浏览： 日期：2020-06-10
Several academicians and researched have written literature on the three major motives for takeovers: the synergy motive, the agency motive and the hubris motive. Berkovitch and Narayanan (1993) define the synergy motive as a takeover that takes place because of economic gains that result by merging the resources of the two firms. Managers of targets and acquirers will agree to a takeover if it the potential combination is forecasted to bring profits to both sets of shareholders, that is, the main motive for the takeover is to maximize shareholder value. There are several reasons for a synergistic takeover- an exogenous change in supply and/or demand, technological innovations, or purposeful investments by the bidding firm. The value created by the combination may result from more efficient management, economies of scale, improved production techniques, the combination of complementary resources, the redeployment of assets to more profitable uses, the exploitation of market power (Bradley et al, 1987).
Martynova and Renneboog (2006) explain two kinds of synergies - operating synergy and financial synergy. If the synergy reflects economies of scale , vertical integration, the transfer of knowledge or skills by the bidder's management team, and a reduction in agency costs by bringing organization-specific assets under common ownership and the elimination of duplicate activities then they are called operating synergies (Ravenscraft and Scherer 1987, 1989). Moreover, operating synergies are seen more often than not in mergers and acquisitions between related industries (Comment and Jarrell 1995). Financial synergies may include improved cash flow stability, lower probability of bankruptcy (Lewellen 1971, Higgins and Schall 1975), access to cheaper funds, the existence of an internal capital market (Bhide 1990), the possibility to use underutilized tax shields, as well as contracting efficiencies created by a reduction in managers' employment risk (Amihud and Lev 1981) (Martynova and Renneboog, 2006). Financial synergies are seen more often in diversifying takeovers (Martynova and Renneboog, 2006).
A second motive for mergers or acquisition is the agency motive. This takes place when the acquirer's managers engage in a takeover for the management's self-interest. They may prefer to maximize corporate growth rather than corporate value as their private benefits tend to increase in line with firm size as pointed out by Goergen and Rennerboog (2004). Diversification of the managements personal portfolio (Amihud and Lev (1981)), use of free cash flow to increase the size of the firm (Jenson (1986)) and acquiring assets that increase the firms dependence on the management(Shliefer and Vishny (1989) are few other reasons for agency motive (Berkovitch and Narayan, 1993)) This motive enables managers to extract wealth from the shareholders. Therefore, in such takeovers, the correlations between the target's value and the bidder's value and between the target's value and the total value will be negative as targets shareholders, realizing their value to the acquirers management, will attempt to obtain some value arising out of the takeover creating what is known as they agency problem. Higher the agency problems lower the acquirer gains.
The Hubris motive maintains that acquisitions take place due to manager's mistakes in evaluating potential targets and not due to any synergy gains (Roll,1986). If there is an equal opportunity that managers are likely to overestimate as underestimate the synergy, they will engage in the takeover only when it is overestimated and hence end up paying too much for the target. As a result, higher the target gain, lower the bidder gain, such total gain is zero with wealth being transferred from the bidder to the target (Berkovitch and Narayanan, 1993).
However, the existing empirical evidence on the above three motives are unable to distinguish between the motives. Bradley, Desai and Kim (1998) argue that takeovers are value increasing transactions because total gains are positive in their sample of takeovers. Interestingly, the gains for the acquiring shareholders are negative in more than half the cases implying that hubris or agency motives may be the dominant factor. In the same nerve, Malatesta (1983) illustrates that mergers are value increasing transactions for targets but the opposite for acquirers concluding that the agency motive might be the driving factor. Firth (1980), using a sample of U.K takeovers finds evidence proving that the hubris hypothesis is consistent. Goergen and Renneboog (2004) find significantly positive correlation between target shareholder gains and total gains as well as target and bidder gains suggesting that synergies are the main motive for takeovers (only in the case for bids with total positive wealth).
