Why do firms repurcha stock to acquire another firmsacrificed
Robin S. Wilber
Published online: 3 August 2007
Abstract:This study investigates firms that repurcha their stock to finance an acquisition. Since rearch shows that cash-financed acquisitions perform better than stock financed acquisitions, why do firms that have available cash initiate the extra transactional step. I find the firms are well compensated for their efforts, especially in the long run. On average, the firms have negative abnormal returns prior to their repurcha announcements and thus may choo repurchasing to signal undervaluation. Furthermore, the stock acquisition step allows the firms to share risk, counteract the negative effects of dilution,
and enjoy a tax advantage for their efforts.
Keywords: Acquisitions Method of payment Repurchas
1 Introduction
This study investigates the enigmatic decision by a firm to take on the extra transactional step to repurcha its shares with cash and then u tho shares to finance an acquisition, rather than u the cash to directly finance the acquisition. It would em to be far easier, if a firm has the cash available, to acquire the target firm with the cash. This is even more of an enigma when it is well known that cash offerings perform better than stock offerings.
I find that firms that in a sample of 96 firms that repurcha shares to finance an acquisition from 1995–2002 are well compensated for their efforts. The most compelling argument as to why firms would take on the extra financing step is to achieve the best of both the stock-financing acquisitions and cash-financing acquisitions. The firms experience risk sharing with the target firms, counteract the negative effects of dilution by repurchasing shares first, and enjoy a tax advantage for their efforts. This is important to firms that want to u stock financing but are concerned about the historical negative returns of firms acquiring another firm with stock. Also this is an important rearch topic that has not been addresd.
The organization of this paper proceeds as follows. The first part discuss merger and acquisition literature. The cond ction develops the hypothes and methodology. The third ction reports the empirical findings and the last ction summarizes and concludes.
3 Prediction, data and methodology
3.1 Hypothes
Bad on previous rearch,9 if a repurcha is conducted in order to finance an acquisition it may also carry with it the poor stock return reactions that have been associated with bidder firms conducting acquisitions. However, rearchers have made a clear distinction between cash-financed acquisitions and stock-financed acquisitions. If a firm us cash to repurcha shares which are then ud to acquire a target firm, this is not straight cash or straight stock-financed. Many rearchers have documented loss to bidding firms that u stock. The u of repurchad shares to conduct an acquisition is stock-financed and may result in the negative abnormal returns associated with stock-financed acquisitions. On the other hand, using repurchad stock to finance an acquisition is just adding a step to a cash-financed acquisition and thus may act according to previous rearch and have no negative abnormal returns or possibly slightly positive returns.
Additionally, using a repurcha to facilitate an acquisition begs further investigation. Why would a firm go through such transactional gymnastics? It would be simpler and lesscostly in time and dollars to just conduct an acquisition with cash.10 Therefore, there must be some benefit to taking on this a
dditional cost. It may be that the premium to acquire is less with a stock-financed acquisition than with a cash-financed acquisition for the bidding firm will not need to compensate the target firm for its immediate tax conquences.grav
It is possible that the repurcha announcement gives managers the anticipated positive stock price return reaction which more than offts the anticipated decrea in stock price with an acquisition announcement. In a n, this may extinguish the negative return reactions associated with a straight stock offering and allow bidder managers to pay a smaller premium at the acquisition. If this is the ca, I expect that the firms may have better long-term performance than firms that do not take the extra transactional step since they would be less likely to overpay for the acquisition.兼收并蓄
Finally, purchasing accounting does carry a long term tax advantage. Normally stock offered acquisitions do not u purcha accounting. However, if the firm us repurchad shares it can only proceed with purcha accounting. This is an advantage to the long-term cash flows of the combined firms.面试英语口语
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In order to test, I will conduct a difference in means between firms announcing both a repurcha jointly with an acquisition and firms that announce an acquisition without a repurcha.
Hypothesis 1 Abnormal return (at the announcement date and long-term post
announcement) will be less negative for firms that announce repurcha intentio ns with an acquisition announcement than for firms that only announce the acquisition.
This test will be performed at the announcement date for announcement date effects and also 2-year and 3-year post-announcement.
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Table 1 summarizes the hypothes put forth in the literature. Most of the hypothes make predictions on the method of payment choice. I question why firms would u cash to repurcha shares in order to conduct a stock-financed acquisition. Since the bidder firm’s wealth is not hurt by cash acquisitions and the combined firm wealth is, on average, better with cash, it is perplexing as to why a firm would incur additional transactions fees and most likely incur labor costs to take this extra financing step that at first glance does not appear to carry benefits.
