The Desire to Acquire and IPO Long-Run Underperformance

Abstract

We analyze 3,547 initial public offerings (IPOs) from 1985 through 2003 to determine the impact of acquisition activity on long-run stock performance. The results show that IPOs that acquire within a year of going public significantly underperform for 1- through 5-year holding periods following the 1st year, whereas nonacquiring IPOs do not significantly underperform over these time frames. For example, the mean 3-year style-adjusted abnormal return is – 15.6% for acquirers and 5.9% for nonacquirers. Our cross-sectional and calendar-time results suggest that the acquisition activity of newly public firms plays an important and previously unrecognized role in the long-run underperformance of IPOs.

Where Have All the IPOs Gone?

“…Arikan and Stulz (2013), Brau, Francis, and Kohers (2003), Brau, Couch, and Sutton (2012), Celikyurt, Sevilir, and Shivdasani (2010), Chemmanur, He, He, and Nandy (2011), Hovakimian and Hutton (2010), and Hsieh, Lyandres, and Zhdanov (2011) all examine mergers around IPOs. Celikyurt et al (Table 2) restrict their analysis to 1,295 IPOs from 1985 to 2004 that raised at least $100 million ($2005) each, and they report that 55% of the firms made at least one acquisition within 1 year of the IPO and that 74% of the companies made at least one acquisition within 5 years of the IPO.…”

“…They also show in their Figure 1 that the fraction of firms going public that subsequently made an acquisition increased dramatically from the 1980s to the 1990s. Brau et al ((2012) Celikyurt et al ((2010), Table 2) point out that the average acquisition expenditures are greater than those on either capital expenditures or research and development. Arikan and Stulz ((2013), Table 6) report that acquisitions of private firms by acquirers that recently went public have an average announcement return of 1.19%.…”

CEO power, product market competition and the acquisition motive for going public

“…Further, post-IPO acquisition spending tends to be substantially higher than capital investments or R&D spending (Celikyurt et al, 2010). For instance, Brau et al (2012) find that acquiring IPO firms significantly underperform their nonacquiring counterparts. For instance, Brau et al (2012) find that acquiring IPO firms significantly underperform their nonacquiring counterparts.…”

“…For instance, Brau et al (2012) find that acquiring IPO firms underperform nonacquiring IPO firms over one through 5-years holding periods relative to the year of going public. For instance, Brau et al (2012) find that acquiring IPO firms underperform nonacquiring IPO firms over one through 5-years holding periods relative to the year of going public.…”

IPOs Performance Analysis: Evidence from Emerging Markets in the Balkans

“…G. Ibbotson, 1975;Pagano et al, 1998;Saunders, 1990). Many authors have proved that a great number of new issues in general have underpriced IPOs (Booth and Chua, 1996;Brau et al, 2012;Li, 2011;Ritter, 1995, 2004;Ritter, 1998Ritter, , 2003Zheng and Li, 2008).…”