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Corporate Takeover Targets

In memory of my parentshellip

Series Editor Jacques Janssen


Acquisition Probability

Hicham Meghouar

First published 2016 in Great Britain and the United States by ISTE Ltd and John Wiley amp Sons Inc

Apart from any fair dealing for the purposes of research or private study or criticism or review as permitted under the Copyright Designs and Patents Act 1988 this publication may only be reproduced stored or transmitted in any form or by any means with the prior permission in writing of the publishers or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address

ISTE Ltd John Wiley amp Sons Inc 27-37 St Georgersquos Road 111 River Street London SW19 4EU Hoboken NJ 07030 UK USA

wwwistecouk wwwwileycom

copy ISTE Ltd 2016 The rights of Hicham Meghouar to be identified as the author of this work have been asserted by him in accordance with the Copyright Designs and Patents Act 1988

Library of Congress Control Number 2016933879 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library ISBN 978-1-84821-917-5

Contents

Introduction ix

Part 1 Corporate Takeovers Theoretical Justifications and Empirical Contributions 1

Introduction to Part 1 3

Chapter 1 Economic and Legal Framework of Takeover Bids in Europe 5

11 Corporate takeover general description 6 111 The control 6 112 The takeover concept 8 113 Techniques and classification of MampA 9 114 Conclusion 14

12 The economic impact of takeover bids 15 121 Global development over the period 1990-2000 16 122 Characteristics of the recent MampA wave 2001ndash2007 26

13 Regulation and control of takeover bids in Europe 34

131 Merger and acquisition control in Europe 35 132 The role of public authorities 38 133 Harmonization of regulations on takeover bids within the European Union 42

14 Conclusion 46

vi Corporate Takeover Targets

Chapter 2 Motivations and Economic Role of Takeover Bids a Theoretical and Empirical Characterization 49

21 Economic interpretation of takeover bids and plurality of their theoretical references 50

211 Economic justifications for takeover bids 50 212 Plurality of theoretical references on the potential effectiveness of takeover bids 60 213 Conclusion 67

22 Performance and effectiveness of takeover bids results of empirical research 68

221 Short term performance of companies around the event date 70 222 Long-term acquisition performance bnormal post acquisition return 77 223 Conclusion 81

23 Motivations of takeover bids results of empirical research 82

231 Empirical studies on targets profile 84 232 Empirical studies of acquiring companiesrsquo profiles 98 233 Joint empirical studies of the profiles of acquirers and targets 100

Part 2 Exploration of Predictive Variables for Takeover Bids and Forecast of European Targets 105


Chapter 3 Detection of Predictive Variables for Corporate Takeover an Exploratory Study 109

31 Conceptual and empirical framework theoretical positioning survey characteristics and choice of data analysis method 109

311 The theoretical positioning of the exploratory study 110 312 The questionnaire characteristics 111 313 Statistical analysis of responses 113

32 Results of empirical tests exploratory factor analysis in principal components 114

321 Reliability and validity of the measurement scale 114

Contents vii

322 Qualitative analysis of responses 116 323 Results of the exploratory factor analysis of variables 122 324 Conclusion 132

Chapter 4 Developing a Takeover Prediction Model The European Case 135

41 Empirical analysis hypotheses sample selection and statistical methodology 136

411 Formulation of hypotheses and measurement variables 136 412 Selection of samples and data collection 150 413 Methodological choices and statistical processing 156 414 Conclusion 161

42 Modeling takeover bids in Europe predicting takeover targets 162

421 Univariate analysis results 163 422 Results of the multivariate analysis 176 423 Performance and predictive ability of the developed models 193 424 Conclusion 201

