Most takeovers benefit shareholders

As Australian businesses look to mergers and alliances for growth, a Deakin University study of takeovers has shown that most result in benefits for their shareholders.

Finance expert, Dr Harminder Singh, from Deakin University’s School of Accounting Economics and Finance along with Joshua Porter, examined the relationship between takeover announcements and returns for 76 Australian firms listed on the Australian Stock Exchange to find out why such takeovers take place.

“The quest for business opportunities leads firms to search for new products and markets via takeovers,” Dr Singh explained.

“As a result mergers, acquisitions and takeovers have been a dynamic part of the corporate sector for decades and play a key role in ensuring management teams operate efficiently.”

Dr Singh said in the past few years there had been a surge in takeover activity both globally and in Australia, which had resulted in the establishment of the Takeovers Panel.

“In any economy, takeover activity is driven by fundamental factors,” he said.

“During most of the sample period of this study (2000 to 2006) the Australian economy enjoyed significant growth and its fundamentals were in good shape.

“Most of the research that relates to takeovers though is published in the US.

“While Australia is similar to the US in that is has a well developed economy based on common law principles and an active equity market, we wanted to see if the results of the US studies would hold in Australia.”

Dr Singh said takeovers broadly occurred for three main reasons – synergy where there are gains in value in the takeover for both parties; agency where managers embarked on a takeover to pursue their own interests; and hubris where managers were overconfident and overestimated the returns of the takeover and instead diminished the firm’s value for their shareholders.

Dr Singh said the analysis had confirmed previous findings that on average shareholders of the target firm gained substantially when the firm received a takeover bid.

“Shareholders in the acquiring firm in contrast extracted a small, if any proportion of the overall gain in the share price,” he said.

Dr Singh said the motives for the takeovers started to become apparent in the data recorded 11 days before the takeover announcement.

“For firms which made positive gains after the takeover took place, we found that synergy was the primary motive, while agency was the prime motivator for firms which registered negative gains,” he said.

“The creation of synergies that result from a takeover is important as it is one way a firm can gain long-term profitability.”

Dr Singh said where synergy was a reason for the takeover; some of the gains made in the sale by the acquiring firm were transferred to the target firm.

“This occurred because of the managers’ overconfidence or hubris, they may have overestimated the value of the target firm, or the gains that would come to them, so the gain was close to zero,” he said.

 “Hubris, however, wasn’t a factor when firms didn’t gain value as a result of the takeover.  “The results indicate that on average managers seek to create economic value and appear to have the ability to do so when pursuing takeovers.

“However in some circumstances they don’t have motive or will to create economic value for their firms.

“This supports the generally held view that takeover announcements which result in a loss are circumvented by the acquiring managers who are pursuing the takeover for agency reasons, they are acting in their own interests rather than in the best interests of their shareholders.

“These takeovers need to be checked by the regulators as such takeovers are only in the management’s own interests.”

Further information

What Factors Drive Takeovers in Australia? Joshua Porter and Harminder Singh, International Journal of Business and Economics 2010, Vol 9, No. 2, pp 87 - 103