Dependence of the multiplier in the transaction on the magnitude of the buyer multiplier

Размещено на http://www.allbest.ru

Abstract

This paper investigates influence of acquirer valuation on deal premium and deal multiple for two samples of deals with public and private targets conducted in the US in 2010-2019. The findings suggest that acquirer P/BV and P/Value have positive and statistically significant influence on deal premium in a subsample of deals where acquirer stock serves as payment method implying that more highly valued acquirers are ready to pay higher deal premiums since they have access to relatively cheap stock financing and can pay higher price without destroying value for its shareholders. Among other factors influencing deal premium are acquirer value-generating ability and target growth opportunities consistent with prior studies (Jovanovic, B. and Rousseau, P., 2002; Davis and Madura, 2017). With respect to the sample of private targets, we find that, firstly, private targets receive on overage higher deal multiple than public targets since they have higher bargaining power due to their concentrated ownership and absence of less informed outside investors who might pressure company into selling during unfavorable times. Secondly, acquirer valuation has bigger influence on deal multiple of private targets than on deal multiple of public ones. This might be because acquirer valuation serves as a strong reference point for private targets during negotiations, while public targets have their own market multiples to refer to.

Данная работа анализирует влияние рыночной оценки компании-покупателя на премию по сделке и мультипликатор по сделке по двум выборкам сделок с публичными и частными компаниями-целями, совершенными в США в 2010-2019 гг. Результаты данной работы демонстрируют, что мультипликаторы P/BV и P/V компании-покупателя положительно и значимо влияют на премию по сделкам, в которых покупатель расплачивается своими акциями. Это означает, что более высоко оцененные покупатели платят более высокие премии в сделках, так как они имеют доступ к относительно дешевому финансированию и готовы заплатить более высокую цену на компанию-цель, при этом не разрушая акционерную стоимость. Среди других факторов, влияющих на премию по сделке, - способность покупателя генерировать экономическую прибыль и возможности роста компании-целя. Данные результаты согласуются с выводами предыдущих исследований (Jovanovic, B. and Rousseau, P., 2002; Davis and Madura, 2017). Относительно сделок с частными компаниями-целями, мы видим, что, во-первых, мультипликатор по сделкам с частными целями значительно выше мультипликатора по сделкам с публичными целями, так как частные компании-цели имеют более концентрированную структуру капитала и более высокую переговорную силу, чему также способствует отсутствие менее информированных внешних инвесторов, которые могут вынудить компанию стать объектом поглощения во время периодов недооценки. Во-вторых, мультипликатор компании-покупателя имеет более сильное влияние на мультипликатор по сделкам с частными целями, чем на мультипликатор с публичными целями. Это можно происходить из-за того, что в отсутствие рыночной оценки компании-цели, оценка покупателя служит ориентиром в переговорах для компании-цели, в то время как публичные компании-цели имеют собственную рыночную оценку, и оценка покупателя в переговорах играет меньшую роль.

Introduction

After the Financial Crisis 2007-2008 M&A activity in the developed markets has been carried out in the new economic conditions. Some researchers (Ching, 2019) call the period from 2010 till present the seventh merger wave which is characterized by the following features: recovered economic growth, low unemployment rate, loose monetary policy combined with unconventional monetary policy tools like quantitative easing and forward guidance, which leads to increased government and corporate financial leverage, global risk-on and search for yield, expansion of stock multiples at the financial market along with growing corporate profits. Availability of cheap financing made competition for quality M&A targets highly competitive and pushed deal multiples to record high levels with higher share of expected synergies now going to target shareholders. Along with new macroeconomic conditions M&A market faces structural changes such as slow organic growth of companies in the developed markets, technology advancements and the need to add digital capabilities, industry convergence and the rise of ecosystems in face of technological changes, demand from shareholders to optimize costs and demonstrate economies of scale with shareholder activism becoming new normal. Therefore, it is relevant to identify the determinants of deal multiples/deal premiums in this new reality and we are especially interested in determining the influence of acquirer valuation on deal multiple/deal premium. Moreover, consideration paid in M&A affects the rate of return on the investment of target firm shareholders and determines takeover profitability for acquiring firm shareholders. Thus, from the standpoint of investors in such firms it is important to identify what drives the variability in deal multiples/deal premiums.

From the corporate finance standpoint, acquirer multiple should not influence deal premium and should be defined by target specific characteristics and expected synergy effects. However, in practice, it is argued that companies with higher multiples are ready to pay more for a target than companies with lower multiples. Therefore, we are interested in finding out the dependence between acquirer valuation and deal multiples/deal premiums on the data of completed M&A deals.

