Competition in the acquisition market and acquirers' long‐run performance

• Date: 01 December 2019
• DOI: http://doi.org/10.1111/infi.12339
• Author: Abeyratna Gunasekarage,Syed Shams
• Published date: 01 December 2019

DOI: 10.1111/infi.12339

ORIGINAL ARTICLE

Competition in the acquisition market and

acquirers' long-run performance

Syed Shams

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Abeyratna Gunasekarage

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1

University of Southern Queensland,

Queensland, Australia

2

Monash University, Melbourne,

Australia

Correspondence

Syed Shams, School of Commerce,

University of Southern Queensland,

Toowoomba, Qld 4350, Australia.

Email: syed.shams@usq.edu.au

Abstract

Using a large sample of completed acquisition deals in

Australia, this study examines the influence of competition

in the acquisition market on the long-run operating

performance of acquirers of private target firms in

comparison to that of acquirers of public target firms. We

find that, in contrast to acquirers targeting private firms,

those targeting public firms improve their performance in

the long run through competition-induced bids. However, in

a competitive takeover market, public target acquirers

experience significant declines in performance when

acquiring targets that are labelled high performers.

Additionally, public target acquirers report improved

performance when acquiring a significant ownership stake

in target firms.

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INTRODUCTION

In a competitive takeover market, alternative managerial teams compete for the right to manage

corporate resources (Jensen & Ruback, 1983). A publicly held firm that does not exploit all available

growth prospects may become an attractive target for other companies. This acquisition threat

incentivizes managers to behave in the best interest of shareholders (Jensen & Ruback, 1983; Macey,

2002). This potential takeover threat should discipline managers to acquire targets that generate long-

term benefits for the acquiring firm. Accordingly, one would expect a positive association between

takeover competition and acquirers' long-run performance. The ‘winners’curse' hypothesis proposes

an opposing view that winning bidders are harmed by competition in the acquisition market, as they

ultimately pay more for the target firm than the firm is worth (Giliberto & Varaiya, 1989; Varaiya,

1988). Corporate managers infected by hubris and overconfidence may offer a high premium to a target

firm to deter potential competitors, thereby converting a potentially positive acquisition into a negative

net present value (NPV) decision (Boone & Mulherin, 2008; Fishman, 1988; Roll, 1986). In this

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context, one could expect takeover competition to have a negative influence on the post-acquisition

performance of acquiring firms.

The extantliterature on takeover competition has not consideredthe differences faced by acquirers of

public target firms and acquirersof private target firms. This study proposes that takeover competition

has different effects on acquirers of private and public target firms and that this distinction should be

consideredwhen examining acquirers' long-run performance.According to the concept of the market for

corporate control,in a competitive takeover market, managers search foran attractive public target with

potential growthopportunities in order to improve the long-run value of theirfirm. However, during this

process,acquirers of public targets could easily face acquisitionmarket competition, as such deals attract

substantialmedia attention and press coverage (Starks & Wei, 2004).A public target acquisitionprocess

may also take a long time to complete, particularly in a highly regulated environment such as that in

Australia. This setting allows other potential bidders to gather information on the deal and to offer

competing bids, which could increase the premium paid to public targets. In this situation, the

post-acquisition performance of public target acquirers could deteriorate. Shleifer and Vishny (1988)

argue that managers may overpay for a target if the target's selection is guided by managerial motives.

Acquirers of public target firms are generally large companies, and executives in large firms with

complex business structures have been shown to desire the accumulation of power and prestige

(Agarwal,1981; Jensen, 1986). For each of these reasons, managers of firms that acquirepublic targets in

competitivebids could overpay for those targets,and thus, such acquisitions are negativeNPV decisions.

The acquisition market for private companies is less competitive than that for public companies for

several reasons. Managers of private target firms have less bargaining power, as acquirers often

provide a liquidity service to firm owners who may be looking to sell their businesses (Kaplan &

Zingales, 1995; Moeller, Schlingemann, & Stulz, 2004). With a large pool of private firms available, a

potential bidder is often able to more easily identify a strategic match among private firms in an

intended acquisition without encountering significant competition.

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In addition, private firms are

difficult to value due to the lack of price reference points and the scarcity of publicly available

information (Chang, 1998). For these reasons, takeover competition may have a lesser impact on the

acquisition decisions of acquirers of private target firms and, in turn, on their post-acquisition

performance.

Three other variables may interact with takeover competition: (i) the acquirer's ownership stake in

the target after the acquisition; (ii) the past performance of the target; and (iii) the acquirer's prior

acquisition experience. Australian bidders for public targets can be certain of obtaining 100%

ownership of a target only when they reach the 90% compulsory acquisition threshold. Therefore, an

acquirer would bid for a high equity stake in a public target only if it can accumulate significant

synergies. In contrast, the acquisition of a 100% equity stake in a private firm in one transaction is a

common occurrence. Therefore, we expect that bidders for public targets generate higher synergies

when they acquire higher ownership stakes in targets in a competitive market compared to bidders who

acquire private targets. In a competitive takeover market, bidders are more likely to acquire a target that

has had superior past performance from which they expect to benefit in the future. The interaction

between acquisition market competition and the past performance of targets can therefore be expected

to have a positive influence on acquirers' future performance.

Frequent acquirers gain the skills and experience necessary to implement post-acquisition structural

changes, enabling them to create significant shareholder value from these acquisitions (Harding & Rovit,

2004). In addition, experienced acquirers encounter few post-acquisition integration problems; thus, they

are able to concentrate on improving the merged entity's performance (Lubatkin, 1983). However, Fuller,

Netter, and Stegemoller (2002) contend that bidders fail to conduct negotiations efficiently when they

make frequent acquisitions, which reduces the value of synergies associated with subsequent acquisitions.

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