The equity wealth effects of method of payment in takeover bids for privately held firms.

Abstract:

In takeover bids for unlisted firms, the typically more closely-knit target shareholders have the bargaining power and incentives to force the bidder's managers to disclose their private information about the value of their firm's shares. The acceptance of share-based offers by private-target shareholders thus conveys favourable information about the net present value of the takeover, unlike the case in share-based bids for listed targets. We document that successful bids for private targets are associated with significantly positive abnormal returns to bidders over the announcement period, a result that diverges from findings based on bids for public targets. Contrary to Chang (1998), share-based bids for Australian private targets are not associated with higher abnormal returns to bidders. Most bids by listed companies for private companies are cash-based and generate a positive return. Our results are consistent with the explanation that lower competition for private targets allows acquirers to capture more of the economic rent from takeovers by offering cash bids.

Keywords:

TAKEOVERS; UNLISTED FIRMS; METHOD OF PAYMENT.

1. Introduction

The overwhelming majority, by value and number, of takeover bids are for non-exchange-listed targets, yet most studies on the economic consequences of takeovers have focused on bids where the target firm is listed (i.e. public bids). The narrow focus is explained in part by data for listed firms being more readily available and by the greater prominence of public bids. Nevertheless, theories developed to explain public bids do not necessarily apply to bids for non-listed firms (i.e. private bids). For instance, Chang (1998) points out that the signalling implications of the method of payment are likely to differ across bids for private and public targets.

Share bids for public targets are affected by adverse selection. Outsider investors may believe that managers with private information about their firm's shares offer them as consideration only when they are overvalued (Leland & Pyle 1977; Myers & Majluf 1984). Support for this proposition comes from the impressive body of evidence that shows cash bids for public targets earn bidders higher returns than do share bids. In private bids, the typically more closely-knit target shareholders have the bargaining power and incentives to force the bidder's managers to disclose their private information about the value of their firm's shares. The target shareholders' willingness to accept shares thus conveys favourable information about the bidding firm. In line with this implication, Chang (1998) finds share-based offers are associated with significantly higher announcement-period returns in private bids by US-listed firms.

The validity of Chang's findings for other markets is a moot point. The US equity market is highly competitive. Chang notes cash bids for unlisted targets may generate positive abnormal returns if limited competition allows bidders to identify undervalued targets. Bidder returns could also be positive in cash bids if acquisition creates synergy gains that are bidder-specific. Again, bidder-specific synergy gains are more likely in markets with fewer firms.

We replicate and extend Chang's analysis using Australian-equity-market data. In extending his analysis, we investigate whether there is a difference in sharemarket reaction to private bids if the unlisted target's shareholders/directors are appointed to the merged entity's board or if the target firm's upper-echelon managers remain in charge. We also gauge the plausibility of the explanation that bidder-specific synergy gains are responsible for positive sharemarket reaction by reviewing the association between abnormal return and the extent the bidder and target are in related industries.

The paper is organised as follows. Section 2 begins with a brief survey of the evidence on the wealth effects of takeover offers over the announcement period and the impact of partitioning samples by method of payment. The testable implications for private takeovers are then discussed. Research method and data are described in section 3 and section 4 comprises a review of results. Finally, in section 5 conclusions and future research directions are discussed.

2. Evidence on Method of Payment and Implications for Private Takeovers

2.1 Method of Payment and Returns to Bidder Firms

In their widely cited survey of the sharemarket consequences of takeover bids, Jensen and Ruback (1983) review the evidence on returns to acquiring firms over the immediate bid announcement period and draw the conclusion that 'bidding firms' shareholders do not lose [from takeovers]' (p. 47). (1) Subsequent studies document considerable divergence in announcement period returns that is systematically associated with method of payment, as predicted by Carleton, Guilkey, Harris and Stewart (1983).

Travlos (1987), for instance, finds that 60 acquiring firms that made share-based bids earned a significant average cumulative return (CAR) of minus 1.47% over the period [-2,0] days relative to the bid announcement date while 100 cash-based bidders experienced insignificant returns. Bellamy and Lewin (1992) obtain similar results when reviewing returns to Australian Stock Exchange (ASX) listed acquiring firms. On the bid announcement day, bidders involved in 52 share offers earned a significantly negative abnormal return of 2.25% while bidders in 81 cash offers earned an insignificant return of 0.03%. (2)

The evidence on method of payment is not entirely consistent. Bugeja and Walter (1995) find that Australian bidders that offer shares (cash) earn significantly positive (negative) abnormal returns over the period [-60,+1] days. (3) However, when they measure returns over the same event-window as Bellamy and Lewin, they find significant positive abnormal returns for cash bidders but all other results are qualitatively unchanged. More curiously, Franks, Harris and Mayer (1988) find that method of payment predicts announcement period abnormal returns in the US but not in the UK.