Conclusion 203

Bibliography 209

Index 221

Introduction

In 2008 the bankruptcy of Lehman Brothers investment bank created a significant abyss The United States feared a repetition of the 1929 crisis A year later in Asia the United States and Europe analysts spoke of the end of the recession In the financial market the crisis seemed a thing of the past The continuous rise in stock indexes in London Paris New York and Tokyo since March 2009 demonstrated this trend In early September CAC 40 gained 378 crossing the symbolic threshold of 3700 points with 373489 points precisely In Wall Street SampP 500 exceeded the 10000 point mark after gaining 394 while in London the FTSE made 329 According to the stock exchange rule positive momentum can result in a ldquospeculative excessrdquo In the absence of significant economic indicators investors contented themselves with announcements of takeover bids After months of inactivity several listed companies engaged in corporate takeovers

The year 2009 recorded massive transactions such as Kraftrsquos bid for Cadbury1 followed by that of Vivendi for the Brazilian operator GVT the acquisition of Cegelec by Vinci group or the announcement of negotiations between Japanese brewer Suntory and Orangina The slow pace in takeover bids witnessed in 2009 was as a result of the economic environment which was too uncertain for most company executives to embark on large-scale transactions During the first quarter of 2010 several transactions were announced Indeed according to Le Monde2 on Friday February 5 the US industrial gas producer Air Products and Chemicals launched a hostile

1 This takeover bid was accepted by Cadbury in early 2010 against revaluation of the price per share offered by Kraft 2 Le Monde 9 February 2010

x Corporate Takeover Targets

takeover bid of 7 billion dollars (51 billion Euros) on its competitor and compatriot Airgas The bid of 60 dollars per share represented a premium of 38 compared to the previous stock price Analysts however questioned the possible intervention of German Linde or French Air Liquide globally number one and two respectively On Monday March 1 British insurer Prudential announced its will to acquire for 355 billion dollars (263 billion euros) the Asian assets of US insurer AIG It would constitute the largest acquisition project in insurance history This marked the return of major deals

In order to grow companies can choose between two strategies internal (or organic) growth through the creation of new production capacities or external growth which is a process of growth through acquisition of all or part of existing companies When external growth is achieved through the takeover of a company we talk about mergers and acquisitions [COU 03] Mergers and acquisitions (MampA) are one of the most common modes of growth and a way to conduct specialization vertical integration and diversification strategies The primary focus of the term ldquotakeoverrdquo is takeover bids and exchange offers and implies the transfer of corporate control from one group of shareholders to another Thus when a company acquires a target the right to control all operational activities of the target is transferred to the newly elected Board of Directors of the acquiring company this is takeover by acquisition Takeover may also take different forms within MampA which include proxy battles and other specific types of operations such as delisting [ROS 90] This usually concerns buyback operations with high debt leverage (leveraged buy-out and leveraged buy-in) Corporate takeover is considered an instrument of corporate governance In effect when the strategic objectives defined by managers do not meet the value creation constraint a conflict of interest arises between managers and shareholders Takeover bids help to resolve this conflict through the implementation of an acquisition that reflects an adjustment in the fundamental contracts (risk of dismissal for managers after the takeover)

Regarding the contribution of empirical studies relating to corporate takeovers [AND 01] state that studies have provided many answers about their tendencies and characteristics in the last century but limited results concerning their motivation There is a lack of homogeneity in the theoretical foundations of takeovers because of their diversity and interdependence [BRE 03] point out that there can always be a reason to justify a particular merger but we have limited ourselves in explaining a

Introduction xi

merger in itself Thus given the importance of this corporate takeover phenomenon and the issue of the real motives behind such an operation identifying companies likely to be the subject of a takeover has become essential insofar as it would allow among others investors to achieve higher returns

Takeover bids have been the subject of many studies that can be classified into two categories of objectives The first category of studies focuses on evaluating the operating and stock market performance of the acquiring company in order to assess the effectiveness (or non-effectiveness) of takeovers Performance is therefore assessed in the short or long term The second category of studies analyses the characteristics of the companies acquired in order to develop a takeover prediction model This aims to highlight the implicit motivations of acquirers and to carry out joint analysis of acquirers and targets to differentiate one from the other