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I review the hypothesis with this question in mind. My sample is of firms which either have the cash available at the repurcha announcement or did not make a credible repurcha announcement. If they have the cash available, then according to the cash availability hypothesis they will prefer to u it if they are undervalued. Since the firm has chon not to u the cash for the acquisition, but rather for the repurcha, the cash-availability hypothesis suggests that the firm is overvalued. However, if the firm is overvalued it is not likely it would choo to repurcha its own stock as suggested by Travlos (1987). Thus, it is feasible that using cash directly to purcha another firm or using cash佐罗 西班牙
indirectly with repurchad share financing is inconquential to the cash availability hypothesis in that both announcements are indicative of undervaluated bidder shares.
欧洲国家有哪些The investment opportunity hypothesis predicts that a high-growth bidder will prefer stock becau it will afford the high-growth firm with future financial flexibility. This hypothesis is not applicable to cash flush firms with moderate growth. The signaling hypothesis is a little problematic in that the repurcha signals undervaluation and the subquent stock-financing signals overvaluation. Although it is unlikely that a firm ts out to nd mixed signals, it is possible that a firm prefers to u stock (i.e., for risk sharing and future tax benefits) and plans to mitigate the bad news of overvaluation indicated with a stock financing by offtting with the undervaluation signal of the repurcha announcement.
3839The risk-sharing hypothesis is consistent with the extra financing. If a firm is concerned about the post-merger performance of the target firm then stock financing will mitigate this concern. Thus, if the target firm will reprent a significant portion of the combined firm, it may be the preference of the bidder firm’s managers to share the risks, even if evidence of poor stock-financed acquisitions is predominant.
The target firm managers may have a preference for stock financing in order to maintain some control in the merged firm. Ghosh and Ruland (1998) show a strong, positive association between managerial ownership of target firms and the likelihood of acquisitions for stock. They suggest that ta
rget firm managers’ have preferences for control rights and want to enhance their chances of retaining jobs in the combined firm. Thus, if the target is large enough in comparison to the bidder and the target firm’s managers have some control, they may be in the position to influence the financing decision. In the extreme, the target may be able to influence the bidder to first repurcha its shares and then to pass the shares on to the target firm’s shareholders. T his argument may hold for the target manager shareholders; however, the argument fails for all the other target shareholders who should prefer cash due to the higher premium. It has also been suggested; however, that the higher premium is nothing more than compensation for the forced tax conquences and thus the high premium quickly disappears net of taxes.
The control hypothesis states that if a manager desires to maintain his ownership position in the firm, he or she will prefer stock to finance an acquisition in order to maintain control. A repurcha decreas the total outstanding shares and thus rves to increa the ownership position of the non-tendering shareholders. Thus, managers with a high concern for their ownership position would favor repurcha of shares first to mitigate the loss in ownership position if a stock-financed acquisition was pursued over the preferable cash acquisition.
Pooling accounting (stock financing) and repurchasing activities are both consistent with
manager objectives of increasing earnings per share. Thus, if a manager’s compensation were tied to earnings per share, both repurchasing shares and stock-financed acquisitions would supplement the manager’s compensation. Thus, the pooling versus purchasing hypothesis would be consistent with the doubled transactions. Furthermore, the doubled transactions may create favorable tax results. Purcha accounting creates a tax burden on the target firm. Thus, stock financing is beneficial for both risk-sharing and tax conquences. Cash financing has historically better returns. Thus, it is possible that by taking on the extra transactions the firm is taking advantage of both types of financing and entering into a win–win situation.
Finally, if it is not the method of payment that matters but only whether the acquisition is a good fit and increas the focus of the firm, then the transactions that preceded the acquisition may not be the important issue. This argument suggests that although it appears inefficient to u cash to repurcha shares to be ud for the acquisition of another firm, this method of payment may not be predictive of poor post-merger stock price returns that have been documented by numerous rearchers. If the bidder acquires a firm that increas its focud line of business then value should be enhanced and the method of payment is immaterial. Similarly, if the bidder attempts a diversifying acquisition, the market would be expected to respond negatively.
The studies suggest that a viable control for a value-enhancing merger versus a valuedecreasing merger could be determined by whether the merger increas or maintains its focus or decreas its focus in diversification attempts. Flanagan and O’Shaughnessy (2003) u primary SIC codes to classify transactions core-related in their paper that explores which firm characteristics influence the size of acquisition premiums. Flanagan and O’Shaughnessy classify an acquisition as core-related if both the acquiring and target firms share the same three or four digit SIC code. I will parate my firms that announce repurcha intentions to conduct an acquisition as value enhancing if the firms have the same three or four digit SIC code and are thus core-related focus increasing or prerving firms. Firms will be considered focus decreasing if the acquiring and target firms do not share three or four digit SIC codes and appear un-related.
3.2 Sample
The sample of firms announcing a repurcha in order to facilitate an acquisition are collected from Securities Data Corpor ation’s Mergers and Acquisitions databa and Repurchas databa. I begin by collecting all repurcha offers with an acquisition (ACQ) purpo. Financial firms (SIC codes 6000-6999) and regulated utilities (SIC codes 4910-4949)
