Acquiring Acquirers: New evidence on the drivers of acquirer’s announcement returns in corporate takeovers Ludovic Phalippou – Oxford University Fangming Xu – Bristol University Huainan Zhao – Cranfield University

 “The third concern is the internet behemoths’ habit of gobbling up promising firms before they become a threat. Amazon, which raised $3 billion in a rare bond issue this week, has splashed out on firms such as Zappos, an online shoe retailer that had ambitions to rival it. Facebook and Google have made big acquisitions too, such as Instagram and AdMob.” -- “Battle of the internet giants: Survival of the biggest” The Economist, December 1,

The stock price of Firstar dropped by 4.75% on that day, while the market went up 0.23%. 3

Target Type 4 Acquirer Acquisitive Target Non-Acquisitive Target CAR=-0.98% CAR=-2.24% CAR=-0.51%

Data and Sample 5  The sample comes from SDC’s U.S. M&A Database,  We follow the same 8 criteria as in Moeller, Schlingemann, and Stulz (2004). 1.Acquirers control less than 50% of target before and obtain 100% after; 2.The transaction is completed; 3.The deal value is greater than $1 million; 4.The No. of days between ann. and comp. dates is between 0 and 1,000; 5.The target is a public or a private or a subsidiary firm; 6.Both the acquirer and the target are based in the US; 7.The acquirer is a public firm listed on both the CRSP and Compustat; 8.The deal value relative to the MV of the acquirer is no less than 1%.

The M&A Sample 6

Best 10 and Worst 10,

Monotone Relationship 8

Sample Distribution by Year 9

10 Sample Distribution by Industry

Determinants of acquirer announcement returns 11

Determinants of the probability of deal success 12

Main Results  What we have found so far:  Markets react negatively to acquiring-acquirer deals and attempts to acquire the acquisitive targets are more likely to fail. 13

The ‘eat or be eaten’ theory  ‘Eat or be eaten’ theory of Gorton, Kahl, and Rosen (2009):  A manager, concerned with the prospect of becoming a takeover target and hence the potential loss of her private benefits of control, would acquire the acquisitive company, i.e., eat in order not to be eaten.  Such a ‘defensive’ acquisition should generate negative announcement returns, and an acquisitive target is more likely to resist takeover attempts. 14

The ‘eat or be eaten’ theory: Implications  GKR’s theory implies that defensive mergers are more likely to occur:  during and post merger waves  when relative size between target and acquirer is large  in industries where firm size is more homogenous  if acquirer and target are in the same industry  if the private benefits of control are larger 15

Target Acquisitiveness and Merger Waves 16

17

18 Acquirer Survival How effective is this defensive strategy?

Acquirer Survival 19

Robustness Tests  Robustness to changing control variables  Robustness to changing methodologies  Robustness to changing sample selection 20

21

22

Conclusion  A key driver of acquirer announcement returns and acquisition success is the number of target’s past acquisitions.  Acquiring an acquisitive firm is more likely to be motivated by the preservation of private benefits of control rather than by synergy considerations.  This explains why these acquisitions have lower announcement returns and why an attempt to take over an acquisitive firm is more likely to fail. 23