Such aspects of deal premiums determinants as deal characteristics, target and acquirer financial characteristics have been extensively studied in the existing literature (Walkling and Edmister, 1985; Schwert, 2000; Moeller, 2005; Savor and Lu, 2009; Alexandridis, 2013).Target and acquirer valuation influence on deal premiums has been relatively less studied. We find that while regarding target valuation influence on deal premiums consensus has been reached (Walkling and Edmister, 1985; Comment, Schwert, 1995; Dong et al., 2006; Alexandridis, 2013; Simonyan, 2014; Lai, 2019), influence of bidder valuation on deal premium has been less studied and results of these studies are inconclusive (Dong et al., 2006; Alexandridis, 2013; Simonyan, 2014). We expand existing analysis by breaking down acquirer and target valuation into three components: value-generating potential, growth opportunities and mispricing to see their separate influence on deal premiums and deal multiples, which has not been yet done in the existing literature. We introduce new independent variables such as ROE/CoE to measure value-generating potential and study their influence on deal premiums and deal multiples. Moreover, prevailing number of studies explore the relation between deal premium and different set of target and acquirer characteristics, which means data samples studied contain deals only with public targets. While this is reasonable from the point of view of data availability, prevailing number of M&A deals are carried out with private targets and they are mostly left out of studies due to data scarcity. This research paper attempts to fill this gap by exploring two data samples, first containing M&A deals between public acquirers and public targets, second - deals between public acquirers and private targets. Therefore, the dependent variable is deal premium for the first data sample and deal multiple - for the second one. We aim to explore the relation and provide comparative analysis of results for two data samples.

Main goal of my research is to determine the relationship between acquirer valuation and M&A deal premium (sample with public targets) and acquirer valuation and M&A deal multiple (sample with private targets). To achieve my goal, I must perform the following tasks:

Choose appropriate multiple as acquirer multiple;

Breakdown market value of acquirer into three components: value of assets in place, value of growth opportunities and mispricing;

Identify relationship between acquirer valuation and its components and deal premium for public targets;

Identify relationship between acquirer valuation and its components and deal multiple for private targets;

Carry out comparative analysis by analyzing the merged sample of public and private targets.

Object of my research is completed M&A deals in USA in 2010-2019. Subject of my research is the relationship between acquirer valuation and M&A deal premium (public targets) and acquirer valuation and M&A deal multiple (private targets).

We adopt methodology used by Rhodes-Kropf et al. (2005) and Bekkum (2011) to estimate fundamental value of acquirer and break down market value of acquirer into three components: value of assets in place, value of growth opportunities, mispricing. We use a multivariate OLS regression setting to determine the impact of acquirer valuation and its components on deal premium and deal multiple. We run the regression of deal premium and deal multiple on a set of variables that represent acquirer valuation, a set of control variables such as target valuation, deal characteristics, target and acquirer financial characteristics, macroeconomic and industry characteristics. We use P/BV multiple as acquirer valuation measure consistent with previous studies (Dong et al., 2006; Alexandridis, 2013; Simonyan, 2014) as this multiple regards equity value and is most purely influenced by value-generating ability measured by ROE/CoE, growth expectations and misvaluation. We take M&A deals conducted during the last 10 years since this period is relatively less studied by the scholars and present the period after the Financial crisis of 2007-2008. We look at transactions conducted with targets incorporated in the US, firstly, to ensure comparability of results with the existing research, secondly, because we want to compare results between samples with public and private targets and the US data will ensure higher data availability and more reliable conclusions resulting from bigger sample.

For the first sample we find the relationship between acquirer multiples P/BV and P/Value and deal premium (public targets) to be not statistically significant for the overall sample of deals and subsample of cash deals and significant and positive for stock subsample of deals. We suggest that acquirers with higher valuation multiple are ready to pay higher deal premiums since they have access to relatively cheap stock financing and can pay more for a targets without destroying value for its shareholders as long as they buy targets that are less overvalued. By decomposing acquirer equity value into value of assets in place, growth opportunities and mispricing, we find the relationship between acquirer growth opportunities and deal premium to be not statistically significant, so we do not find support for the hypothesis that acquirers with high growth opportunities are less motivated to engage into M&A activity and pay high premiums for a target. We also find the relationship between acquirer's value-generating potential ROE/CoE and deal premium to be positive and statistically significant which may be explained by the fact that ratio ROE/CoE might also be indicator for managerial efficiency which would imply higher expected synergies and higher deal premium. Positive and significant relationship between target growth opportunities and deal premium is consistent with prior studies (Davis and Madura, 2015; Davis and Madura, 2017) and can be explained by the fact that targets with higher growth opportunities are more desirable by the acquirers, receive on overage more competitive bids and have higher bargaining power which leads to higher deal premiums. multiplier transaction buyer

In the second sample of deals we find that acquirer P/BV influence on deal multiple is positive and significant also for overall sample and both stock and cash deals and mispricing proxy P/Value is significant for overall sample and stock subsample and not significant for cash subsample of deals. Therefore, we find support for the fact that more highly valued acquirers are ready to pay higher deal multiples as they can pay more without diluting shareholder value.

