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Acquiring Intangible Resources through M&As: Exploring Differences between Public and Private Targets

by

J-C. Shen and

L. Capron

2003/50/SM

Working Paper Series

ACQUIRING INTANGIBLE RESOURCES THROUGH M&As: EXPLORING DIFFERENCES BETWEEN PUBLIC AND PRIVATE TARGETS

Jung-Chin Shen Strategy and Management Department

INSEAD Boulevard de Constance 77305 Fontainebleau Cedex, France Tel.: (33) 1 60 72 44 40 Fax: (33) 1 60 74 55 00 E-mail: jung-chin.shen@insead.edu

Laurence Capron* Strategy and Management Department

INSEAD Boulevard de Constance 77305 Fontainebleau Cedex, France Tel.: (33) 1 60 72 44 68 Fax: (33) 1 60 74 55 00 E-mail: laurence.capron@insead.edu

Version: 20th June, 2003

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ACQUIRING INTANGIBLE RESOURCES THROUGH M&As: EXPLORING DIFFERENCES BETWEEN PUBLIC AND PRIVATE TARGETS

Abstract In this study, we examine whether the resources bought from public targets are different from those bought from private targets, and the implications on acquirer returns. We argue that public targets represent a stronger mechanism for buying intangible resources than private targets. However, we do not expect acquirers of public targets to outperform acquirers of private targets. Combining an event study with a survey of post-acquisition resource transfer on a sample of 101 horizontal acquisitions, we find support for our predictions. Overall, the results suggest that public and private targets are qualitatively different in terms of the degree of asymmetric information, bidding process and post-acquisition process.

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INTRODUCTION In this study, we examine whether the resources bought from public targets are different from those bought from private targets, and the implications on acquirer returns. Previous merger and acquisition (M&A) research has tended to focus on the perspective of the buyer side and examine the acquisition of publicly traded companies. As a result, not only is the seller side perspective under-theorized, but privately held targets have been largely ignored in prior M&A studies. However, several recent studies provide initial evidence suggesting that acquisitions of public and private targets are qualitatively different. Two recent papers have reported that bidders acquiring private targets experience a positive abnormal return in stock and/or cash offers, which contrasts with the zero or negative abnormal returns documented for bidders using stocks to acquire public targets (Chang, 1998; Fuller, Netter and Stegemoller, 2002). Evidence also shows that bidders tend to acquire public rather than private targets when acquisitions involve higher transaction costs in the presence of adverse selection problems (Shen and Reuer, 2003). Despite the initial evidence on the qualitative differences between public and private targets, our understanding of how acquirers deal with the differences remains incomplete. Previous studies attribute variations in acquisition performance to characteristic differences between public and private targets based on blockholder or liquidity explanations (Chang, 1998; Fuller et al., 2002). Little attention has so far been devoted to the difference in resources bought through private versus public targets, and accordingly, to the differences in post-acquisition behaviors that are presumably the sources of economic gains from acquisitions (Capron, 1999). We develop two focal arguments concerning resource redeployment following acquisitions of public versus private targets and its performance implications. We

first argue that bidders' propensity to redeploy the target's intangible resources tends to be stronger in acquisitions involving public targets rather than in those involving private targets. This is because greater information disclosure on public targets and the signals attached to being public can mitigate the problems associated with information asymmetry between acquirers and targets. Second, despite public targets' greater propensity to mitigate transaction costs and redeploy intangible resources, we do not expect acquirers of public targets to outperform acquirers of private targets. Overpayment, uncertainty associated with the value of intangible assets, bidding competition may prevent acquirers of public targets from capturing the value from an acquisition, while acquirers of private targets may benefit from the liquidity discount associated with private firms and lower competition among bidders.

Our empirical data include 101 horizontal mergers and acquisitions that took place in European and American manufacturing industries between 1988 and 1992. The empirical evidence suggests that acquirers' propensity to redeploy targets' intangible resources is significantly higher in acquisitions involving public targets than in those involving private targets. We also find that acquirers of public targets do not outperform acquirers of private targets.

In the next section, we introduce the theoretical background for the study and the predictions. We then present the methods and the empirical results. We conclude by discussing the implications and limitations of our findings.

BACKGROUND AND HYPOTHESES Drawing on information economics (Akerlof, 1970; Spence, 1974; Rothschild and Stiglitz, 1976), finance (Jensen and Meckling, 1976; Allen and Faulhaber, 1989; Fuller et al., 2002), and strategy literature (Coff, 1999a; Reuer and Shen, 2002), we argue that acquiring a public target is a stronger mechanism for buying intangible

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