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Control premiums in acquisition transactions: a natural experiment.

INTRODUCTION

Much research exists that addresses the determinants for success of mergers and acquisitions and the premiums paid in acquisition transactions (Jensen & Ruback 1983; Pautler 2003). Within this literature, it is maintained that corporate control accounts for a significant portion of a firm's value and this corporate control value is embodied in these acquisition transactions' control premiums. Haleblian et al. (2009) reports that for a sample of acquisitions, premiums over market value ranged from zero to 733% with a median of 27.5% and mean of 35.7%. The topic of premiums has been addressed in both the strategic management and the financial economics literature (cf. Datta et al. 1992; Jarrell et al. 1988). The strategic management perspective emphasizes management control factors, e.g., mode, method, and form, in determining the economic value created in a merger or acquisition. The financial economics perspective states that market characteristics determine the total economic value and its partitioning between acquirer and target. While the two have different frames of reference and emphasize different determinants, they cannot seem to explain why, on average, firms acquire other firms at substantial premiums over market value.

Why are acquiring firms willing to offer such premiums? One important reason is that prior to July 1, 2001 business combinations were accounted for using one of two methods: the pooling-of-interests method or the purchase method. Under these accounting choices, similar business combinations could be accounted for by using different methods that produced significantly different financial statement results. Financial information users had difficulty in comparing the entities' financial accounting information. In turn, the flexibility of choosing methods affected competition in markets for mergers and acquisitions (King & Neil 2000). Moreover, the pooling of interests method could result in non-recognition of the purchase premium from the financial accounting and reporting perspective. Some empirical evidence suggest companies paid a premium to pool to avoid goodwill amortization (Andrews et al. 2009). The balance sheet of a firm involved in a high-priced merger will result in significant goodwill under purchase accounting. In contrast, under pooling-of-interests, paying a large premium for an inflated target would not be detrimental to the company's financial statements. Indeed, this inquiry began with the observation that pooling transactions during the period of 1998 through 200 had higher premiums compared to purchase transactions.

The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", eliminated the opportunity to account for acquisition assets at their current book value. Utilizing pooling-of-interests accounting, it was possible for companies to pay a large off-the-book premium with their own stock to buy an inflated target (King & Neil 2000). After July 1, 2001 the pooling-of-interest method was no longer allowed. Instead, all mergers and acquisition (M&A) transactions must be accounted for using the purchase method. Using a large sample of M&A transactions, this study examines the relative levels of control premiums for the period January 1998 through December 2005. To the best of my knowledge, this M&A transaction database has not been analyzed by the method described in this study. By exploiting an exogenous event as a natural experiment, this study is able to examine whether the willingness of acquiring firms to pay acquisition premiums is affected when companies are restricted to the purchase method of accounting for the acquisition.

This study is divided into five sections. First, it discusses the market for mergers and acquisitions. Second, it elaborates on the theoretical foundations of the study and derives the hypothesis to be tested. Third, it describes the research method. Fourth, it reports the results, and fifth, it discusses the findings and provides concluding comments.

BACKGROUND

Acquisition is a popular choice of market entry (Cooper & Finkelstein 2009). The academic literature regarding merger and acquisition issues and the popular press has reported on the growing volume of transactions over the past decades. For example, from 1990 through 1997, 96,020 companies have come under new ownership worldwide in deals worth a total of $3.9 trillion--but this figure just includes acquisitions valued at $5 million and over (Cooper & Finkelstein 2009). In 1999 alone, $3.4 trillion was spent worldwide on mergers and acquisitions (Hitt et al. 2001). The popular press is not left out in reporting on this frenzy. Business Week (2005), reports 5,400 transactions worth more than $346 billion for the first three quarters of 2002. Data on merger and acquisition activity levels point to an underlying increased M&A activity level. Most every major company in the United States today has experienced a major acquisition at some point in its history (Cooper & Finkelstein 2009). Add to this the motivation for international expansion and its associated complexities, and the realm of M&A activity becomes a rich area of interest for researchers and practitioners.

