Efficient Mechanisms for Mergers and Acquisitions*

Abstract

We characterize incentive-efficient merger outcomes when payments can be made both in cash and stock. Each firm has private information about both its stand-alone value and a component of the (possibly negative) potential synergies. We study two cases: when transfers can, and cannot, be made contingent on the value of any new firm. When they can, we show that redistributing shares of any nonmerging firm generates information rents and provides necessary and sufficient conditions for the implementability of efficient merger rules. When they cannot, private information undermines efficiency more when it concerns stand-alone values than synergies. Here, acquisitions emerge as optimal mechanisms. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

What Drives Bidder Cash Reserve Effects in Acquisitions: Agency Conflicts or Precautionary Motive?

“…Using a sample of all-stock offers, Gao (2011) finds that the negative wealth effect of cash reserve is mainly due to adverse selection. This argument builds on the two-sided information framework of Rhodes-Kropf and Viswanathan (2004) and Brusco, Lopomo, Robinson, and Viswanathan (2007). In particular, uncertainties exist for both deal synergies and bidder assets in place.…”

“…First, we highlight the importance of the precautionary motive in explaining cash reserve effects in acquisitions. The precautionary motive has solid theoretical foundation (Brainard and Tobin, 1977;Jovanovic and Rousseau, 2002;Rhodes-Kropf and Viswananthan, 2004;Brusco, et al, 2007), but has been ignored in previous literature on cash reserve effects in acquisitions. Second, we argue that the negative announcement effect of cash reserve is due to revaluation.…”

“…Building on the two-sided information framework of Rhodes-Kropf and Viswanathan (2004) and Brusco, Lopomo, Robinson and Viswanathan (2007), Gao (2011) finds that, for all-stock offers, adverse selection is the primary reason that cash-richer bidders have worse announcement returns. The first reason applies regardless of the means of payment.…”

Signalling to Dispersed Shareholders and Corporate Control

“…First, target shareholders have no private information and face, instead, a collective action problem; that is, they are unable to coordinate their individual tendering decisions. 12 Second, the takeover is not undertaken to combine assets from two firms but to replace the incumbent managers. We explore the role of bidder assets later in the paper (Sections 3.1.4 and 3.4).…”

“…Several papers show that cash-equity offers can overcome asymmetric information problems in mergers (Hansen, 1987;Berkovitch and Narayanan, 1990;Eckbo et al, 1990;Brusco et al, 2007;and Ferreira et al, 2007). These papers abstract from the free-rider problem, which plays a crucial role in undermining the signaling role of cash-equity offers in our setting.…”