Scope, Scale, and Concentration: The 21st century firm

Authors

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Gordon M. Phillips

Dartmouth College - Tuck School of Business and NBER

Abstract

We provide evidence that over the past 30 years, U.S. firms have expanded theirscope of operations. Increases in scope and scale were achieved largely without increasing traditional operating segments. Scope expansion significantly increases valuation and is primarily realized through acquisitions and investment in R&D, but not through capital expenditures. We show that traditional concentration ratios do not capture this expansion of scope. Our findings point to a new type of firm that increases scope through related expansion, which is highly valued by the market.

Merger Waves and Innovation Cycles: Evidence from Patent Expirations

Authors

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Ran Duchin

Boston College - Carroll School of Management

Jarrad Harford

University of Washington and ECGI

Abstract

We investigate the link between innovation cycles and aggregate merger activity using data on patent expirations. We focus on patents that expire due to term expirations, which mandatorily occur at a pre-specified date. We find strong clustering in industry patent expirations (“patent expiration waves”). These patent waves trigger industry merger waves with lower announcement returns and worse long-term performance for acquirers, but higher announcement returns and larger premiums for targets. Acquirers also experience declines in profit margins, cash holdings and investment opportunities, while cutting costs in the year prior to a merger. Overall, we put forth a link, unexplored in the literature, between merger waves and patenting activity.

Acquirer Types and M&A Puzzles

Authors

Antonio J. Macias

Baylor University

P. Raghavendra Rau

University of Cambridge

Aris Stouraitis

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Abstract

Using a novel typology of serial acquirers, we solve several puzzles documented in prior literature. We show that acquisitions by different types of acquirers are driven by different factors, they acquire different sizes of targets, and subsequent acquisitions by acquirers are predictable ex ante. Controlling for market anticipation, the most frequent serial acquirers do not earn declining returns as they continue acquiring, while less frequent acquirers do. Our methodology significantly enhances our understanding of acquisition dynamics, anticipation, and economic value adjustments. The methodology is likely to be relevant to topics related to event anticipation beyond those covered in this study.

The use of escrow contracts in acquisition agreements

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Sandy Klasa

University of Arizona - Department of Finance

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business and University of Pennsylvania - Wharton Financial Institutions Center

Abstract

A large fraction of acquisition deals for private firm and subsidiary targets include an escrow contract giving the bidder the opportunity to lay claim on escrow account funds if subsequent to the acquisition the seller fails to meet specific acquisition agreement terms. The likelihood of using an escrow contract is higher when buyer or seller transaction risk is larger. Also, the use of escrow contracts (i) helps to reduce bidders’ due diligence costs, (ii) enables sellers to obtain a higher sale price, and (iii) raises the extent to which an acquisition leads to an increase in bidder firm shareholder value.

The Incentives of SPAC Sponsors

Felix Feng

University of Washington - Michael G. Foster School of Business

Tom Nohel

Loyola University of Chicago

Xuan Tian

Tsinghua University - PBC School of Finance

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Yufeng Wu

University of Illinois at Urbana-Champaign - Department of Finance

Abstract

This paper quantitatively studies the incentives of the sponsors of Special PurposeAcquisition Companies (SPACs) and their impact on SPAC investor welfare. We estimate a structural model featuring the strategic interactions between sponsors, targets, and investors using a hand-collected dataset with rich information such as sponsor concessions, earnouts, redemptions, etc. Agency costs appear pervasive: the inter-quintile range of returns reaches 19% for deals sorted on the extent of agency conflict. Tying more of the sponsor’s promote to earnouts and improving information transparency each significantly improve investors’ welfare, while curtailing the issuance of warrants yields only modest improvement.

Tax Avoidance through Cross-Border Mergers and Acquisitions

Authors

Jean-Marie Meier

University of Texas at Dallas

Jake Smith

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Abstract:

We investigate 13,307 cross-border, tax-haven mergers and acquisitions (M&A) from 1990 to 2017, totaling $4.1 trillion in deal value, or about 30% of total cross-border M&A volume. $2.4 of the $4.1 trillion is beyond what is predicted based on a gravity model with economic fundamentals. Tax-haven M&A result in $30.7 billion in recurring annual tax avoidance. To illustrate the magnitude, for a US firm with no prior cross-border, tax-haven M&A history, buying an Irish firm worth 5% of its total assets would result in an expected decline in its eective tax rate of 3.32 percentage points. For identification, we use a change in US tax law in 2004. Following haven acquisitions,firms are more likely to relocate their headquarters to havens. Our results document that tax avoidance through havens is a significant determinant of cross-border M&A.

Beyond Culture: How does international migration affect cross-border mergers and acquisitions?

Authors

Ning Gong

Deakin University

Micah S. Officer

Loyola Marymount University - Department of Finance

Hong Feng Zhang

Deakin University - Deakin Business School

Abstract

We show that a higher migrant stock from an acquiring country to a target country leads to greater deal frequency and dollar value in cross-border acquisitions after controlling for the differences in economic and financial development, regulatory environments, valuations, and cultural distance. Our results support the arguments that migration impacts cross-border deal activity by ameliorating the effect of cultural distance, facilitating post-merger integration, and mitigating information asymmetry between acquiring and target countries. Instrumental variables derived from the interactions of the push and pull factors of migrant flows mitigate endogeneity concerns in our study.