Preview

Hello World

Better Essays
Open Document
Open Document
18274 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Hello World
Signaling and risk allocation in merger agreements

Antonio J. Macias* Thomas Moeller**

Abstract Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.

Keywords: Mergers, acquisitions, signaling, material adverse change clauses and exclusions JEL classification: D86, G14, G32, G34 This draft: April 2013
* Texas Christian University, TCU Box 298530, Fort Worth, TX 76129. E-mail: a.macias@tcu.edu, phone: 817.257.5962 ** Texas Christian University, TCU Box 298530, Fort Worth, TX 76129. E-mail: t.moeller@tcu.edu, phone: 817.760.0050

Signaling and risk allocation in merger agreements

Abstract Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are



References: 32 Boone, A., Mulherin, J., 2008 33 Davidoff, S., 2011 34 Hilbe, J.M., 2009 35 Roberts, M., Sufi, A., 2009

You May Also Find These Documents Helpful

  • Better Essays

    Unit VIII Final Project

    • 1018 Words
    • 4 Pages

    Islam, S., Sengupta, P., Ghosh, S., & Basu, S. (2012). The behavioral aspects of mergers and acquisitions: A case study from India. Global Journal of Business Research, 6(3), 103-112.…

    • 1018 Words
    • 4 Pages
    Better Essays
  • Better Essays

    Extended Essay

    • 1587 Words
    • 7 Pages

    Acquisition initially provides growth to the acquirer. An empirical research study based on a sample of 12023 acquisitions shows that these firms received an equally weighted abnormal announcement return of 1.1% (Moeller, Schlingemann and Stulz, 2004). The return was generally positive, which indicates that acquiring-firms’ market value might ascend faster than original schema while the overall risk is constant. Therefore after a formal announcement is made, acquisition, to some extent, stimulates firms’ growth within a short-term observation period. Moreover, according to another study in the US, shareholders of both target firms and bidder firms benefited from acquisitions at different levels in the short-term (Sudarsanam, 2003), which could probably be explained by the generalized market rise promoted by optimistic expectations of investors after careful and thorough risk analysis (Petmezas, 2009). The rise of market value means available revenues newly…

    • 1587 Words
    • 7 Pages
    Better Essays
  • Powerful Essays

    The Timken Case

    • 4265 Words
    • 18 Pages

    Bibliography: * DePamphilis D. (2007), ‘‘Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions’’, fourth edition, Elsevier/Academic Press: San Diego.…

    • 4265 Words
    • 18 Pages
    Powerful Essays
  • Best Essays

    Mergers and acquisitions have become a growing trend for companies to inorganically grow a business within its particular industry. There are many goals that companies may be looking to achieve by doing this, but the main reason is to guarantee long-term and profitable growth for their business. Companies have to keep up with a rapidly increasing global market and increased competition. With the struggle for competitive advantage becoming stronger and stronger, it is almost essential to achieve these mergers. Through research I will attempt to dissect the best practices for achieving merger success.…

    • 3233 Words
    • 13 Pages
    Best Essays
  • Powerful Essays

    Kargin, S. (2001). Mergers and Tender Offers: A Review of the Literature. Retrieved March 14, 2008, from http://www.bayar.edu.tr/~iibf/dergi/pdf/C8S12001/SK.PDF…

    • 1629 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Does M&a Add Value?

    • 2939 Words
    • 12 Pages

    Bibliography: Goergen, M. and Renneboog,L., 2003. Shareholder wealth effects of European domestic and crossborder takeover bids. European Corporate Governance Institute Finance Working Paper Roll, R., 1986. The hubris hypothesis of Corporate Takeovers, Journal of Business 59, 197-216 Servaes,H., 1991. Tobin’s Q and the gains from takeovers. Journal of Finance 46, 409-419 Kaplan,S and Weisbach,M.,1992. The Success of Acquisitions: Evidence from Divestitures, Journal of Finance 47, 107-138. Jensen, MC., 1986. Agency costs of free cash flow, corporate finance and takeovers. American Economic Review 76, 323-329 Asquith, P; Bruner, R; and Mullins,F., 1987. Merger returns and the form of financing. Working Paper, Cambridge, Mass., Harvard Business School Bruner, R., 2001. Does M&A Pay? A Survey of Evidence for the Decision-Maker. Batten Institute Working Paper, Darden Graduate School of Business Caves, R., 1989. Mergers, Takeovers and Economic Efficiency. International Journal of Industrial Organization, 7 151-174 Meeks,G., 1977. Disappointing Marriage: A Study of Gains from Merger. Cambridge University Press Huang,Y and Walkling,R., 1989. Target Abnormal Returns Associated with Acquisition Announcements: Payment, Acquisition Form and Managerial Resistance, Journal of Financial Economics Yook, K.C., 2000. Larger Return to Cash Acquisitions: Signalling effect or Leverage effect? Working Paper, Johns Hopkins Gregory, A., 1997. An Examination of the Long Run Performance of UK Acquiring Firms. Journal of Business Finance & Accounting 971-1002 Loughran,T and Vijh,A., 1997. Do long term shareholders benefit from corporate acquisitions? Journal of Finance, 52 1765-1790 Lang,L; Stulz,R; and Walkling,R.,1989. Managerial Performance, Tobin’s Q and Gains from Successful Tender Offers. Journal of Financial Economics 24 137 - 154 Lewellen,W; Rosenfeld,A., 1985. Merger Decisions and Executive Stock Ownership in Acquiring Firms. Journal of Accounting and Economics 7 209-231 Berger,P.G and Ofek, E.,1995. Diversification’s Effect on Firm Value. Journal of Financial Economics 37 39-65 Bloomberg for accounting and financial data…

