The Performance of REIT Acquirers in the Post-Merger Period

Abstract

Executive SummaryMergers and acquisitions are a feature of modern economies. However, research on conventional bidding firms in mergers and acquisitions (M&As) has shown, on average, shareholders are worse off in the long-run (Alexandridis, Mavrovitis and Travlos, 2012). This study examines the long-term post merger performance of US Equity Real Estate Investment Trusts (REITs) to see if this underperformance extends to the largest REIT sector in the world. In contrast to the earlier REIT data samples used by Campbell, Giambona and Sirmans (2009), we find, prior to the macroeconomic event of the financial crisis, that existing shareholders of bidding firms earn significant and positive abnormal returns. This outcome supports the synergy motive for M&As in the REIT sector. Results from announcements occurring after the onset of the financial crisis show signs of negative and significant abnormal returns, suggesting these M&As were driven by the agency and/or hubris motive.Keywords REITs, Equity REITs, Mergers and Acquisitions, Post-merger abnormal returns JEL Classifications G11; G14; G34 2 INTRODUCTIONMergers and acquisitions are an ongoing process as markets respond to internal and external pressures.A key issue arising from this activity is the extent to which it promotes efficient market outcomes.From an economic perspective, mergers and acquisitions (M&As) should provide for the efficient management of companies, improved mobility of capital and an efficient allocation of scarce resources (Manne, 1965). However, there is growing evidence of underperformance of bidding firms shares in the years following the M&A announcement (Alexandridis, Mavrovitis and Travlos, 2012, Bessembinder and Zhang, 2013). Jensen and Ruback (1983, p.20) comment 'these post-outcome negative abnormal returns are unsettling because they are inconsistent with market efficiency and suggest that changes in stock prices overestimate the future efficient gains from mergers'. Such arguments are supported by Campbell, Giambona and Sirmans (2009) who argue that these types of results are troubling as they suggest the existence of weak form market efficiency. The ensuing informational problems translate into an inefficient allocation of resources.Whilst the debate surrounding the issue of post merger performance continues, one issue that has received less attention is that of the motivations of acquiring firms. If acquiring firms do not reap the returns expected, why do they engage in such activities? Berkovitch and Narayanan (1993) identify several motives for M&As; namely the synergy motive, the hubris hypothesis and the agency motive.The post-announcement under-performance of acquirers suggests that the motivation for M&As may be a result of hubris and/or agency issues rather than efficiency considerations (Alexandridis, Mavrovitis and Travlos, 2012, Ang, Yingmei and Nagel, 2008, Conn, Cosh, Guest and Hughes, 2005. September 2014 suggest that the REIT M&A market is informationally efficient. We find no significant negative abnormal perfor...

Strategic Transactions around REIT Conversions

“…However, they tend to focus on returns around takeover events and the pre-and post-merger performance of targets and acquirers in the (U.S.) REIT sector. As Sahin (2005) and Ratcliffe et al (2018) note, studies on the long-run post-acquisition performance of REIT acquirers find no persistent evidence of positive effects on REIT performance or even negative impact of acquisitions on acquirers' returns in the years following an acquisition, as described in Campbell et al (2009). Thus, if the conversion process is accompanied by an increased number of acquisitions, and if long-lasting adverse performance of acquirers accompanies REIT takeovers, we presume that, on average:…”

“…r i,t is the individual daily total return of company i at day t, and r P F,t represents the total return of each country's EPRA real estate index. Similarly to previous BHAR analyses of REITs by Sahin (2005), Campbell et al (2009), and Ratcliffe et al (2018), the benchmark portfolio reflects an eligible peer group of the respective REIT market.…”

Modelling housing market fundamentals and the response to economic and political events: empirical evidence from Kuwait

“…Case et al, 2012), mergers and acquisitions (e.g. Allen & Sirmans, 1987;McIntosh et al, 1995;Ratcliffe et al, 2018), natural disasters (Sah et al, 2008), political news and information (Schaub, 2020) and regulatory change (e.g. Howe & Jain, 2004).…”

“…The event study methodology, as discussed in papers such as McKinlay (1997) and Borusyak and Jaravel (2018), is a widely accepted framework in finance and has also been adopted in a large number of papers to have specifically considered public real estate vehicles such as Real Estate Investment Trust. This literature has considered a similar broad range of issues including bankruptcies (Stevenson, 2000b), capital structure and stock issuance (Howe and Shilling, 1988; Giambona et al , 2005), dividend announcements (Case et al , 2012), mergers and acquisitions (Allen and Sirmans, 1987; McIntosh et al , 1995; Ratcliffe et al , 2018), natural disasters (Sah et al , 2008), political news and information (Schaub, 2020) and regulatory change (Howe and Jain, 2004). However, in contrast, there is a relatively sparse literature to have examined how housing, or indeed commercial real estate, responds to events.…”