CHAPTER 11

MERGERS AND ACQUISITIONS

Rizki Nur Sa’diyah 041711333143
Dina Indriana 042024253016
Darojatum Muthi’atur R 042024253030
Sub Bab
01 Motivation for Merger and Acquisition

02 Acquisition Pricing

03 Acquisitions Financing and Form of Payment

04 Acquisition Outcome
 Motivations for Merger and Acquisitions
There are number of reasons why a firm may choose to merge with or acquire another one, including:

Economies of scale Improving target Combining Capturing tax benefits

management complimentary
resources
 Motivations for Merger and Acquisitions
There are number of reasons why a firm may choose to merge with or acquire another one, including:

Increasing
product-market
Providing low-cost Penetrating new rents
financing to target Creating value markets
trough Diversification
restructuring and
breakups
 Motivation for the Exxon-Mobil Merger

Motivation for the merger

The Exxon-Mobil merger serves as a

Efficiency gains
great real-life example to examine

Complimentary strengths and some of the issues related to M&A.

assets

Risk management related to

new exploration projects
Acquisition Pricing
the following methods to assess whether the acquiring
firm is overpaying for the target

Analyzing Premium Offered to Target

Stockholders

Analyzing Value of the Target to the

Acquirer

Earning Multiples

Discounted Abnormal Earnings or Cash

Flows
Earning Multiples
To estimate the value of a target to an acquirer using earnings multiples, we have to forecast
earnings for the target and decide on an appropriate earnings multiple, as follows:

Step 1: Forecasting earnings

Step 2: Determining the

price-earnings multiple

Limitations:
1. PE multiples assume that merger
performance improvements come
either from an immediate increase
in earnings or from an increase in
earnings growth (and hence an
increase in the postmerger PE
ratio). In reality, improvements and
savings can come in many forms
2. PE models do not easily
incorporate any spillover benefits
from an acquisition for the acquirer
since they focus on valuing the
earnings of the target.
 Discounted Abnormal Earnings or Cash Flows
Step 1: Forecasting
abnormal earnings / free
cash flows

Step 2: Compute the

discount rate

Step 3: Analyze
Sensitivity
 ACQUISITION FINANCING AND FORM OF PAYMENT
Effect of Form of Payment on Acquiring Stockholders
costs and benefits of different financing alternatives depend on 3 factors :

how the offer any information control issues

affects their firm’s effects associated arising from the
capital structure with different forms form of payment
of financing

Capital Structure Effects of Form of Financing

assess the acquirer’s financial risk following the proposed acquisition by 3 methods:

Analyze the Assess the pro Examine whether Determine whether

business risks and forma financial there are important the pro forma
the volatility of the risks for the off-balance-sheet assets for the The financing preferences of
combined acquirer under the liabilities for the acquirer are largely acquiring and target stockholders
proposed financing target intangible
plan can diverge.
Information Problems and
the Form of Financing
information asymmetries between
managers and external investors can
make managers reluctant to raise
equity to finance new projects.
1. firms forced to use stock
financing are likely to face a
stock price decline when
investors learn of the method
of financing.
2. if the acquiring management
does not have good
information about target.
If the acquirer finds out that
the value of the target is less
than previously anticipated,
the accompanying decline in
the acquirer’s equity price will
be partially borne by target
stockholders.
Control and the Form Effect of Form of Payment
of Payment on Target Stockholders
There is difference between
the use of cash and stock :
1. cash allows acquirer to
retain the structure and
composition of its equity
ownership.
2. stock could have a
significant impact on the
ownership and control
of the firm
postacquisition.
Tax Effects
if they receive shares in the
acquirer as consideration and the
acquisition is undertaken as a
tax-free reorganization, they can
defer any taxes on the capital gain
until they sell the new shares.
Transaction Costs
target stockholders sell any stock
received as consideration for their
shares in the target. These costs will
not be faced by target stockholders if
the bidder offers them cash.
to evaluate the likelihood that an offer will be accepted, the
financial analyst has to understand whether there are ACQUISITION OUTCOME
potential competing bidders who could pay an even higher
premium to target stockholders than is currently offered.