To compare results across two samples we build regression of normalized by industry average deal multiple on a set of variables for merged data of public and private targets. We notice that mean normalized deal multiple for private targets (3.3x) is significantly higher than for public targets (1.65x). Our findings are consistent with prior study of Ang and Kohers (2001) which state that private targets have higher bargaining power due to their concentrated ownership and absence of less informed outside investors who might pressure company into selling during unfavorable times. We also find that acquirer valuation influences deal multiple of private targets more than deal multiple of public targets. This might be explained by the fact that 75% of deals with private targets are carried out by acquirers in the same industry and since a private target does not have market valuation, acquirer valuation and multiples might serve as a reference point during negotiations and private targets with their higher bargaining power can push deal multiple towards acquirer multiple (taking into account premium for control). Public targets, on the other hand, have their own market multiples which serve as stronger reference point in deal negotiations to, therefore, influence of acquirer multiples on deal multiple is lower.

The rest of the paper is organized as follows. Chapter 1 presents literature review of factors affecting deal premium/multiple and hypotheses development section. Chapter 2 presents description of research methodology, data sample and descriptive statistics. Chapter 3 presents the empirical results.

Chapter 1. Literature review and hypotheses development

1.1 Literature review

There are several points of view on what drives M&A activity. Neoclassical direction of research suggests that M&A activity is driven by economic and industry shocks such as deregulation, changes in cost curve, technological innovations (Mitchell and Mulherin, 1996; Jovanovic and Rousseau, 2002; Harford, 2005) that lead to reallocation of assets. Another direction of research suggests that rational managers time acquisitions in according with irrational market/industry wide misvalution that lead to stock market misvaluation of the firms participating in M&A deals (Shleifer and Vishny, 2003; Rhodes-Kropf and Viswanathan, 2004; Dong, 2006; Bekkum,2011). Agency theory (Jensen, 1986) suggests that managers might engage in M&A to increase resources under their control and therefore, their power instead of paying out free cash flows to shareholders. Management hubris theory (Roll, 1986) suggests that overconfident decision makers in the bidding firms tend to overestimate expected synergies from a deal and overpay for a target. These different theories regarding drivers of M&A activity affect different directions of studies with regard to takeover premiums.

Various factors affecting M&A deal premiums have been studied in the academic literature. There are three broad groups of factors that researchers identify in their studies: deal characteristics, target and acquirer characteristics and macroeconomic and industry factors.

1.1.1 Influence of deal characteristics on deal premium

Key factor that affects a premium paid in a M&A deal is expected value of synergy effects (Asquith, 1983; Gupta and Gerchak, 2002; Madura and Ngo, 2008). Synergies are the primary reason for a premium paid and increased combined equity of merging firms. Synergies can result from increased market power, operational efficiency improvement, tax gains (Bradley, Desai, and Kim, 1988; Goergen and Renneboog, 2004; Devos et al., 2009). The upper bound of deal premium is the present value of expected synergies from acquiring a target. Historically, buyers kept around two-thirds of expected synergies (paying one-third as premium to target shareholders) as a reward for risk bearing and responsibility for synergy realization, however, currently buyers are keeping less than half of expected synergies which indicates seller's market and active competition for quality targets.

Number of competitive bids in the auction process has been found to positively affect deal premiums (Walkling and Edmister, 1985; Stulz, 1990; Flanagan and O'Shaughnessy, 2003; Schwert, 2000; Betton, 2009; Aktas, 2010) as higher number of potential buyers and bids received leads to higher seller's bargaining power and phenomenon known as “winner's curse” which means that to win an auction a buyer is encouraged to bid the price close to his estimate of true value of a target which might be overestimated and can lead to overpayment.

Among other characteristics of deal process that positively influence deal premium are, in general, hostility or opposition from a target towards acquirer's intention to buy a company: hostile acquisitions (Schwert, 2000), target defensive tactics and antitakeover measures (Comment, Schwert, 1995) such as poison pills, control share laws and business combination laws that create substantial difficulties to an acquirer that buys a target without prior management approval.

Influence of form of payment (cash versus stock) on deal premium has also been studied. On the one hand, cash payment implies unfavorable tax consequences for a seller and might lead to higher premium to compensate for that fact (Travlos, 1987; Moeller, 2005; Savor and Lu, 2009; Bruslerie, 2013). On the other hand, cash payment removes large portion of uncertainty for a seller caused by buyer stock price fluctuations and deal success and is generally favored by sellers.

Deal type (tender offer versus merger) might also affect deal premium. In a merger, offer is first made to target's board of directors and then shareholders vote to approve the deal. In tender offer potential acquirer proposes a deal directly to target's shareholders bypassing board of directors. Tender offers historically were viewed to be hostile and intended to bypass unwilling board of directors. However, currently the choice between tender offer and merger is defined by priorities of acquirer: completion speed versus negotiation a better price. Tender offers are executed faster than mergers due to less rigorous SEC filing requirements and allow acquirers to avoid high uncertainty regarding a deal and bidder competition. Faster execution comes at a price as effectively it means target agrees to give up its go-shop opportunity for more attractive deal terms, which results in higher deal premium (Schwert, 1996; Officer, 2003; Moeller et al., 2004; Offenberg, 2015).

