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					  Bidders’ Strategic Timing of Acquisition
 Announcements and the Effects of Payment
Method on Target Returns and Competing Bids


  Sheng-Syan Chena, Robin K. Choub and Yun-Chi Leec
             aNational Taiwan University

            bNational Chengchi University

             cNational Central University
                                     I. Introduction

   In M&A, the method of payment has an information signaling effect
   Stock returns accrued to target firms are significantly higher in cash
    payment acquisitions than in stock or mixed payment acquisitions
        Huang and Walkling, 1987; Servaes, 1991; Schwert, 1996; Heron and Lie, 2002
   High initial acquisition premium signals a high bidder valuation
        Cash payments are used to signal a higher valuation of the target firm so as to preempt
         any potential competing bidder.
        Giammarino and Heinkel (1986), Fishman (1988 and 1989), and Hirshleifer and Png
         (1989)




                                                 2
                                    I. Introduction

   Cash payment transactions are associated with higher acquisition premiums
    and target shareholders earn higher returns when the acquisition is financed
    with cash.
        Cotter and Zenner, 1994; Officer, 2003 and 2006
   Cash payment offers may be more effective in deterring competition.
        Fishman (1989)
        Mixed evidence: Martin (1996) documents that cash payments preempt competing bids,
         but Jennings and Mazzeo (1993), Officer (2003), and Bange and Mazzeo (2004) do not
         find supporting evidence.




                                               3
                                I. Introduction

   Existing studies do not distinguish between the announcements of
    acquisitions made during overnight (nontrading) and daytime (trading)
    hours.
   Prior literature suggests that it is important to separate these two different
    types of acquisition announcements.
   Patell and Wolfson (1982), Woodruff and Senchack (1988), and Gennotte
    and Trueman (1996) document that managers strategically choose their
    announcement timing when disclosing corporate news.
   Announcement timing may affect the degree of information dissemination
    preceding the first trade in the post-announcement period.




                                         4
                                    I. Introduction

   If the news is announced during the market close, the nontrading period
    allows the information to be fully transmitted to all market participants.
        Both investors and market makers thus have more time to evaluate the news.
   The trading procedures during the market opening differ from those
    employed during normal trading hours.
        The opening mechanism ensures that much of the nontrading hour information is
         impounded into the prices (Greene and Watts, 1996; Cao, Ghysels, and Hatheway, 2000;
         Masulis and Shivakumar, 2002).




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                             I. Introduction

   Market reaction is greater for announcements made during nontrading
    (Greene and Watts, 1996; Masulis and Shivakumar , 2002).
   Their findings indicate that nontrading-hours announcements tend to have
    more information content than trading-hours announcements.
   We argue that bidder managers’ strategic timing of acquisition
    announcements is important in assessing the effects of payment method on
    signaling target valuation and deterring competing bids.




                                      6
                          II. Hypothesis Development

A. The information effect of payment method during different announcement
   times
  Bidders may choose to release their acquisition announcements during the
   market close to achieve the widest possible information dissemination.
  They would choose to release their cash-financed acquisition with high
   premiums during nontrading periods.
        Result in higher stock returns to target shareholders than stock or mixed payment offers.
   The timing strategy of a bidder is likely to maximize the signaling effect of
    the method of payment and to create a unanimous market perception of the
    bidder’s valuation of the target.
        Market participants have more time to obtain, analyze, and evaluate the new information
         arising from overnight announcements.
                      II. Hypothesis Development

   If a bidder decides to make an announcement during normal trading hours,
    the information asymmetry that exists between informed traders and other
    market participants cannot be reduced (Francis, Pagach, and Stephan,
    1992).
   Chaotic traders tend to immediately react to daytime disclosures, thereby
    creating excessive noise during trading hours.
   The information signaling effect of the payment method will thus be
    weakened, resulting in greater uncertainty with regard to the market
    perception of the bidder’s valuation of the target and his/her determination
    to acquire it.