Other Potential Acquirers

If there are other potential bidders for a target,
especially ones who place a higher value on the
target, there is a strong possibility that the
bidder in question will be unsuccessful.

From the perspective of the initial bidder, the

offer could potentially reduce stockholder value
by the cost of making the offer.

Target Management Entrenchment

Some firms have implemented “golden parachutes” for top managers to allay their concerns about job security at the
time of an offer. Golden parachutes provide top managers of a target firm with attractive compensation rewards
should the firm get taken over.
Antitrust and Security Issues
The objective is
to ensure that no one firm,
through mergers and
acquisitions, creates a dominant
position that can impede
effective competition in specific
geographies or product markets.
Political concerns around firms
have an impact on the national
and economic security of a
country come under the scrutiny
of local lawmakers, whose
opposition can often derail
cross-border acquisition efforts.
Corporate Innovation, Likelihood to be
Acquired, and Takeover Premiums
Rizki Nur Sa’diyah 041711333143
Dina Indriana 042024253016
Darojatum Muthi’atur R 042024253030
 Introduction
We analyze the effects of a
firm’s innovation output and
R&D spending on its likelihood
to be acquired and the takeover
premium.
Using a sample of completed
domestic mergers and
acquisitions (M&As) during the
period from 1980 through 2011.
We use the cumulative number
of patents and forward citations
from the past 10 years as
empirical proxies for a firm’s
innovation output and the total
amount of R&D spending in the
past 10 years as a measure of
innovation input.
We measure the takeover
premium by the ratio of the deal
value to the target’s market
value 50 days prior to the
announcement date.
The present study contributes
to the literature by showing that
the acquisition of innovation is
another motive for corporate
takeovers and firms are more
likely to be acquired and receive
greater takeover premiums in
the market for corporate
control when they have a
comparative advantage in
innovation over their rivals.
Literature Review and Hypothesis Development
Literature Review

Prior studies
➔ Zhao (2009) analyzes the effect of a firm’s innovation output on its
decisions to acquire other companies.
➔ Phillips and Zhdanov (2013) show that a firm’s R&D investment is
positively related to the probability of becoming a target.
Our study
➔ Our study differs from Zhao (2009) in that we analyze the effect of a firm’s
innovation output and R&D spending on its likelihood to be acquired.
➔ The direction of causality in Philips and Zhdanov (2013) study is opposite to
that of our analysis.
➔ Our study differs from Frésard, Hoberg, and Phillips (2019) in that we use
more comprehensive measures of innovation output.
➔ Our study also differs from Sevilir and Tian (2012), Hirshleifer et al. (2013),
Cohen et al. (2013), Phillips and Zhdanov (2013), Seru (2014), and Bena and
Li (2014) because none of these studies explicitly looked at the relation
between the takeover premium and the target’s innovation output and R&D
spending.
Literature Review and Hypothesis Development

Hypothesis 1 Hyphotesis 2

A firm’s likelihood to be The takeover premium is

acquired is positively positively related to the
related to its competitive target firm’s competitive
innovation output and R&D innovation output and R&D
investment. spending.
 Data Sources
We obtain data on completed mergers
and acquisitions with announcement
dates between January 1, 1980 and
December 31, 2011 from Thomson
Reuters’s SDC Platinum
Each deal is classified as a merger
(M), an acquisition of assets (AA),
an acquisition of majority interest
(AM), or an acquisition of remaining
interest (AR).
We require the deal value in 2011 dollars to
be larger than $1 million, and if the bidder
owns less than 50% of the target prior to
the announcement date and seeks to own
100% after the deal completion
The target firm is included in the
Compustat and CRSP databases
We obtain institutional ownership
data from the Thomson-Reuters 13F
Database.
We collect patent and citation data from
two sources. First, we obtain patents
granted during 1976- 2010 from
https://iu.app.box.com/v/patents.
Second, for each patent we obtain a
technology classification with a
matched PERMNO identifier from the
Harvard Business School patent
database.
 Variable Measurements

Measures of competitive Measure of innovation input

innovation output

Measure of takeover premium

Following Moeller, Schlingemann, and Stulz
(2004, 2005) and Li (2013), we use a
value-based measure of takeover premium:
Premium = (Transaction value – Target’s
market value of equity) / Target’s market value
of equity.

