"Does Merger Structure Matter?"
8/25/2008
Does Merger Structure Matter? (Grace) Qing Hao, John S. Howe
The paper provides evidence on the determinants and effects of merger structure in the context of friendly mergers. A friendly merger can be structured as a one-step transaction or a two-step transaction. In a two-step transaction, the first step is to launch a tender offer according to a merger agreement, and the second step is a merger. By contrast, a one-step transaction involves only a merger. We test two competing hypotheses to explain the effects of a two-step transaction form: the efficiency and reduced competition hypotheses. Controlling for deal and firm characteristics, shareholder anticipation, and the endogenous nature of the choice of transaction form, we report several findings. First, two-step mergers do not prevent competing bids and are not associated with lower takeover premiums. Second, two-step mergers have greater (positive) market reactions to the target firm and the bidder firm, a greater combined wealth effect, higher deal completion speed, and higher completion rates. Third, we detect no post-merger return reversal for either kind of merger, nor for the return difference between the two types of mergers. The evidence does not support the reduced competition hypothesis and suggests that using a tender offer in a friendly merger is beneficial to both target and bidder shareholders. We provide several explanations for the continued use of one-step mergers.
JEL classification: G34; K22
Mergers; Merger structure; Two-step mergers; Negotiated tender offers; Takeover premiums; Market reactions
Last Edited: 9/12/2008