Independent Expert's Reports in Takeover Bids

Abstract

This paper reports an empirical examination of independent expert reports in takeover bids using the 170 reports that were issued in the 364 cash‐based bids that occurred between January 1988 and December 1991. It was found that bid premia offered in takeover bids where an expert's report was issued were not significantly lower than bid premia in other bids. This may be attributable to independent experts acting as a countervailing influence on bidders holding a superior pre‐bid bargaining position. Next, some dimensions of the “fair and reasonable” criterion that experts are required to use are examined. These are the single‐test and dual‐test interpretations of the phrase, the relation between offer price, market price and the expert's valuation of the target, the cost and length of expert's reports and, finally, the influence an expert has on the outcome of a bid.

The Role of Independent Expert Reports in Australian M&A Market

“…The statutory provision of independent expert reports is issued to avoid the recurrence of circumstances in which a bidder takes advantage of its target after gaining a particular proportion of the target's shares, or to prevent the bidder from exploiting advantages arising from a common directorship. According to Eddey (), the compulsory requirement of an expert report has two mitigating effects. First, it slows down the takeover process, so that the target can have enough time to read the terms of the offer carefully.…”

“…First, it identifies a significant positive relation between a “fair and reasonable” opinion and the probability of success. Eddey () groups three opinions: FNR, “not fair but reasonable”, “fair but not reasonable” into a single dummy indicator, but finds no evidence supporting the hypothetical relation. In contrast to his method, I separate the effect of a positive opinion “FR” from the negative “FNR”, and estimate them in the same equation.…”

“…In contrast, I analyze the value of offer revision rather than the probability of receiving it. I also employ a more comprehensive sample which covers the period after 2000 compared to previous studies (Eddey ; Bugeja ; Bugeja ; Bugeja et al ).…”

The ‘Independence’ of Expert Opinions in Corporate Takeovers: Agreeing With Directors’ Recommendations

“…In a successful offer, the expert is likely to lose their other business dealings to the bidder's incumbent. As the evidence in Eddey (1993) shows a bid's success is related to the directors’ recommendation, a ‘non‐independent’ expert will place undue weight on this recommendation in forming their opinion. An expert that expects directors to recommend bid acceptance faces conflicting incentives.…”

“…It is necessary to control for the expert's opinion as Eddey (1993) finds ‘fair and reasonable’ opinions increase the likelihood of bid success and reduce the chance of a price revision. The greater probability of success will have a positive effect on the target's share price.…”