A signaling theory of
acquisition premiums:
Evidence from IPO targets
Academy of Management Journal (2012)
Jeffrey Reuer
Tony W. Tong
Cheng-Wei Wu
University of ColoradoBoulder
University of ColoradoBoulder
University of Hong Kong
Presented by W. Zhang
Motivation
• Information asymmetries during acquisition of
IPO firms
• To join literatures on IPOs and acquisition
premiums with signaling theory
• Research question: What particular signals about
IPO firms will have an impact on the premiums
they obtain when selling their companies?
Background theory
• Acquisition premiums determinants:
• Value creation potential
• Managerial biases and organizational learning
• Agency costs
• Signaling theory: implications of asymmetric
information and adverse selection. Spence (1974)
seminal work on hiring.
Hypotheses
• Hypothesis 1. The acquisition premium received by
an IPO target is positively related to the reputation
of its investment bank.
• Hypothesis 2. The acquisition premium received by
IPO targets is greater for targets backed by
prominent VCs.
• Hypothesis 3. The acquisition premium received by
an IPO target is positively related to the number of
alliances it has formed with prominent partners.
Hypotheses
• Hypothesis 4a. Affiliations with reputable investment banks
are particularly beneficial to the acquisition premiums that IPO
targets receive when they sell their companies to acquirers
based in industries with different knowledge requirements.
• Hypothesis 4b. Affiliations with prominent VCs are particularly
beneficial to the acquisition premiums that IPO targets receive
when they sell their companies to acquirers based in industries
with different knowledge requirements.
• Hypothesis 4c. Alliances with prominent partners are
particularly beneficial to the acquisition premiums that IPO
targets receive when they sell their companies to acquirers
based in industries with different knowledge requirements.
Hypotheses
• Hypothesis 5b. Affiliations with prominent VCs
are particularly beneficial to the acquisition
premiums that IPO targets receive when they sell
their companies to acquirers based in foreign
countries.
• Hypothesis 5c. Alliances with prominent partners
are particularly beneficial to the acquisition
premiums that IPO targets receive when they sell
their companies to acquirers based in foreign
countries.
Data
• SDC database, M&A data, Compustat and CRSP
• Newly public firms (1991-2001), excluding REITs, mutual
funds, unit offerings, spin-offs, LBOs and financial
services sector.
• IPO firms that where acquired within five years of going
public
• Deals with a transaction value greater than $50 million
• 308 deals involving 263 acquires
Measures
• Dependent variable
• Acquisition premium: percentage difference
between a purchase price and IPO target’s
value four weeks prior the announcement of
the acquisition.
Measures
• Independent variables
• Investment bank reputation: ranking index by
Carter and Manaster (1990)
• Venture capitalist prominence: dummy
variable. 1 if the number of IPOs backed by the
VC where above the median, 0 otherwise
Measures
• Independent variables
• Prominent alliance partners: log (1 + number of
prominent alliance partners)
•G
Proportion of
employees in
occupation k in an
acquirer’s industry
Proportion of
employees in
occupation k in an
target’s industry
• Cross border: dummy variable, 1 if acquirer was a
foreign, 0 otherwise.
Measures
• Controls
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Firm size
Firm Tobin’s q
Underpricing
Analysis coverage
Time since IPO
Managerial ownership
Inside directors
Blockholdings
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Acquire M&A experience
Deal size
Tender offer
Stock offer
Competing bidders
Percentage acquired
High tech industry
Results
Results
Results
Supplementary analysis
• Sample selection bias
• Endogeneity
• Decay of signals
• Alternative measures of signals and acquisition
premiums
Discussion
• Target firms’ signals can positively affect the
acquisition premiums they receive
• Inter-organizational relationships with prominent
organizations confer benefits
• These benefits are greater when IPO firms sell
their companies in different industries.