An Analysis of UK Domestic Cash Acquisitions
Thesis or dissertation
University of Exeter
The significant impact of method of payment on the share price abnormal returns following mergers and acquisitions have been broadly considered and documented in US and UK empirical studies (Agrawal and Jaffe 2000). In the UK, all-cash acquisitions show insignificant negative or small positive abnormal returns, whilst the all-equity acquisitions have significant negative returns. Whilst it is tempting to conclude that it is simply the form of financing that separates the shareholder value destruction of equity-financed takeovers from cash takeovers, such a conclusion tends to ignore the question of where the cash to fund the acquisition comes from in the first place. Theory tells us this should matter. Whilst different theories on firm financing offer competing explanations on both managerial choices and shareholder preferences, it seems reasonable to ask the question whether the source of the cash influences the long run wealth effect of the acquisition. In order to shed light on this issue, this investigation looks at short-term daily abnormal returns as well as long-term abnormal returns including a five-year horizon of post-takeover returns and a three-year horizon of pre-takeover returns. The short-term daily abnormal returns support the signalling information hypothesis to some extent as acquirers financing takeovers using internal cash out-perform those financing takeovers by equity or debt issues. After categorizing the research sample firms into two sub-groups, one being internal funding while the other being external sources including equity or debt, the share price abnormal returns show statistically significant differences between these two sub-groups over 11-day event windows. Further, by using one- and two-dimensional analyses and a univariate test, the results reveal that UK cash acquisitions explored by this investigation contradict the free cash flow (FCF) hypothesis. Regression models show that book-to-market ratio is important in explaining the short-term daily abnormal returns. The long-term post-takeover stock performances show sensitivity to the benchmark adopted as well as the calculation used for the long-term abnormal returns, i.e. cumulated or compounded. Owing to the small sample firms entering the calendar time monthly portfolios, the calendar time approach employs White (1980) corrections and a GLS model to mitigate the effects of heteroskedasticity in the research sample. Generally speaking, long-term abnormal returns show a negative pattern for the whole sample as well as the sub-groups depending on their dominant financing methods. Furthermore, the univariate and multivariate tests demonstrate that the FCF hypothesis cannot explain the 60-month share price abnormal returns of the research sample. According to the coefficient derived from regression model(s), the most significant factor to predict 60-month abnormal returns is relative size (market value of target to that of bidder). The results suggest that the bigger the relative size of the target, the more negative the abnormal return will be (Hansen 1987, Martin 1996, Loughran and Vijh 1997). Besides, the institutional investors contribute a positive effect on long-term share price performance, which is consistent with the findings of Chen, Harford, and Li (2007). The pre-takeover share price abnormal returns over three years intervals prior to the bid announcements clearly show that cash acquirers overall experience a significant positive stock performance. This result is robust to adopting various benchmarks of event time and calendar time regression-based framework. Based on the dominant financing method used for the acquirers, firms issuing debt before the bid announcements do perform extremely well. Those firms subsequently perform badly for post-takeover long-term intervals. Accordingly, this phenomenon demonstrates a mean reversion picture. Regardless of whether an event time or a calendar time approach is used, high q firms always have higher abnormal returns even when allowing for other factors, such as free cash flow or cash stock. However, multinomial logistic tests fail to find any statistically significant link between pre- takeover abnormal returns and the form of financing.
PhD in Finance