Most studies on merger and acquisition activities focus on motives, modes, and wealth creation. For example, the transaction cost perspective focuses on the effect of the acquisition on the efficiency of the resulting entity (Papadakis & Thanos 2009), another perspective examines the notion that managerial incentives may drive some mergers, a type of self-aggrandizing behavior (Li et al. 2004), and finance theory, in general, states that the market value of a firm is an unbiased estimate of value. Yet, on average, firms acquire other firms at substantial premiums over market value. Only recently has research focused on the concept and measure of the control premium, although this concept may be an outgrowth from the idea of stakeholder expropriation (Pautler & O'Quinn 1993). In terms of empirical evidence on the effects of mergers and acquisitions, the research falls into three categories: accounting data studies, stock market studies, and econometric case studies.

Motivated by this prior research, this study seeks to develop a better understanding of the determinants of the control premium in acquisition transactions. Using a large sample of merger and acquisition transactions, it examines the impact of SFAS No. 141, "Business Combinations" on the willingness of acquiring firms to pay acquisition premiums. To the best of the author's knowledge, no academic studies have examined the effect of a change in the method of accounting for acquisitions on the willingness of a firm to pay a control premium. In this sense, this study contributes to the understanding of whether accounting is biased or neutral and whether the FASB actions meet their objectives. A better understanding of what is behind acquisition behavior may benefit researchers, practitioners, and policymakers. First, researchers may find such knowledge helpful in addressing the growing activity in acquisitions. Second, for practitioners, awareness of their own, or others', behaviors, may enable the development of better acquisition strategies. Finally, knowing the determinants of acquisition behavior may help policymakers enhance the effectiveness of investment related trade measures and especially domestic anti-trust (merger) policies.

THEORETICAL BACKGROUND

Two streams of literature form the building blocks for this study. The literature review starts with the literature suggesting that corporate control has a significant value. The discussion then turns to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and explains why this change in accounting methods may influence the control premium paid in acquisition transactions.

The Concept of a Control Premium

Researchers have investigated the logic behind the nature and importance of control in the firm for several decades. Coase's seminal article, "The Nature of the Firm" (1937), provides a description of how firm authority is allocated and the interactions between owners and managers. Berle and Means, "The Modern Corporation and Private Property" (1968, reprinted from 1933) emphasized the separation of ownership and control may lead managers to pursue their own objectives at the owner' expense. Other classic articles addressing the central issue about the separation of ownership and control address: incomplete contracts and the risk for opportunism (Markides & Williamson 1996); the integration decision between entities owned and managed by the same person, the property rights approach (Hart & Moore 1990); the observation that internal capital markets provide greater monitoring incentives than an external capital market (Alchian & Demsetz 1972); and that ownership and capital structures can mitigate these agency costs (Jensen & Meckling 1976). Much of the subsequent theoretical literature builds on Jensen and Meckling's insight by spelling out different kinds of agency costs and other mechanisms by which such agency costs can be mitigated.

In sum, this research shows how the separation of ownership and control lead to significant agency costs. Based on this paradigm, corporate control has significant value (Stultz et al. 1990) and this value has been empirically observed when a firm exhibiting a separation of ownership and control, e.g., a widely-held and therefore diffuse ownership undergoes a change-of-control transaction, e.g., a leveraged buyout (Finnerty & Douglas 2004; Slusky & Caves 1991). The most common valuation premiums and discounts relate to the degree of ownership control, or the lack of it (i.e., non-controlling ownership interest status), and in the valuation literature these premiums are generally referred to as control premiums.