Type of acquirer also affects takeover premium: strategic (versus financial) acquirer tends to pay higher premiums due to higher expected synergies that strategic acquirer can accomplish (Dittmar, Li, Nain, 2008; Partin, 2012). Public (versus private) acquirer tends to pay higher premium and in particular, public companies with low managerial ownership (Bargeron et al., 2007; Lai, 2019).

Investment bank involvement has been identified as a factor that might influence takeover premium. Both acquirer and target involvement of investment banks leads to higher deal premium. While the influence of target advisors on deal premium seems intuitive, positive influence of acquirer advisors on deal premium seems to be a puzzle considering that acquirers hire investment banks to ultimately pay less for a target. This might be caused by high informational disparity regarding target that makes acquirer hire advisors in the first place and overpay for a target. Misalignment of interest when investment bank fee positively depends on deal size might be another reason (Porrini, 2006).

1.1.2 Influence of target and acquirer characteristics on deal premium

Acquirer ownership of target shares prior to a deal (toehold strategy) negatively influences deal premiums (Walkling and Edmister, 1985; Betton&Eckbo, 2000; Bris, 2002; Bessler, 2015) as prior ownership in a target decreases bidding competition and possibility of target hostile response as well as because a buyer does not need to pay offer premium for shares already acquired.

Target and acquirer industry relatedness has divergent influence on takeover premium. On the one hand, acquisitions in related industries should result in higher expected synergies and lead to higher deal premium (Officer, 2003; D.J. Flanagan and K.C. O'Shaughnessy, 2003). On the other hand, acquirers in unrelated industries might pay higher premium as they are less familiar with their targets which results into higher informational disparity (Ang, Cheng, and Nagel, 2008). As a result, a number of researchers found an insignificant relationship between industry relatedness and takeover premium (Kohers, 2001; Madura and Ngo, 2008).

Target and acquirer financials affect takeover premiums. Target size negatively affects deal premium (Officer, 2003; Moeller, 2004; Alexandridis, 2013) because bigger companies are more efficiently managed which might reduce expected synergies, costs of integration for large deals are higher (Ahern, 2010) and difficulties of integration might result into smaller pool of potential bidders and less intense competition (Gorton et al., 2009). Acquirer size is positively related to deal premium since larger acquirers are more likely to overpay due to presence of managerial hubris in bigger companies and tendency for empire building (Moeller et al., 2004). Relative size of acquirer versus target positively influences deal premium as acquirer that is bigger than target might pay a higher premium as total consideration paid for a target constitutes only a small portion of acquirer's value and has a smaller impact on its share price (Dong et al., 2006; Simonyan, 2014).

Influence of target financial leverage on deal premium has been contradictory. On the one hand, higher target financial leverage leads to lower deal premium (Walkling and Edmister, 1985) since target shareholders' benefits such as free cash flows to equity are limited by both high interest and principal mandatory payments which reduces equity value and required offer premium. On the other hand, targets with higher financial leverage should receive higher premium as the dollar premium is spread over smaller equity base (Billett and Ryngaert,1997; Raad, 2012). Acquirer financial leverage has been found to have a negative influence on deal premium (Dong et al., 2006; Simonyan, 2014). High financial leverage might imply covenants imposed by creditors such as ability to conduct M&A deals, which leads to future capital constraints. All that limits acquirer opportunity to offer high premiums for a target.

Target cash and other liquid assets (% of total assets) are negatively related to deal premium as such assets limit the potential upside from revaluation of non-financial assets for acquirer (Billett Ryngaert, 1997; Schwert, 2000). Acquirer cash and other liquid assets (% of total assets) are positively related to deal premium (Harford, 1999; Vladimirov, 2015). Vladimirov (2015) investigates the effect of financing choice on takeover premium and comes to conclusion that non-cash constrained firms that have access to competitive capital market and have no difficulties attracting external financing will raise debt and pay higher cash premiums compared to equity financing of a deal which is the most expensive source of financing for a bidder and that leads to lower takeover premiums.

Among other target specific characteristics are analyst's target prices which positively influence deal premium. Analyst's target prices serve informational role providing sanity check in acquirer valuation and anchoring role being a relevant reference during deal negotiations (Gerritsen, 2015). Target's innovation output and R&D spending to sales might signal about its growth opportunities and lead to higher premiums (Davis and Madura, 2017; Wu, Chung, 2019). Target's possession of credit rating might lead to lower premiums as presence of credit rating reduces information asymmetry and permits acquirers to pay a fair price for a target. Target stock price's relation to its trailing 52-week high might negatively influence deal premiums (Baker et al., 2012): the further a stock is trading from its recent highs, the more acquirers are ready to pay to acquire a target as 52-week high plays an anchoring role in the acquirer's valuation of a target.