Regarding the development of a takeover prediction model several studies especially from Englishndashspeaking countries have been carried out [SIM 71 STE 73 WAL 94 HAR 82 WAN 83 DIE 83 PAL 86 CUD 00 ESP 03] in the United States [CAS 76 CHA 87 EDD 91] in Australia [BEL 78 REG 84 KIR 93] in Canada [TZO 72 BAR 90 BAR 99 BAR 00 POW 97] in the United Kingdom Though the results differ and do not lead to the same conclusions many authors believe that financial variables are discriminatory in terms of acquisition probability between targets and non-targets Meanwhile few studies have focused on European companies involved in such transactions In France we have studies by [GUI 76 NAV 78 DUM 89 GRA 91 COR 92 CAB 94 NGU 05 ALL 05 BOU 14] In Greece we find the works of [ZAN 97 TSA 06] In Spain there is the study of [ALC 03 COL 05] and in Belgium we find [MPA 04] Using different financial variables [GUI 76 NAV 78] argue that it is impossible to determine a standard profile of companies involved in such transactions on the sole basis of their financial characteristics Models developed by [DUM 89] demonstrate a superior explanatory power to classify the two types of companies acquirer and acquiree For [BRA 09] who attempted to establish a European takeover model using a sample of several European companies acquired between 1992 and 2003 (in the United Kingdom France Germany Spain Italy the Netherlands etc) takeover targets are characterized by their small size are undervalued have low liquidity and achieve low revenue growth Furthermore they witness significant and momentary increase of

xii Corporate Takeover Targets

their share prices these being actively sold before the announcement of the acquisition transaction Ultimately the results of studies conducted remain very mixed For some authors financial variables alone cannot effectively distinguish between the different business groups In other words a standard profile of targets acquirers and non-targets cannot be developed For others the results seem to be more convincing This study falls within the framework of the second category of academic studies namely the study of economic and financial characteristics of targets and the development of an acquisition probability model

Though these operations are often inconclusive in terms of value creation for acquiring companies they however continue to multiply This observation leads to the following question why do the acquiring companies still engage in takeover transactions with the knowledge that they do not seem to ensure an improvement of their post-acquisition performance What are their main motivations To answer this question this study proposes to test several theories explaining takeovers and identifying factors that may influence such transactions It seeks to identify implicit motivations of acquirers with the main objective of developing a successful model for predicting targets Moreover an in-depth study is required given the multiplicity of takeover transactions and the limited number of European research in the area This work also strives to create a predictive model for takeovers by introducing alongside the quantitative variables used by previous studies (profitability debt distribution of dividends the shareholder structure etc) the original variables and establishing their contribution in improving the performance of predictive models This research is focused on testing the theoretical motivations of takeovers which can be ascertained by identifying the characteristics of takeover targets Therefore this study uses a predominantly hypothetical-deductive approach

To identify the characteristics of takeover targets and to develop an acquisition probability models have been studied largely in academic literature The results of previous empirical studies do not always match sometimes contradicting each other regarding the significant impact of this or that variable and even questioning the possibility of modeling takeovers Regarding the performance of predictive takeover models study findings portray correct classification rates of targets in the original sample which vary from 60 to 80 Part of the variance thus remains unexplained meaning that there are other takeover motivations known only to the acquirer which have not been taken into account in developing takeover

Introduction xiii

prediction models This research approach is unique in that it undertakes an exploratory study (preliminary survey) primarily to identify the main predictive financial variables used by MampA practitioners to predict targets for takeover It also attempts to develop a probability acquisition model (secondary survey) This exploratory study opens up a new way for research on predictive variables and is the first of its kind

The second survey is devoted to empirical research applied to the European market in order to highlight the characteristics of European takeover targets This is to analyze the economic and financial characteristics of European targets to identify implicit motivations of acquirers and to develop an efficient model for predicting targets Besides its general interest in predicting potential takeover targets this study aims to improve the performance of predictive models through the integration of distinctive variables not yet considered by previous studies

Several points therefore contribute to differentiating this research firstly it enriches the bulk of research work on the profiles of takeover target companies in the virgin European market and thus contributes to a better understanding of the existence of tender offers and exchange offers in Europe Then contrary to recent studies [ALL 05 NGU 05] that combine acquiring companies up to 2004 this study covers the period 1996ndash2007 and thus focuses on the last two waves of takeovers observed in the market for corporate control The developments in governance including those related to the new regulations on takeover bids in Europe are taken into consideration through the selection of a sample of companies relating to the most recent transactions

