Does it pay to acquire private firms? Evidence from the U.S. banking industry

Abstract

We extend the U.S. bank M&As literature by examining bidder announcement abnormal returns in deals involving both public and private targets over a 32-years examination period. Our main findings document the existence of a listing effect in our sample. Banks gain when they acquire private firms and lose when they acquire public firms. Gains in private offers are even higher when bidders employ financial advisors, whereas the opposite is true for public deals. We argue that this adverse advisor effect relates to the different levels of information asymmetry between public and private targets. Our results remain robust when we control for usual determinants of bidder abnormal returns, such as the method of payment, size, or relative size and when we control for sample selection and endogeneity problems.

Advisor-Hedge Fund Connections, Information Flows and Deal Outcomes in Mergers and Acquisitions

“…Therefore, advisors may use connected fund holdings as an 'indirect toehold' in target firms, exploit information obtained from affiliated funds with holdings in the target firm, and help bidders gain more bargaining power, leading to a higher probability of acquisition completion, lower target premiums and target abnormal returns after the acquisition announcements. Our findings contribute to the literature showing that financial advisors reduce information asymmetry between targets and acquirers (Officer, 2007;Leledakis et al, 2021). We highlight one particular channel through which it is achieved-utilising 'indirect toehold' through connected hedge funds.…”

“…Acquirers strategically exploit their superior bargaining power and are more likely to offer cash payments and earn a more significant fraction of total M&A gains if the target is characterized by higher information asymmetry (Luypaert and Van Caneghem, 2017). Acquirers gain higher when they employ financial advisors in private offers, whereas the opposite is true for public deals (Leledakis et al, 2021). We show that advisors' connected fund holdings in the target firm are also a source of information for acquirers and help the bidder gain more bargaining power.…”

“…Hansen (1987) argues that a lemons problem arises in M&A transactions when targets possess proprietary information about their own value. Bidders can mitigate information asymmetry in several ways, including pay a lower purchase price (Makadok and Barney, 2001), pay with stock (Hansen, 1987, Finnerty et al, 2012, and use financial advisors (Officer, 2007, Leledakis et al, 2021. In particular, financial advisors use their expertise to collect superior information for the potential targets and identify any synergetic benefits.…”

Оцінка Інвестиційної Привабливості Банківського Сектору Сша Для Міноритарних Інвесторів: Теоретико-Прикладний Аспект

“…The article is recommended for printing15.05.2021 © Morhachov I., Ovcharenko Ie., Oviechkina O., Tyshchenko V., Tyshchenko O.…”