Considerable amount of empirical research has been done on mergers and acquisitions in the past with a unanimous conclusion that takeovers create value for the combined firm, with the majority of the gains accruing to the target shareholders. Target shareholders in nearly all cases receive large premiums (on average 10% to 30%) relative to the pre-announcement share price (Martynova and Renneboog 2006) Similar to the domestic acquisitions, target shareholders in cross border M&A activity are seen earning positive abnormal returns (see Harris and Ravenscraft, 1991; Cebeynoyan et al, 1992; Cheng and Chan, 1995), although Danbolt (2002) finds no statistical difference between short-run abnormal returns for UK targets of domestic mergers and acquisitions (18.46%) and those of cross-border takeovers (19.68%).
A comparison of the shareholder's wealth between US and UK reveal the following results. Conn and Connell (1990) and Feils (1993) conclude that wealth effect for the US firms is significantly larger than UK firms (40% versus 18% in Conn and Connell and 26% versus 16% in Feils). Jarrell and Poulsen (1989), Servaes (1991), Kaplan and Weisbach (1992), Mulherin and Boone (2000), for instance, report average US target abnormal returns of 29% (for 1963-86), 24% (for 1972-87), 27% for (1971-82), and 21% (for 1990-99), respectively(Martynova and Renneboog, 2006). Similarly to their US counterparts, UK and Continental European targets gain average announcement returns of 24% during the period 1955-85 (Franks and Harris 1989), 19% in 1966-91 (Danbolt 2004), and 13% in 1990-2001 (Goergen and Renneboog 2004).
Empirical evidence from previous literature suggests there is a considerable contrast between the large share price returns of target firms and the frequently negligible returns of bidding firms. Jenson and Ruback( 1983) and Frank, Broyles and Hecht in their research on US firms showed that targets clearly gain and bidders gain, or at least do not lose.(Franks and Harris (1989). For the bidding firms, there is mixed findings in the literature about the sign of the price reaction to the announcement of an M&A. While some report small negative announcement returns for the acquirers (see e.g. Andrade et al. 2001, Mulherin and Boone 2000, Franks et al. 1991, Healy et al. 1992), others finds zero or small positive announcement abnormal returns (see e.g. Moeller and Schlingemann 2005, Schwert 2000, Loderer and Martin 1990, Asquith et al. 1983) (Martynova and Renneboog, 2006). But, bidder shareholders realize abnormal returns immediately around the announcement day which are insignificantly different from zero, regardless of the sign.
Similarly, Goergen and Renneboog (2004) conclude from the existing comprehensive literature that mergers and acquisitions are value creating for shareholders as target shareholders earn large positive abnormal returns and the bidder shareholders do not lose on average. Likewise, Halpern (1973), Mandelker (1974) Asquith (1983) Bradley, Desai and Kim (1988) prove that successful acquisitions create value for shareholders, but Malatesta (1983) and Roll(1986) refute this. While some studies conclude that gains from a takeover go to the target (Dodd (1980) Mandelker (1974), Asquith (1983) Halpern (1973)), some others find that gains are spilt between the acquirer and the target ( Franks, Broyles and Hecht (1977) in contrast report gains to both parties and yet other prove that bidding firms shareholder earning positive and significantly gains from successful takeovers (Asquith (1983), Bruner and Mullins(1983), Dodd and Ruback (1977)) (Frank and Harris, 1989).
Significant amount of research has been done to under the reasons for such changes in the target and bidder shareholders returns. A number of value drivers for target and bidder shareholder returns have been exposed by these studies. In the following section, we present the existing finding on a few of these value drivers.
An acquisition is defined as hostile, if the management of the potential target, for any reason, rejects the offer for takeover. Among other reasons, hostility maybe due to extract a higher premium from the acquirers for the target shareholders (Schwert, 2000) or the target management may believe that the proposal does not match their firm's strategy (Goergen and Renneboog, 2006). Moreover, according to the shareholder-welfare hypothesis as noted by Huang and Walking (1987), when there is resistance to a bid, it may result in the shareholders interest in the form of higher premiums from the current bidder or another one. Consistent with the shareholder-welfare hypothesis, Kummer and Hoffmeister (1978) account for higher abnormal returns during the initial announcement month for hostile tender offers.