This study is of interest to several categories of economic agents Institutional or individual investors would benefit in the management of their portfolio3 Companies subject to this type of operation will be able to assess

3 The initiator of a takeover bid proposes a purchase price for one share of the target company that is equal to the share price on the eve of the announcement of the transaction plus a premium which averages 35 If the prudent investor anticipates this announcement he will buy the share before the bid and resell at the offered price thus making a profit equal to the premium

xiv Corporate Takeover Targets

their acquisition probability and develop adequate anti-takeover4 protection strategies Managers will appraise the acquisition probability of their company and set up prior anti-takeover measures in order to consolidate their position and preserve their jobs Companies seeking external growth through takeover bids and looking for companies with major economic and financial opportunities to target will also benefit from this study

This study consists of two parts each of which contains two chapters Part 1 provides a literature review of theoretical justifications and empirical contributions relating to takeover bids Chapter 1 outlines the economic and legal aspect of takeovers in Europe Chapter 2 focuses on motivations and the economic role of takeovers Part 2 consists of two chapters Chapter 3 is dedicated to an initial empirical study on modeling takeovers it is an exploratory study conducted using a questionnaire survey with MampA practitioners Chapter 4 creates a powerful takeover prediction model for targets in Europe during the entire 1996ndash2007 period as well as two sub-periods (1996ndash2000 and 2001ndash2007) each characterized by a wave of takeover bids

4 There are two main types of protection mechanisms against hostile bids those preventive in nature which exist before any hostile takeover and those in respons implemented during the transaction In order to respect the principles of transparency and equality of minority shareholders these mechanisms are usually governed strictly by law

PART 1

Corporate Takeovers Theoretical Justifications and Empirical Contributions

Introduction to Part 1

Takeover bids are considered a major instrument in organizing the economic fabric created by companies through a more efficient reallocation of assets and capital which responds to an industrial logic of redeploying various activities within the economy [MUL 96] Expansion through takeover bids is one of the means used by companies to carry out specialization vertical integration or diversification strategies Therefore these transactions form the core of industrial and technological policies They call to attention all economic actors ndash national political and economic authorities the European Commission ndash which seek to ensure the observance of competition rules and the proper functioning of financial markets To prevent the abuse of a dominant position (or monopoly power) companies considering a merger or acquisition are required to apply for authorization from market regulators and thus monopolies have been since 1890 and following the Sherman Antitrust Act generally prevented [COM 02] Regarding the main motivating factors behind takeover these transactions can be used for speculative or strategic purposes They are particularly useful when the competitive arena changes rapidly as in periods of rapid innovation and globalization Several studies have been carried out on their performance What is first observed regarding these studies is the vast diversity of the results

The aim of the first part of this book is to present the theoretical environment in which our research is carried out through a survey of theoretical and empirical contributions of takeover bids The first chapter presents the economic and legal framework of takeovers It highlights the importance of this phenomenon to the company and to economic growth in general and describes its legal aspects including the role played by local and

Corporate Takeover Targets Acquisition Probability First Edition Hicham Meghouarcopy ISTE Ltd 2016 Published by ISTE Ltd and John Wiley amp Sons Inc

4 Corporate Takeover Targets

national authorities in the planning and implementation of these transactions The second chapter reviews economic justifications of takeovers and theoretical references on their potential effectiveness as well as the results of empirical research on the motivation and performance of this type of transaction

1

Economic and Legal Framework of Takeover Bids in Europe

Takeover bids are operations that change the ownership of a business usually resulting in a change in the management and strategy of the latter The acquisition of giant companies destabilizes the functioning of targets and frequently affects its employees It undermines the authorities and poses the problem of the role and rights of shareholders Statutory and regulatory measures are put into place by financial market authorities to enable the smooth running of these transactions and to ensure the protection of rights of shareholders involved in this process

