Partial acquisitions, corporate control, and performance

Abstract

A partial acquisition represents a unique form of corporate restructuring because it alters the ownership structure of two entities (in opposite ways), and therefore alters the form of control over the target's management. The proportion of the partial target that is owned by other shareholders is reduced by the increase in ownership by the partial acquirer. Yet, the transaction is unique in that the target firm continues as a going concern. Therefore, the target can be evaluated over time to determine the impact of the restructuring. Given the shift in ownership structure and control over the partial target, the performance of partial targets could be affected. It is found that while the partial targets experience favourable valuation effects at the time of the announcement, there is no evidence of unusual long-term performance beyond the initial announcement effects. Therefore, the realized benefits to the partial target due to improved monitoring by the partial acquirer are limited on average to the initial market reaction. However, there is much dispersion in the performance levels of the partial targets following the date at which they were partially acquired. A cross-sectional analysis to determine whether the variance in performance levels among partial targets can be attributed to corporate control characteristics. It is found that the performance of the partial targets subject to the least amount of control before the partial acquisition is more favourable following the acquisition. This finding attributed to the greater change in discipline as a result of the partial acquisition. In addition, it is found that the performance of the target following the partial acquisition is conditioned on characteristics of the partial acquisition itself that represent the partial acquirer's degree of control over the partial target.

Notes

 This criteria was employed to help ensure that the partial acquisition was large enough to have a measurable effect on the long term valuations of the acquirer.

 It is possible that a partial acquisition may be a prelude to a full acquisition in the future, depending on the performance of the partial target since the partial acquisition occurred. However, the partial target is included in the sample whether it ultimately was fully acquired or not, and its returns are included until the publicly-traded entity no longer exists.

 Following Rau and Vermaelen (1998), the partial target's abnormal returns is computed relative to a size and book-to-market control portfolio. The statistical significance of these abnormal returns is also tested by using the bootstrapping methodology described in Ikenberry et al. (1995). The results (not reported) are qualitatively similar to the results obtained by using the control-firm approach.

 The buy-and-hold return for the first year starts 20 days after the partial acquisition date to exclude the announcement effect of the acquisition.

 In a separate regression (not reported) the squared value of the INSIDER variable was also included. The estimated coefficient was statistically insignificant.

 Some studies use a variance inflation factor value greater than 5.0 as an indication of severe multicollinearity. See Marquardt and Snee (1975) on the use of this measure.

 Also, Gujarati (1978) and Judge et al. (1988), caution against applying simultaneous equation models such as 2SLS to relatively small samples, as in this research.