Cost Inefficiency, Size of Firms and Takeovers

Abstract

Abstract. This study, using the Cox proportional hazards model, finds that the risk of takeover rises with cost inefficiency. It also finds that a firm faces a significantly higher risk of takeover if its cost performance lags behind its industry benchmark. Moreover, these findings appear to be remarkably stable over the nearly two decades spanned by the sample. The effect of the variables used to measure the risk-size relationship, however, indicates temporal changes. Lastly, the study presents evidence from fixed-effects models of ex post cost efficiency improvements that support the hypothesis that takeover targets are selected based on the potential for improvement.Key words: corporate finance and governance, mergers, acquisitions, econometric methods, models with panel data, truncated and censored models.JEL Classification: G3, G34, C2, C23, C24Corporate takeovers have been a permanent feature of the American business landscape since the mid-1800s (Pound, 1992). Mergers and acquisitions continue to play an important role in allocating resources in the U.S. economy. The same number of mergers and acquisitions were completed in the first five years of the 1990s-about 23,000-as in the entire previous decade (Mergers and Acquisitions, September-October, 1995). Furthermore, in the peak years of each decade, the value of takeovers equaled about one-fourth of GNP (Fortune, March 2, 1998.)The prominent role of takeovers in reallocating control over capital in the U.S. economy has generated vigorous debate over whether takeovers actually improve efficiency. Two issues dominate the debate: the pre-takeover performance of targets and the post-takeover changes in performance. As discussed in more detail in the next section, earlier studies of the ex ante performance of target firms did not reach a definitive conclusion about the effect of efficiency on the risk of takeover. Moreover, there is no consensus on the ex post effect of takeovers on firm performance.

Managerial Cost Inefficiency and Takeovers of U.S. Thrifts

“…Their results contrast with previous studies examining bank mergers in the 1980's that find little evidence of post-merger cost efficiency gains for banks (see Calomiris and Karceski, [2000]). Their results also contrast with findings by Trimbath, Frydman, and Frydman (2001), using the same methodology, of a significant positive relationship between cost inefficiency and takeovers of non-financial, Fortune 500 firms during 1980 to 1997. Their differing results may reflect average acquirer motivations across diverse industries versus a single, more regulated banking industry.…”

“…Logit models are simpler and require fewer restrictive assumptions, such as constant proportionality. However, they can be biased as predictive models for the temporal risk of takeover (see Trimbath, Frydman, and Frydman, [2001]). Since the purpose of this study is to examine ex-post correlates of takeovers versus prediction, the simpler logit approach is used.…”

How to identify targets in the M&A banking operations? Case of cross-border strategies in Europe by line of activity

“…Company size is negatively correlated to its likelihood to become a target. Besides, Trimbath et al (2001) concluded that the probability of ''being acquired'' increases for relatively inefficient firms.…”

Financial Buyers in Takeovers: Focus on Cost Efficiency

“…We show that they indeed are and thus conclude that takeovers by financial buyers play a potentially beneficial role in the allocation of corporate assets in the U.S. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann and Little's acquisition of General Instrument for a brief case study.…”

“…Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001) (hereinafter referred to as TFF). As a significant improvement over the earlier approaches that have utilized probit and logit analysis, our methodology employs the Cox regression model, which is particularly appropriate for the study of a time-varying risk profile.…”