Control Variables
Return on assets (ROA), financial leverage,
past stock returns, dummy variable for
mergers of equals, leverage ratio, return on
assets, dummy variable for diversifying deals,
institutional ownership, tangible asset ratio,
and the target firm’s 52- week highest price.
 Descriptive
Statistics
This table shows the number of
acquisitions in each year from 1980 to
2011, together with the number of
acquirers and targets with at least one
patent granted during a ten-year period
prior to the deal announcement year.
Panel A shows the results for the full
target sample and Panel B shows the
results for the subsample of target firms
acquired by public firms.
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 Descriptive Statistics
Panel A provides descriptive statistics for the full sample of target firms acquired by public firms. Panel A provides descriptive statistics
for target firm characteristics and deal characteristics. We show the results for the whole sample in column (1) through column (5),
non-innovative targets or acquirers in columns (6) and (7), and innovative targets or acquirers in columns (8) and (9). All continuous
variables are winsorized at the 1st and 99th percentiles. N denotes sample size. S.D. denotes standard deviation. See the Appendix for
definitions of the variables. *, **, and *** in column (8) indicates statistical significance at the 10%, 5%, and 1% level, respectively, for
the t-test of the difference in mean between column (6) and column (8). *, **, and *** in column (9) indicates statistical significance at
the 10%, 5%, and 1% level, respectively, for the Wilcoxon test of the difference in median between column (7) and column (9).

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Panel B provides descriptive statistics for
Descriptive Statistics
the subsample of target firms acquired by
public firms. Panel B provides descriptive
statistics for target firm characteristics,
acquiring firm characteristics, and deal
characteristics.We show the results for the
whole sample in column (1) through column
(5), non-innovative targets or acquirers in
columns (6) and (7), and innovative targets
or acquirers in columns (8) and (9). All
continuous variables are winsorized at the
1st and 99th percentiles. N denotes sample
size. S.D. denotes standard deviation. See Your Text Here
the Appendix for definitions of the
You can simply impress your
variables. *, **, and *** in column (8)
audience and add a unique zing
indicates statistical significance at the
10%, 5%, and 1% level, respectively, for Your Text Here
the t-test of the difference in mean You can simply impress your
between column (6) and column (8). *, **, audience and add a unique zing
and *** in column (9) indicates statistical
significance at the 10%, 5%, and 1% level, Your Text Here
respectively, for the Wilcoxon test of the You can simply impress your
difference in median between column (7) audience and add a unique zing
and column (9).
 Empirical Results
Likelihood to be acquired (Hypothesis 1)
Logit regression model using cross-sectional data as of the fiscal year-end prior to the merger announcement date :

Baseline regression Likelihood to receive Likelihood to receive multiple bids

Hasil regresi bahwa efek marginal dari setiap
unsolicited bids hasil regresi secara lengkap sampel target dengan
hasil regresi bahwa Koefisien pada
variabel penjelas pada nilai rata-rata. Koefisien pada efek marjinal dari setiap variabel penjelas pada nilai
3 langkah inovasi semuanya positif dan
ketiga ukuran inovasi (INNO_PT, INNO_CITE, atau rata-rata. Koefisien pada ketiga ukuran inovasi
signifikan terlepas dari metode
INNO_R&D) adalah positif dan signifikan, semuanya positif dan signifikan, menunjukkan
pencocokan, menunjukkan kemungkinan
menunjukkan perusahaan target dengan output bahwa perusahaan dengan inovasi yang lebih besar
permusuhan pengambilalihan juga
inovasi atau pengeluaran R&D yang lebih tinggi output atau investasi R&D lebih cenderung
meningkat dengan hasil inovasi dan
adalah lebih mungkin untuk diakuisisi. menerima banyak tawaran
investasi R&D.
 Empirical Results
Innovation output, R&D investment, and takeover premium (Hypothesis 2)
regression model using cross-sectional data as of the fiscal year-end prior to the merger announcement date:

