Differences in Acquirer Motivations, Announcement Effects, Target Characteristics, and Financing in Private versus Public Acquisitions: The Case of REITs by David C. Ling and Milena Petrova

2 Background and Motivation   Large body of theoretical & empirical research on corporate M&As, most of which is focused on shareholder wealth effects   Most event studies conclude mergers tend to create shareholder value, with most of the gains accruing to target shareholders   However, empirical research on several important M&A topics is much less developed (1) (1)What causes some firms to become target? (2) (2)Why are some M&A deals “going-private” transactions; others “staying public”? (3) (3)Do the objectives of private bidders differ from those of public bidders?

3 Why REITs?   First…   Existing literature documents that mergers occur in waves with significant clustering by industry (Mitchell & Mulherin, 1996, Andrade, Mitchell, & Stafford, 2001)   This clustering suggests M&As may result from unexpected shocks to the structure & regulation of particular industries   These predominate industry effects may explain why predicting takeover targets using firm-level data from multiple industries has produced mixed results   To help isolate firm-level determinates of M&A bids, we focus on the REIT industry

4 Why REITs?   Second…   Recent years have witnessed an increased number of “going-private” REIT transactions   Blackstone’s acquisition of EOP in 2006   Our examination of these going private REIT acquisitions allows us to contribute to the literature on the causes & consequences of going private transactions relative to public-to-public deals

5 What Questions Do We Address? 1. 1.What REIT characteristics are associated with an increased probability of becoming a M&A target?   Not explored with one exception; Eichholtz and Kok (2008) examines the characteristics of targets in 122 takeover acquisitions, of which only 31 involved U.S. firms. The authors conclude that mergers involving real estate firms and assets are driven by diversification and operational synergy motivations Conditional on being a target, are REITs purchased by private firms similar to those acquired by public firms?   has not been examined in the RE literature 3. 3.Do target shareholder wealth effects differ in going-private (GP) deals vs. public-to-public (PTP) transactions? 4. 4.What factors explain the variation in abnormal returns in both GP & PTP transactions?

6 Data & Sources   Announcements of REIT M&As for U.S. obtained from FactSet for years   Final M&A sample: 161 bids; 39 GP deals; 122 PTP deals   Obtained additional accounting data for target firms from COMPUSTAT database   UpREIT data from SNL and NAREIT   Institutional ownership data from Thomson Financial   REIT type and property concentration data from CRSP Ziman   Governance Data from Risk Metrics (governance results not reported in the paper, due to limited sample size)   Corresponding data also collected annually for each firm in NAREIT universe that did not receive a bid

Distribution of M&A Bids by Announcement Year:

Distribution of Acquirer Financing by Type and Year

9 Analysis: Two-Stage Estimation Approach 1. 1.We estimate pooled logistic regressions, with clustered standard errors in which dependent variable (BID) is set =1 if REIT was a M&A target, and zero otherwise   Sample of 161 mergers is “treatment” group   Remainder of REITs at beginning of each year is control group   Firms are excluded from control sample (comparison group) if they received a bid in year t-3, t-2, t-1 t+1, t+2, t We estimate standard logit model in which dependent variable (PRIVATE) is set =1 if bidder is private firm   Firm-level predicted probabilities of being a target from first stage logits are used as explanatory variables to control for sample selectivity bias   Use characteristics of targeted REITs to explain why bidding entity is a private firm versus a public firm

10 Alternative Approach: A Multinomial Model   An alternative framework is to assume that public and private bidders identify a company before it becomes an acquisition target and bid to acquire it.   In this framework, the outcomes or choice variables can be modeled with multinomial logistic regression, following the methodology presented in Shumway (2001).   We estimate multinomial logit model has the following form where the dependent variable, MPRIVATE it, is a dummy variable equal to zero if the bidder is a public firm; 1 if the bidder is a private firm; and 2 if the REIT received no acquisition bid in calendar year t;

11 Event Study   Use standard event study methodology to examine whether target stock price announcement effects differ in GP deals relative to PTP transactions   Use standard regression analysis to determine whether factors driving target announcement effects in GP transactions differ from those in PTP deals

12 Empirical Results – Two-Stage Approach

13 First Stage Empirical Results Summary   The coefficient on total assets is negative and significant, indicating that larger REITs are less likely to become merger or acquisition targets.   The coefficient on dividend yield is positive and significant in Models 3 and 4; this supports the notion that higher dividend paying firms may be an attractive acquisition target to bidders.   The coefficient on cash as a percentage of total assets is negative and significant in all but Model 4. That is, more liquid REITs are less likely to become targets, all else equal.   The estimated coefficient on UPREIT is negative and statistically significant, which is consistent with our hypothesis that UPREITs are less attractive acquisition targets due to the complexity of their organizational structure.   The degree of institutional ownership is significantly and positively associated with the acquisition probability, which supports our expectation.

Stage Two: Logistic Models Explaining Probability of Private Acquirer

Stage Two Regression Results Summary   Total leverage and the interest coverage ratio are negatively and significantly related to the probability of receiving a bid from a private firm.   This is consistent with our prediction that REITs more likely to be acquired by private firms have lower leverage and lower profitability.

16 Multinomial Logistic Model Results Model 1 & 2 control for property type, Model 3 adds year fixed effects Each model is based on 1995 obs (365 clusters).

17 Empirical Results, cont. Do target announcement effects differ in GP deals relative to PTP transactions? Table 9: Target Announcement Abnormal Returns by Acquirer Type: 1994 – 2007

18 Empirical Results, cont Do target announcement effects differ in GP deals relative to PTP transactions?   We observe target abnormal returns much higher than in previous REIT M&A studies   McIntosh, Officer and Born (1989) find average CARs of 3% for targets in a one-day window before announcement   Campbell, Ghosh and Sirmans (2001) also find target announcement effects of approximately 3%   Target announcement returns are more similar to those reported for conventional firms   Higher ARs associated with acquisitions by private bidders, as hypothesized

19 Empirical Results, cont What factors drive announcement returns?   Coefficient on deal size is positive & significant in PTP regressions, but insignificant in GP deals suggesting that public acquirers are interested in increasing scale economies; private acquirers are not   Cash/Total Assets – negative and significant in GP deals   Buyer is a REIT – negative and significant in PTP deals – suggesting that REITs overpay for their targets

20 What factors drive announcement returns?   Coefficient on EBIT/total assets is generally negative & significant in PTP transactions → increased target profitability (based on EBIT) decreases abnormal returns when bidder is public   Coefficient on Mortgage REIT merger is positive and significant in PTP deals – larger wealth effects for mortgage mergers   Coefficient on financing source cash is positive and significant; Consistent with many previous studies (e.g., Mitchell & Stafford, 2000, Campbell, Ghosh & Sirmans, 2001, 2005)

In Summary   We find that REITs more likely to become acquisition targets are smaller, with no umbrella operating partnership, less liquidity, higher dividend yields and greater institutional ownership than non-targets.   We document that targets of private acquirers have lower leverage, interest coverage ratios, and profitability.   Although acquisitions by private buyers are always done with cash, there has been a shift toward the use of cash in public-to- public deals.   In addition, the factors related to abnormal returns differ in public-to-public and public-to-private deals.

Differences in Acquirer Motivations, Announcement Effects, Target Characteristics, and Financing in Private versus Public Acquisitions: The Case of REITs by David C. Ling and Milena Petrova