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Evaluation of IPO-firm takeovers: an event study

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Abstract

The acquisition of innovative and entrepreneurial firms has become an important issue in gaining competition advantages. While there exists a fruitful and promising literature analyzing M&A activities in general, there is only limited evidence available on the acquisitions of high-tech start-ups and entrepreneurial firms by larger incumbents. This study addresses this issue and focuses on acquisitions targeted at public IPO firms. Our main interest is whether and how the stock market evaluates the specific human capital of the CEO and founder of the entrepreneurial target firm. While in general target firms assets are positively evaluated by market participants, this should not necessarily hold for assets owned by the founder of the target firm. The findings clearly show that stock market participants positively evaluate target firms intangible assets, as measured by patents. But that also the opposite holds if the assets are under control of the founder CEO. Our results thus strongly support conclusions derived from property rights or incomplete contract theory on joined ownership of assets and performance. We conclude that the acquirer’s post-acquisition performance strongly depends on the continued access to the targets’ specific intangible assets, which is not necessarily the case for the founder’s specific human capital.

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Notes

  1. Past research has identified several firm characteristics to have important influences on abnormal returns earned by bidder and target shareholders, such as, for example, past stock market valuation as evident by book-to-market ratios (Fama and French 1993; Rau and Vermaelen 1998), the decision between tender offers and mergers (Jensen and Ruback 1983), or the relative sizes of bidders and targets (Agrawal et al. 1992).

  2. Increasing the time period from 1995 until 2010 does not increase the number of observations. Starting in 1990 (or before) will only marginally increase the dataset but lead to other adverse effects biasing the results.

  3. The analysis of patent ownership shows that the owner CEO is almost the sole owner of the patent. However, if they are jointly owned, then the separation or availability of access the patent knowledge for its use may remain unclear. We are grateful to an anonymous referee for this point.

  4. The number of entrepreneurial firms is rather low—Germany is by far no IPO country. Increasing the time period to 20 years, from 1992 until 2012, will not increase the number of entrepreneurial firms as defined above.

  5. We additionally checked for robustness of our results with abnormal returns derived from the market-adjusted model. See our discussion of drawbacks and robustness checks below for details.

  6. With the exception of one target firm which was publicly quoted for 160 trading days only prior to the announcement of its takeover.

  7. Table 4, which has been relegated to the “Appendix,” exhibits average as well as cumulative average residuals for the full samples of bidders and targets across all the individual days of our event windows.

  8. We additionally checked for robustness of our results with the specific t test proposed in MacKinlay (1997).

  9. Assume an investor buys a portfolio of the 12 entrepreneurial targets 10 days before the official takeover announcement occurs and sell the shares exactly 10 days after the announcement. Then, s/he would receive a return of 16.158 % within this 20-day buy-and-hold period compared to an investment in the underlying benchmark, the C-DAX. Investing in the 9 bidder companies within the same time window and selling then after 20 days will not lead to an abnormal return compared to the benchmark. Although this investment could lead to a loss of 4.407 % compared to the benchmark, this difference is not statistically different from zero.

  10. For a detailed discussion as well as comparative studies of several of these tests, thorough discussion of potential issues in test reliabilities and powers, and influences of sample sizes and volatilities of sampled securities, see, e.g., Patell (1976), Brown and Warner (1980, 1985), Armitage (1995), MacKinlay (1997), McWilliams and Siegel (1987), and Kothari and Warner (2007).

  11. Corresponding results are not reported in detail in this paper, but are available on request.

  12. The market-adjusted model assumes an individual firm’s stock on average to earn the return on the market portfolio for any given point in time. See, for example, Brown and Warner (1980, 1985) for details. Results are of course available on request.

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Authors and Affiliations

  1. University of Augsburg, Universitaetsstr. 16, 86159, Augsburg, Germany

    Erik E. Lehmann

  2. Leibniz University Hannover, Königsworther Platz 1, 30167, Hannover, Germany

    Manuel T. Schwerdtfeger

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  1. Erik E. Lehmann
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Correspondence to Manuel T. Schwerdtfeger.

Appendix

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Table 4 Average and cumulative average residuals for bidders and targets
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Lehmann, E.E., Schwerdtfeger, M.T. Evaluation of IPO-firm takeovers: an event study. Small Bus Econ 47, 921–938 (2016). https://doi.org/10.1007/s11187-016-9740-y

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