Notwithstanding Franks, Harris and Mayer's (1988) results, (4) the import of the early method of payment findings is that cash bids convey positive information about the value of the acquisition in the eyes of the acquirer while investors evidently interpret share bids as a signal that acquirers consider their shares overvalued. Amihud, Lev and Travlos (1990) add more structure to the theory by pointing out that the information content implicit in the method of payment is likely to be affected by the ownership structure of bidding firms. They note that managers of bidding firms who own a controlling shareholding run the risk of losing control when they make share based takeover offers. Investors recognise this and the offer of shares by these managers signals to investors that the acquisition is at least not value-decreasing because owners will not dilute their holdings for a negative NPV project.

Interestingly, the evidence on the influence of ownership structure on the signalling properties of method of payment is mixed. Amihud, Lev and Travlos (1990) find evidence consistent with the above argument. However, Blackburn, Dark and Hanson (1997) expand the definition of owner-controlled firms to include all firms with large shareholders and find divergent results. In line with Amihud, Lev and Travlos, they document that manager-controlled (but not owned) firms making share offers earn significantly negative returns but, contrary to Amihud, Lev and Travlos, that owner-controlled firms making share based bids also earn significantly negative returns. Blackburn, Dark and Hanson conclude that 'apparently, the negative signal implied in the stock exchange for owner-controlled firms is not sufficiently attenuated by the knowledge that owners are unlikely to risk diluting or losing their control over a non-beneficial investment opportunity' (p. 585).

If the premise that investors take into account ownership structure when assessing the information content of method of payment is at all valid, we may expect it to be particularly relevant in the case of private takeovers. Private companies are typically controlled by a large shareholder who participates closely in management (La Porta, Lopez, de Silanes & Shleifer 1999). The private knowledge of the target's value held by the large shareholder intensifies the 'double lemons' problem first noted by Hansen (1987). Bidders do not offer shares when they believe their shares are undervalued and targets only accept cash when their private assessment of their own share value is less than the offer.

One way to avoid the 'double lemons' impasse is through the exchange of information among bidders and targets that reduces their joint information asymmetry. Importantly, the controlling stake held by the large shareholders in the private target makes them well placed to receive and evaluate information on the value of the proposed merger. Since they have more concentrated holdings, the shareholders in private targets have lower costs in coordinating their negotiation with the bidder firm. Their in-depth firm knowledge also better places them to evaluate the merits of a proposed merger. All this implies that if the target shareholders accept shares then outside investors will interpret this as a credible signal that the deal is expected to create value (Chang 1998) or, more weakly, that the bidder's shares are not overvalued. We note that the credibility of the value of bids in which shares are offered as consideration is enhanced if the target firms' upper echelon managers accept positions in the merged entity. In this case, they are committing their human capital as well as their financial capital.

2.2 Competition for Corporate Control and Bidder Returns

The preceding analysis implies that the information content of the method of payment is different in public and private takeovers. However, it is likely that the level of competition in the market for corporate control is lower for private targets and this can also be expected to affect acquiring firms' returns from takeovers.

Firms that acquire public targets may earn unimpressive returns because the market for corporate control of public companies is highly competitive. Jarrell and Poulsen (1987), Jarrell, Brickley and Netter (1988), Bradley, Desai and Kim (1988) and Shwert (1996) test this hypothesis by reviewing announcement returns over various periods of time. All four studies document that the growth in auction-style takeover contests has been accompanied by decreasing returns over time to acquiring firms.

Auction-like contests are more likely to attract entrants when more is known about the target. In this respect, it is pertinent that privately held firms are not obliged to release value relevant information to the public. On the other hand, ASX-listed firms are obliged to release any price sensitive information they hold. The higher cost of obtaining information on privately held firms is thus likely to be associated with higher returns to acquiring firms since they can now capture a greater proportion of the expected gains, particularly if there are only a few firms with whom the target may reap synergistic gains.

2.3 Summary

A majority of studies find that announcement period returns to firms making cash bids are higher than the returns to firms that initiate share based bids. The favourable signalling implication of cash bids is the widely accepted explanation. Chang (1998) posits that the more cohesive shareholders of private targets have the incentive and relative bargaining power to extract more information from acquirers so that the acceptance of share based offers will be interpreted by outside investors as a credible indication that the acquisition has a positive NPV or, at least, as a credible indication that the bidders' shares are not over-valued, thereby cancelling the negative signal from an equity issue. In this case, the acquirer should earn higher returns when it makes a successful share based offer for a private target. However, the level of competition in the takeovers market is a confounding factor. The returns to acquirers that offer cash may be higher if cash bids allow the acquirer to capture more of the economic rent arising from lack of competition in the market for corporate control. The relative validity of each explanation is tested using the method described in section 3.

3. Research Method and Data

3.1 Research Method

In brief, we test whether the signalling implications of the method of payment in takeovers of private and public companies are different by comparing the share market reaction to cash and share bids made by listed companies for, respectively, private and public (i.e. ASX listed) companies.

