The interplay between target firm R&D, acquirer debt financing and takeover premia

ABSTRACT

The level of acquisition premia is of paramount importance in light of the vast sums paid to target shareholders and the often disappointing returns realized by corporate buyers. In this letter, we focus on the impact of R&D investments by targets on the acquisition premium contingent upon the acquirer’s financing choices. Based on a unique hand-collected sample of 407 listed European transactions, we find a positive effect of target R&D on premia paid. Yet, when acquirers finance the acquisition of an R&D intensive target with debt, the positive relation disappears. Consequently, we establish that financing sources affect bidding strategies of acquiring companies in case of difficult-to-value targets.

KEYWORDS:

• Mergers
• acquisitions
• premium
• financing
• R&D

JEL CLASSIFICATION:

• G34
• O30
• G32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Headquarters of both the target and acquirer have to be in one of the EU-27 member states: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Republic of Ireland, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, the UK.

² Based on Directives of the European Union, a uniform treatment of R&D investments had been established across European countries since 1996. Despite a couple of specific cases, R&D investments cannot be capitalized and should thus be expensed. Although disclosing R&D expenses is only mandatory in the UK, prior research indicates that companies with R&D expenses are usually inclined to disclose them on a voluntary basis (Hall and Oriani 2006).

³ The study of Laamanen (2007) is restricted to acquisitions of targets active in technology-based industries.