    • 2939 Words
    • 12 Pages
    Powerful Essays
  • Powerful Essays

    Communication Plan

    • 1637 Words
    • 7 Pages

    Krug, et al. (2008). Merger and Acquisition Lead to long term Management Turmoil. Newswise Retrieved from http://www.newswise.com/articles/view/542588/…

    • 1637 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Seo, M.G. (2001). Managing Merger and Acquisition Process: An integrative framework. Academy of Management Proceedings. pp.1-7.…

    • 1392 Words
    • 6 Pages
    Powerful Essays
  • Better Essays

    In regards to acquisitions, it is important to distinguish between mergers and acquisitions. In a merger, two companies come together and create a new entity. In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs. An acquisition that involves integration has greater staffing implications than one that involves separation (Rizvi, 2008). A combining of companies is a major change. Mergers and acquisitions represent the end of the gamut of options companies have in combining with each other. It is the mergers and acquisitions that are the combinations that have the greatest implications for size of investment, control, integration requirements, pains of separation, and people management issues (Doz and Hamel, 1998).…

    • 3253 Words
    • 14 Pages
    Better Essays
  • Powerful Essays

    Edward Jones Case

    • 4171 Words
    • 17 Pages

    P. C. Haspeslagh & Jemison, D. B. “Acquisitions – Myths and reality”, Sloan Management Review, Winter 1987, pp. 53-58.…

    • 4171 Words
    • 17 Pages
    Powerful Essays
  • Powerful Essays

    Merger Analysis

    • 15900 Words
    • 64 Pages

    Bibliography: Historically, mergers have often failed to add significantly to the value of the acquiring firm 's…

    • 15900 Words
    • 64 Pages
    Powerful Essays
  • Best Essays

    Cultural Intelligence

    • 2256 Words
    • 10 Pages

    Rappeport, A., & Lucas, L. (2011, May 23). Mergers and acquisitions: A bitter taste. Retrieved 2012, from Financial Times: http://www.ft.com/intl/cms/s/0/03559624-8571-11e0-ae32-00144feabdc0.html#axzz2AcXR8y2q…

    • 2256 Words
    • 10 Pages
    Best Essays
  • Powerful Essays

    Merger. Research Proposal

    • 4518 Words
    • 19 Pages

    "Virtually every major company in the United States today has experienced a major acquisition at some point in history. And at any given time, thousands of these companies are adjusting to post-merger reality. For example, so far in the decade of the 1990's (through June 1999), 96,020 companies have come under new ownership worldwide in deals worth a total of $ 3.9 trillion - and that's just counting acquisitions valued at $ 5 million and over. Add to this the many smaller companies and nonprofit and governmental entities that experience mergers every year, and the M & A universe becomes large indeed".…

    • 4518 Words
    • 19 Pages
    Powerful Essays
  • Best Essays

    Mergers and Acquisitions is an extreme matter of concern in the corporate world since last few decades. M&A can also be considered as a main vehicle which drives towards direct investments, either domestic or foreign. With motives of achieving greater efficiency and effective strategies, most of the companies had gone through at least one M&A activity at least once in a lifetime.…

    • 2995 Words
    • 12 Pages
    Best Essays
  • Powerful Essays

    Mergers and Acquisition

    • 754 Words
    • 3 Pages

    Why are there mergers and acquisitions? Mergers and acquisitions take place for a number of reasons, such as refinancing for a better price, amplifying expansion, and submerging risk through diversification. New entities may drag behind after a merger takes place due to the higher cost of matching different and unconnected economic activities. Diversification by business groups may also reduce technical effectiveness. When a merger takes place, a bigger business groups emerges from the two which usually will have more economic and political influence In this paper, we will assess the impact of mergers and acquisitions on firms, including sensible" and dubious reasons for, and benefits and costs of, cash and stock transactions. We will also be sure to examine the financial risks of merging with or acquiring an organization in another country and how those risks could be mitigated.…

    • 754 Words
    • 3 Pages
    Powerful Essays