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Bidders’ Strategic Timing of Acquisition Announcements and the Effects of Payment Method on Target Returns and Competing

Bidders’ Strategic Timing of Acquisition Announcements and the Effects of Payment Method on Target Returns and Competing Bids. Sheng-Syan Chen a , Robin K. Chou b and Yun-Chi Lee c a National Taiwan University b National Chengchi University c National Central University. I. Introduction.

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Bidders’ Strategic Timing of Acquisition Announcements and the Effects of Payment Method on Target Returns and Competing

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  1. Bidders’ Strategic Timing of Acquisition Announcements and theEffects of Payment Method on Target Returns and Competing Bids Sheng-Syan Chena, Robin K. Choub and Yun-Chi Leec aNational Taiwan University bNational Chengchi University cNational Central University

  2. I. Introduction • In M&A, the method of payment has an information signaling effect • Stock returns accrued to target firms are significantly higher in cash payment acquisitions than in stock or mixed payment acquisitions • Huang and Walkling, 1987; Servaes, 1991; Schwert, 1996; Heron and Lie, 2002 • High initial acquisition premium signals a high bidder valuation • Cash payments are used to signal a higher valuation of the target firm so as to preempt any potential competing bidder. • Giammarino and Heinkel (1986), Fishman (1988 and 1989), and Hirshleifer and Png (1989)

  3. I. Introduction • Cash payment transactions are associated with higher acquisition premiums and target shareholders earn higher returns when the acquisition is financed with cash. • Cotter and Zenner, 1994; Officer, 2003 and 2006 • Cash payment offers may be more effective in deterring competition. • Fishman (1989) • Mixed evidence: Martin (1996) documents that cash payments preempt competing bids, but Jennings and Mazzeo (1993), Officer (2003), and Bange and Mazzeo (2004) do not find supporting evidence.

  4. I. Introduction Existing studies do not distinguish between the announcements of acquisitions made during overnight (nontrading) and daytime (trading) hours. Prior literature suggests that it is important to separate these two different types of acquisition announcements. Patell and Wolfson (1982), Woodruff and Senchack (1988), and Gennotte and Trueman (1996) document that managers strategically choose their announcement timing when disclosing corporate news. Announcement timing may affect the degree of information dissemination preceding the first trade in the post-announcement period.

  5. I. Introduction • If the news is announced during the market close, the nontrading period allows the information to be fully transmitted to all market participants. • Both investors and market makers thus have more time to evaluate the news. • The trading procedures during the market opening differ from those employed during normal trading hours. • The opening mechanism ensures that much of the nontrading hour information is impounded into the prices (Greene and Watts, 1996; Cao, Ghysels, and Hatheway, 2000; Masulis and Shivakumar, 2002).

  6. I. Introduction Market reaction is greater for announcements made during nontrading (Greene and Watts, 1996; Masulis and Shivakumar , 2002). Their findings indicate that nontrading-hours announcements tend to have more information content than trading-hours announcements. We argue that bidder managers’ strategic timing of acquisition announcements is important in assessing the effects of payment method on signaling target valuation and deterring competing bids.

  7. II. Hypothesis Development A. The information effect of payment method during different announcement times • Bidders may choose to release their acquisition announcements during the market close to achieve the widest possible information dissemination. • They would choose to release their cash-financed acquisition with high premiums during nontrading periods. • Result in higher stock returns to target shareholders than stock or mixed payment offers. • The timing strategy of a bidder is likely to maximize the signaling effect of the method of payment and to create a unanimous market perception of the bidder’s valuation of the target. • Market participants have more time to obtain, analyze, and evaluate the new information arising from overnight announcements.

  8. II. Hypothesis Development If a bidder decides to make an announcement during normal trading hours, the information asymmetry that exists between informed traders and other market participants cannot be reduced (Francis, Pagach, and Stephan, 1992). Chaotic traders tend to immediately react to daytime disclosures, thereby creating excessive noise during trading hours. The information signaling effect of the payment method will thus be weakened, resulting in greater uncertainty with regard to the market perception of the bidder’s valuation of the target and his/her determination to acquire it.

  9. II. Hypothesis Development B. Preemptive bidding during different announcement times • Cash payment offers tend to lower the likelihood of competition than other offers when the announcements are made during nontrading periods. • Due to higher premiums • Competing bids are negatively related to the probability of bid success (Officer, 2003; Bange and Mazzeo, 2004; Hsieh and Walkling, 2005), • A greater likelihood of completing proposed acquisitions for those overnight announcements that involve all cash payment. • In contrast, the positive effects of the payment method, in terms of deterring potential bidders and completing proposed transactions, are less likely when the announcements are made during normal trading hours.

  10. III. Data and Methodology A. Data and sample description • SDC Worldwide Mergers and Acquisitions database from 1995 to 2004. • NYSE, Amex, and Nasdaq. • The specific timing of the public announcement is identified by searching the Dow Jones News Retrieval Service (DJNRS) database. • Intraday trade and quote data from the Trade and Quote (TAQ) database • Examine the real-time market reaction to acquisition events in the two-hour trading period immediately surrounding the announcements.

  11. III. Data and Methodology 1,230 acquisition announcements. The NYSE, Amex, and Nasdaq are open for trading from 9:30 a.m. to 4:00 p.m. EST. If an acquisition is announced outside this trading period or during holiday periods, this is defined as a nontrading-hours announcement An announcement made during 9:30 a.m. to 4:00 p.m. is referred to as a trading-hours announcement. Table 1 reports the sample distributions and summary statistics for the 1,230 initial acquisition announcements.