The practice of takeover bids has been developed in Europe since the mid-1980s and had increased by the end of this period Thus after relative stability in the mid-1990s a new rebound was observed at the end of this decade The Internet bubble burst in 2000 resulted in a relative stagnation of the phenomenon before being revived over the course of 2003 However mergers between giants can also have consequences in terms of consumer interest because of monopoly Are MampA controlled in Europe What about national regulations and their harmonization

Before giving answers to these questions we present in the first section a general approach to the term ldquotakeoverrdquo In the second section we will present the economic impact of takeover bids in the global economy while stating the importance of the phenomenon in Europe and the United States The third section shall analyze the degree of control of such operations by competition authorities in Europe



11 Corporate takeover general description

The reflections given by Berle and Means in the 1930s [BER 32] focused on the separation of ownership and control in business shareholders entrust the management of the company to managers who do not necessarily have common objectives with those of their constituents Managers can for example take advantage of their position to pay people who are close to them beyond their expertise or to engage in investments enabling them to increase their social position and not to maximize shareholder wealth For companies that are controlled by such managers and in which ownership is dispersed the ldquothe market for corporate controlrdquo is the means of disciplining managers by floating the threat of a market sanction over their authority The market of corporate control provides a protective function to shareholders with regards to the authority of managing bodies

Before defining the term takeover we propose to revisit the concept of takeover within the company Insofar as the control of a company involves the provision and management of its assets by the management team in place a management that does not improve the wealth of the owners creates an agency problem between shareholders and prepares the ground for a possible corporate takeover

111 The control

The historical evolution of the financial structure of companies brings about shareholding which has progressively become the centre of interest within companies The separation of ownership and control reflects a situation where the divergence of interests between owners and managers is problematic

1111 General approach to the term

The development of shareholding has been one of the major advancements of companies since the late nineteenth century The management of affairs and ownership of share capital have become two independent functions the shareholder is the legal owner of the company and has the right to make profits a right to a portion of the assets and a right to vote the control group is the economic owner it participates in strategic decisions and in the allocation of corporate resources

Economic and Legal Framework of Takeover Bids in Europe 7

For [FAM 83] ldquothe control of a company is the right to manage the companyrsquos resources (right to hire dismiss and determine the remuneration of company managers)rdquo It is therefore defined as an organization that enables the management of another personrsquos property as if they were the owner This control function has raised several issues specifically on the added value of the managing team [ADA 76] talks about the inefficiency of companies managed by non-owners ldquoThe directors of this type of company (joint stock companies) being the managers rather of other peoplersquos money than of theirs it cannot be expected that they should watch over it well with the same anxious vigilance as the owners They are led to believe that attention to little things would not be suitable to honor their masters and they pay little or no attention to such Negligence and profusion therefore must always prevail more or less in the management of the affairs of such a companyrdquo This thought was echoed by [BER 32] who showed that the separation of ownership and control creates a situation where the divergence of interests between stakeholders owners and managers is problematic

1112 The separation of ownership and control

The traditional separation of ownership rights identifies three categories usus which is the right to use property fructus which relates to the right to enjoy fruits and abusus which is the right to dispose of the property [PAR 03] Thus exercising power within the company without being its owner poses the issue of ownership and control [BER 32] who interpreted the managerial theory of company (where the owner has fructus and abusus while the manager has the usus right of the company) were the first to study and stress on this distinction regarding the company Their research proved that most often managers at the head of a company pursue their own objectives and not the interests of shareholders The work of [BAU 59 GAL 67] later analyzed the impact of the will of company managers to maximize their usefulness in the companyrsquos investment decisions Improving business performance and shareholdersrsquo profit come after the primary objective of managers which is to increase the company size to justify the demand for a more attractive remuneration

[BER 32] provide a very pragmatic definition of control ldquoto exercise control requires ownership of a majority of the capital in reality due to the constant absence of small shareholders at general meetings and the possibility to gather shares through shares with double voting rights or shares without voting rights and through the successive shareholding


systems it is common that a minority shareholding is sufficient to establish controlrdquo Their main idea is that of a deep separation between the ownership and control and they evoke ownership without control