Hostile bids generate a higher abnormal return for the target (12.6% on day 0 and almost 30% with the price run-up) on the announcement day whereas the bidders shareholders earn -2.5% showing their disapproval for the takeover as shown in the research of Georgen and Renneboog (2004). Alternatively, if the bid is a friendly one, or is a merger then they show that the acquisition generates a positive return of 2.5%. The reason for such bidder reaction, they say is, because when hostile bids are made, the share price of the target automatically reflects the expectations of such opposition which leads to an upward revision of the offer prices and hence the takeover premium to be paid. Moreover, the bidder will usually incur additional costs, including litigation and delay, and may be forced to pay higher premiums to target shareholders to encourage tendering (Jarrel and Poulsen, 1986). On the other hand, Gregory (1997); Loughran and Vijh (1997); and Lang et al (1989) show that hostile bids generate higher target as well as bidder returns than the announcement of friendly mergers or acquisitions. From the merged firm perspective, Kuipers at al (2003) show that for offers opposed by target firm's management, value is created for the combined firm but target shareholders earn lower returns (albeit not at significant levels).
Excessive managerial resistance, on the other hand, might only hinder the success of the deal as pointed out by Huang and Walking (1987). Similarly, Jensen and Ruback (1983) show that since an opposed bid increases acquisition costs for bidding firms they may forego the acquisition attempt that otherwise (if the bid were friendly, or less resistant) would have been profitable. Abandonment of these attempts produces what Jensen and Ruback term thetruncation phenomenon.
If a target firms shareholder reject a bid, in favor of the current management, then the shareholders the unsuccessful bidding firm will not experience any abnormal price changes. However, if the same target firm accepts the offer of another rival bidder, then the primary bidding firm will experience significant wealth loss around the days where the tender offer is made by the successful rival bidder (Bradley et al, 1982).
Looking at hostile bids from a corporate governance point of view, Rossi and Volpin (2004) show that hostile deals are more likely to take place in countries with better shareholder protection because good protection of minority shareholders makes control more contestable by reducing the private benefits of control.
A number of empirical studies investigate the rationale for offering cash for some acquisitions and stock for other acquisitions. Cumulative abnormal returns, of the bidders and targets, tend to differ most significantly and noticeably with the form of payment. Huang and Walking (1987), Travlos (1987), Servaes (1991) and Andrade et al (2001) find that cash offers generally induce significantly higher abnormal returns than do stock offers, for both the target and the bidding firm shareholders, in other words, the method of payment influences the takeover premium that must be paid.
Strong evidence is found by Goergen and Renneboog (2004) showing targets are highly sensitive to the means of payment used. They show that cash offers induce the CAR to increase by 10% compared to equity offers which shows an increase of only 6.7% in the CAR. In conclusion, they show that no matter whatever the event window, the CAAR of cash financed bids at significantly higher than other bids.
Conversely, Goergen and Renneboog (2004) show a completely different picture for the acquiring firms CAR. Regardless of the size of the event window, the bidding firm's shareholders react more favorably to stock offers (1%) than cash offers (0.4%). This result is in contradiction to that of Travlos( 1987) who shows that for pure stock offers, the bidder shareholders experience significant losses while in cash offers the bidding firms shareholders earn normal rates of return. Amongst others, such mixed empirical findings have been reported by Huang and Walking (1987), Franks and Harris (1989), Harris and Ravenscroft (1991), Eckbo et al (1990) and Loughran and Vijh (1997).
Such reaction in favor of cash offers to equity offers can be interpreted as a signal of the bidder's confidence in its abilities to exploit the synergies from the potential takeover without sharing the future value creation with the target shareholders (Goergen and Renneboog, 2004). Moreover, Amihud, Lev, and Travlos (1990), build on Harris and Raviv (1988) and Stulz (1988) and find that managers who value control prefer to pay cash for acquisitions to avoid ownership dilution and the possible loss of control (Ghosh and Ruland, 1998).
