The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&amp;As

Barbopoulos, Leonidas G.; Adra, Samer

doi:10.1016/j.irfa.2016.04.007

Cited by 34 publications

(27 citation statements)

References 37 publications

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“…The findings suggest that, for two comparable deals, a missing covariate should increase the likelihood of the acquirer to low investor scrutiny by more than 50% to invalidate our PSM-based conclusions. When assessed relative to previous findings in the corporate finance literature (Barbopoulos and Adra, 2016;Peel and Makepeace, 2012), this evidence suggests that our findings are, to a large extent, insensitive to the effect of a confounding variable.…”

Section: Introductionsupporting

confidence: 59%

“…For instance, Peel and Makepeace (2012) report a level of 1.55 to highlight the robustness of their conclusion regarding the premium received by accounting auditors. Likewise, Barbopoulos and Adra (2016) report a level of 1.50 to highlight the robustness of their conclusion with respect to the initial payments in earnout financed deals.…”

Section: Sensitivity Analysismentioning

confidence: 99%

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The valuation effects of investor attention in stock-financed acquisitions

Adra

Barbopoulos

2018

Journal of Empirical Finance

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Limited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention. K eywords: investor attention, corporate takeovers, payment method, acquirer abnormal returns. JE L Classification: G34. We are grateful to comments and suggestions offered by the participants of the 14th INFINITI Conference on International Finance, Dublin, Ireland, June 2016 and the BAFA Scottish Area Group meeting, Strathclyde, UK, August 2016. The authors are also grateful for comments and suggestions offered by Faten Hammoud, Marc Morris and the participants in the seminar series of the School of Economics and Finance at the University of St. Andrews. Any remaining errors remain are ours.Investor attention affects the reaction to announced takeovers Low attention incentivizes overvalued firms to engage in stock-financed M&As These acquirers realize limited announcement period losses The overvaluation of these acquirers is only corrected in the long-run *Highlights (for review) AbstractLimited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention.

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Section: Introductionsupporting

confidence: 59%

Section: Sensitivity Analysismentioning

confidence: 99%

The valuation effects of investor attention in stock-financed acquisitions

Adra

Barbopoulos

2018

Journal of Empirical Finance

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“…Within the first research stream, another strand of studies focuses on the consequences of earnouts in terms of market reactions to M&A deal announcements, providing mixed results. While Kohers and Ang () and Barbopoulos and Sudarsanam () find that acquisitions that involve earnouts are associated with higher announcement period returns, McNichols and Stubben () and Barbopoulos and Adra () do not find a significant relationship between the use of earnouts and bidders’ returns upon announcement. More recently, Barbopoulos, Paudyal, and Sudarsanam () show, for a sample of deals announced by US firms between 1986 and 2013, that the relationship between announcement returns and the use of earnouts is significantly negative.…”

Section: Literature Reviewmentioning

confidence: 97%

Enforcement quality and the use of earnouts in M&A transactions: International evidence

Viarengo

Gatti

Prencipe

2018

Business Fin & Account

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Earnouts are contractual agreements in merger and acquisition (M&A) deals that link part of the acquisition price to the future performance of the target company. These contracts seem to be a panacea for adverse selection and valuation risk issues in M&As.However, earnouts are not very popular. A likely reason for their limited diffusion is that earnouts have their origin in disagreement and in disagreement they may end: given the complexity of the verification of their outcome and the risk of moral hazard by the bidder, litigation at the time of their payout is far from uncommon. Absent effective legal protection for earnout holders, the potential benefits of these contracts could turn out to be empty promises, thus limiting incentives to include them in acquisition deals. Using an international sample of 37,228 deals completed between 2000 and 2015,we show that the inclusion of these contracts in M&As is significantly related to a country's enforcement quality. Furthermore, we show that a similar relation holds for the proportion of earnout payments with respect to total consideration. Our results hold after controlling for other determinants of earnout suggested by prior literature and for other institutional factors that could affect the use of earnouts.

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“…Understanding this will make it possible in the future for researchers or business practitioners to correctly apply the patterns obtained in other countries or other industries. The research work cited at [7] addresses the issue of the dependence of the premium in the deal and the length of the deal's processing period. The authors concluded that increasing the time interval between the moment of hearing of the deal and the moment of announcement of the deal means an increase in premium.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

“…The authors concluded that increasing the time interval between the moment of hearing of the deal and the moment of announcement of the deal means an increase in premium. At the same time, the research methodology in [7] uses the CAR principle, so we would like to check these findings with respect to the relative premium. Industry characteristics of mergers and acquisitions of Russian companies are analysed in the research work cited at [3].…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Premium evaluation in mergers and acquisitions of electricity companies

Sterkhov

2019

КФ

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The purpose of the article is to build a model for estimating the relative premium in mergers and acquisitions of electric power companies, based on four groups of factors: the company's operating and financial results, the country affiliation, the industry affiliation, the debt market conjuncture. The research methodology is based on a comparative business valuation method. The empirical base of the research includes data on 6504 deals that occurred throughout the world from 1997 to 2018. The research database includes data on both public and non-public companies for which the amount paid in the deal is known, as well as the value of total assets. The scientific novelty consists in clarifying the conceptual apparatus (the concept of relative premium in a deal has been introduced); the selection and grouping of factors affecting the size of the relative premium; identifying and quantifying the influence of variables included in each group of factors. The article proposed the author's approach to the grouping of countries and industries, based on the equality of premium coefficients in the regression and obtained groups of countries and industries with equal premiums. It is shown that the grouping of industries, obtained by the mathematical algorithm, almost completely corresponds to the industry structure of the electric power industry. The coefficient of determination of the final econometric model is more than 20 per cent, which can be estimated as a high-quality assessment. That is because the relative premium, not the amount paid in the deal, is predicted which is in close correlation with the value of the company's assets. The practical significance of the research study consists in the possibility of predicting the value of a business, as well as determining the value paid in a deal in cases where such information is not available in available sources.

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The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Cited by 34 publications

References 37 publications

The valuation effects of investor attention in stock-financed acquisitions

The valuation effects of investor attention in stock-financed acquisitions

Enforcement quality and the use of earnouts in M&A transactions: International evidence

Premium evaluation in mergers and acquisitions of electricity companies

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