1.1.3 Influence of target and acquirer valuation on deal premium

The focus of this paper is influence of bidder valuation on deal premium, so we address literature on acquirer and target valuation and its influence on premium in more detail.

First group of researchers study how valuation issues affect merger activity. Shleifer and Vishny (2003) argue that overvalued acquirers buy relatively undervalued targets which accept acquirer overvalued stock as target shareholders have relatively short investment horizons and use bidder overvalued stock to cash out. Rhodes-Kropf and Viswanathan (2004) find that market-wide overvaluation increases merger activity and number of stock-financed deals, and targets will be willing to accept overvalued bidder stock as they overestimate expected synergies during such period. They argue that firms in overvalued industries will purchase firms in relatively undervalued industries. Rhodes-Kropf and Viswanathan (2005) find that acquiring firms are priced significantly higher than targets according to P/BV ratio and that is mainly because acquirers are overvalued (firm-specific error). They decompose P/BV ratio into P/Value and Value/Book where P/Value is misvaluation component and Value/Book reflects long-run growth opportunities and find that once controlled for misvaluation acquirers with low growth opportunities measured by P/Value buy target with high growth opportunities. Bekkum (2011) finds that bidders with higher P/BV buy targets with lower P/BV. They decompose market value of firms into value of assets in place, fundamental value of growth opportunities and mispricing to identify what causes disparity between acquirer and target P/BV. They argue that acquirers have highly priced equity that is mostly due to mispricing, and they use it to acquire fundamental growth opportunities that are less overvalued than theirs.

Second group of researchers study the influence of valuation issues on deal premiums. Dong et al. (2006) investigate the relations between acquirer and target valuation and a broad set of deal characteristics such as deal premium, method of payment, acquirer and target announcement period cumulative abnormal returns (CAR), deal type (tender offer versus merger) and deal attitude (hostile versus friendly). Dependent variables measuring acquirer and target valuation are P/BV and P/Value where Value if the fundamental equity value net of misvaluation. Therefore, P/Value ratio is argued to be a better measure of stock misvaluation compared to P/BV which also captures higher growth opportunities, returns, better management, etc. With respect to deal premium researchers find that target P/BV and P/Value are negatively related to bid premium consistent with the fact that undervalued targets receive higher premiums; influence of acquirer P/BV and P/Value on deal premium was found to be not statistically significant for the overall sample of deals and positive and significant at 1% significance level within the stock offer subsample.

Davis and Madura (2017) study influence of growth options, valuation and size of target and acquirer on deal premium in technology industry. They find P/BV value of target and acquirer not to have a statistically significant influence on premiums paid. They also find that acquirers with higher conversion of R&D into growth options pay higher premiums and targets with high R&D intensity get higher premiums in M&A deals in technology industry. Lai (2019) studies difference in deal premiums paid by private equity firms compared to non-PE firms and explores target valuation influence on deal premiums. He finds that PE-firms pay lower premiums compared to non-PE firms due to their financial skills and higher target firm-specific overvaluation and lower target long-run growth potential are associated with lower acquisition premium.

Third group of researchers use acquirer and target valuation as control variables in their studies of different factors affecting deal premiums. Comment, Schwert (1995) find statistically significant negative relation between target P/BV value and P/Earnings and takeover premiums. Alexandridis (2013) finds statistically significant negative relation between target P/BV value and takeover premiums and statistically significant positive relation between acquirer P/BV value and takeover premiums. Simonyan (2014) finds statistically significant negative relation between both target and acquirer P/BV value (adjusted by industry median value) and takeover premiums. Jory (2016) finds no statistically significant relation between both target and acquirer P/BV value (adjusted by industry median value) and deal premium.

Overall, we find that target valuation influence on deal premiums has been extensively studied and consensus has been reached, whereas influence of bidder valuation and its components (returns, growth opportunities, misvaluation) on deal premium has been less studied and results of these studies are inconclusive. Therefore, our study contributes to existing literature by exploring the aspects of bidder valuation on deal premiums and expanding analysis by studying private targets.

1.1.4 Influence of macroeconomic and industry factors on deal premium

Among most common macroeconomic factors that influence deal premiums are financial market sentiment, GDP growth, capital liquidity, investment climate in the target country. On the one hand, when financial market sentiment is positive and market valuations are high, deal premiums tend to be lower since such periods are associated with increased M&A activity and potential del premium gets built in the share prices of target firms (Bouwman et al., 2009; Alexandridis, 2013; Simonyan, 2014). On the other hand, merger premiums are higher when the economy is growing and has more capital liquidity which facilitates merger activity and increases expected growth opportunities (Madura, 2012). According to Harford (2005), credit conditions are relatively loose during the expansion stage of a cycle, which can lead to increased competition for a given number of targets and increase deal premium. So, the influence of financial market sentiment on deal premium remains to be found out empirically. Investment environment in the target's country might lead to higher takeover premium (Rossi and Volpin, 2004; Maung, 2019) as stronger legal and regulatory standards, investor rights protection, and corporate transparency in the target firm's country contribute to lower cost or risk, higher valuations and higher premiums.

