The Role of Independent Expert Reports in Australian M&A Market

• DOI: http://doi.org/10.1111/irfi.12142
• Author: Giang Duc Nguyen
• Published date: 01 June 2018
• Date: 01 June 2018

The Role of Independent Expert

Reports in Australian M&A Market

GIANG DUC NGUYEN

Graduate School of Economics, Waseda University, Tokyo, Japan

ABSTRACT

This paper examines the role of independent expert reports in Australian

M&A market. Using a comprehensive sample of 2888 transactions between

1991 and 2013, I find that a “neither fair nor reasonable”opinion forces

the acquirer to increase the offer premium by 5%, ceteris paribus. The

finding remains robust after controlling for the target’s bargaining power

measured by the residual values of initial premiums that are not explained

by observable firm-deal characteristics. The target that has a weak bargaining

position tends to receive less effect of an unfavorable report. In addition, a

“fair and reasonable”opinion increases the probability of success, while

the unfavorable report does not affect the transaction outcome. I identify

the causal effect of expert opinions by differences-in-differences analysis

using the Duke case decision.

Accepted: 6 June 2017

I. INTRODUCTION

In Australian M&A market, a takeover target is required to prepare an

independent expert report whenever the bidder has 30% or more interests in

the target, or they share a common director. Regulations of related parties are

stated in S640 Corporations Act for takeover offers and S411 Corporations Act

for schemes of arrangement. This requirement is first introduced by the

Companies Acquisition of Shares Act in 1980 and substituted by one of takeover

provisions in the Corporate Law from January 1991.

This paper asks whether independent expert reports can solve the conflict

between the target’s board of directors and its shareholders when the acquirer

has substantial power in the decision-making process of the target, i.e., toehold

or common directors. Expert advice acts as a countervailing influence to negotiate

additional premiums for the target when the offer is not reasonable. Specifically, a

“neither fair nor reasonable”(FNR) opinion will force the bidder to revise its offer

premium. In addition, if expert opinions are effective, the takeover bid’s outcome

is likely to be influenced by the conclusion of independent experts. Particularly, if

a bid is concluded as “fair and reasonable”(FR), it is likely to be completed, while

it will be rejected when it receives an FNR opinion.

I collect a sample of 2888 Australian M&A transactions during the period

1991–2013 from International Mergers database in Thomson SDC Platinum.

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12142

International Review of Finance, 18:2, 2018: pp. 149–167

DOI:10.1111/irfi .12142

© 2017 International Review of Finance Ltd. 2017

Linear regressions reveal a clear and significant relationship between an FNR

opinion and offer revision. Specifically, offer revision increases 5% when the

independent expert rates the transaction as FNR, ceteris paribus. I then regress

initial premium on observable firm-deal characteristics, and the residual values

are considered as a proxy for the bargaining power of the target. I find that the

positive effect of an FNR opinion on offer revision is significantly lower when

the target has weak bargaining power. In addition, a takeover bid is likely to be

completed when it receives a favorable opinion. Particularly, the takeover

likelihood of success increases almost 6% when independent experts rate the

bid as FR, ceteris paribus. Empirical evidence, however, indicates no significant

relation between an FNR opinion and transaction outcome.

My paper contributes to the literature of corporate governance with regards to

the role of independent experts in four aspects. First, it identifies a significant

positive relation between a “fair and reasonable”opinion and the probability

of success. Eddey (1993) groups three opinions: FNR, “not fair but reasonable”,

“fair but not reasonable”into a single dummy indicator, but finds no evidence

supporting the hypothetical relation. In contrast to his method, I separate the

effect of a positive opinion “FR”from the negative “FNR”, and estimate them

in the same equation. In addition, I control for various factors including

firm-deal characteristics that affect the transaction outcome rather than expert

opinions and director recommendation.

Second, the paper uses a different research approach to examine to what

extent an unfavorable comment increases offer revision. Bugeja (2005) uses a

probit regression to relate FNR and the frequency of being revised. His definition

of a dummy indicator that equals 1 if there is offer revision is not satisfactory

because there are both positive and negative revisions.

1

In contrast, I analyze

the value of offer revision rather than the probability of receiving it. I also

employ a more comprehensive sample which covers the period after 2000

compared to previous studies (Eddey 1993; Bugeja 2004; Bugeja 2005; Bugeja

et al. 2005).

Third, I control for the bargaining power of the target measured by the residual

values of initial premiums that are not explained by observable firm-deal charac-

teristics. I then examine whether the target’s bargaining power partially affects

the influence of expert opinions on offer revision. This examination helps us to

understand whether independent expert reports compensate for the bargaining

weakness of the target.

Last, expert opinions are endogenous. My paper attempts to identify the

causal effect of expert opinions on transaction outcome and offer revision using

differences-in-differences analyses. My sample covers the period 1991–2013,

which allows us to use the Duke case decision as an exogenous event that

changes experts’risk attitude, effort and independence.

1 Bugeja (2005) creates a dummy indicator equal to 1 if there is a revision, 0 otherwise, ignoring

the existence of negative revisions. Bugeja (2007), however, defines offer revision dummy as 1

if the bidder increases the offered price.

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