A signaling theory of acquisition premiums: evidence from IPO targets

Jeffrey Reuer Tony W. Tong

Presented by Carla Fernández-Corrales, Fall 2014

Academy of Management Journal (2012)

Purdue University University of Colorado Boulder

Cheng-Wei WuUniversity of Colorado, now at

University of Hong Kong

Motivation

• Information asymmetries during acquisition of IPO firms

• To join literatures on IPOs and acquisition premiums with signaling theory

• Research question: What particular signals about IPO firms will have an impact on the premiums they obtain when selling their companies?

Background theory

• Acquisition premiums determinants:• Value creation potential • Managerial biases and organizational learning• Agency costs

• Signaling theory: implications of asymmetric information and adverse selection. Spence (1974) seminal work on hiring.

Hypotheses

• Hypothesis 1. The acquisition premium received by an IPO target is positively related to the reputation of its investment bank.

• Hypothesis 2. The acquisition premium received by IPO targets is greater for targets backed by prominent VCs.

• Hypothesis 3. The acquisition premium received by an IPO target is positively related to the number of alliances it has formed with prominent partners.

Hypotheses• Hypothesis 4a. Affiliations with reputable investment banks

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

• Hypothesis 4b. Affiliations with prominent VCs are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in industries with different knowledge requirements.

• Hypothesis 4c. Alliances with prominent partners are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in industries with different knowledge requirements.

Hypotheses

• Hypothesis 5b. Affiliations with prominent VCs are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in foreign countries.

• Hypothesis 5c. Alliances with prominent partners are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in foreign countries.

Data

• SDC database, M&A data, Compustat and CRSP

• Newly public firms (1991-2001), excluding REITs, mutual funds, unit offerings, spin-offs, LBOs and financial services sector.

• IPO firms that where acquired within five years of going public

• Deals with a transaction value greater than $50 million

• 308 deals involving 263 acquires

Measures

• Dependent variable

• Acquisition premium: percentage difference between a purchase price and IPO target’s value four weeks prior the announcement of the acquisition.

Measures

• Independent variables

• Investment bank reputation: ranking index by Carter and Manaster (1990)

• Venture capitalist prominence: dummy variable. 1 if the number of IPOs backed by the VC where above the median, 0 otherwise

Measures

• Independent variables• Prominent alliance partners: log (1 + number of

prominent alliance partners)

• G

• Cross border: dummy variable, 1 if acquirer was a foreign, 0 otherwise.

Proportion of employees in

occupation k in an acquirer’s industry

Proportion of employees in

occupation k in an target’s industry

Measures• Controls• Firm size• Firm Tobin’s q• Underpricing• Analysis coverage• Time since IPO• Managerial ownership• Inside directors• Blockholdings

• Acquire M&A experience• Deal size• Tender offer• Stock offer• Competing bidders• Percentage acquired• High tech industry

Results

Results

Results

Supplementary analysis

• Sample selection bias

• Endogeneity

• Decay of signals

• Alternative measures of signals and acquisition premiums

Discussion

• Target firms’ signals can positively affect the acquisition premiums they receive

• Interorganizational relationships with prominent organizations confer benefits

• These benefits are greater when IPO firms sell their companies in different industries.