Amongst others, there are several factors that influence the choice of payment. Firstly, when targets are compensated in cash during an acquisition, the transaction becomes taxable, and the bidders end up paying a higher premium to the target. On the other hand, if they are compensated in stock (or any other form of payment), the taxation liability can be deferred or be paid immediately, depending on the situation, and the bidders do not have to pay a higher premium (Huang and Walking, 1987). Hence, due to these differential tax treatments cash offers have a higher return than stock offers, that is, targets demand a higher premium in situations that will force them to pay immediate taxes on their capital gains. (Wansley, Lane, and Yang [42]) (Travlos, 1987)
Furthermore, agency effects (as stated by Jenson (1986)) can also be a motive for acquirers to use cash instead of stock as a takeover currency. Firms will prefer using the excess cash flow to fund other activities, like takeovers, rather than returning this amount to the shareholders. Therefore, firms who are influenced by the agency effects will use cash to finance a takeover compared to other methods.
Regulation effect is another factor influencing the choice of payment. Wansley, Lane and Yang (1983) note that for stock offers, the acquirer must take a prior approval from the Securities and Exchange Commission before the targets begin to tender their shares. Huang and Walking (1987) argue that this could become a problem in hostile bids as the processing time for the approval is long, giving leeway to the target management to leak information to preferred acquirers or it could induce other bidders to join the race. In contrast, if bidders use cash instead of stock, they can start acquiring the target within a few weeks and avoid unnecessary payments of high premiums due to competing bids. Thus, if cash is used, then prior approval of the SEC is unwanted and acquisition becomes faster, making it a preferred form of payment in cases of hostile takeover where time is crucial and the speed of transactions matter.
In perfectly markets with symmetrically informed agents, the method of payment to finance acquisitions is economically irrelevant. However, if managers of an acquiring firm are aware that their shares are worth more than the current market price, that is, they are overpriced; then they will prefer to finance the takeover with cash. Conversely, if they feel that their shares are below the market price (underpriced), then they will want to use stocks as a takeover currency. Such behavior of managers arises due to information asymmetries (Myers and Mjluf, 1934), another factor that influences the method of payment. When the bidding firm, uses equity to finance the bid, the market will perceive this as negative news regarding the bidder's true stock value (signaling hypothesis). This negative reaction of the market participants on the announcement day is reflected in the negative returns for the bidder shareholders. Hence, such information asymmetries between the managers of a firm and the external investors may have a bearing on the choice of payment to be used.
Goergen and Renneboog (2004) show that in their sample of takeover, the smaller ones are all cash bids, while the larger ones involve equity. This implies that for large bids, the choice of payment is either all equity or a mixed offer as it becomes difficult to raise such large amounts of cash. As a result, the choice of means of payment does not act as a signal to the market about the over/undervaluation of the bidder's equity.
In conclusion, it becomes necessary to control the method of payment as most cross border deals are cash offers (Starks and Wei, 2003; Rossi and Volpin, 2004) and we need to control the likelihood that higher abnormal returns earned by the target and the bidder are driven by the fact that most of these acquisition are cash offers.
From the targets size perspective, an increasing its size relative to that of the acquirer would create an impact which would be readily observable in the acquirers return. In this context, if the acquisition is a wealth increasing one, then the largest positive return will be reflected when the target is relatively large compared to the bidding firm. Asquith, Bruner and Mullins (1983) and Travlos (1987) conducted their tests on the relationship between relative size and the returns to the acquirers, they found a significantly positive relation between the two (Jarrell and Poulson, 1989). However, Goergen and Renneboog (2008) argue in their research that the size of the target relative to the size of the bidder does not have an impact on target and bidder wealth effects. But they also highlight that a probable reason for such a conclusion could be that their study focused on large M&A deals and that therefore the average relative size was fairly homogeneous. Jarrell and Poulsen (1989) conclude that as the target size, relative to the bidder increases, the bidder firm shareholders experience a significant appreciation in their share prices. They measured the relative size as the value of outstanding equity of target divided by the value of outstanding equity of the bidder at three months before the transaction.
