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Challenging the payment effect in bank-financed takeovers

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Abstract

In the context of bank-financed takeovers, I examine the influence of loans and their characteristics on the success of acquisitions. The unique setting of matched syndicated loans allows me to forego the regular assumption in academic literature of cash payment being equal to debt financing. Consequently, I am able to distinguish between the payment effect and the financing effect of an acquisition. My three main findings are: (i) Payment method is just an estimator of the debt proportion in takeovers. Although percentage of cash has significant explanatory power to account for the sources of financing, variation still remains. (ii) Controlling for the real financial structure renders the payment method insignificant. Hence, the well-known outperformance of cash payment around the announcement of a takeover might actually just be an outperformance of debt-financed takeovers. (iii) Bank-financed acquisitions are associated, on average, with positive abnormal returns for acquirers’ stockholders. Higher bank involvements—approximated by greater deal leverage, higher loan costs, longer maturity, lower interest coverage, or no previous banking relationship—are signals for a more successful takeover.

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Notes

  1. Data is retrieved from SDC Platinum in September 2015. The terms acquisition, merger, takeover, and transaction are used interchangeably.

  2. Section 2.2 provides other explanations for differences between stock and cash payment.

  3. I acknowledge that there are several other studies which use the source of financing either with another research focus (for example, Datta and Iskandar-Datta 1995; Dittmar et al. 2012; Vladimirov 2015) or with an indirect approach (for example, Schlingemann 2004; Harford et al. 2009; Elsas et al. 2014).

  4. As the syndicated loans in my sample include all kinds of bank loans (such as revolving credit facilities, term loans, or bridge loans), I use syndicated loans and bank loans synonymously when referring to my study. Moreover, the assumption of no other external source of financing implies that the proportional breakdown for the source of financing is complete and only consists of the matched loan(s) and internal funds. This seems reasonable as the average loan proportion in my sample is 84.00 % as shown in Table 3. Additionally, in a recent study, Colla et al. (2013) find that 85 % of firms have one predominant debt source.

  5. This section outlines theoretical considerations regarding the capital structure and does not consider recent empirical studies on project financing (for example, Harford et al. 2009; Uysal 2011; Byoun et al. 2013; Elsas et al. 2014). For an overview of traditional capital structure theories, see also Harris and Raviv (1991).

  6. Several other theoretical models (for example, Krasker 1986; Noe 1988; Lucas and McDonald 1990) also assume asymmetric information and confirm the negative implications of a new share issue.

  7. See also Narayanan (1988) and Heinkel and Zechner (1990) in this context.

  8. There is extensive empirical evidence that managers might actually engage in value-destroying takeovers under certain circumstances such as weak corporate governance (Masulis et al. 2007), extensive internal financing options (Harford 1999; Malmendier and Tate 2008; Oler 2008), or high free cash flows (Lang et al. 1991; Schlingemann 2004).

  9. Grossman and Hart (1982) suggest that managers have a strong incentive to avoid bankruptcy.

  10. See Sect. 1 for a reference to those studies.

  11. See Sect. 1 for a reference to those studies.

  12. One possible shortcoming of this reasoning is a potential waste of money by managers as part of the free cash flow theory that implies a negative reaction of capital markets to an acquisition announcement paid with cash. Several empirical studies suggest some negative relation between the acquirer’s cash level and post-acquisition returns and so find evidence for the free cash flow theory (for example, Lang et al. 1991; Harford 1999; Schlingemann 2004; Oler 2008). Cheap debt from financial intermediates is quite similar to internal cash and might also be used for empire building purposes.

  13. The information is needed to calculate the proportion of bank financing in the takeover.

  14. This restriction is common in recent studies (for example, Erel et al. 2012; Ferris et al. 2013; Nadolska and Barkema 2013; Bena and Li 2014) and necessary in this study as financial firms might have a systematically different access to debt or their debt has systematically different characteristics. Also, debt utilization in takeovers might be different—a demonstrative example is leveraged buyouts of private equity firms. Financial firms are excluded based on their primary SIC code.

  15. Note that the considered sample of 950 takeovers is distinctly larger than the corresponding samples of Bharadwaj and Shivdasani (2003) as well as Martynova and Renneboog (2009) with 115 observations and 312 (at least partly debt-financed) observations, respectively.

  16. The results are robust regarding this cap as is shown in Regression (3) of Table 8.

  17. The current interest level is approximated by the interest rate on government bonds. The corresponding data is provided by Kenneth R. French and available under http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. I exclude a few cases with base rates other than LIBOR to ensure comparability.

  18. Note that the sample for this variable includes all syndicated loans reported by SDC Platinum and is not restricted to acquisition-related loans.

  19. Note that the total row has more observations than the sum of the respective column because the total row includes observations with an undisclosed method of payment. As Table 3 shows, the payment method is only available for 747 out of 950 takeovers.

  20. Remarkably, the 2.69 % of average cumulative abnormal returns in this sample is close to the results of Bharadwaj and Shivdasani (2003). Their analysis shows an average cumulative abnormal return of \(-0.27\) % for partially bank-financed takeovers (41 out of 115 successful cash tender offers) and 4.00 % for acquisitions entirely financed with bank debt (40 out of 115 successful cash tender offers) over the symmetric 3-day event window. The result is also in line with Martynova and Renneboog (2009) who find an underperformance of internal financing when compared to debt-financed takeovers.

  21. See Sect. 1 for a reference to those studies.

  22. See Sect. 2.2 for a reference to those studies.

  23. As the high correlation between DealLeverage and CashPayment might raise concerns about multicollinearity, I calculate the variance inflation factor in Regression (4) of Table 5 and later, in Regression (2) of Table 6. The maximum (mean) variance inflation factor in Regression (4) of Table 5 is 1.63 (1.31). For Regression (2) of Table 6, the maximum (mean) variance inflation factor is 1.62 (1.24). Therefore, I conclude that my regression results do not face multicollinearity issues.

  24. Factors are provided by Kenneth R. French and available under http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  25. Unreported regressions reveal that an extension from a symmetric 3-day event window to a symmetric 5-day event window has no influence on the conclusions.

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Acknowledgments

I am very grateful to Christoph Kaserer, Josh Lerner, Andrea Schiralli, Friedrich Sommer, an anonymous reviewer, and Thomas Günther for their valuable comments and suggestions.

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  1. Department of Financial Management and Capital Markets, TUM School of Management, Technische Universität München, 80333, Munich, Germany

    Mario Fischer

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Correspondence to Mario Fischer.

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Part of this research was conducted during stays at Harvard University and Yale University. An earlier version of this paper circulated under the title Characteristics of Bank-Financed Takeovers and is also included in my PhD thesis at Technische Universität München.

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Fischer, M. Challenging the payment effect in bank-financed takeovers. J Manag Control 26, 347–376 (2015). https://doi.org/10.1007/s00187-015-0221-2

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