and is significant at the 1% level. The model has an adjusted R squared of 0.1502.
The third regression model contains the dummy variable INTCRISIS in addition. Hostility has a positive influence of 15.65% on the abnormal return and is significant at the 1% level. The financial crisis and the internet crisis both are significant at the 1% level and have an positive influence on the CAR [-20,20] of 24.41% and 28.49% respectively. The model has an adjusted R squared of 0.2460.
The fourth model contains the dummy variable CASH in addition. The variable hostility has a positive influence of 13.74% on the cumulative abnormal return. The coefficient is significant at the 5% level. Again, the coefficients for the financial crisis and the internet crisis are significant at the 1% level and have a positive effect on the CAR [-20,20] of 25.82% and 29.66% respectively. The coefficient for cash is 0.0880, but is insignificant. The model has an adjusted R squared of 0.2574.
The fifth regression model includes the variable for the takeover premium is addition. Hostility has a positive influence of 8.77% on the cumulative abnormal return and is significant at the 10% level. Again the coefficient for the variables for the financial crisis and the internet crisis are significant at the 1% level. The variables have a positive effect on the CAR [-20,20] of 21.04% and 20.74% respectively. The coefficient for the premium has positive influence on the cumulative abnormal return of 30.35% and is significant at the 1% level. The model has an adjusted R squared of 41.49%.
The sixth model contains the logarithms of the total assets of the target and the deal value in addition. Hostility has a positive influence on the cumulative abnormal return of 10.09% and is significant at the 5% level. The coefficients for the financial crisis and the internet crisis have a positive influence on the cumulative abnormal return and are significant at the 1% level. The coefficient for the financial crisis is 0.2239 and the coefficient of the internet crisis is 0.2132. This means that the CAR is 22.39% higher when the takeover announcement is during the financial crisis and 21.32% higher during the internet crisis. Premium has a positive influence on the cumulative abnormal return. The coefficient of premium is 0.2515 and is significant at the 1% level. The coefficients for the payment type and deal value are both insignificant. The model has an adjusted R squared of 0.4900.
The last regression contains the variable SUCCESS and the dummy variables for the industry in addition. Hostility has a positive influence on the cumulative abnormal return of 10.47% and is significant at the 10% level. The financial crisis has a positive influence on the cumulative abnormal return 22.81% and is significant at the 1% level. The internet crisis has a positive influence on the cumulative abnormal return of 19.85% and is significant at the 5% level. The premium has a positive influence on the cumulative abnormal return of 24.34% and is significant at the 1% level. The variable ln(ASSETS) has a negative effect on the abnormal return. The coefficient is -0.0669 and is significant at the 1% level. SUCCESS has a positive effect on the abnormal return of 3.26% but is not significant. The model has an adjusted R squared of 0.4515.
4.3 Hostility Premium
The small it is not that small statistical evidence that hostility has a positive influence on the announcement effect can possibly be explained by two variables. On the one hand, when the bid is a hostile bid, the takeover premium should be higher and therefore the CAR should be higher.
Table 6: regression on takeover premium
This table shows the regressions on the merger premiums offered by the bidding firm.
1 2 3 4 5 6 HOS 0.1770** 0.1670* 0.1937** 0.1639* 0.1616* 0.1668* (0.0860) (0.0867) (0.0859) (0.0876) (0.0868) (0.0914) FINCRISIS 0.0837 0.1354 0.1573* 0.1607* 0.1594 (0.0912) (0.0927) (0.0932) (0.0917) (0.0966) INTCRISIS 0.2758** 0.2940** 0.2765** 0.2664* (0.1317) (0.1313) (0.1297) (0.1368) CASH 0.1373 0.1300 0.1267 (0.0916) (0.0901) (0.0964) ln (ASSETS) -0.0713** -0.0716 (0.0353) (0.0447) ln (DEAL) 0.0454 0.0420 (0.0342) (0.0420 Constant 0.1677*** 0.1437** 0.0764 -0.0085 0.1931 0.0698 (0.0608) (0.0662) (0.0723) (0.0915) (0.1502) (0.4170)
Ind. Dummy No No No No No Yes
𝑅! 0.0491 0.0589 0.1078 0.1325 0.1828 0.2068
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑅! 0.0375 0.0357 0.0744 0.0886 0.1191 0.0728
Observations 84 84 84 84 84 84
* Significant at the 10% level, ** significant at the 5% level, and *** significant at the 1% level Standard error displayed below the coefficients in the brackets
Hostility triggers a higher merger premium in the first regression model. In the regression of premium on hostility (1), hostility seems to increase the takeover premium by 17.70%. This result is insignificant at the 5% level. The model has an adjusted R squared of 0.0375.