The number of
Baseline regression
competing bids and
takeover premium
Koefisien pada ketiga
ukuran inovasi Hasilnya menunjukkan
semuanya positif dan bahwa koefisien pada Hasilnya menunjukkan koefisien
signifikan, menunjukkan istilah interaksi
semuanya positif dan
bahwa premi
pengambilalihan signifikan, menunjukkan
meningkat seiring bahwa tawaran bersaing
dengan kegiatan inovasi. memperbesar pengaruh inovasi perusahaan target ketika
inovasi pada premi
pengambilalihan.
The effect of
acquiring firm’s
product market
competition
pada ke-3 langkah inovasi
adalah positif dan signifikan,
menunjukkan perusahaan yang
mengakuisisi menempatkan
lebih besar nilai pada aktivitas
ada kejutan yang secara
eksogen mengubah persaingan
lanskap pasar produk mereka.
The effects of
technological
proximity and
technology
spillovers
Hasil menunjukkan koefisien
pada interaksi antara output
inovasi (INNO_PT dan
INNO_CITE) dan variabel
kedekatan teknologi, semuanya
negatif dan signifikan,
menunjukkan hubungan positif
antara inovasi perusahaan target
output dan premi
pengambilalihan dimitigasi oleh
limpahan teknologi.
 Empirical Results
Acquirer performance

Hasil regresi di Panel C dan Panel D menunjukkan bahwa efek positif

pada kinerja operasi perusahaan yang mengakuisisi dapat menjadi
setidaknya sebagian dikaitkan dengan pengurangan biaya dan
pertumbuhan penjualan selama periode pasca-merger.

Peneliti juga menemukan hubungan

negatif dan signifikan antara imbal hasil
saham sebelum pengumuman
pengakuisisi dan CAR, yang konsisten
dengan temuan Masulis, Wang, dan Xie
(2007).
Robustness Checks: Purchased Patents
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The Author obtain patent assignment data from the United States Patent and
Trademark Office (USPTO) website19 and patent inventor data from the Harvard
Business School (HBS) U.S. Patent Inventor Database. 20 They only consider patent
purchase transactions prior to the deal announcement date. They then merge the
purchased patents with the invented patents, recalculate their innovation output
measures using equations (1) to (4), repeat the industry-size and industry-size-B/M
matching procedures, and re-estimate regression models (6) and (7). Panel A of
Table 11 reports the results of the regression model (6) and Panel B reports the
results of the regression model (7)
Conclusion
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• The study sheds additional light on a firm’s likelihood to be acquired and the
takeover premium by exploring the implications of its innovation activities for these
variables
• They use more comprehensive measures of corporate innovation
• They consider various firm and industry characteristics that moderate or reinforce
the effect of corporate innovation.
• show that firms with larger innovation outputs or R&D investments are more likely
to be acquired, receive unsolicited bids, and receive multiple bids. We also show
that the takeover premium increases with the target firm’s innovation output and
R&D spending and this positive relation is stronger when there are more
competing bidders,
• Their results indicate that firms potentially benefit from innovation activities by
increasing their likelihood to be acquired and raising the takeover premium
Limitation & Future Research
Your Text Here

Limitation of the study:

1. They cannot rule out the possibility that the observed relation is driven by some
other variables not included in our analysis that are related to both the takeover
premium and the target firm’s innovation activities.
2. They found correlations rather than directions of causality between variables
3. Their main explanatory variable of interest, corporate innovation, is inherently
difficult to measure and thus subject to a large measurement error

Future research could analysis of the role of innovation in the market for corporate
control with an empirical design that better addresses the endogeneity problem
associated with omitted variables, simultaneity, and measurement error.
Thank you
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