In common with similar event studies, we review share market reaction on announcement of a takeover bid. However, Asquith (1983) and Malatesta and Thompson (1985), among others, note that reviewing abnormal share price performance only around the bid announcement period will not capture all relevant reaction, in part because the outcomes of takeover offers are usually not confirmed for some considerable time after the bid announcement date. Following Limmack (1991), the problem is addressed by reviewing abnormal performance over eight event-periods, ranging from a period prior to the announcement date to a period after the outcome is confirmed, that is, the effective date. The eight periods are depicted graphically in figure 1. Each period is expressed in trading days, relative to either the bid announcement date or the date the outcome of the bid was confirmed, that is, the effective date.

[FIGURE 1 OMITTED]

Continuously compounded market excess returns adjusted for dividends and capitalisation changes are calculated for the various holding periods depicted in figure 1. The All Ordinaries Accumulation Index is used as the benchmark in calculating excess returns. In the cases where no trades occurred, the average of the best midnight bid/ask spread is used. Missing data are collected from the Australian Financial Review. In the few instances where data are unavailable the company is omitted from the analysis in the event window affected.

Finally, characteristics of the takeover bid that may affect the signalling implications of a cash or share bid are tracked to determine their relative contribution to the share market impact of a bid. (5) The characteristics include creation of a substantial shareholder (i.e. blockholder), appointment of the target firms' management to senior positions in the merged entity, the extent to which the bidder and target are in related industries and the relative sizes of the bidder and target firm.

3.2 Data

A total of 155 takeover bid announcements by ASX listed firms for unlisted targets are identified from the SDC Platinum Database for the period spanning 1st January 1990 (6) to 31st December 1998. To facilitate collection of relevant information on aspects of each takeover offer, the offers must be on record in either Signal G (7) or

DataDisc. This criterion leads to 9 transactions being omitted from the initial sample, leaving 146. Two further takeover bids undertaken to give the acquirer 100 per cent ownership of a subsidiary are also dropped, leaving a final sample of 144 announcements. Finally, Signal G and DataDisc are scrutinised for other price-sensitive announcements made by the sample firms over the period [-10,+10] trading days relative to the bid announcement date. None is found for any of the firms.

Interestingly, despite the ASX requiring an announcement if 'substantial' takeover negotiations take place, the first announcement is issued at the effective date for 83 out of the 144 offers for the private targets. The average time between the announcement date and the effective date is 26 days while the median is zero (see table 1). Given that extensive discussions typically take place between acquirer and target before completion of a deal and that news of these frequently leak to the public, there is a high probability that the average abnormal returns over the announcement period represent an underestimate of the share market impact of the deal. We return to this point later. We also note that only four of the 144 takeover offers are unsuccessful (i.e. do not lead to an acquisition) which rules out a meaningful comparison of the difference in returns between successful and unsuccessful offers for private firms. The subsequent analysis is therefore restricted to the 140 cases where the takeover bid is successful (henceforth, private takeovers).

For comparative purposes, we search the SDC Platinum Database for all takeover bid announcements made over the same period for ASX listed (i.e. public) firms by other listed firms. One hundred and twenty-one takeover bid announcements are identified. Announcements are dropped if: they represent raised bids (four announcements), they are unrecorded in either Signal G or DataDisc (one announcement), the transactions involve subsidiaries (three announcements); the target firm is incorrectly classified by SDC Platinum as being ASX-listed (five announcements); or the bidder is the target in a bid by another company (one announcement). The final sample, therefore, contains 107 takeover offers, consisting of 78 announcements that resulted in an acquisition and 29 that did not. We review just the 78 'successful' acquisitions, given that there are only four bid announcements for private targets that are 'unsuccessful'. Table 1 provides descriptive statistics.

Consistent with Chang (1998), the median transaction value for private takeovers of $4.35m is significantly lower than the $18.50m for public takeovers. Table 1 also shows that the relative size of the bid (transaction value divided by market capitalisation of the bidder one month before the announcement date) is significantly lower in private takeovers. The lead time is significantly longer in public takeovers.

Descriptive statistics on the method of payment employed in our samples of takeovers are presented in table 2. Bids are partitioned into three categories, cash, stock, and mixed. (8) Cash offers include non-convertible debt exchanges, stock offers include shares and convertible notes, and mixed offers are the ones that are not either cash or stock offers. The available data do not allow identification of the respective portions financed by cash and stock in mixed offers.

There is a significant difference in the method of payment across private and public bids ([chi square] = 26.8, df = 2, p < 0.001). The majority of private bids are financed by cash while stock and mixed bids predominate in public bids. This finding diverges from Chang (1998) who finds that stock and mixed offers comprise the majority of takeover bids for both private and public targets, although the margin is smaller in the case of private bids. We return to discuss the implications of the Australian findings when reviewing the announcement period returns.