Ghosh and Ruland (1998) have investigated the correlation between managerial incentive for control rights in the combined firm and the relative size. Their results illustrate that if the target firm is small compared to the acquirer, then the target firm's managers' influence in the combined firm will also be small. Furthermore, they examine the relation between the method of acquisition and the relative size of the target and conclude that for acquiring firm managers who are concerned about the potential dilution of equity or the loss of control while acquiring a target larger in size compared to them, will prefer to offer cash instead of equity as compensation.
While calculating the effects of mergers on bidders, the large size of the bidder compared to the target can pose potential problems as presented by Frank and Harris (1989). They argue that this difference in sizes can make the gains or losses from the acquisition ambiguous. Conversely, if the target is bigger than the bidder, the bidder does not significantly lose. Controlling the size of the bidder, helps us detect the impact of the acquisition on the bidders share price (Frank and Harris, 1989).
Diversifying a business has several advantages- greater operating efficiency, less incentive to forego positive net present value projects, greater debt capacity, and lower taxes. Contrarily, there as costs associated with such diversification like the unrestricted resources to undertake value-decreasing investments, cross-subsidies that allow poor segments to drain resources from better-performing segments, and misalignment of incentives between central and divisional managers. There is no clear prediction about the overall value effect of diversification.
Berger and Ofek (1994) in their study of the effects of diversification on firm value are of the view that diversification reduces value. They estimate the value of each segment as if it were operating as a separate firm and concluded that the average value lost was 13% to 15% over the sample period. This loss is reduced when the diversification. Comment and Jarrell (1994) find a negative relation between abnormal stock returns and diversification. Similarly, Lang and Stulz (1994) also find a negative relation between shareholder wealth and diversification.
Doukas et al (2001) examined the effects of corporate diversification on the short term and long term wealth effects of 101 Swedish bidding firms. The results were the same as above- diversification does not create value. Furthermore, they provide evidence that unrelated diversification result in greater agency cost and operating inefficiencies which have a negative effect on the short and long term performance of the firm. This implies that unrelated diversification is a burden on shareholder wealth. On the contrary, they emphasize that if firms engage in expansion of their primary line of business (related diversification), then announcement and post-acquisition performance gains are realized (Doukas et al, 2001). In the same vein, Harris and Ravenscraft (1991) present that relation diversification not only increase the efficiency of the firm but also have a positive effect on economies of scale and market power. Martynova and Renneboog (2006) find that when bidding firms engage in related diversification, bidding shareholders earn significantly while target shareholders earn more in unrelated diverfication. The reason for such opposite effects on wealth is bidders tend to overpay due to aggressive bidding, implying that acquisitions are driven by motives other than shareholder profit.
Empirical analysis by several researchers (Bradly, Kim and Desai, 1988; Kuipers, 2003) show evidence that the greater the bidding competition for assets, higher the returns to targets and lower the returns to acquirers. Franks and Harris show that target abnormal returns are one third or two thirds higher when there are multiple bids. These results are in line with those of Bradly, Desai and Kim (1988) who state that multiple bidders increase abnormal returns by over 40% to target shareholders, compared with less than 30% in the single bidder case.
However, Frank and Harris (1987) do reason that in challenged bids, the total synergistic gains are larger. Hence, target shareholders not only benefit at the expense of bidding firm shareholders, but also from the synergistic gains of the deal. This is acknowledged by Jarrel and Poulsen (---) who are of the opinion that if an acquisition is not challenged, then the target will have to accept the number of shares offered by the bidders, but in the opposite case due to competition, the target will benefit from the merger gains as the offer price will be driven up and larger share of the returns will go to the target compared to the bidder. Franks and Harris (1987) also conducted a direct comparison research on contested bids between two countries. Their evidence suggests contested bids lead to higher target wealth in both countries.
Virtually all researchers have found that target wealth increases in contested bids, but in terms of bidder's wealth, there is a mixed finding. While Bradley, Kim and Desai (1988) show that takeover wealth to acquiring firm shareholders are significantly positive in single-bidder contests and insignificantly different from zero in multiple-bidder's case, Franks and Harris (1987) find no such substantial result. Franks and Harris explain that the competition amongst bidders reduces the average gains for the acquirers, the negative effect being especially severe for late-bidder acquirers, commonly known as white knights.