Industry factors affecting deal premiums are industry growth, industry concentration and presence of excess capacities, industry R&D intensity and target industry performance. Since higher industry growth contributes to target's expected growth prospects and increases demand for the targets, it will lead to higher deal premiums in the industry (Rhoades, 1987; Madura, 2012). Industry R&D intensity has served as proxy for industry growth opportunities and is positively related to deal premium (Madura, 2012). Influence of industry concentration on deal premiums has mixed evidence. On the one hand, higher industry concentration makes targets scarcer and increases bidder competition which leads to higher premiums (Madura, 2012). On the other hand, higher industry concentration might signal of less excess capacities and less benefits associated with industry consolidated which might lead to lower takeover premium (Simonyan, 2014). Target industry performance measured by ROE is positively related to value created by the company and, respectively, deal premiums (Madura, 2012).

1.1.5 Private targets and deal multiple

Prevailing number of studies explore the relation between deal premium and different set of target and acquirer characteristics, which means data samples studied contain deals only with public targets. While this is reasonable from the point of view of data availability and opportunity to include set of control variables to check the robustness of research, prevailing number of M&A deals are carried out with private targets and they are mostly left out of studies due to more scarce data available. We are interested in deals with private targets not only because of higher volume of transactions with private targets, but also because there are several distinct features about private targets which can lead to different empirical results. Firstly, private targets usually have more concentrated ownership than public targets which results into smaller internal agency conflict and higher bargaining power (Ang and Kohers, 2001). Secondly, private targets are not pressured to sell by less informed outside investors who might vote for a sale during unfavorable times when target stock is undervalued, therefore, they have better control over deal timing and can wait for a better offer. Therefore, we expect private targets to receive higher deal premium compared to public targets. Ang and Kohers (2001) study takeover premium in deals with private targets using deal multiple as dependent variable (offer price divided by target book value of equity) and find that, among others, bidder Tobin's q does not have significant explanatory power of deal multiple in acquisition of privately held firms; factors such as acquirer size, target industry belonging to high-tech industries and mixed form of payment are found to have positive and statistically significant influence on deal multiple for private targets.

Capron and Shen (2007) study private targets participance in the M&A market and find that while lack of information on private target might cause valuation errors, it can at the same time create more value-enhancing opportunities from using private information whereas public market on public targets itself serve as valuation and information-processing mechanism for potential acquirers and limits potential upside from an acquisition. Moreover, they find that due to less informational transparency acquirers prefer buying private targets in the same or related industry and public targets when entering new industries. Other specific features of deals with private targets include mean positive abnormal returns for acquirer compared with negative abnormal returns for acquirers of public targets and higher use of contingent earn outs which represent optional payouts to target shareholders upon achievement of certain performance objectives (Chang, 1998; Datar, Frankel and Wolfson, 2001).

This research paper attempts to fill the existing gap in research by exploring two data samples, first containing M&A deals between public acquirers and public targets, second - deals between public acquirers and private targets.

Summary of factors influencing deal premium that have been studied in existing literature is provided in Table 25 -Table 28 in the Appendix to Chapter 1.

Hypotheses development

The hypotheses tested in this paper are derived from variables that can be broken down in two groups: 1) valuation, value-creating potential, growth opportunities, mispricing of acquirer; 2) deal, target and acquirer, macroeconomic and industry characteristics that will serve as control variables.

We use Price/Book ratio as valuation metrics consistent with prior studies due to the ability to include wider range of observations compared with other metrics like Price/Earnings and EV/EBITDA. According to Fama and French (1992), book/market ratio serves as a useful determinant in explaining stock returns. Moreover, Price/Book multiple regards equity value and is most purely influenced by value-generating ability measured by ROE/CoE, growth expectations and misvaluation.

Hypotheses 1-5 are aimed at comparing these characteristics between acquirers and targets, hypotheses 7-10 explore the relationship between acquirer valuation, growth, value-creating potential and deal premium and deal multiple and hypotheses 6 and 11 compare results between public and private targets.

Dependent variable for the second sample will be normalized deal multiple rather than deal premium. Therefore, hypotheses 7-10 (b) explore the relation between acquirer valuation, growth, value-creating potential and normalized deal multiple for private targets.

Therefore, in this research paper we derive the following hypotheses:

H1: Buyers with higher Price/Book buy targets with lower Price/Book

We hypothesize that buyers with higher Price/Book buy targets with lower Price/Book for several reasons: firstly, buyers might be more overvalued than the targets and be willing to use their overvalued stock (cheap financing) to acquire less overvalued targets. This means, that difference between Price/Book of buyers and targets might be more pronounced for stock deals than for cash ones. Secondly, buyers are usually bigger and more effectively managed which implies a premium over smaller and less efficient targets. This hypothesis is consistent with findings of Rhodes-Kropf and Viswanathan (2005), Dong et al. (2006) and Bekkum (2011).