If, as we predict, the medium of exchange is informative in private takeovers, then it should also follow that the credibility of the 'news' being conveyed will vary with certain characteristics of the takeover. The characteristics we follow are whether the target firms' shareholders become substantial shareholders in the merged entity, the extent to which the bidder and target are in related industries, whether target directors are appointed to the board of the merged entity, and finally whether upper echelon target managers remain in equivalent positions. Descriptive statistics that indicate the distribution of the above characteristics in our experimental samples are presented in table 3.

Consistent with Chang (1998), a blockholder is defined as a beneficial shareholder of 5% shareholding or greater of the bidder's outstanding shares at or after the completion of takeovers. Company announcements made at the time of bid announcement and at the completion dates as well as annual reports are used to identify creation of blockholders.

Table 3 shows that, when only stock and mixed bids are reviewed, a blockholder emerged in 38% (or 19 out of 50) cases. This proportion is slightly higher than the one reported by Chang (1998). However, it is worth noting that in about half of all share based offers the total consideration amounts to less than five percent of the bidder's outstanding shares, that is, less than the amount required to become a blockholder. Not surprisingly, significantly more blockholders emerge in pure stock offers relative to mixed offers ([chi square] = 9.4, df = 1, p < 0.01)

To determine the relatedness of business between a bidder and target, we compare the bidders' and targets' primary two-digit SIC codes, as recorded in SDC Platinum. Bidders and targets are classified as being in a related industry if they have a common two-digit SIC code. (9) Table 3 shows about 50% of the acquisitions of privately held and unlisted targets are in related business. Interestingly, if being in a related industry lowers information asymmetry this does not appear to affect the method of payment. Knowing if the target is in related industry is not informative about the method of payment ([chi square] = 0.9, df = 2, p = 0.657).

Information on the appointment of a target firm's director to the board of the merged entity is obtained from company announcements. Table 3 shows that in only 26 out of 140 takeovers are shareholders/directors appointed to the bidder's board of directors. As expected, these appointments are more likely if a share offer was made ([chi square] = 18.67, df = 2, p < 0.001). In 44 out of 140 takeovers, the pre-bid managers continued in their positions but this is not significantly related to the method of payment ([chi square] = 0.34, df = 2,p = 0.84).

4. Results

4.1 Excess Returns to Bidders in Public and Private Takeovers'

Table 4 reports the excess returns to bidders for private and public companies, respectively, over various event-periods expressed in trading days relative to the bid announcement date (AD) and the effective date (ED). (10) A remarkable aspect of the results is that acquiring firms earned significantly positive excess returns on announcement of bids for private targets but not for public targets. (11) Over the periods [-2AD, +2AD] and [-10AD, +10ED] the excess returns to bidders of private targets are significantly higher than the excess returns to bidders of public targets. (12) Note the results for public takeovers are consistent with the broad results noted in the literature; bidding firms do not experience significantly positive excess returns when takeover bids are announced.

The announcement period result for the private takeovers is remarkable for two reasons. One is that the strong positive returns on announcement of bids for private targets suggest that the market does not appear to have anticipated the bids, despite the first formal notification of a bid by the acquirer being made at the effective date in the majority of cases. The other reason the higher return on news of bids for private targets is remarkable is that the relative values of the bids are, as seen in table 1, generally much lower than the bids for public targets. Other things being equal, the smaller bids may be expected to have less impact on the equity value of the acquiring firms.

A potential explanation for the difference in announcement period returns to bidders in public and private takeovers is that investors anticipate public takeovers prior to the official announcement. However, the excess returns to acquiring firms over the period [-50AD, -1AD] are not significantly different for public and private takeovers. If anything, it appears that private takeovers are more likely to be anticipated. The acquirers involved in private takeovers which had return data available earn a mean excess return of 5.57% (Z-value = 1.84) while the acquirers in public takeovers earn a mean return over the same pre-announcement period of 1.55% (Z-value = 1.55).

In sum, the returns to acquiring firms from public takeovers are disappointing when compared with their returns from private takeovers. The reasons for this are unclear but the strongly positive returns from private takeovers indicate that measurement issues are unlikely to be the explanation. The excess returns in public and private takeovers are calculated the same way. Our results reinforce the anomalous nature of the announcement period excess returns to acquiring firms in public takeovers.

4.2 Method of Payment and Excess Returns

Table 5 documents market excess returns in private takeovers, after partitioning the sample firms on the basis of method of payment. (13) The results diverge sharply from those reported by Chang (1998). Over the immediate bid announcement period [-2AD, +2AD], acquiring firms which offered cash earn a significantly positive (at the 0.001 level) mean (median) excess return of 3.26% (2.14%), while bidders whose offers included a share component earn an insignificant mean (median) excess return of 1.65% (1.77%).