Furthermore, both Jarrell and Bradley, hypothesize that post Williams Act, the acquirer's returns should have decreased further as now the competing bidders could use the information produced by the original bidders, and the target returns should have increased. They prove their hypothesis as they found that abnormal returns to bidders declined from an average of about 9% prior to the Williams Act to about 6% following the adoption of the Williams Act, and that returns to targets increased by about 20% (Jarrell and Poulsen, ---)
Corporate control is defined as the rights to determine the management of corporate resources - that is, the rights to hire, fire and set the compensation of top-level managers [Fama and Jensen (1983a, b)]. It encompasses activities that range from controlling the use of corporate resources, such as legal and regulatory systems and competition in product and input market, to controlling the majority seats of a firm's board of management. When a bidding firm acquires a target firm, the managing and controlling activities of the target firm are transferred to the board of directors of the acquiring firm. Therefore, through acquisitions the top management of the acquiring firm acquires the rights to manage the resources of the target firm.
Contractual devices, like cross border mergers and acquisitions, (re) incorporations, and cross listings, are means enabling firms to change its national corporate governance standards and adopt a new one (Goergen and Renneboog, 2004). According to Rossi and Volpin (2004) selling to a foreign firm is a form of contractual convergence similar to the decision of listing in countries with better corporate governance and better-developed capital markets. Pagano, et al. (2002) and Reese and Weisbach (2002) highlight that firm's from countries with weak legal protection for minority shareholders list abroad more frequently than do firms from other countries.
Nevertheless, the possibility of a world wide convergence in corporate governance standards is a subject of debate amongst various academicians. While Hansmann and Kraakman (2001) suggest that a formal convergence towards the acquirers governance standards will happen soon, Coffee (1999) argues that diffences in corporate governance will persist but with some degree of functional convergence (Rossi and Volpin, 2004).
Rossi and Volpin (2004) focus on merger activities and the target premium aggregated by countries. They hypothesize that cost of capital is reduced when the acquirer hails from a superior system of corporate governance than the target, making the acquisition of the target a sensible choice. On the same lines, Coffee (1999) concludes that firms from better investor protection system will acquire firms from lower protection systems. Furthermore, when most targets are from countries with weaker shareholder protection and disclosure practices they stand to gain from lower cost of capital associated with high investor protection. Rossi and Volpin (2004) base their findings on those of La Porta et al (2000), showing that a more active market for mergers and acquisitions is the outcome of a stronger corporate governance regime. They conclude that cross border M&A's enhance convergence towards stronger investor protection, which has a positive impact on the volume of takeovers, bid premiums and the number of hostile takeovers. In addition, better protection in the bidder country, allows the bidder to make all equity offers.
Recent studies have been carried out to assess the impact of the legal and corporate governance environment on the valuation of a firm. These studies have been done at both the firm specific and industry level. Bris and Cabolis (2005) and Kuipers et al (2003) are amongst a few who have focused their research on firm specific environment.
Kuipers et al, (2003) test the impact of the legal environment on the shareholders returns of US targets, foreign acquirers and the combined firm. They further test the agency cost contracting hypothesis of the acquiring firm as captured by the legal environment and quality of protection provided to the security holders based on the LLSV indices. Agency cost contracting hypothesis states that firms from strong investor protection countries will act in the interests of their shareholders (or creditors, if creditor protection is superior compared to the shareholders) and will accordingly engage in value increasing (or value decreasing) investments. Alternatively, there is the contractual convergence hypothesis which states that firms from weak investor protection countries acquire firms from high investor protection, with the aim of bootstrapping themselves to a better system of governance. In support of Wurgler (2000) and LLSV(2002) Kuipers et al.(2003) conclude that- The existence of a strong rule of law and security owner protection mechanisms acts as a substitute contracting mechanism for mitigating the classic agency cost of the firm (Kuiper et al, 2003). With regards to shareholder returns, they find that shareholders of the acquiring firm stand to gain when their rights are protected and the combined firm is more valuable but if the creditor rights are stronger then they earn lower returns (keeping in mind that Kuipers et al, focused on US targets alone).