The concept of control premium indicates that some shares are more equal than others. Cooper and Finkelstein (2009) provides various reasons for the existence of a control premium: stockholders with a controlling interest in a company can determine the nature of the business. They can select management, enter into contracts buy, sell, and pledge assets, borrow money, issue and repurchase stock, register stock for public offerings, and liquidate, sell, or merge the company. The controlling party can also set management compensation and perquisites, declare (or not declare) dividends, make capital distributions, and control contracts and payments to third parties. In privately held companies the ability to set compensation is critical, for owner/managers frequently distribute proceeds as compensation rather than dividends in order to avoid double taxation. Minority stockholders often have minimal influence on these key activities (Cooper & Finkelstein 2009). A stockholder would only be willing to pay a premium if he or she believes in the potential of the acquisition to increase the value of the firm. The percentage of the control premium thus depends on various factors. Haleblian et al.'s (2009) review of acquisitions research showed 487 cases in which purchases of major blocks of stocks in publicly traded companies commanded a premium. The premiums ranged from zero to 733% with a median of 27.5% and mean of 35.7%.

There is a substantial body of research in financial economics and strategic management literatures that links the pattern and amount of stock ownership with managerial behavior, and, eventually, with corporate performance (Gibbs et al. 2003; Hoskisson et al. 2000; Jensen & Werner 1988). Companies may have large, undiversified shareholders that play a critical leadership and monitoring role. They have both the incentives and the means to restrain the self-serving behavior of managers (Dahya & McConnell 2005; Resnick et al. 2006). In addition, they make value-enhancing implicit contracts with employees and other stakeholders (Shleifer & Summers 1988). Some researchers, however, have indicated that concentrated shareholding may create entrenchment effects in addition to incentives effects (Dahya & McConnell 2005; Li et al. 2004), and, instead of imposing an efficient monitoring and control on managerial discretion, the large-block shareholders may produce their own set of agency costs (Dalton et al. 2003). It should be noted, however, that other research points to the phenomena that ownership concentration per se may negatively affect the value of the firm when majority shareholders have a possibility to abuse their position of dominant control at the expense of minority shareholders (Bebchuk 1994), especially when legal protection of minority shareholders is weak.

ACCOUNTING FOR BUSINESS COMBINATIONS

During the past two decades a large number of mergers and acquisitions were completed, and Generally Accepted Accounting Principles (GAAP) were well established to record the transactions and account for the acquired assets. Over time however, analysts and users of financial statements had difficulty in comparing different statements as the principles did not reflect the market realities regarding the assets, their useful lives and their contribution to a company's value. In addition, over this same time period intangible assets have become more important as an economic resource. Although the FASB had approached the subject of reexamining business combinations during 1970's and early 1980's, it wasn't until 1986 that it included the topic in its agenda. The purpose of the project was to improve the transparency of accounting and reporting of business combinations, including the accounting for goodwill and other intangible assets. The study by the FASB found that users placed greater importance on goodwill as an asset reported on the balance sheet of the financial statement than on the goodwill amortized on the income statement. This lead to the FASB's emphasis on fair value measurement of assets and liabilities and resulted in SFAS 141 (Toppe-Shortridge et al. 2006).

It is very important for investors to have complete financial information of an entity and be able to compare it with other entities before they make an investment. Prior to July 2001, business combinations were accounted for using one of the two methods, the pooling-of-interests method or the purchase method. Pooling-of-interests accounting combines all assets of merged firms at their current book value. When a company acquires assets of another under the purchase method all the tangible and intangible assets of the target company must be identified, appraised, revalued, and booked at "fair value", rather than the original historical cost, or book value (Toppe-Shortridge et al. 2006). If we look at the now outdated Accounting Principles Board (APB) Opinion No. 16, the use of the pooling method was required whenever 12 criteria were met; otherwise the purchase method was to be used. The criteria did not distinguish economically dissimilar transactions and similar business combinations were accounted for using different methods that produced significantly different financial statement results. The analysts and users of the financial information had difficulty in comparing the financial information of entities. In turn, the flexibility of choosing alternate methods affected the markets for mergers and acquisitions (Wilson & Key 2008).