The announcement period returns do not support the hypothesis that successful share based bids for private targets are interpreted by investors as a credible sign that the takeover is expected to be a positive NPV investment. However, given that the usual market reaction to equity-based financing is unfavourable, the non-negative market response may manifest because investors in Australia interpret share bids for private targets as a credible signal that bidders' shares are not over-valued (i.e. the negative implication of a share issue is counter-balanced by the positive news that the shareholders in the private target accept the shares). Nevertheless, the insignificant returns to share offerers remains puzzling given the US based results reported by Chang. Note that the strongly positive returns to bidders that offered cash are consistent with the alternative hypothesis that these bidders identify undervalued targets in the less competitive unlisted sector and capture the gains for their shareholders by offering cash. If undervalued targets are available, it may be that share based offers signal that the target is not undervalued in the bidder's eyes and this news may disappoint the market, which could explain why the bid does not generate significantly positive abnormal returns.

Undervaluation and the consequent disappointment at the news that a bid for a private target is share based rather than cash based is more likely in a less competitive market. This may explain the difference between our results and those reported by Chang (1998).

The sharemarket consequences associated with the signalling implications of method of payment are likely to be most apparent around the bid announcement since that is when the information becomes public. However, table 5 shows that bidding firms that made cash offers achieved significantly positive abnormal returns of 7.01% on average over the pre-bid announcement period, [-50AD,-1AD]. In contrast, firms that made pure equity or mixed share and cash bids earned insignificant returns over the immediate pre-bid period. The hypotheses investigated in this paper do not predict this finding but we may note that the result is inconsistent with the view that firms take advantage of periods of exceptional share price increases by making share-based takeover offers; our results do not suggest that bidders which make share-based offers exhibit higher pre-bid performance relative to other bidders.

Cash bidders also continue to earn significant positive abnormal returns, of 3.62% on average, over the period just prior to the effective date, [-10ED,-1ED], while share bidders experience insignificant returns. Assuming that the period [-10ED,-1ED], captures the effect of the news that the bid will prove successful in terms of leading to acquisition of the target, the result for the cash bidders reinforces the view that the market considers cash bids as value-increasing, on average. In this context, it is surprising that the resolution of uncertainty when share based bids are made does not generate a comparable significant upward revision in the return to bidding companies. If share based bids are more difficult to value, we might expect that the resolution of uncertainty when they are made is more 'newsworthy' than the resolution of uncertainty associated with cash-bids.

In light of the insignificant returns earned by share bidders around various sub-periods measured relative to the bid announcement date and the effective date, it is surprising to see from table 5 that over the period [-10AD, +10ED] share bidders earn a mean (median) return of 6.35% (6.86%) which is significant at the five per cent level using a two-tailed test. Further, both the mean and median returns to the share based bidders are higher than the corresponding returns to the cash based bids. Note that returns over the period [-10AD, +10ED] may be expected to provide a more complete assessment of investors' response to news of a takeover offer since this period incorporates both the announcement date and the effective date. A possible explanation for the insignificant returns to share bidder observed in periods that incorporate just the announcement date or the outcome date is that although the market views share based bids positively, the upward revision in share price is not strong enough to be significant over short event-windows that do not incorporate all relevant information about the bid. The statistics in table 5 on the proportion of sample firms that experience positive abnormal returns provide further support that share based bids are viewed positively by the market. Seventy per cent of all equity and mixed bids were associated with a positive abnormal return to the bidding firm over the period [-10AD,+10ED] while 61% of all cash based bids were met with a positive market response over the same event-period. Interestingly, in all cases over all event-periods, positive abnormal returns outnumbered negative abnormal returns indicating that bids for private targets are mostly seen as 'good news' by the market.

In closing this review of the impact of method of payment, we note that notwithstanding that our results for private takeovers diverge from those reported by Chang (1998), at least around the bid announcement period, the difference in mean excess returns to bidders that make, respectively, cash and shares offers does seem connected with the fact that these are private takeovers. The insignificant returns, before controlling for method of payment, around the immediate bid announcement date (see table 4) to bidders for public targets are consistent with those reported by da Silva Rosa, Izan, Steinbeck and Walter (2000). Over the bid announcement period excess returns were not empirically associated with the proposed medium of exchange consistent with part of the results reported by Bugeja and Walter (1995) but inconsistent with Bellamy and Lewin (1992). (14)

4.3 The Interaction of Method of Payment with Other Takeover Characteristics

Given that the medium of exchange is informative in private takeovers, we may expect that the credibility of the 'news' being conveyed will vary with certain characteristics of the takeover. For instance, Chang (1998) posits that outside investors are likely to view a takeover more favourably when acceptance of a share offer in a private takeover leads to the creation of a substantial shareholder (i.e. blockholder). His rationale is that blockholders are more likely to monitor managers closely and therefore reduce agency costs and their acceptance of a substantial holding of shares provides a credible signal that they believe the takeover will be value-increasing. In line with his prediction, Chang finds that the average excess return to acquirers when a new blockholder emerges from the merger of the target and bidder is 4.96% and just 1.77% when no blockholder emerges. (15) The difference is significant at the one percent level.