  12. III. Data and Methodology B. Methodology B.1. Measurement of acquisition premiums • The acquisition premium employed in this study is defined as follows:

  13. III. Data and Methodology B. Methodology B.2. Measurement for the stock price impact of acquisition announcements • Follow Busse and Green (2002) • Calculate the percentage price change from the prevailing mid-quote data. The real-time share price response to the target firm is measured by the cumulative stock returns starting from one trading hour before to one trading hour after the announcement. • For nontrading-hours announcements, the cumulative returns over a two-hour trading window is adjusted for changes in the overall market.

  14. III. Data and Methodology C. Evidence on different information processes by announcement in days of the week and by exchanges • As previously pointed out, a unanimous market perception of the bidder’s valuation of the target is more likely to achieve, if the time of nontrading periods is longer. • One way of testing this hypothesis is to examine the effects of announcements on weekends versus on weekdays. • The signaling effect should be stronger for announcements made after market close on weekends than on weekdays. • Moreover, it is interesting to see whether the effects of nontrading periods are affected by trading mechanisms.

  15. Panel A: Nontrading-hours cash offers made during weekend have significantly higher mean and median cumulative returns than those made during weekdays. • Panel B: Nontrading-hours announcements are found to have significantly higher mean and median cumulative returns than trading-hours announcements across three exchanges.

  16. IV. Evidence on the Information Effect of the Payment Method for Different Announcement Times A. Acquisition premiums • For overnight announcements, the cash payment dummy are positive and statistically significant. • For daytime announcements, the acquisition premiums are insignificantly related to the cash payment dummy.

  17. B. Target firm stock price reaction • The coefficients for the cash payment dummy are significantly positive at the 1% level for overnight announcements. • They are statistically insignificant for daytime announcements.

  18. C. Target firm stock price reaction net of acquisition premiums • The effect of cash payment offers is correlated with the acquisition premiums. • Overnight cash payment offers still have a marginal effect on the target’s stock price reaction after considering the effect of acquisition premiums on target announcement returns.

  19. IV. Evidence on the Information Effect of the Payment Method for Different Announcement Times The results from Tables 3 to 5 support our hypothesis. For overnight acquisition announcements, cash payment offers are associated with significantly higher acquisition premiums and target returns. For daytime announcements, no significant differences in the acquisition premiums and target returns are found between cash acquisitions and those using other payment methods. Even after considering the effect from acquisition premiums, cash payment offers cause greater market reaction than other payment offers for nontrading-hours announcements, but not for trading-hours announcements.

  20. V. Evidence on Deterring Competition by Cash Payments for Different Announcement Times A. The relationship between the payment method and competition Nontrading-hours: Cash(2.43%) v.s. Stock (4.92%), Diff=-2.49%, 10% significant                    Cash(2.43%) v.s. Mixed (6.69%), Diff=-4.26%, 5% significant Trading-hours: All differences are insignificant. The frequency of multiple competitors is significantly lower for cash payment offers for nontrading-hours announcements, this relationship does not hold for trading-hours announcements.

  21. For overnight announcements, the coefficients on the cash payment dummy are negative and statistically significant at the 5% level. • For daytime announcements, the cash payment dummy has no significant influence on competing bids.

  22. Robustness checks: Larger acquisition premiums deter competition, irrespective announcement timing. • For cash payment offers, overnight announcements are associated with significantly lower frequency of competition in both high and low premium subsamples.

  23. V. Evidence on Deterring Competition by Cash Payments for Different Announcement Times B. The relationship between the method of payment and the success of the bid Nontrading-hours: Cash(87.84%) v.s. Stock (82.51%), Diff=5.33%, 5% significant                     Cash(87.84%) v.s. Mixed (82.27%), Diff=5.57%, 10% significant Trading-hours: All differences are insignificant. For overnight acquisition announcements, deals involving all cash payment are more likely to be successful than deals involving other payment methods. However, this relationship does not hold for daytime acquisition announcements.

  24. For overnight announcements, the coefficients on the cash payment dummy are significantly positive. • For daytime announcements, the cash payment dummy does not have any significant impact on the probability of bid success.

  25. V. Evidence on Deterring Competition by Cash Payments for Different Announcement Times Tables 6 to 8 show that overnight announcements of cash payment offers lower the likelihood of competition. Tables 9 and 10 show that cash payment acquisition offers announced overnight are more likely to result in successful completion. Because overnight cash payment offers are more likely to deter potential competing, the likelihood of bid success is higher for these deals.

  26. VI. Two-stage estimation of cash payments and acquisition premiums for different announcement times Payment methods and premiums are likely to be simultaneously determined. Thus, we need to show that managers strategically announce cash payment offers during nontrading periods, which result in higher premiums. To address the potential endogeneity problem between cash payment offers and acquisition premiums, we follow Officer (2003) and estimate the relation between these two decisions using a two-stage regression approach.

  27. Overnight cash payments have a significantly positive influence on acquisition premiums, while premiums do not significantly affect the probability of cash offers. • Cash payments offers result in higher premiums for target shareholders only when announcements are made during nontrading periods. • Managers strategically announce cash payment offers during the overnight periods as an instrument to signal the high valuation of the target to the market.

  28. VII. Conclusion For overnight announcements, the acquisition premiums and target stock returns are significantly higher when the acquisitions are financed with cash. Furthermore, overnight cash payment offers are more likely to result in a significantly lower frequency of multiple competitors and a significantly higher frequency of bid. However, we do not find such relationship for daytime acquisition announcements. Acquisition announcements signaling the bidder’s high valuation of the target, through a cash offer with large premiums, is more likely to be made during nontrading hours. The acquisition announcement timing of bidders is an important consideration in assessing the effects of the method of payment on signaling target valuation and preempting competing bids.

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