Australian takeover waves: a re-examination of patterns, causes and consequences

Thi Hong Duong

Research output: ThesisDoctoral Thesis

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Abstract

This thesis provides more precise characterisation of patterns, causes and consequences of takeover activity in Australia over three decades spanning from 1972 to 2004. The first contribution of the thesis is to characterise the time series behaviour of takeover activity. It is found that linear models do not adequately capture the structure of merger activity; a non-linear two-state Markov switching model works better. A key contribution of the thesis is, therefore, to propose an approach of combining a State-Space model with the Markov switching regime model in describing takeover activity. Experimental results based on our approach show an improvement over other existing approaches. We find four waves, one in the 1980s, two in the 1990s, and one in the 2000s, with an expected duration of each wave state of approximately two years. The second contribution is an investigation of the extent to which financial and macro-economic factors predict takeover activity after controlling for the probability of takeover waves. A main finding is that while stock market boom periods are empirically associated with takeover waves, the underlying driver is interest rate level. A low interest rate environment is associated with higher aggregate takeover activity. This relationship is consistent with Shleifer and Vishny (1992)'s liquidity argument that takeover waves are symptoms of lower cost of capital. Replicating the analysis to the biggest takeover market in the world, the US, reveals a remarkable consistency of results. In short, the Australian findings are not idiosyncratic. Finally, the implications for target and bidder firm shareholders are explored via investigation of takeover bid premiums and long-term abnormal returns separately between the wave and non-wave periods. This represents the third contribution to the literature of takeover waves. Findings reveal that target shareholders earn abnormally positive returns in takeover bids and bid premiums are slightly lower in the wave periods. Analysis of the returns to bidding firm shareholders suggests that the lower premiums earned by target shareholders in the wave periods may simply reflect lower total economic gains, at the margin, to takeovers made in the wave periods. It is found that bidding firms earn normal post-takeover returns (relative to a portfolio of firms matched in size and survival) if their bids are made in the non-wave periods. However, bidders who announce their takeover bids during the wave periods exhibit significant under-performance. For mergers that took place within waves, there is no difference in bid premiums and nor is there a difference in the long-run returns of bidders involved in the first half and second half of the waves. We find that none of theories of merger waves (managerial, mis-valuation and neoclassical) can fully account for the Australian takeover waves and their effects. Instead, our results suggest that a combination of these theories may provide better explanation. Given that normal returns are observed for acquiring firms, taken as a whole, we are more likely to uphold the neoclassical argument for merger activity. However, the evidence is not entirely consistent with neo-classical rational models, the under-performance effect during the wave states is consistent with the herding behaviour by firms.
Original languageEnglish
QualificationDoctor of Philosophy
Publication statusUnpublished - 2009

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