We also incorporate a blockholder variable in our analysis but suggest other factors that the market is also likely to take into account when evaluating the prospects of success for a takeover. We posit that takeovers of private companies that operate in industries closely related to their acquirers are viewed positively by the market because synergy benefits and/or economies of scale are more likely to be realised and the level of information asymmetry between acquirer and target is likely to be lower, which means that the target shareholders are more likely to be accurate in their assessment of the value of the takeover. In similar vein, the appointment of a target's director to the board of the merged entity also signals to the market that the merger has taken place between two more or less equally informed parties who both expect the takeover to yield value and who are committed to its success. The continued appointment of the targets' upper echelon managers to similar positions is also expected to be interpreted as a positive sign that valuable firm-specific knowledge will not be lost.

The results in table 6 show that only two of the four factors that we posit are relevant when evaluating the likelihood that a takeover will be a positive NPV investment are statistically significant predictors of sharemarket reaction. Our results diverge from Chang (1998) in that creation of a blockholder is not associated with statistically significant higher positive abnormal returns, however, over the extended event-period [-10AD,+10AD] the mean abnormal return to bidders making offers in which a blockholder is created verge on being significantly higher. The results over the extended event-period merit particular attention because news of creation of a blockholder will generally only be known or confirmed some considerable time after the announcement and confirmation of a successful offer.

Appointment of the target directors to the board of the merged entity is not associated with a significantly different abnormal return over the immediate bid announcement period [-2AD, +2AD]. However, if news of the appointment of the target directors to the board of the merged entity is unknown at the time of the takeover announcement, the insignificant result over the immediate bid announcement period is not surprising. The market is likely to know of the appointment of the directors by the effective date and table 6 shows there is a statistically significant negative association (at the 1% level) between appointment of a target director to the merged entity's board and excess return over the period [-2ED,+2ED]. The association is in the opposite direction to that predicted, but note that over the extended period [-10AD, +10ED] there is a statistically significant positive association (at the 5% level) between appointment of a target director and excess return to the acquirer.

The divergent abnormal returns across different event-periods associated with appointment of the target's directors to the board of the merged entity are a puzzle, prima facie. A potential explanation for the significantly negative association around the effective date is that investors interpret appointment of the target's directors as a signal that the extensive reorganisation necessary to capture the gains from the merger are less likely to take place. However, it is difficult to reconcile this finding with the significantly positive association between return and board appointment over the extend period, [-10AD, +10ED]. The lack of a significant association between retention of target management and abnormal return to bidders over any event-window also does not support the hypothesis that investors consider retention of target management as a barrier to capturing gains from takeover. However, given that it is likely that news of whether target management is retained only emerges well after the effective date, it may be that our event-windows do not capture this effect. We leave resolution of these results for future research

Table 6 also indicates that firms earn a higher return when their target is unrelated. The difference is statistically significant (at the 5% level) over the immediate period before the effective date, [-10 ED, -1ED], and the overall period, [-10AD,+10ED]. Leaving aside the reason for the significant difference, it is surprising that it does not manifest in a statistically significant way over the immediate bid announcement period, when the degree of industry relatedness among the firms is known. In any event, the results do not support the hypothesis that bids for unrelated companies are less value-increasing for firms that acquire private companies. Our results suggest the reverse.

5. Summary, Conclusions, Suggestions for Future Research

In summary, bidding firms exhibit statistically significant positive excess returns on announcement of takeover bids for unlisted companies. This result stands in contrast with the typically insignificant returns to acquirers on announcement of bids for listed firms, which are usually much larger than unlisted firms. Australian listed acquirers tend to make cash offers rather than share offers when bidding for unlisted targets, unlike their US counterparts. Furthermore, the positive returns to acquirers in private bids are driven by the cash-based offers, a result that diverges from that reported by Chang (1998). We conclude that these results are more consistent with the explanation that the Australian market for private takeovers is less competitive than the market for corporate control among listed entities, than with any other explanation. The lack of competition yields economic rent to acquirers who maximise returns to their shareholders by offering cash rather than shares.

Contrary to expectation fuelled by theory and Chang's (1998) results, the emergence of a new blockholder in the merged entity's share register comprising members of the target shareholders is not empirically associated with significantly positive excess returns to acquiring firms. Blockholders comprising target shareholders can only emerge in share-based bids. It may be that in a relatively uncompetitive environment where cash bids predominate and are associated with positive excess returns, the announcement of a share offer for an unlisted target sends a signal that the acquirers are unsure about the expected gains. In this event, the market's disappointment is evidently not offset by the reassurance that the acquiring firm's shareholders signal their confidence in the deal by accepting the share offer.