According to the theory of ownership rights the company is a form of team production organization [ALC 72 JEN 76] extended this concept by taking into account in their analysis all contracts entered between the organization and its environment and not only contracts related to the production function The agency theory completes the economic theory of ownership rights and is considered the primary framework for analysis of the company [JEN 76] ldquoCompany is seen here as a set of contracts which in an imperfect information world manages individual conflicts and contains behaviors by setting up appropriate incentivesrdquo [COH 99] Following the same trend organization is considered as a nexus of contracts Contractual relations (employees suppliers and customers) are the driving force of the company the conflicting goals of shareholders are managed through a set of contractual relations where the starting point is the analysis of agency relationships

Thus the shareholderndashmanager relationship is considered a special case of agency relationship where companies should be run by managers who have no reason to have the same objectives as the capital owners The expected consequence of this divergence of interest is low performance and destruction of shareholder value Takeover is in this case considered as a solution to the agency problem Through this observation one can ascertain that the agency problem is the first justification of the takeover phenomenon

112 The takeover concept

Takeover is a general term which could be defined as the transfer of control of a company of a group of shareholders to another (having a majority of voting rights on the Board of Directors for example) The acquirer pays in cash or securities to purchase the shares or assets of another company When an acquiring company takes over a target company the right to control all operational activities of the target is transferred to the newly elected Board of Directors in the acquiring company this is referred to as takeover


This restructuring process occurs in waves during which companies of various sizes combine according to their field of activity [AND 01] Takeover may also take different forms within MampA including proxy battles and other more specific operations such as delisting [ROS 90] which usually concern buyback operations with high debt leverage (Leverage Buy-Out and Leveraged Buy-In)

The proxy battle is not considered a real ldquotakeoverrdquo it occurs when a group of shareholders try to control a number of seats on the Board of Directors through the appointment of new directors in order to vote at shareholdersrsquo meetings on all strategic decisions Shareholders who do not depend on any group are in this case sought by another group of shareholders ldquothe insurgentsrdquo with the aim of taking control As for delisting operations a small group of investors basically composed of members of the management team in place and a few outside investors proposes to purchase the listed companyrsquos shares which will be delisted and shall no longer be subject to a purchase on the financial market An example includes the withdrawal of a subsidiary by a parent company

113 Techniques and classification of MampA

The MampA are at the confluence of several fields finance law industrial economy strategy and management Their interdisciplinary nature contributes to their diversity [MEI 03] classify MampA on many economic financial strategic and legal criteria

ndash legal framework of the relationship is the equity investment level (100 70 and 51) and control nature of the company purchased (the shareholding structure)

ndash merger objectives a buyerrsquos motivations to purchase another company

ndash the degree of merger before the acquisition transaction (hostile or friendly takeover)

ndash the size sector and degree of internationalization of the operation in order to measure the scope and consequences of the transaction

Thus the choice made by acquiring companies differs according to takeover procedures which do not have the same comparative advantages






Hicham Meghouar







Contents

Introduction ix








14 Conclusion 46
















Contents vii







Conclusion 203

Bibliography 209

Index 221

Introduction








Introduction xi








Introduction xiii










PART 1








1










111 The control































Contents

Introduction ix








14 Conclusion 46
















Contents vii







Conclusion 203

Bibliography 209

Index 221

Introduction








Introduction xi








Introduction xiii










PART 1








1










111 The control








































Contents vii







Conclusion 203

Bibliography 209

Index 221

Introduction








Introduction xi








Introduction xiii










PART 1








1










111 The control

























Introduction








Introduction xi








Introduction xiii










PART 1








1










111 The control





























Introduction xi








Introduction xiii










PART 1








1










111 The control





























Introduction xiii










PART 1








1










111 The control





























PART 1








1










111 The control































1










111 The control





























111 The control

























thumbnail - download.e-bookshelf.de€¦ · financial variables, [gui 76, nav 78] argue that it is...

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