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                          II. Hypothesis Development

B. Preemptive bidding during different announcement times
  Cash payment offers tend to lower the likelihood of competition than other
   offers when the announcements are made during nontrading periods.
        Due to higher premiums
   Competing bids are negatively related to the probability of bid success
    (Officer, 2003; Bange and Mazzeo, 2004; Hsieh and Walkling, 2005),
        A greater likelihood of completing proposed acquisitions for those overnight
         announcements that involve all cash payment.
   In contrast, the positive effects of the payment method, in terms of
    deterring potential bidders and completing proposed transactions, are less
    likely when the announcements are made during normal trading hours.




                                                9
                           III. Data and Methodology

A. Data and sample description
  SDC Worldwide Mergers and Acquisitions database from 1995 to 2004.
        NYSE, Amex, and Nasdaq.
   The specific timing of the public announcement is identified by searching
    the Dow Jones News Retrieval Service (DJNRS) database.
   Intraday trade and quote data from the Trade and Quote (TAQ) database
        Examine the real-time market reaction to acquisition events in the two-hour trading
         period immediately surrounding the announcements.




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                       III. Data and Methodology

   1,230 acquisition announcements.
   The NYSE, Amex, and Nasdaq are open for trading from 9:30 a.m. to 4:00
    p.m. EST.
   If an acquisition is announced outside this trading period or during holiday
    periods, this is defined as a nontrading-hours announcement
   An announcement made during 9:30 a.m. to 4:00 p.m. is referred to as a
    trading-hours announcement.
   Table 1 reports the sample distributions and summary statistics for the
    1,230 initial acquisition announcements.




                                        11
                     III. Data and Methodology

B. Methodology
B.1. Measurement of acquisition premiums
  The acquisition premium employed in this study is defined as follows:




                                     13
                     III. Data and Methodology

B. Methodology
B.2. Measurement for the stock price impact of acquisition announcements
  Follow Busse and Green (2002)
  Calculate the percentage price change from the prevailing mid-quote data.
   The real-time share price response to the target firm is measured by the
   cumulative stock returns starting from one trading hour before to one
   trading hour after the announcement.
  For nontrading-hours announcements, the cumulative returns over a two-
   hour trading window is adjusted for changes in the overall market.




                                      14
                          III. Data and Methodology

C. Evidence on different information processes by announcement in days of the
   week and by exchanges
  As previously pointed out, a unanimous market perception of the bidder’s
   valuation of the target is more likely to achieve, if the time of nontrading
   periods is longer.
  One way of testing this hypothesis is to examine the effects of
   announcements on weekends versus on weekdays.
        The signaling effect should be stronger for announcements made after market close on
         weekends than on weekdays.
   Moreover, it is interesting to see whether the effects of nontrading periods
    are affected by trading mechanisms.




                                               15
        Panel A:
         Nontrading-hours cash
         offers made during
         weekend have
         significantly higher
         mean and median
         cumulative returns
         than those made
         during weekdays.
        Panel B:
         Nontrading-hours
         announcements are
         found to have
         significantly higher
         mean and median
         cumulative returns
         than trading-hours
         announcements across
         three exchanges.
16
 IV. Evidence on the
Information Effect of
the Payment Method
     for Different
Announcement Times
A. Acquisition premiums
   For overnight announcements,
    the cash payment dummy are
    positive and statistically
    significant.
   For daytime announcements, the
    acquisition premiums are
    insignificantly related to the cash
    payment dummy.
B. Target firm stock price
    reaction
   The coefficients for the
    cash payment dummy are
    significantly positive at
    the 1% level for overnight
    announcements.
   They are statistically
    insignificant for daytime
    announcements.
C. Target firm stock price
    reaction net of acquisition
    premiums
   The effect of cash
    payment offers is
    correlated with the
    acquisition premiums.
   Overnight cash payment
    offers still have a
    marginal effect on the
    target’s stock price
    reaction after considering
    the effect of acquisition
    premiums on target
    announcement returns.
    IV. Evidence on the Information Effect of the Payment
         Method for Different Announcement Times

   The results from Tables 3 to 5 support our hypothesis.
   For overnight acquisition announcements, cash payment offers are associated
    with significantly higher acquisition premiums and target returns.
   For daytime announcements, no significant differences in the acquisition
    premiums and target returns are found between cash acquisitions and those
    using other payment methods.
   Even after considering the effect from acquisition premiums, cash payment
    offers cause greater market reaction than other payment offers for
    nontrading-hours announcements, but not for trading-hours announcements.