After July 1, 2001, all mergers and acquisition transactions must be accounted for using only one method, the purchase method. The Financial Accounting Standards Board brought about this change when it released its new Statement of Financial Accounting Standards No. 141. SFAS 141 is based on the proposition that all business combinations are essentially acquisitions - as examples, when one or more entities are merged or become subsidiaries, when one entity transfers net assets or its owners transfer their equity interests to another, or when all entities, or owners of those entities, transfer net assets or equity interests to a newly formed entity. Thus all business combinations should be accounted for in a consistent manner. The transactions that occur in all these combinations can be done in the form of cash, other assets, a business or a subsidiary of the entity, debt, common or preferred shares or other equity interests, or a combination of these forms. SFAS 141 requires business combinations be measured and recognized on the basis of the accumulated cost of the combination based on their estimated fair values at date of acquisition. Under Paragraph 39 of this statement, identifiable intangibles have to be accounted separately. If an intangible asset arises from contractual or other legal rights it needs to be recognized as asset, and separately from goodwill when it is feasible to separate or divide it from the acquired entity and be sold, transferred, licensed, rented, or exchanged. An acquired intangible asset that does not meet the criteria in Paragraph 39 needs to be included in the amount recognized as goodwill (Wilson & Key 2008). Under the new rules, intangible assets including patents, contracts, trademarks, and licensing agreements must be recognized, valued, and amortized.

With the passing of SFAS 141, the fair value of all acquired assets appears on the books of the acquirer, and hence acquirers have to evaluate potential acquisitions more realistically (Huefner & Largay III 2004). The balance sheet of a firm involved in a high-priced merger will result in significant goodwill under purchase accounting, but under pooling-of-interests, paying a large premium for an inflated target would not be detrimental to the company's bottom line. In this sense, the method could make mergers a less attractive exit strategy for small companies, and in turn for the venture capital industry. King and Neil (2000) maintain that as the business community gets used to the new M&A ground rules, there will be more rational acquisitions and because all transactions will now be treated as purchases, there will be no more "funny money" where companies overpay with their own stock to buy an inflated target. Acquiring firms cannot continue to make bad acquisition-pricing decisions on the basis that the premiums paid did not cost the company. After SFAS 141, companies that use their stock in an acquisition are required to use the fair value of the stock as compensation and any overpayment will appear on the balance sheet and eventually reflect on the income statement. That there will be a large amount of value assigned trademarks and brand names in both consumer and industrial acquisitions is in accord with economic reality, which suggests that such assets do not typically diminish in value over time; now preparers and users of financial statements will be able to work with transparent data (Andrews et al. 2009). Other research also suggests that M&A transactions able to be structured as a pooling-of-interests can significantly raise premiums paid for the target and that, under SFAS 141, acquisitions that could have been justified now look less attractive (Cooper & Finkelstein 2009).

METHODOLOGY

Model Description and Hypothesis

Tax benefits have been analyzed as a potential explanation for acquisition activities. In a comprehensive study of merger performance, Papadakis and Thanos (2009) showed that after the acquisition, profitability of the firm, an accounting measure, did not change if the premium and subsequent asset revaluations were ignored (i.e., pooling-of-interest accounting). If, on the other hand, the premium and asset revaluations are included (i.e., purchase accounting), then the firm profitability was three percentage points below the industry average. However, there exists a number of tax-based studies having different frames of reference and emphasizing different determinants of acquisition behavior and the empirical evidence on the tax explanation of acquisitions from these studies is not compelling. Several academic studies have analyzed the impact of tax incentives for mergers and find little support for the hypothesis that tax changes have a significant effect on takeover activity. Romano's (1992) review of the literature on tax incentives for mergers and a related study by Cook and Wheeler (2009) found little evidence that tax policy affected the pattern of acquisitions. Even the tax effect of the Tax Reform Act of 1986 was very short-lived, reflected in the timing of acquisitions, but not in the long-run number of mergers (Pautler, 2003).

The research model examines the control premiums in acquisitions before and after the imposition of SFAS 141. In this model the relative size of the control premiums offered by acquiring firms are measured against each other in the two sample periods. In other words, are the control premiums prior to July 1, 2001 no different than the control premiums after July 1, 2001? Did the exogenous event of FASB's SFAS 141 have any effect?

