An Empirical Analysis of Some Determinants of the Target Shareholder Premium in Takeovers

Abstract

While a considerable amount of research in Australia, the United States and elsewhere shows that takeovers create value for target shareholders, there is relatively little research investigating the explanations for cross‐sectional differences in the size of the premium paid to target shareholders. This paper tests various arguments proposed to explain some of the sources of this premium. One such explanation is the removal of inefficient target management. Takeovers have been recognised as a mechanism that allows management teams to compete for the right to manage corporate assets. We test the associations between bidder and target managerial ownership (proxied by director's holdings), the prior performance of the bidder and target and the size of the premium paid to target shareholders. Other potential influences on the premium include a reduction in the agency costs of free cash flow and the provision of financial slack or reserve borrowing capacity to the target firm by the bidder. Using a sample of seventy‐eight Australian takeovers occurring between 1981 and 1989 our tests indicate that the provision of financial slack to the target is associated with a significantly higher premium, while high bidder ownership results in a significantly lower premium. The premium is found to be positively related to the performance of the bidder in the period prior to the bid. The tests disclose an association between the agency costs of free cash flow and the target premium which is inconsistent with the theory, and reveal only weak evidence that the takeover premium is higher when inefficient target management is removed.

Did the goodwill accounting standard impose material economic consequences on Australian acquirers?

“…The negative and significant sign for TOEHOLD is consistent with the findings of earlier studies (Ayres et al, 2002;Bugeja and Walter, 1995;Robinson and Shane, 1990). It is also consistent with the explanations that (a)…”

“…We excluded foreign bidders since the incentives of domestic bidders can be different from those of foreign acquirers; this sampling procedure also ensures that all sample firms are subject to the same accounting standard for goodwill. To ensure homogeneity of data, bids involving target and bidder firms in the extractive industries were excluded (Bugeja and Walter, 1995).…”

“…evidence supports this (e.g., Ayres et al, 2002) but not the Australian evidence (Bugeja and Walter, 1995). Therefore, no sign is predicted for DIROWN, measured as the sum of the target directors' share ownership, direct and beneficial, divided by the total number of target firm's issued ordinary shares.…”

“…The proportion of the target's shares held by the bidder in the pre-bid period, coined as toehold in the literature, can significantly reduce the bid premium and is controlled for in the tests (Ayres et al, 2002;Bugeja and Walter, 1995;Robinson and Shane, 1990). Where the bidder has a large pre-bid holding, the pre-acquisition share price would have factored in the probability of a future bid by a substantial shareholder.…”

Australian evidence on the determinants and impact of takeover resistance

“…They find that the bid premia on bids that target directors recommend be rejected are statistically significantly lower than the premia on bids that target directors recommend be accepted. Bugeja and Walter (1995) examine the impact of target director recommendations on the wealth of target shareholders around the takeover announcement. They find that the cumulative average abnormal return is higher for bids that directors reject than bids that directors accept.…”