Cross‐border mergers and acquisitions: The role of private equity firms

Abstract

Research summary: We show that private equity ownership (“PE backing”) of the acquirer is a signal of deal quality in cross‐border takeovers. As such, PE‐backed acquirers experience higher announcement returns in cross‐border takeovers, but only if targets are in poor information environments. We show that PE backing is a positive market signal because of PE firms' experience and networks that result from prior deals in target countries. We document that the market correctly anticipates that operating performance of PE‐backed acquirers increases as a result of cross‐border mergers and acquisitions (M&A). Managerial summary: We study cross‐border acquisitions by acquirers that are partially owned by private equity firms (“PE backing”). Cross‐border acquisitions are challenging as acquirers often have little information about targets. We document that investors react positively to cross‐border deals of PE‐backed acquirers—their stock prices increase upon deal announcements. However, this is only the case if targets are in countries with poor information environments. This is because PE backing allows acquirers to access PE firms' deal experience and networks. This makes it easier to identify and evaluate good targets, making it more (less) likely that a deal eventually creates (destroys) value. Consistent with this, we find that earnings of PE‐backed acquirers increase after buying targets in poor information environments. Copyright © 2016 John Wiley & Sons, Ltd.

The Stock Market Reaction to Mergers and Acquisitions: Evidence from the Banking Industry

“…The event-study method enables us to estimate the effect that an event has on firms' securities (Fama et al, 1969;MacKinlay, 1997). However, traditional event studies only estimate abnormal returns of stocks around M&A announcements (Akhigbe & Madura, 2001;Alexandridis et al, 2017;Amihud et al, 2002;Balaban & Constantinou, 2006;Eckbo, 1983;Elyasiani et al, 2016;Goddard et al, 2012;Hankir et al, 2011;Houston & Ryngaert, 1994;Humphery-Jenner et al, 2017). Because the objective of this article is to analyze the effect of M&A announcements on the mean and variance of bank returns, we conduct a GARCH event study, which allows us to estimate the impact of M&A announcements on stocks' mean and variance of acquirer, target, and rival banks.…”

“…7 However, as mentioned above, the effects may be different in emerging economies. Specifically, one relevant issue in M&As is the effect of announcements in terms of creating value for shareholders and their possible impact on stock volatility (Elyasiani, Staikouras, & Dontis-Charitos, 2016;Hankir, Rauch, & Umber, 2011;Houston & Ryngaert, 1994;Humphery-Jenner, Sautner, & Suchard, 2017;Hutson & Kearney, 2001;Nain & Wang, 2016;Piloff & Santomero, 1998). Thus, this paper has two goals: first, to quantify whether M&A announcements generate abnormal returns for the acquirer, the target, and rival banks; second, to measure whether M&A announcements create market volatility due to evidence about acquirers, targets, and rivals.…”

“…Therefore, the empirical literature has evaluated the two effects of M&As: on the creation of value for shareholders and on market volatility. This evaluation is generally conducted separately (Alexandridis et al, 2017;Amihud, DeLong, & Saunders, 2002;Bozos, Koutmos, & Song, 2013;Chang & Cho, 2017;Eckbo, 1983;Humphery-Jenner et al, 2017;Nain & Wang, 2016;Song & Walkling, 2000).…”

“…Akhigbe and Madura (2001) find positive and significant valuation effects for publicly traded acquirer and target insurance companies. In general, the positive effects can be explained by the market power obtained by firms due to the deal, the reduction in information asymmetry about companies, and improvement in corporate governance policies (Alexandridis et al, 2017;Hankir et al, 2011;Humphery-Jenner et al, 2017);…”

Organizational Political Ideology, Host Country Institutions, and Impact on Employee Outcomes

“…Research on M&As has grown significantly in recent years (Humphery-Jenner, Sautner, & Suchard, 2017), as management scholars have been very much concerned with the challenges of these transactions, in particular cross-border ones, and how to increase their success rate (Morán & Panasian, 2005). To date, research has primarily focused on assessing the benefits of M&As, or their lack thereof.…”