The extent bidders and targets are in related industries, and the appointment of target directors to the board of the merged entity, do appear to be significantly informative to sharemarket investors but in a direction contrary to that expected. The appointment of the target's upper-echelon managers to equivalent positions in the merged entity do not significantly enhance the credibility of share offers. However, our results indicate that further research is necessary before firm conclusions may be drawn. Our main finding is unaffected: successful bids for private targets are associated with significantly positive abnormal returns to bidders over the announcement period, a result that diverges from findings based on bids for public targets. We infer from our results that lower competition for private targets allows acquirers to capture more of the economic rent from takeovers by offering cash bids.

(Date of receipt of final transcript: April, 2003. Accepted by Garry Twite, Special Issue Editor.)

Table 1
Descriptive Statistics for Acquiring Companies

                               Public   Private   Difference

Transaction Value in ($m)
  Mean                          82.11    13.47      68.64 *
  Median                        18.50     4.35      14.15 *
Relative Size of Acquisition
  Mean                           0.53     0.23       0.30 *
  Median                         0.34     0.08       0.26 *
Lead Time (days)
  Mean                         109       26         83 *
  Median                       101        0        101 *

Note: * significantly different, p < 0.001, t-test (means),
Mann-Whitney U test (medians)

Table 2
Method of Payment in Public and Private
Acquisitions in Australia: 1990-1998

            Method of Payment

          Cash   Stock   Mixed   Total

Public     29     32      17       78
           37%    41%     22%      36%
Private    90     16      34      140
           64%    11%     25%      64%
Total     118     48      51      218
           54%    22%     24%     100%

Table 3
Changes in Corporate Structure: Private
Acquisitions in Australia: 1990-1998

                                Cash   Stock   Mixed   Total

Blockholder Creation
  New Blockholder Created                11       8      19
                                         58%     42%     38%
  No Blockholder Created                  5      26      31
                                         16%     84%     62%
  Total                                  16      34      50
                                         32%     68%    100%
Relatedness of Acquisition
  Related                        43       7      19      69
                                 62%     10%     28%     49%
  Unrelated                      47       9      15      71
                                 66%     13%     21%     51%
  Total                          90      16      34     140
                                 64%     11%     25%    100%
Appointment to Board
  Appointed to Bidder's Board     8       8      10      26
                                 31%     31%     38%     19%
  Not Appointed                  82       8      24     114
                                 72%      7%     21%     81%
  Total                          90      16      34     140
                                 64%     11%     25%    100%
Continued Employment
  Remains Serving                28       6      10      44
                                 64%     14%     22%     31%
  Discontinues Serving           62      10      24      96
                                 65%     10%     25%     69%
  Total                          90      16      34     140
                                 64%     11%     25%    100%

Table 4
Market Excess Returns to Acquiring Company Shareholders
in Private and Public Takeovers

 Event Window     Mean (%)   Median (%)   % Positive

Private
  (-50AD,-1AD)      5.57        2.40          58
  (-2AD,+2AD)       2.70        1.94          66
  (-10ED,-1ED)      2.95        1.55          58
  (-10AD,+10ED)     5.34        4.43          64

Public
  (-50AD,-1AD)      3.50        1.47          59
  (-2AD,+2AD)       1.11        0.32          53
  (-10ED,-1ED)      0.76        0.65          54
  (-10AD,+10ED)    -0.16       -1.48          46

 Event Window     Mann-Whitney   Sig (2 tailed)
                    Z-value
Private
  (-50AD,-1AD)        1.84           0.065
  (-2AD,+2AD)         3.71           0.000
  (-10ED,-1ED)        2.51           0.012
  (-10AD,+10ED)       3.46           0.001

Public
  (-50AD,-1AD)        1.55           0.120
  (-2AD,+2AD)         0.16           0.871
  (-10ED,-1ED)        0.69           0.488
  (-10AD,+10ED)       1.10           0.271

Table 5
Market Excess Returns Cash and Equity/Mixed Bidders in
Private Takeovers

Event Window            Mean   Median   Positive
                        (%)     (%)       (%)

Cash (n = 90)
  (-50AD,-1AD)          7.01   2.70     57
  (-2AD,+2AD)           3.26   2.14     69
  (-10ED,-1ED)          3.62   1.30     56
  (-LOAD,+10ED)         4.82   3.40     61

Equity/Mixed (n = 50)
  (-50AD,-1AD)          2.81   1.94     60
  (-2AD,+2AD)           1.65   1.77     59
  (-10ED,-1ED)          1.73   1.91     61
  (-10AD,+10ED)         6.35   6.86     70

Event Window            Mann-Whitney      Sig
                          Z-value      (2 tailed)

Cash (n = 90)
  (-50AD,-1AD)          1.90           0.057
  (-2AD,+2AD)           4.10           0.000
  (-10ED,-1ED)          2.33           0.020
  (-LOAD,+10ED)         2.59           0.010

Equity/Mixed (n = 50)
  (-50AD,-1AD)          0.67           0.502
  (-2AD,+2AD)           0.99           0.323
  (-10ED,-1ED)          1.02           0.310
  (-10AD,+10ED)         2.05           0.041

Table 6 Discriminatory Factors in Private Takeovers

                   Blockholder    Mann-
                     Created     Whitney
                                 Z-value
Event Window      Yes     No     Signif.

