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Real Estate Mergers: Corporate Control & Shareholder Wealth

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Abstract

This study contributes new evidence to distinguish why mergers occur in the real estate industry by quantifying the combined firm return for nearly three decades of real estate mergers. As a measure of the overall change in shareholder wealth created by a merger, the combined firm return plays a key role in differentiating competing merger theories and is quantified for the real estate industry for the first time. Findings from this study are consistent with the notion that real estate mergers occur because firms with superior management acquire other firms that possess unexploited opportunities to cut costs and increase earnings (the inefficient management hypothesis). Furthermore, the results indicate that real estate mergers generally create wealth, as shareholders at best realize modest gains and at worst break even.

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Notes

  1. See Allen & Sirmans (1987) for a detailed discussion of these requirements.

  2. This study is no exception: only 1 out of the 94 mergers in this paper can be classified as a hostile takeover.

  3. The bidder purchases the target, and these firms are subsequently combined together as a single entity known as the combined firm.

  4. This approach is validated by the efficient market hypothesis (Fama 1970).

  5. It should be noted that Eckbo et al. (1990) conclude that the market reaction to any voluntary corporate announcement (such as mergers) actually captures only the surprise content of the announcement because management controls the type, timing, and magnitude of the event. Their study concludes that managers of bidders (but not targets) seem to possess valuable private information in regards to mergers.

  6. See Hawawini & Swary (1990), Houston & Ryngaert (1994), Becher (2000) and Andrade, et al. (2001) for examples of non-real estate studies that calculate the combined firm return.

  7. In event studies, this is referred to as the event window.

  8. Although not directly tested in this paper, the tax motivation merger hypothesis as presented in Li et al. (2001), which predicts a positive CAR for bidders, is inconsistent with the central results of this paper.

  9. As pointed out in Becher (2000), this hypothesis is associated with Roll’s hubris hypothesis (1986), which states that managers systematically overestimate the benefits of an acquisition, because they think they are better at managing new acquisitions than their counterparts in other companies.

  10. An event window such as (−1,+1) is defined by the number of days before the announcement as a negative number (in this case one day before) followed by the number of days after the announcement as a positive number (in this case one day after). The merger announcement date is denoted as day 0.

  11. Denotes that both the target and bidder firms are publicly traded.

  12. It should be noted that the table does not include Li et al. (2001), because the study did not breakout their sample into public to public mergers. However, that study found overall bidder returns to be 1.44% for the (−1,+1) window.

  13. Such as the 30% to 50% found by Jensen (1988), the 18% to 32% found by the numerous studies summarized in the appendix of Mulherin & Boone (2000), and the 16% average from a study of 4,256 mergers by Andrade et al. (2001).

  14. Equity REITs invest in real estate properties or companies, mortgage REITs invest in mortgage assets, and hybrid REITs invest in a mix of these two types of assets.

  15. Figures obtained from various tables provided by NAREIT, available at http://www.reit.com/IndustryDataPerformance/tabid/76/Default.aspx

  16. See Eichholtz & Kok (2008) for a detailed study of target firm pre-merger performance.

  17. Lease et al. (1991) note that a buy-sell order imbalance shift can cause event day returns to be biased.

  18. Subsequently, out of concerns that this day was too far from the actual announcement date, the combined CARs were recalculated using the first day of each event window. However, no significant differences in the results were noted.

  19. Mitchell et al. (2004) note that “the common conclusion that mergers destroy value is not convincing after considering the behavior of professional investors around the announcements of these events.”

  20. It should be noted, however, that recent research by Campbell et al. (2009b) finds evidence that merging REIT bidders significantly underperform non-merging REITs over a period of five years following the merger.

  21. The explanatory variables in the cross-sectional analysis have been screened for potential multicollinearity by using correlation tables, condition indices and variance inflation factors (VIF). Any variables that exhibited correlations greater than .60 (in absolute value), condition index values of greater than 30, or a VIF greater than 10 were dropped from the model. Multicollinearity was found to be especially pronounced in return and efficiency related variables (e.g.: ROA, ROE, and Operating Exp Ratio) and for sub-samples (due to small sample sizes).

  22. While this finding is consistent with prior literature, recall that Relative size is defined in this paper as the ratio of target market value to bidder market value. In studies that define this variable in the inverse manner, the coefficient is positive.

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Acknowledgements

I am especially grateful to Harold Mulherin (Department of Finance, University of Georgia), James B. Kau (Department of Insurance, Legal Studies, and Real Estate, University of Georgia) and an anonymous referee for their valuable comments and suggestions. Any remaining errors are my own.

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  1. Department of Insurance, Legal Studies, & Real Estate, Terry College of Business, University of Georgia, 286 Brooks Hall, Athens, GA, 30602-6255, USA

    Kiplan S. Womack

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Womack, K.S. Real Estate Mergers: Corporate Control & Shareholder Wealth. J Real Estate Finan Econ 44, 446–471 (2012). https://doi.org/10.1007/s11146-010-9251-6

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