In the second model the takeover premium is regressed on hostility and the financial crisis. The coefficient for the variable hostility is 0.1670 and is significant at the 10% level. The coefficient of the financial crisis is 0.0837 but is insignificant. The model has an adjusted R squared of 0.0357.
Regression three contains the dummy variable for the internet crisis is addition. Hostility has a positive effect of 19.37% on the takeover premium and is significant at the 5% level. The coefficient for the financial crisis is again insignificant. The coefficient for the internet crisis is 0.2758 and is significant at the 5% level. The model has an adjusted R squared of 0.0744.
The fourth model includes the dummy variable for a cash payment is addition. Hostility has a positive effect on the merger premium of 16.39% and is significant at the 10% level in this model. The coefficient for the financial crisis is 0.1573 and is significant at the 10% level. The coefficient for the internet crisis is 0.2940 and is significant at the 5% level. Cash has a coefficient of 13.73% but is insignificant. The model has an adjusted R squared of 0.0886.
The fifth model contains the variables ln(ASSETS) and ln(DEAL) in addition. The coefficient of hostility is 0.1616 and is significant at the 10% level. The financial crisis has a coefficient of 0.1594 and is significant at the 10% level. The coefficient for the internet crisis is 0.2765 and is significant at the 5% level. De value of the assets has a negative effect on the merger premium. The coefficient of ln(ASSETS) is -0.0713 and is significant at the 5% level. The model has an adjusted R squared of 0.1191.
The sixth model includes the dummy variables for the industries in addition. In this model hostility seems to have a positive effect on the premium. The coefficient for hostility is 0.1667 and is significant at the 10% level. The coefficient for the internet crisis is 0.2664 and is significant at the 10% level. All other variables are insignificant. The model has an adjusted R squared of 0.0728.
4.4 The success probability of hostile takeover announcements
The variable SUCCESS has a negative but insignificant effect on the cumulative abnormal return. The probit regression on SUCCESS tests the effect of bid hostility on the probability of a successful takeover. Table 7 provides five probit regression models on the depended variable SUCCESS.
Table 7: Probit regressions on success
This table provides the probit regressions on the success ratio of the announcement. The ratio of success is a binary variable. A successful outcome has the value 1 and a unsuccessful has the value 0 (Pr[SUCCESS = 1| UNSUCCESSFUL = 0]). 1 2 3 4 5 HOS -0.9132* -0.8593* -0.8615* -0.9242* -0.9433 (0.4828) (0.5007) (0.5142) (0.5620) (0.6857) FINCRISIS -0.4893 -0.4891 -0.7661 -1.1194 (0.5539) (0.5542) (0.6834) (0.9287) INTCRISIS 0.2580 0.2588 0.2458 0.3086 (0.5401) (0.5415) (0.5668) (0.7254) CASH 0.0084 -0.0060 -0.0199 (0.4497) (0.4979) (0.6628) ln(ASSETS) 0.2180 0.1379 (0.1826) (0.2523) ln(DEAL) -0.0117 0.1698 (0.1880) (0.2487) PREMIUM -0.3815 (0.8033) Constant -1.0676*** -1.0133*** -1.0181*** -2.4816*** -5.8418 (0.2393) (0.3111) (0.4053) (0.8847) 697.7702
Ind. dummy No No No No Yes
𝑝𝑠𝑒𝑢𝑑𝑜 𝑅! 0.0890 0.1187 0.1187 0.2244 0.2954
Observations 84 84 84 84 84
* Significant at the 10% level, ** significant at the 5% level, and *** significant at the 1% level Standard error displayed below the coefficients in the brackets
The first model explains the probability of success with the depended variable HOS. The coefficient for hostility is -0.9132 and is significant at the 10% level. This means that the probability of a successful takeover is 91.32% lower when the takeover announcement is hostile. The first model has a pseudo R squared of 0.0890.
The second model includes the dummy variables for the financial crisis and the internet crisis in addition. The coefficient of the financial crisis is -0.4893 and the coefficient of the internet crisis is 0.2580 but both coefficients are insignificant. The variable HOS has a coefficient of -0.8583 and is significant at the 10% level. This means that the probability of a successful takeover is 85.83% lower when the takeover attempt is classified as hostile. The second model has a pseudo R squared of 0.1187.
The dummy variable for a cash payment is added to the third model. However the variable for the payment type is insignificant. Even as the variables for the financial crisis and the internet crisis. Hostility has a coefficient of -0.8615. This means that the probability of a successful takeover is 86.15% lower when the takeover attempt is hostile. This third model has a pseudo R squared of 0.1187.