(-2AD,+2AD)       2.40   1.87     0.25     0.800
(-2ED, +2ED)      -0.8   0.83     0.42     0.678
(-10ED,-1ED)      2.56   1.47     0.77     0.440
(-10AD,+10ED)     9.83   3.77     1.48     0.139
Observations:

                    Retention
                    of Target     Mann-
                   Management?   Whitney
                                 Z-value
                  Yes    No      Signif.

(-2AD,+2AD)       1.76   2.27     0.42     0.671
(-2ED, +2ED)      0.80   0.77     0.60     0.549
(-10ED,-1ED)      0.10   1.91     0.54     0.586
(-10AD,+10ED)     4.15   4.60     0.62     0.535
Observations:

                   Appointment     Mann-
                    to Board      Whitney
                                  Z-value
Event Window       Yes     No     Signif.

(-2AD,+2AD)       -0.62   2.15     0.77     0.442
(-2ED, +2ED)      -3.89   1.58     2.76     0.006
(-10ED,-1ED)       1.77   1.47     0.30     0.764
(-10AD,+10ED)      9.77   3.35     2.44     0.015
Observations:

                     Related       Mann-
                   Acquisition?   Whitney
                                  Z-value
                  Yes      No     Signif.

(-2AD,+2AD)        1.50   3.07     1.51     0.132
(-2ED, +2ED)       0.77   1.63     0.65     0.517
(-10ED,-1ED)       0.12   2.56     2.31     0.021
(-10AD,+10ED)      3.11   5.49     2.07     0.038
Observations:

Note: Figure in table represents median values.

(1.) Other studies track long-term returns to acquiring firms and find evidence of under-performance. However, in a study of Australian takeovers, Brown and da Silva Rosa (1998) show that the purported evidence of long-run under-performance by acquiring firms is not robust to likely sources of bias.

(2.) The performance of the cash bidders improved in days [+1] and [+2] when they earned significantly positive abnormal returns of 1.3% and 0.56% respectively.

(3.) Franks, Harris and Mayer (1988) report a similar result for US acquirers.

(4.) One possible reason for Franks, Harris and Mayer's atypical UK results is that their announcement date may be inaccurate for many of their sample firms. It is the earliest of: (a) the date the London Stock Exchange is informed; (b) the date of the first merger offer; (c) the date the acquirer acquires sufficient shares to achieve control; and (d) the last date for which monthly return data are available for the target. In contrast, the US announcement date is defined as the first mention of an acquisition in the Wall Street Journal Index.

(5.) The possible signalling implications are discussed more fully in section 4.3.

(6.) SDC Platinum's record of Australian takeovers begins to be comprehensive from 1990.

(7.) Signal G contains all company announcements made to the Australian Securities and Investments Commission (ASIC) from the year 1992. For announcements made prior to 1992, DataDisc is used. DataDisc contains company's announcements from 1980 up to 1998.

(8.) Details of the method of payment employed are from the SDC Platinum database.

(9.) A common director between the bidder and target is another potential proxy for relatedness. However, this occurred in only one transaction in our sample.

(10.) In the results reported in tables 4 and 5 only four of the eight event windows shown in figure 1 are reported. These four capture: the pre-bid period [-50AD, -1AD]; the announcement period [2AD, +2AD]; the immediate period just before the effective date [-10ED, 1ED]; and overall [-10AD, +10ED]. The remaining four event windows are consistent with those reported and yield no additional insights. Table 6 reports differences in returns associated with factors that are most likely known only some considerable time after a bid is announced (e.g. creation of a blockholder) and so the pre-bid period event-window is dropped and the results over the immediate effective date [-2ED, +2ED] are reported instead.

(11.) Since the data are not normally distributed the tables report the results of the non-parametric Mann-Whitney U test. Virtually identical results come from using standard t tests and the means are reported along with medians.

(12.) The Mann-Whitney U test Z scores = 2.44 (p. = 0.015) and 2.71 (p. = 0.007). The Z-scores are for a two tailed test of significance.

(13.) The results for 'equity' and 'mixed' are combined since the same results are obtained if the two groups are treated separately. The results for private bidders only are discussed here since the results for public bidders do not differ (see footnote 14).

(14.) Median excess returns for public cash bidders in the announcement period were -0.33% (Z = 0.57, p = 0.569) while equity and mixed bidders earned a median excess return of 0.66% (Z = 0.73, p = 0.467). Similar insignificant results were obtained for the other periods examined.

(15.) Chang (1998) also reports that the median excess return when a blockholder emerges is 4.6% and 0.60% in takeovers when a blockholder does not emerge.

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