Three essays on merger and acquisition

Abstract

This thesis consists of three independent essays on merger and acquisition (M&A) in the U.S. capital market. The first essay explores how the social tie with the acquirer’s investment bank advisor influences the acquisition performance of the acquirer and the target. The second essay reconciles the behavioral theory and the rational theory of stock payment in M&A using the acquirer-target social tie. The third essay exams the impact of target customer concentration on acquisition performance. Using interpersonal social ties based on professional experience, the first essay (Chapter 3) analyzes the impact of the acquirer-acquirer’s advisor tie (A-AA) and the target-acquirer’s advisor tie (T-AA) on the acquirer’s performance. This study shows that both acquirer and target can benefit from building networks with the acquirer’s advisor, while the price is that the interests of the other party would be impaired. A-AA can significantly increase the acquirer's short- and long-term performance, while T-AA has the opposite effect. The result keeps valid on a series of robust tests. This study also finds that acquirers with A-AA pay fewer advisor fees and fewer takeover premiums. The positive impact of A-AA is more pronounced for opaque targets, suggesting that A-AA can reduce information asymmetry. Besides, we find evidence of the information leakage caused by T-AA. Taken together, A-AA improves the acquirer’s performance by reducing cost and information asymmetry, while T-AA impairs the acquirer’s performance due to information leakage. The second essay (Chapter 4) distinguishes between the rational and the behavioral theory of the stock payment in acquisitions from the perspective of information asymmetry between the acquirer and the target. I use the acquirer-target social tie (A-T) as the proxy of information asymmetry. The results support both theories and show that they dominate alternatively based on whether the target can learn the overvaluation of the acquirer. This study begins by presenting evidence of the behavioral theory based on U.S. domestic acquisitions in the past 40 years. Then, I bring the A-T tie into the study. Consistent with the rational theory, the A-T is positively associated with the stock payment. Moreover, I find that connected acquirers and targets weaken the effectiveness of the behavioral theory. When acquirers and targets are connected, (1) targets receive less overpriced stock, (2) premiums raise with the degree of overvaluation of acquirers, (3) both acquirers and targets experience higher announcement return in stock financed M&A. These findings suggest that the behavioral theory can better explain stock-financed acquisition when the acquirer and the target are ill-informed about the overvaluation, while the rational theory demonstrates greater explanatory power when the acquirer and the target can learn the overvaluation via social ties. The third essay (Chapter 5) investigates how target firms’ customer concentration affects the acquisition performance. We find that acquiring targets that rely on major customers has a significantly negative effect on acquirer performance. Target customer concentration leads to greater value losses when targets experience high cash volatility, when targets cater for large customized investment, and when targets have a high probability of losing major customers. We find that the negative effect of the target’s concentrated customer base mainly derives from corporate customers rather than governmental customers. One explanation for the negative relationship between customer concentration and acquirer performance is that the target’s concentrated customer base raises the acquirer’s post-acquisition risk level. Lastly, this study finds that sharing common customers helps to explain why acquirers choose targets with major customers even if acquirers tend to suffer poor acquisition performance