A SIGNALING THEORY OF ACQUISITION PREMIUMS: EVIDENCE FROM IPO TARGETS

Reuer, Tong and Wu (2012)

Presented by Yifan for BADM549 (FALL 2012)

Introduction• Research question: what particular signals about IPO

firms will have an impact on the premiums they obtain when selling their companies?

• Theoretical contribution

• To advance a signaling theory of acquisition premium

• Shift attention in research on acquisition premium from the buyer’ perspective to the seller’s perspective.

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Theoretical Background of acquisition premiums

• Management research

• Total value creation potential of acquisition as a determinant of acquisition premiums

• How managerial biases and org learning can shape acquirers’ decisions on acquisition premiums

• Finance research: how management resistance to acquisition affects acquisition premiums (agency costs)

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Signaling theory

• Signaling theory: asymmetric information and ‘adverse selection’• Spence (1974): educational achievement can be a valuable signal

for employee productivity

• 3 types of interorganizational relationships • IPO firm’s relationship with prominent investment banks• venture capitalists• alliance partners

• have been shown to signal the quality of IPO firms and help a seller to obtain a higher acquisition premium

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Hypotheses• H1:the acquisition premium received by an IPO target is

positively related to reputation of its investment bank

• H2: the acquisition premium received by an IPO target is greater for targets backed by prominent VCs

• H3: the acquisition premium received by an IPO target is positively related to the number of alliances it has formed with prominent partners

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Hypotheses• H4a - c: affiliation with reputable investment banks,

prominent VCs, prominent partners are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in industries with different knowledge requirements

• H5a - c: affiliation with reputable investment banks, prominent VCs, prominent partners are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in foreign countries

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Methods

• Dataset: 308 acquisition deals involving 263 acquirers for all IPOs from 1991 to 2000

• Dependent variable

• Acquisition premium: the percentage difference b/w a purchase price and an IPO targets’ value four weeks prior to the date of the announcement of the acquisition (market value as a scaling factor)

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Methods

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• Independent variables• Investment bank reputation: ranking index for leading underwriters• Venture capitalist prominence: 1 for association, and 0 otherwise• Alliance partner prominence: number of partners publicly listed• Knowledge distance: • Cross boarder: 1 for non-U.S. acquirer, and 0 otherwise

• Control variables: firm size, firm Tobin’s Q, analyst coverage Time since IPO, etc.

• GEE analysis

Results

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Results

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Results

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Discussion• Focus on acquisition premiums received by IPO targets

• Generalization: what about other countries?

• Other signals r remedies for the challenges of acquisition deals

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