H1: Acquisition control premiums are not significantly different after the July 1, 2001 implementation of SFAS 141.

This hypothesis stems directly from the restriction of accounting for acquisition transactions with the purchase method and the observation that acquirers can no longer ignore the premium it pays for an acquisition from the financial accounting and reporting perspective, leading to less overvaluing of an acquisition.

The model is consistent with prior literature on the affects of accounting changes. Accounting standards and tax laws are an important predictor of corporate behavior. Recently published articles have researched the impact of the adoption of accounting changes (cf. Colley et al. 2006) and the economic affects of compliance with accounting changes (cf. Hall & Gaetanos 2006). The model presented in this paper hypothesizes that the accounting change imposed by SFAS 141 affects the willingness to offer control premiums. The model is also consistent with prior merger and acquisitions research: corporate acquirer versus passive investor (Bradley 1979); financial determinants of bid premiums (Waikling 1985); wealth effects of corporate acquisitions (Datta 1992); and corporate takeover bids and methods (Travflos 1987).

Data Analysis

Control premium data from January 1998 through December 2005 comes from the Mergerstat/Control Premiumdatabase. A control premium is the premium that one pays to gain control of the company and this reflects the substantial influence the shareholder exerts over the company. This influence enhances the buyers' ability to alter management, change dividend policies, or streamline operations. Minority shareholders usually have little authority over business decisions and this lack of control may allow for a discount to be applied when valuing their interests. The control premium in the Mergerstat/Control Premium database is computed by comparing the per share total consideration price for one share of the target company's common stock to the unaffected price. This pre-announcement price is selected by Mergerstat and based on volume and price fluctuations during the period prior to the acquisition announcement (Pratt 2006).

The Mergerstat/Control Premium study covers 4,855 completed acquisitions of public company takeovers. The data are gathered from national stock exchange filings. The criteria for inclusion are that the acquirer ends up with over 50 percent of the voting equity and the deal value is over $1 million. Approximately 58% of the transactions represent U.S. based companies, with the remainder being international companies. The study contains over 690 deals in business services, over 620 deals on depository institutions, and 165 deals in the communications industry. 52% of the deals in the database have net sales less than $100 million, with the remainder having net sales greater than $100 million. SFAS 141, as an accounting requirement, only pertains to U.S. corporations and those corporations listed on a U.S. stock exchange. As such, the study only includes transactions for U.S.-listed acquiring firms from the total sample period. Additionally, only one transaction per acquirer is allowed to maintain observation independence), and only ADRs subject to the same accounting standards are included. This results in a sample size of 2,692. Prior to performing the analyses, the author ensured that the basic assumptions of regression analysis were satisfied.

The study uses two different model specifications to differentiate between the levels of control premiums and is particularly focused on the effects of SFAS 141 on control premiums. It uses a dummy variable to capture the unique aspect of these time periods. First it uses the dummy variable SFAS that is set to 0 for data that are in the months before July 2001; otherwise it is 1. Thus, it captures any temporal effects on control premiums due to the implementation of SFAS 141. To allow a less restrictive specification, the study also regresses returns on quintile dummy variables. These are dummy variables that are set to 1 if an observation is in that quintile of relative control premiums (a preceding B denotes the observation is in a month that is before SFAS 141; a preceding A denotes the observation is in a month that is after SFAS 141). Otherwise, the variable is set to 0. These variables allow the study to examine whether "extreme" control premiums are affected more than moderate levels of control premiums, and they do not impose the constraint that the effect must be the same in all quintiles. By examining the differences between the coefficients in the regressions, the study can determine the effects of SFAS 141. It also examined the correlations between control premiums and target market value, target size, deal value, deal size, and earnings. These variables, along with the control variables of interest, were included in a round of hierarchical regressions. These additional variables did not contribute to the model (see Table 1) and, therefore, it did not include these variables in further analysis.