Starks and Wei (2003) use country-level corporate governance focusing on the U.S target returns and argue that target shareholders should be compensated for adopting inferior corporate governance standards. In other words, they argue that takeover premium should decrease with an increase in the level of acquirer's home country corporate governance. Moreover, they elucidate that the importance of the bidder's corporate governance is of significance only in stock offers, as only when the form of compensation is stock, the target is exposed to increased risk from low corporate governance standards. In a cash for-stock merger, the shareholders of the newly created firm are the old shareholders of the acquirer and thus unaffected, while in a stock-for-stock merger, some shareholders of the newly created firm are located in the country of nationality of the target. In conclusion, they prove that the difference in corporate governance regimes across countries have a significant impact on the cross-border merger premiums, suggesting that corporate governance has a valuation effect.
Bris and Cabolis (2008) find that takeover premiums in cross-border deals are increasing in the level of shareholder protection and the quality of accounting standards in the acquirer's country and that the pattern holds only when target nationality changes completely and this takes place only in 100% acquisitions. This is contradiction to the finding of Starks and Wei (2003) who find a negative relationship between takeover premium and the acquirer's corporate governance standards. Furthermore, they do not find a symmetric effect, that is, if the bidder has a worse protection regime which is enforced on the target or if the merged firm chooses accounting standards that are worse than before the merger, the takeover premium is not significantly lower.
Wang and Xie (2007) report positive and significant impact of positive spillover effects of shareholder rights on both the target and acquiring shareholders wealth in domestic U.S mergers and acquisitions. They also examine the operating performance of the combined firm and conclude that difference in the shareholder rights index has a positively significant impact. On the same lines, Martynova and Renneboog (2008) have studied the valuation effects of corporate governance spillover in cross-border M & A's. They hypothesize that the variation in the different corporate governance standards will be accentuated in cross-border transaction compared to domestic deals. When the bidder is subject to better corporate governance standards than the target, the acquisition may result in the target importing the better corporate governance standards from the bidder. This improved governance is expected to generate additional value which should be reflected in the abnormal share prices of both the target and the bidder. This effect, in the case for full takeovers, has been termed as positive spillover by law. If the takeover is a partial one, then the same effect is termed as spillover by control. On the other hand, if the target firm is from a country with high investor protection standards and it is being acquired by a country with low investor protection standards, then this can have two effects. The target firm could either adopt the poor standards of the acquirer thereby suffering from low abnormal returns and a loss of in value of target assets (negative spillover by law) or the acquirer could voluntarily adopt the superior governance standards of the target and enjoy the benefits of a higher investor protection regime (bootstrapping). The effects of bootstrapping, as explained by Martynova and Renneboog (2008) and Starks and Wei (2003) could be amplified in cases of partial takeovers, all stock offers and mixed offer as the target shareholder will remain involved in the merged company and may actively resist managerial decisions. In their research, Martynova and Renneboog (2008) show their positive spillover by law hypothesis was supported while the negative spillover by law hypothesis was not. Moreover, the bootstrapping hypothesis was proved only for partial takeovers.
In the first section we identified the different motives for merger and acquisitions. Empirical research points out three main motives - synergy, agency and hubris. As explained, the synergy motive creates vale for both, the target and the acquirer shareholders, while agency and hubris motives reduce value. We then proceeded to explain the different drivers of value in mergers and acquisitions - form of bid, the method of payment, relative size of the bidder, effects of diversification and contested nature of the bid. Different views of different academicians and researchers were presented in this section. Finally, we presented in brief, the works of various papers that have studied the effects of corporate governance on bidder and target shareholders wealth, specifically that of Rossi and Volpin (2004), Kuipers et al (2003), Starks and Wei (2003), Bris and Cabolis (2005), Wang and Xie (2007) and Martynova and Renneboog (2008).
