22-01-2013, 02:30 PM
MERGERS AND ACQUISITIONS
MERGERS.ppt (Size: 450.5 KB / Downloads: 77)
The Winner's Curse in M&A
Between 1991 and 2001, shareholders of acquiring firms lost $216 billion, thereby experiencing the winner's curse.
Disproportionate share traced to very large losses by a few acquirers during the period 1998 through 2001.
Many of the large loss acquirers had been active acquirers prior to their large loss acquisitions, and the market values of their firms had been increasing.
Optimistic, Overconfident Executives
Hubris hypothesis.
Excessively optimistic, overconfident CEOs
Are described as such in the press, and
Wait too long before exercising options.
More likely to have completed an acquisition.
Tendency compounded when firm is generating positive cash flow, but mitigated when board size less than 12.
Cash Flow
Financially constrained firms run by excessively optimistic, overconfident CEOs choose not to go to the capital markets in order to secure the funds needed to conduct an acquisition.
They act as if the market undervalues the equity and/or risky debt issued by their firm.
AOL Time Warner
In January 2000, America Online (AOL) announced its intention to acquire the media conglomerate Time Warner.
Goal was to create a distribution channel whereby Time Warner’s media products would be delivered via Internet broadband.
The purchase price, $165 billion in AOL stock, set an acquisition record.
Valuation
The combination of AOL and Time Warner occurred at the height of the technology stock bubble.
In January 2000, the market capitalization of AOL was $185.3 billion, over twice as large as the $83.7 billion market capitalization of Time Warner.
The market’s judgment of the overall merger was favorable, with the shareholders of Time Warner benefiting at the expense of the shareholders of AOL.
Behavioral Issues
Did Carly Fiorina’s questions appeal to the directors’ natural tendency to be overconfident?
Did she frame the issue for them in a way that placed them in the domain of losses?
In speaking about drastic action, did she induce them to be risk-seeking?