H2: In deals where acquirer P/BV is higher than target P/BV, deal premium is higher than in deals where relationship is opposite

We hypothesize that in deals where acquirer P/BV is higher than target P/BV, acquirer is ready to pay higher premium without destroying shareholder value and at the same time acquirer valuation might serve as a reference point during negotiations for a target who might demand higher premium.

H3: Buyer with higher Price-to-Value buy targets with lower Price-to-Value

There is substantial support for Price/Value being a better indicator of misvaluation than Price/Book: several studies find that Price/Value predict future returns more accurately than Price/Book (Frankel and Lee, 1998; Ali et al., 2003). We hypothesize that more overvalued buyers acquire less overvalued targets, therefore creating value for acquirer shareholders. We also expect that the effect will be more significant for stock deals than for cash ones. This hypothesis is consistent with findings of Rhodes-Kropf and Viswanathan (2005), Dong et al. (2006), Bekkum (2011).

H4: Buyers with less growth opportunities buy targets with more growth opportunities

Owen and Yawson (2010) find the positive relation between likelihood to become a bidder and firm life cycle, stating that mature firms have more willingness and ability to engage in M&A deals. We hypothesize that buyers being bigger find themselves on a different firm life cycle stage than targets, they are on average more mature and profitable than targets (Miller and Friesen 1984; Lester, Parnell and Carraher, 2003), however, excess returns may start to decline, so companies might look for growth options and potential excess returns externally by acquiring smaller targets that are still at growth stage. Davis and Madura (2017) find that target firms have higher R&D intensity than acquiring firms, however, acquiring firms have better conversion of R&D into growth options as measured by growth options divided by R&D intensity. Bekkum (2011) finds that acquirers and targets fundamental growth opportunities do not differ significantly, so exchange of value takes place, where acquirers exchange their overvalued stock for less overvalued stock of the target with similar growth opportunities.

H5: Buyers with higher value-creating potential (ROE/CoE) buy targets with lower value-creating potential (ROE/CoE)

On the one hand, as acquirers find themselves on average in the mature phase, they have size advantages over its competitors, experience economies of scale and high bargaining power, maximize their efficiency through increased knowledge of operations (Wernerfelt, 1985). Selling and Stickney (1989) find that mature firms face intensifying competition and emphasize on cost reduction and better capacity utilization. Anthony and Ramesh (1992) find that EPS and ROA are highest during maturity stage. On the other hand, companies that have high share of retained earnings in their capital have a high propensity to make acquisitions (Owen and Yawson, 2010). As retained earnings grow and equity increases, it might become difficult to maintain same level of high ROE, so ROE tends to decrease over time as denominator increases. Still, we hypothesize that acquirers on average will create more value as defined by ROE/CoE ratio than targets that are younger, smaller and less efficient and might be unprofitable during the growth stage where the primary goal is to capture the market share.

H6: Private targets receive on overage higher deal multiple than public targets

Since private targets usually have more concentrated ownership than public targets and smaller internal agency conflict and furthermore, they are not pressured to sell by less informed outside investors they have better control over deal timing and terms and therefore, higher bargaining power. Therefore, we expect private targets to receive higher deal premium (calculated as normalized by industry average deal multiple) compared to public targets.

H7 (a): Higher buyer P/BV leads to higher deal premium (public acquirers and public targets)

H7 (b): Higher buyer P/BV leads to higher deal multiple (public acquirers and private targets)

We hypothesize that buyers with higher P/BV are ready to pay higher deal premiums and deal multiples since they have access to relatively cheap stock financing and can pay more without destroying value for its shareholders if they buy targets that are less overvalued. Also, higher P/BV might result from acquirer higher efficiency and better management that can realize higher value of synergies and contributing more to the efficiency of the target firm which implies readiness to pay higher deal premium. The effect might be pronounced for stock deals than for cash deals. There is no consensus in the literature on the relation between buyer P/BV and deal premium. Dong et al. (2006) and Davis and Madura (2017) find the relation to be not statistically significant, however, Dong et al. (2006) finds that this relation becomes significant at the 1% level within the stock offer subsample. Alexandridis (2013) find statistically significant positive relation between buyer P/BV and deal premium, while Simonyan (2014) find statistically significant negative relation between buyer P/BV and deal premium, though not economically significant (-0,000).

We will use target P/BV as a control variable in this regression. We expect the coefficient by this variable to be negative and significant consistent with numerous previous studies (Walkling and Edmister, 1985; Comment, Schwert, 1995; Dong et al., 2006; Alexandridis, 2013; Simonyan, 2014; Lai, 2019). On the one hand, more undervalued targets have incentive to negotiate more actively in takeover bids to ensure a premium and, on the other hand, acquirers have incentive to offer higher premium to ensure bid success, which results in higher deal premium for more undervalued targets.