The results of regressions 1 and 2 are reported in Table 2 and Table 3:

Controlpremium = [[beta].sub.0] + [[beta].sub.1] * SFAS + e, (1)

Controlpremium = [[beta].sub.0]+ [[beta].sub.1] * B2Q + [[beta].sub.2] * B3Q + [[beta].sub.3] * B4Q + [[beta].sub.4] * B5Q + [[beta].sub.5] * A1Q + [[beta].sub.6] * A2Q + [[beta].sub.7] * A3Q + [[beta].sub.8] * A4Q + [[beta].sub.9] * A5Q + e. (2)

Having done that, the study then considered post hoc tests to examine whether statistically significant differences exist among industries.

RESULTS

The results fulfilled the expectations developed from existing literature. The differences between the pre-SFAS 141 period and the post-SFAS 141 period are nil and not statistically different from zero in my sample. The study also tests for statistical differences between coefficients to determine if the control premiums have decreased. Specifically, in the less restrictive model specification, it tests for differences between the regression coefficients on the following variables: B2Q and A2Q, B3Q and A3Q, B4Q and A4Q, B5Q and A5Q. The implementation of SFAS141 implies that the relative level of control premiums should decrease with the restriction to use only the purchase method of accounting for acquisitions but my hypothesis suggests no change. Therefore, SFAS141's influence should be that the coefficients of the quintile variables to become less positive after SFAS 141, making the expected sign on all of my difference tests negative. To support the hypothesis the results should show otherwise. The results of these regressions are in Table 3. The most important information from the regressions, though, is not the values of the coefficients themselves but the differences in coefficient values. Table 4 reports the results of difference tests among coefficients for the temporal dummy variables. For the study, relative control premiums are not significantly different after SFAS 141. Difference tests for my quintile dummy variables are .000 for A2Q-B2Q, -.002 for A3Q-B3Q, -.005 for A4Q-B4Q, and .007 for A5Q-B5Q, respectively. The averages differences for the dummy variables are 0.0%. After SFAS 141, the relative control premiums did not change. A possible explanation for this result is suggested: the tax explanation of acquisitions and the effects of tax law and accounting changes may not be significant.

Post Hoc Analysis: Tests for Industry Differences

The original research question focused on the impact of SFAS 141 on the level of acquisition control premiums. However, once the results ran counter to the expectations of the accounting change, the study explored whether the industry classification of the acquiring firm impacts the relative levels of control premiums after implementation of SFAS 141.

The study used multiple regression analysis to test the effects of industry. Regressions were run at the 2-digit and 3-digit hierarchical NAICS classification level. The results show that for all industry classifications, except one, the levels of control premiums were not significantly different. The banking and financial intermediary industry (i.e., NAICS 522--Credit Intermediation and Related Activities) is the anomaly. The difference in control premiums before and after SFAS 141 is significant at p < 0.05 and in the opposite direction suggested by the implementation of SFAS141. As stated above, the hypothesis implies that the relative level of control premiums should exhibit no change with the restriction to use only the purchase method of accounting for acquisitions. Therefore, the coefficients of the industry variables are expected to be non-negative. These results are presented in Table 4.

DISCUSSION AND CONTRIBUTIONS

As indicated in the results, SFAS 141 did not impact the control premiums offered in acquisition (change-of-control) transactions. These conclusions are important as corporate control accounts for a significant portion of a firm's value and the value of corporate control is embodied in the control premium. This topic has been addressed in both the strategic management and the financial economics literature. The strategic management perspective emphasizes factors of management control, e.g., mode, method, and form, in determining the economic value created in a merger or acquisition. The financial economics perspective states that the total economic value and its partitioning between acquirer and target are determined by market characteristics. While the two have different frames of reference and emphasize different determinants, they do not address the influence of accounting changes.

