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Beware of acquiring acquirer deals
A
re public acquisitions
bad for business?
Evidence shows that when a public
company acquires another public
company it can suffer a significant
shareholder wealth loss at the
point when the deal is announced.
It has never really been clear why
this happens, leading us to ask the
question – are public acquisitions
bad for business? At Cranfield we
have just completed a piece of
research with colleagues from Oxford
and Bristol University that shows
that acquiring companies’ losses
are largely as a result of whether or
not the company being acquired
was itself an acquirer (i.e. had
previously acquired a number of other
companies itself).
An example of this is the Firstar
Corporation (now the US Bancorp).
The Milwaukee bank announced
its takeover bid for the Mercantile
Bancorporation on 30 April 1999. On
the day it was announced the Firstar
stock price plunged by 5%, while the
market rose by 0.2%. How could
Firstar’s shares have dropped so
much in just one day and in such a
mild market environment? A closer
look at Mercantile Bancorporation
reveals that they had in fact made
over 20 acquisitions themselves in the
previous four years. In other words,
Firstar had acquired an acquirer.
For our research we looked at over
4,000 sizable public mergers and
acquisitions (between 1985 – 2010) in
the U.S. We defined a company that
has made one or more acquisitions
during the preceding three-year period
as ‘acquisitive’. By this definition,
27% of our sample were ‘acquiring-
acquirer’ deals.
We found that a company’s
acquisitiveness is negatively related
to the acquirer’s announcement
stock returns. Announcement returns
averaged -2.24% for deals with
acquisitive targets, -0.51% for deals
with non-acquisitive targets, and
-0.98% for the overall sample.
The figures show that if you announce
that you are going to acquire an
acquirer, your company’s stock
price will drop on average four times
more than deals with non-acquisitive
companies. From the sample period
we looked at, six out of ten of the
worst US acquisitions (based on
stock returns) involved an ‘acquisitive’
target, in comparison to the top
ten deals, none of which involved
‘acquisitive’ targets.
We also found that there is a negative
relationship between the number of
past acquisitions made by the target
and acquirer announcement returns.
Announcement returns on average
drop by -1.7% when the target has
made one past acquisition; it drops to
-3.4% when the target has made three
past acquisitions; and drops markedly
to -6.2% when the target has made
five or more past acquisitions. So, the
more acquisitive the target firm is, the
larger the losses of the acquirer.
Our findings are consistent with the
‘eat or be eaten’ theory of mergers
and acquisitions, whereby a company
reduces their chance of being
acquired by acquiring another firm
and hence increasing the size of their
own firm. The basic idea is that a
manager, concerned with the potential
loss of control, decides to acquire the
BEWARE
of acquiring
acquirer
deals
by
Huainan Zhao
, Professor of Corporate Finance
22
Management Focus
Management Focus
23
acquisitive firm before that firm grows
larger and the company ends up being
next on its shopping list. In other
words, the company is defensive and
it ‘eats in order not to be eaten’.
Based on this theory, acquiring an
acquirer is more likely to be motivated
by the preservation of private benefits
or control rather than to increase
the value of the company. As a
consequence, stock markets react
negatively to the news. This is why
this kind of acquisition has a negative
impact on returns and why the more
acquisitive the target firm, the lower
the acquirer’s announcement returns.
Our findings have a number of
implications for the practice of
mergers and acquisitions. For
company executives considering
making acquisition deals, you should
clearly distinguish between acquisitive
and non-acquisitive targets. It is clear
from our research that stock markets
do not welcome acquiring-acquirer
deals. You should, therefore, think
carefully if the target you are looking
at is itself an acquirer.
Company directors and shareholders
need to approach acquiring-acquirer
proposals with extreme caution and
immediately question the motivations
of managers behind the deal. Rather
than assume that any growth is good,
always beware of acquiring-acquirer
deals.
“
Our findings are consistent with
the ‘eat or be eaten’ theory.
”
MF
Number of past acquisitions
Acquirer returns
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%
1
3
5+
-1.7%
-3.4%
-6.2%