H8 (a): Higher buyer growth opportunities lead to lower deal premium (public acquirers and public targets)

H8 (b): Higher buyer growth opportunities lead to lower deal multiple (public acquirers and private targets)

Davis and Madura (2017) find that acquirers in high tech industry which have higher conversion of R&D into growth options as measured by growth options/sum of R&D expenses for the last three years, pay higher premiums. That means companies that convert R&D expenses into growth options more efficiently are ready to pay more for the targets. This can be explained by higher value of expected synergies that such companies can realize in a deal. However, for subsample of the largest targets conversion of R&D into growth options has significant negative influence on deal premium. They suggest that negative sign comes from acquirers with negative and low conversion of R&D into growth options which struggle to grow with internal efforts and are ready to pay more for targets. Kim (2011) finds that firms with low organic growth in the banking industry might become desperate for growth and pay higher premiums in acquisitions. We hypothesize that if acquirer has high growth opportunities, it will have less incentives to buy growth opportunities externally and overpay for this growth and therefore, have higher bargaining power which will lead to lower deal premium and deal multiple.

We will use target growth opportunities as a control variable in this regression. We expect the coefficient by this variable to be positive and significant consistent with prior studies. Long-term growth has been identified as an important acquisition motive (Harding and Rovit, 2004; Schweizer, 2005). Davis and Madura (2015) find that growth options significantly influence the likelihood that firms are acquired. Davis and Madura (2017) find that targets in high tech industry with higher R&D intensity as measured by R&D/Sales that can approximate growth opportunities receive on overage higher premiums in M&A deals. That is why we hypothesize that targets with higher growth opportunities are more desirable by the acquirers, receive on overage more competitive bids and have higher bargaining power which leads to higher deal premiums.

H9 (a): Higher buyer P/V (mispricing) leads to higher deal premium (public acquirers and public targets)

H9 (b): Higher buyer P/V (mispricing) leads to higher deal multiple (public acquirers and private targets)

Dong et al. (2006) finds acquirer P/V influence on deal premium to be not statistically significant for the overall sample of deals and significant at the 1% level within the stock offer subsample. He also finds that acquirers with higher P/V (more overvalued) are more likely to pay with stock. We hypothesize that overvalued acquirers are ready to pay higher premiums as they have access to relatively cheap stock financing and can pay more without destroying value for its shareholders if they buy targets that are less overvalued. We also expect the effect to be pronounced for stock deals.

We use target P/V as a control variable in this regression. We expect the coefficient by this variable to be negative and significant consistent with Dong et al. (2006) who finds target P/V to have statistically significant negative influence on bid premium and positive influence on the probability of the acquirer to pay with stock. That is why we hypothesize that more overvalued targets have less potential upside in the M&A valuation and acquirers are less likely to offer high premiums if they believe that target is overvalued.

H10 (a): Higher buyer ROE/CoE leads to lower deal premium (public acquirers and public targets)

H10 (b): Higher buyer ROE/CoE leads to lower deal multiple (public acquirers and private targets)

Davis and Madura (2017) use acquirer ROE as one of control variables and find statistically significant negative influence on deal premium. We hypothesize that if acquirer generates excess returns as measured by ROE/CoE than its shareholders might have less incentives to engage in M&A and overpay for them. On the other hand, ROE/CoE might also be indicator for managerial efficiency which would imply higher expected synergies and higher deal premium and deal multiple.

Target ROE/CoE serve as control variables (among other) in this regression. Almeida, Campello and Hackbarth (2011) find that targets in financial distress might be acquired by more profitable acquirers even without straightforward synergies. Khatami, Marchica and Mura (2015) find that financially distressed targets receive higher deal premiums. They suggest that targets will receive access to capital and resources in acquisition that result into improved synergies for the acquirers. Lai (2019) also finds statistically significant negative influence of target ROA on deal premium. Madura (2012) finds influence of target industry ROE not to have statistically significant influence on deal premiums. Despite the evidence of negative influence of target ROE on deal premium, we hypothesize that targets generating excess returns should get higher premiums in M&A deals compared to targets who do not do so.

H11: Influence of acquirer P/BV, P/Value, growth opportunities and ROE/CoE on deal multiple is the same for deals with public and private targets

Kohers (2001) investigates the influence of acquirer Tobin's q as measure of firm valuation which indicates firm growth opportunities and firm performance, on deal multiple for a sample of private targets and does not find Tobin's q to be statistically significant. Dong et al. (2006) does not find acquirer P/BV and P/Value to have significant explanatory power of deal premium in acquisitions with public targets within overall sample of deals. However, no prior studies carry out direct comparative analysis of factors affecting deal multiple for private and public targets, so we hypothesize that influence of acquirer valuation and its components on deal multiple should be the same for deals with public and private targets.

Summary of hypotheses tested in this paper and empirical results is presented in Table 29 in the Appendix to Chapter 1.

Chapter 2. Methodology and data overview

2.1 Methodology