Acquiring the Acquirer: The Role of Target’s Acquisition Experience in M&A Indrajeet Mohite (ICMA Centre, Henley Business School, University of Reading) 8 th May, 2014

Introduction Motivation, hypothesis and related literature Contribution Data, methodology and sample description Empirical results Robustness tests Conclusion

Motivation, Hypothesis and Related Literature Are M&As important? – Global M&A volume reached $2.9 trillion in 2013 (Dealogic global M&A review, 2013). – Vodafone’s sale of its stake in Verizon Wireless for $ 130 billion was the biggest deal in 2013 (The Guardian). – M&As decisions are one of the most significant and widely researched corporate investment decisions. Do M&As create value? – Overall, M&As create value, but majority of the gains from the transaction are retained by target shareholders (Bruner, 2003). – Acquiring shareholders experience insignificant gains from the transaction. – The underlying sources of value creation and destruction in M&A need to be identified (Andrade, Mitchell and Stafford, 2001).

Motivation, Hypothesis and Related Literature M&A and Negotiation – “33% of corporates mentioned ‘Deal term Negotiation’ as the most difficult aspect of M&A” – M&A outlook report 2013 by Mergermarket and R.R. Donnelly. – Large public targets have the ability to negotiate the deal in favour of their shareholders to retain the synergy gain from the transaction (Fuller, Netter and Stegemoller, 2002). – But how do targets become good negotiators? Are they simply born skilled negotiators? Alternately, do they develop negotiation skills through acquisition experience? Role of acquisition experience – Organisational learning theory suggests that firms can draw inferences from their previous deals and apply these inferences to improve the quality of their subsequent deal (Haleblian and Finckelstein, 1999 and Hayward, 2002). – Managers can apply negotiation skills learned in one task to other negotiation situations (Thompson, 1990). Improvement in negotiation performance with experience is associated with greater judgment accuracy, higher bargaining aspiration (Thompson, 1990) and increase in tacit knowledge (Nadler, Thompson and Boven, 2003). – Previous deal-making experience can enable the managers to precisely identify the synergies available from the deal (Aktas, deBodt and Roll, 2009).

Motivation, Hypothesis and Related Literature Hypothesis – H1: Acquirer’s acquisition performance will be negatively related to target’s acquisition experience. Additional supporting conjecture – The premium negotiated by the target will be positively related to target’s acquisition experience. Other possible alternative explanation – Targeted acquirers are ‘bad acquirers’ that get disciplined by the market for corporate control and their resistance to being taken over can explain the lower gains to the acquirers.

Contribution Behavioural finance literature - Target’s ability to negotiate deals in favour of their shareholders develops from its past acquisition experience. M&A literature – The reduction in acquirer gains in public acquisitions is enhanced by target’s acquisition experience. It is the first paper, to the best of our knowledge, to examine and provide evidence related to wealth effects associated with acquiring another acquirer, especially experienced acquirer. It clarifies the motivation of the acquirer to take-over another acquirer in recent time period. Other minor contributions include – Analysis of recent comprehensive M&A sample. – Robust research design involving analysis of adjusted performance measures to overcome the methodological challenges faced by previous researchers.

Data: Sample Selection Criteria

Acquisition database to identify the acquisition history – All completed deals by US public acquiring firms between 1 st January, 1990 and 31 st December, – Target firm is a US public, private or subsidiary firm. – Excludes spin-offs, recapitalizations, self-tenders, repurchases, minority stake purchases, acquisition of remaining interest, exchange offers, privatizations and clustered deals. – Acquirer return data is available on CRSP – The target and the bidder are different companies. – Bidder ownership in the target is less than 50% before the deal and is greater than 50% after the deal. – Transaction value >= 1 million and relative size of the deal to the acquirer >= 1% N = 21694

Data: Sample Selection Criteria and Methodology Primary sample drawn from the above mentioned acquisition database (N = 2355). – The Target is a US publicly listed firm. – The announcement date is between 1 st January, 1995 and 31 st December, The first 5 years of the sample period are used to measure the acquisition history. To calculate adjusted performance measures based on matching of sub-sample deal to similar control sample of deals. – Sub-sample of deals involving targets with acquisition experience (N = 1216). – Control-sample of deals involving targets with no acquisition experience (N = 1139). Standard event study methodology suggested by Brown and Warner (1985). – Acquisition performance is measured by calculating cumulative abnormal returns (CARs) to the acquiring firm’s shareholders over a 3-day (-1,+1) event window around the deal announcement date (ACAR). – Adjusted Performance (Adjusted-ACAR) is calculated as acquirer CAR minus the median acquirer CAR of control sample of deals that were completed in the year around the announcement year and involved target in the same industry, same listing status, similar relative size (+/- 10%) and similar target MTB (+/- 10%).

Data: Sample Description Target’s acquisition experience: – Target’s acquisition experience is defined as the number of deals completed by the target in the prior 10 years or at least prior 5 years when the acquisition history of prior 10 years in not available. – Descriptive statistics

Data: Sample Description Deal characteristics and target’s acquisition experience

Empirical Results Univariate results: Acquirer gains and target’s acquisition experience

Empirical Results Multivariate results: OLS regression of acquirer gains on target’s acquisition experience and other control variables

Additional Tests Analysis of Premium:

Additional Tests Analysis of non-hostile deals, combined CARs and target’s specific acquisition experience:

Additional Tests Analysis of acquirer’s past acquisition performance i.e. acquirer’s aggregate CAR classified by non-targeted acquirers and targeted acquirers

Long- Run Post-Event Abnormal Stock Performance Analysis of acquirer’s 12 month buy-and-hold abnormal return (BHAR) and calendar-time abnormal returns (CTAR).

Robustness Tests Alternate adjusted measures of target’s acquisition experience

Robustness Tests Alternate measures of acquirer CAR and premium

Conclusion The combination of findings provides support for the conceptual premise that targets with experience are able to negotiate better deals for their shareholders and reduce the gains available from the deal to the acquirer. Acquirer gains are significantly negatively related to target’s acquisition experience, whereas the premium received by the target shareholders is significantly positively related to the target’s acquisition experience. Targeted-acquirers (targets with acquisition experience) are not likely to be ‘bad acquirers’ that get disciplined by the market for corporate control. Market does not reverse its initial perception of the quality of the deal. Acquirers can face integration complexities while integrating targets that have pursued acquisitions in the past. The role of acquisition experience in the development of manager’s negotiation skills has implications on important corporate policies such as hiring, monitoring and incentive policies. Acquiring firms should negotiate cautiously while bargaining with targets with acquisition experience.

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