This study used control premium data from January 1998 through December 2005 from the Mergerstat/Control Premium database. The data covers 2,692 completed acquisitions of public company takeovers. The purpose of this database is to aid analysts in pricing and structuring merger and acquisition transactions: the idea behind using transaction databases like this is to relate the price paid in other transactions to the transaction under consideration. To the best of the author's knowledge, this database has not been analyzed by the method described in this study.

The results confirm and extend previous research on the immunity and resilience of the level of acquisition activity to exogenous events. Several efforts were made to discourage takeovers through the U.S. federal income tax laws in the late 1980s but these did not affect the long-run level of acquisition activity. In this study, the accounting changes contained in SFAS 141 showed no effect in the levels of control premiums offered in acquisition for the period 1998 through 2005.

Practical and policy implications

Mergers and acquisitions form a complex market and the complexity is increasing. Practitioners need to consider the many factors that influence merger and acquisition transactions. Awareness of their own, and others', behaviors, may enable the development of better acquisition strategies. From this perspective, for example, the restriction in method could make mergers a less attractive exit strategy for start-up companies, and subsequently negatively affect the venture capital industry. Equally as important as this environment is to the practitioner, knowing the determinants of acquisition behavior may help policymakers enhance the effectiveness of investment related trade measures and especially domestic anti-trust, e.g., merger, policies.

LIMITATIONS AND FUTURE RESEARCH

Although the study did not find any significant correlation between control premiums and target market value, target size, deal value, deal size, and earnings, other moderating variables may exist. Variables to consider can include consideration (method of payment), attitude (friendly, neutral, or hostile), form of the acquisition (acquisition, tender offer, MBO, going private), and purpose (conglomerate, financial, vertical, or horizontal). For instance, my post hoc analysis of industry sector suggests that control premiums in the banking industry may be trending upward over the sample period. Over the last several decades, the deregulation movement in the U.S. has removed many of the competitive restraints in the banking industry (Streeter 2006). In doing so, it has established conditions for a substantial intensification of competition. Future research may examine the relationship of control premiums, bank merger policy, the impact of merger policy on banking structure, and competitive issues that are raised as a result.

Future studies can extend this research in additional ways, such as, research on domestic acquisitions relative to international acquisitions. This study did not control for whether it was a U.S. acquirer and domestic target versus a U.S. acquirer and foreign target. Results of such research could indicate whether acquisitions located in different host countries were affected.

While the research did not find a significant difference in control premiums between the two periods, many relevant refinements and extensions beckon. For example, evidence was found of a greater volatility in control premiums after SFAS 141 implementation. Perhaps different interpretations of the meaning of SFAS 141 and it contemporaneous standard SFAS 142 can generate hypotheses to explain this phenomenon--under the companion standard, SFAS 142, goodwill and intangible assets are subject to impairment rules. Also, a number of other exogenous events (e.g., the 'Internet bubble', the disclosure of accounting frauds, the SarbanesOxley Act) occurred during this sample period and may influence this study's findings.

CONCLUSIONS

This study empirically investigated the impact of SFAS 141 on the willingness of an acquiring firm to offer a premium for a controlling acquisition of a target firm. The original hypothesis that the control premium decreases after SFAS 141 due to the restriction of accounting for the transaction with the purchase method was not supported. Rather, the results confirmed previous research on the immunity of M&A activity to exogenous events such as changes to the federal tax law. This demonstrates the need to consider specific dimensions, like synergy gains, reduction in agency costs, and even value-maximizing expropriation, in explaining merger and acquisition strategies. A variety of arguments concerning the causes of M&A transactions remain to be investigated. These motivations may be particularly important for practitioners and policymakers.

