Corporate Takeovers: Mode of Payment, Returns and Trading Activity

Abstract

This paper examines the impact of takeover bids and, in particular, the method of payment to the shareholders of the target firms on the returns, trading activity and bid-ask spreads of target and bidding firms traded on the London Stock Exchange. It suggests that the shareholders of target firms benefit substantially from takeover activity while the shareholders of bidding firms do not suffer. The combined value of the firms engaged in takeover activity increases by a small percentage during the event period. However, the benefit from a takeover announcement to the shareholders of the target firm varies from year to year and has declined in the recent past. The magnitude of excess returns available to the shareholders is also dependent on the mode of payment. Prices of target (bidding) firms increase (decrease) most if the shareholders of the target firms are given an option to receive payment in shares or in cash. The findings also reveal that during the event period trading activity in target and bidding companies increases depending on the form in which payments to shareholders are made. In response to this increased liquidity, the bid-ask spreads of target and bidding firms decline during the event period. Copyright Blackwell Publishers Ltd 1999.

Interorganizational imitation and payment mode decisions in cross‐border acquisitions

“…The choice of payment mode reflects the confidence of the acquirer in the deal for achieving postacquisition synergistic gain (Draper & Paudyal, 1999). Extant literature on payment mode choices have investigated various firm and industry level antecedents such as taxation consideration (Wansley et al, 1983), ownership structure (Faccio & Masulis, 2005), capital structure (Chaney et al, 1991), industry relatedness (Draper & Paudyal, 2006);business cycle (Choe et al, 1993), and so forth.…”

“…In an M&A deal, the deal structuring process includes various decisions such as mode of payment, level of equity ownership, amount of premium paid, and use of termination fee (Draper & Paudyal, 1999) and other related aspects. Mode of payment is a critical decision as it signals the level of confidence of the acquirer in achieving postdeal synergies (de La Bruslerie, 2012) and hence it has a substantial impact on the wealth creation of shareholders (Betton, Eckbo, & Thorburn, 2008).…”

Takeover Premiums and the Perception of Auditor Independence and Reputation

“…These include: synergies (e.g.. Morck, Shleifer and Vishny, 1990;Sudarsanam, Holl andSalami, 1996 andHietala, Kaplan andRobinson, 2003), disciplining of inefficient or underperforming target management (e.g., Agrawal andJaffe, 2003 andHarford, 2003) and the differential tax treatment of alternative payment forms (e.g., Huang and Walkling, 1987;Draper andPaudyal, 1999 andDa Silva Rosa, Izan, Steinback andWalter, 2000).…”

“…Cash takeover offers have been documented to be associated with increased takeover premiums (see : Huang and Walkling, 1987;Franks, Harris and Mayer, 1988;Draper and Paudyal, 1999;Da Silva Rosa, Izan, Steinback andWalter, 2000 andBugeja, 2005). Method of payment (PAYT) is controlled using an indicator variable that denotes takeovers where the initial takeover consideration is exclusively cash.…”

Impact des rumeurs d’offres publiques d’acquisition sur la liquidité : cas des entreprises françaises cibles

“…La baisse du volume de transactions est conforme aux résultats retrouvés par Draper and Paudyal (1999) sur la période post-annonce des offres publiques d'acquisition et aussi aux prédictions du modèle de Kim and Verrecchia (1991). Ces derniers proposent en effet que le volume de transactions connaît une baisse après l'annonce de l'information.…”