                                      20
    V. Evidence on Deterring Competition by Cash Payments
              for Different Announcement Times

A. The relationship between the payment method and competition




   Nontrading-hours: Cash(2.43%) v.s. Stock (4.92%), Diff=-2.49%, 10% significant
                      Cash(2.43%) v.s. Mixed (6.69%), Diff=-4.26%, 5% significant
    Trading-hours: All differences are insignificant.
   The frequency of multiple competitors is significantly lower for cash payment offers for
    nontrading-hours announcements, this relationship does not hold for trading-hours
    announcements.                               21
   For overnight
    announcements, the
    coefficients on the
    cash payment dummy
    are negative and
    statistically significant
    at the 5% level.
   For daytime
    announcements, the
    cash payment dummy
    has no significant
    influence on
    competing bids.
   Robustness checks:
    Larger acquisition
    premiums deter
    competition, irrespective
    announcement timing.
   For cash payment offers,
    overnight
    announcements are
    associated with
    significantly lower
    frequency of competition
    in both high and low
    premium subsamples.
    V. Evidence on Deterring Competition by Cash Payments
              for Different Announcement Times

B. The relationship between the method of payment and the success of the bid




   Nontrading-hours: Cash(87.84%) v.s. Stock (82.51%), Diff=5.33%, 5% significant
                       Cash(87.84%) v.s. Mixed (82.27%), Diff=5.57%, 10% significant
    Trading-hours: All differences are insignificant.
   For overnight acquisition announcements, deals involving all cash payment are more likely to
    be successful than deals involving other payment methods. However, this relationship does
    not hold for daytime acquisition announcements.
                                                 24
   For overnight
    announcements, the
    coefficients on the cash
    payment dummy are
    significantly positive.
   For daytime
    announcements, the
    cash payment dummy
    does not have any
    significant impact on
    the probability of bid
    success.
    V. Evidence on Deterring Competition by Cash Payments
              for Different Announcement Times

   Tables 6 to 8 show that overnight announcements of cash payment offers
    lower the likelihood of competition.
   Tables 9 and 10 show that cash payment acquisition offers announced
    overnight are more likely to result in successful completion.
   Because overnight cash payment offers are more likely to deter potential
    competing, the likelihood of bid success is higher for these deals.




                                       26
    VI. Two-stage estimation of cash payments and acquisition
          premiums for different announcement times

    Payment methods and premiums are likely to be simultaneously determined.
    Thus, we need to show that managers strategically announce cash payment
     offers during nontrading periods, which result in higher premiums.
    To address the potential endogeneity problem between cash payment offers
     and acquisition premiums, we follow Officer (2003) and estimate the
     relation between these two decisions using a two-stage regression approach.




                                       27
   Overnight cash
    payments have a
    significantly positive
    influence on acquisition
    premiums, while
    premiums do not
    significantly affect the
    probability of cash
    offers.
   Cash payments offers
    result in higher
    premiums for target
    shareholders only when
    announcements are
    made during nontrading
    periods.
   Managers strategically
    announce cash payment
    offers during the
    overnight periods as an
    instrument to signal the
    high valuation of the
    target to the market.
                             VII. Conclusion

   For overnight announcements, the acquisition premiums and target stock
    returns are significantly higher when the acquisitions are financed with
    cash.
   Furthermore, overnight cash payment offers are more likely to result in a
    significantly lower frequency of multiple competitors and a significantly
    higher frequency of bid.
   However, we do not find such relationship for daytime acquisition
    announcements.
   Acquisition announcements signaling the bidder’s high valuation of the
    target, through a cash offer with large premiums, is more likely to be made
    during nontrading hours.
   The acquisition announcement timing of bidders is an important
    consideration in assessing the effects of the method of payment on
    signaling target valuation and preempting competing bids.
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posted:9/20/2011
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