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Paul J. Komiak

Memorial University

Paul Komiak (Ph.D. in International business Administration from Texas A&M International University) is an Assistant Professor of International Business and Finance in the Faculty of business Administration at memorial University. Dr. Komiak also holds a BA in economics and an MBA in international business and finance from the University of Chicago. He holds professional certifications as an accredited senior appraiser in business valuation and as a certified fraud examiner. Dr. Komiak's research focuses on the relations among international governance, strategy, and policy from a multi-disciplinary perspective.
Table 1
Regression Results for Excluded Variables (Dependent Variable =
Control Premium)

                             Beta        Sig. (t)

Net Sales LTM                -.008         .703
                                          (-.381)

EBITDA LTM                   -.034         .094
                                          (-1.675)

BV Target Common Equity      -.031         .127
                                          (-1.528)

Total Implied MVE            -.002         .930
                                          (-.088)

Book Value per Share         -.010         .614
                                          (-.505)

Common Shares Outstanding    -.005         .799
                                          (-.255)

Net Profit Margin            .018          .375
                                          (.887)

Table 2
Regression Results (Dependent Variable = Control Premium)

                                  Regression (1)       Regression (2)

                                   Coefficients         Coefficients
                                   (t-statistic)       (t-statistic)

Intercept                        .366 (25.041) ***   -.185 (-9.896) ***
SFAS 141 (SFAS)                    .024 (1.139)
Quintile 2 pre SFAS 141 (B2Q)                        .327 (11.892) ***
Quintile 2 post SFAS 141 (A2Q)                       .327 (11.887) ***
Quintile 3 pre SFAS 141 (B3Q)                        .483 (17.769) ***
Quintile 3 post SFAS 141 (A3Q)                       .481 (17.303) ***
Quintile 4 pre SFAS 141 (B4Q)                        .690 (24.935) ***
Quintile 4 post SFAS 141 (A4Q)                       .685 (23.970) ***
Quintile 5 pre SFAS 141 (B5Q)                        1.322 (48.165) ***
Quintile 5 post SFAS 141 (A5Q)                       1.329 (47.608) ***
Adjusted [R.sup.2]                     .022                 .637
F-Statistic                            1.297            524.632 ***
n=                                     2692                 2692

***. Denotes significance at the 1% level.

Table 3
The Results of Difference Tests

Coefficients    Expected Sign    Difference (t-Statistic)

A5Q--B5Q           Negative               .007
                                         (-.868)

A4Q--B4Q           Negative              -.005
                                         (-.369)

A3Q--B3Q           Negative              -.002
                                          (.133)

A2Q--B2Q           Negative               .000
                                         (-.028)

Table 4
Regression Results by Industry

NAICS    NAICS Title                                   Coefficient
Code                                                   (t-statistic)

11       Agriculture, Forestry, Fishing and Hunting    -.351 (-.729)
21       Mining                                        -.175 (-1.522)
22       Utilities                                     .120 (1.049)
23       Construction                                  -.046 (-.130)
31       Food Manufacturing                            -.212 (-1.530)
32       Non Metallic Manufacturing                    .079 (.930)
33       Primary Manufacturing                         -.092 (-1.874)
42       Wholesale Trade                               -.065 (-.341)
44-45    Retail Trade                                  -.079 (-.765)
48-49    Transportation and Warehousing                .176 (.651)
51       Information                                   .067 (.842)
52       Finance and Insurance                         .065 (2.197) **
522      Credit Intermediation and Related             .077 (2.373) **
           Activities
5221     Depository Credit Intermediation              .070 (2.124) **
5222     Nondepository Credit Intermediation           .459 (2.538) **
5223     Activities Related to Credit Intermediation   -.220 (-1.386)
53       Real Estate and Rental and Leasing            .328 (1.723)
54       Professional, Scientific, and Technical       .170 (1.699)
           Services
56       Administrative and Support and Waste          .902 (1.674)
           Management and Remediation Services
61       Educational Services                          -.050 (-.152)
62       Health Care and Social Assistance             -.105 (-.523)
71       Arts, Entertainment, and Recreation           .419 (.488)
72       Accommodation and Food Services               -.024 (-.107)

**. Denotes significance at the 5% level.
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Author:Komiak, Paul J.
Publication:International Journal of Business, Accounting and Finance (IJBAF)
Geographic Code:1USA
Date:Dec 22, 2010
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