In the fourth model the variables of the logarithms of the asset value of the target firm and the deal value are added. However, both variables are insignificant. The coefficients of the variables for the payment method and the crisis are also insignificant. The coefficient of hostility is -0.9242 and is significant at the 10% level. This means the probability of a successful takeover is 92.42% lower when the takeover announcement is hostile. The fourth model has a pseudo R squared of 0.2244.
The fifth model contains the variable for merger premium and the dummy variables for the industry in addition. The coefficient for hostility is -0.9433 but is insignificant. The coefficient for the financial crisis seems big with -1.1194 but is either insignificant. The fifth model has a pseudo R squared of 0.2954.
5 Conclusion and discussion
This paper provides an explanation for the difference in the abnormal returns for the target firm’s shareholders when the takeover announcement is hostile. This paper expects a trade-off between the higher merger premiums and the lower probability of success when the bid is hostile. The sample contains 84 takeover announcements between 1998 and 2014. 42 announcements are hostile and 42 announcements are non-hostile. All target firms are U.S. based companies and their shares are traded publicly.
The first hypothesis is that there is no difference in the cumulative abnormal return when the bid is hostile. The regression on the CAR tests whether this hypothesis cannot be rejected. Two event windows are tested. The regression models on the CAR [-2,2] provide weak evidence that there exists a positive effect on the cumulative abnormal return of the target firm. Hostility seems to trigger a 10.08% higher abnormal return in the first regression of table 4. Although, when more explanatory variables are added to the model, the statistical significance of hostility declines. This is in line with the study of Huang and Walkling (1987) who find also insignificant coefficients for hostility. However, the positive effect of hostility on the cumulative abnormal return seems clearer in the time
window [-20,20]. The regressions for this time window are provided in table 5. The coefficients for hostility are significant positive in all regressions. This means that a hostile bid triggers a higher abnormal return for the target firm’s shareholders. This is in line with the studies of Bradley, Desai, and Kim (1983) and Goergen and Rennenboog (2004) who conclude that hostility triggers higher abnormal returns.
Roll (1986) states that the merger premium triggers the initial increase in the target firm’s share price after the takeover announcement. This paper makes the same conclusion. Table 4 and table 5 show a significant positive effect of the merger premium on the abnormal returns. DeAngelo and Rice (1983) state that hostility triggers a higher merger premium. This study tests this hypothesis by regressing the merger premium on the dummy variable hostility. This paper finds that a hostile takeover announcement triggers higher abnormal returns. This conclusion is in line with the theory of DeAngelo and Rice (1983). The second hypothesis cannot be rejected based on the significant evidence that the merger premium triggers a higher abnormal return and hostility triggers a higher merger premium.
Schwert (1999) states that hostile takeover announcements are less successful than non-hostile takeover announcements. In additions, the researcher states that the lower ratio of success has a negative effect on the target firm’s abnormal returns. There seems to small significant evidence that the probability of a successful takeover when the takeover announcement is hostile. This is in line with the conclusion of Schwert (1999). However, success seems to have less effect on the cumulative abnormal return. The coefficients are insignificant and there is no evidence that the success of the takeover announcement affects the cumulative abnormal return.
Hostility seems to have a positive effect on the cumulative abnormal return with a time window [-20,20]. However, the effect of hostility on the cumulative abnormal return seems to be smaller for the time window [-2,2]. The higher cumulative abnormal return concerning a hostile bid can be explained by the higher merger premium paid. The probability of success is lower when the takeover announcement is hostile. Although there is no evidence that de probability of success affects the abnormal return. Therefore, the positive effects of the premium overweight the negative effect of the probability of success concerning hostile takeover announcements.
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Appendix
I. The merger timeline
Private takeover process Public takeover process
Private initiation Public Resolution
announcement date
Figure 1: The timeline of the takeover announcement process
This figure illustrates the timeline of a merger (Schwert ,1999). The merger process starts with the private takeover process. Only the target firm knows that there is a merger announcement coming. The public announcement date is the date where the bidding firm makes the merger announcement public. The public knows the information about the takeover during the public takeover process. The process stops when the target firm makes a resolution.
II. The announcement effect
Figure 2: The average daily abnormal returns for hostile and non-hostile announcements
In this figure the average abnormal return for hostile and non-hostile announcements are plotted. The abnormal return of hostile target firm seems to peek higher than non-hostile target firms.
-5% 0% 5% 10% 15% 20% -20 -15 -10 -5 0 5 10 15 20 Abnormal Return Days hostile(daily(abnormal(return non1hostile(daily(abnormal(return
