Merger waves: Are buyers following the herd or responding to structural queues?

While there has been a significant amount of research covering the causes of merger waves, few papers have rank ordered merger waves based on the causes nor sought to determine which rationale leads to higher bidder payouts. This paper seeks to fill this gap by examining a cross section of large mergers across most industries occurring over a 17 year period. I find that merger waves over this period are caused foremost by changing economic and regulatory conditions. It is the behavioral rationale of mispricing, however, that more often leads to higher bidder payouts or merger premiums among acquirers in merger waves.

What Drives the Payment of Higher Merger Premiums?

This study examines whether the premiums paid to targets firms are affected by bidder CEO overconfidence, merger waves, method of payment, industry of merged firms, and capital liquidity. Using merger data for the period spanning from 1991 to 2000, this study finds that CEOs pay less premiums in cash mergers and pay more premiums for mergers undertaken during the year of high capital liquidity. Moreover, the findings also demonstrate that CEOs tend to pay higher merger premiums for mergers that occur during merger waves and in high capital liquidity year. CEOs’ behavior, which is the main variable examined in this study, does not show any significant effect on the premiums paid. This suggests that the effect of CEO overconfidence on the premiums paid may be exaggerated.

Tax Benefits as a Source of Merger Premiums In Acquisitions of Private Corporations

Scholes et al. (2005) predict that S corporations, and other conduit entities such as partnerships and LLCs, can sell for a tax-driven purchase price premium relative to C corporations. We test this conjecture by comparing purchase price multiples in a sample of taxable stock acquisitions of S corporations to purchase price multiples for a matched set of taxable stock acquisitions of privately held C corporations. Consistent with Scholes et al.'s (2005) predictions, we find evidence that the organizational form of the target influences acquisition tax structure and acquisition price. Specifically, the evidence supports the conclusion that conduit entities (S corporations) fetch a taxbased purchase price premium relative to similar C corporations. Furthermore, our estimates indicate that average tax benefits in S corporation acquisitions are equal to approximately 12–17 percent of deal value.

Merger Premium Predictions Using a Neural Network Approach

Over 80 percent of mergers fail to achieve projected financial, strategic, and operational synergies (Marks and Mirvis 2001). It is critical for management to find accurate models to price merger premiums. Management has an interest to protect stakeholders by acquiring companies that can add value to their investments at the most favorable price. Published studies in the area of pricing mergers have not attempted to use expert systems in the decision-making process. This paper is the first of its kind that describes the development and testing of neural network models for predicting bank merger premiums accurately. A neural network prediction model provides a tool that can filter through noise and recognize patterns in complicated financial relationships. The results confirm that a neural network approach provides more explanation between the dependent and independent financial variables in the model than a traditional regression model. The higher level of accuracy provided by a neural network approach can provide practitioners with a competitive advantage in pricing merger offers.