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E-MailThe following post comes to us from Vojislav Maksimovic, Professor of Finance at the University of Maryland, Gordon Phillips, Professor of Finance at the University of Maryland, and Liu Yang of the Finance Department at the University of California, Los Angeles.
In our paper, Private and Public Merger Waves, which was recently made publicly available on SSRN, we examine the participation of public and private firms in merger waves. We find that public firms participate more in the market for assets, especially during merger waves, than private firms. Acquisitions by public firms are more likely to lead to an increase in productivity of acquired assets, especially when the assets are acquired from other public firms. Public firms also acquire and sell assets more when they are productive and when there is increased liquidity in the financial market.
However, differences in participation are not just driven by liquidity and access to capital market. First, we find that acquisition activity differs between public and private firms because of their fundamentals differ. Larger and more productive firms select public status, and these firms also engage in more acquisitions in the long run, all other things being equal. Using initial productivity from over five and ten years prior to the transaction, we show that better firms select to become public and later participate more in acquisitions. Second, public status causes a differential in response to measured firm fundamentals or macro-economic shocks. Public firms participate more because they have the option to access public financial markets at more favorable or easier terms than otherwise identical private firms. These effects are reflected in the differences in the estimated coefficients between public and private firms.
Our paper provides several implications to the understanding of mergers and acquisitions, especially across different organization forms and over the business cycle. Consistent with the neoclassical theories, we find that mergers that occur on the waves are associated with greater increases in productivity. In particular, acquisitions by public firms on-the-wave are associated with high gains. We find little evidence that merger waves are causing economic inefficiency in the market for corporate control, although we do not know whether these reallocations create sufficient value to the acquiring firms’ shareholders to cover the premiums usually paid. On the corporate governance side, we find that public firms make better acquisition decisions than private firms judged by efficiency gains despite of the potential conflicts due to separation of ownership and control in public firms.
Our results also show that the future acquisition behavior of firms can thus be predicted by firm characteristics early in their lives. Productive firms select to become public and later participate more in the market for corporate assets in ways that increase the productivity of the acquired assets. These findings are related to the recent study by Lemmon, Roberts and Zender (2006) that shows that a firm’s later financial policies are predictable from before they become public. Together, these studies suggest that there are deep differences between firms that persist over many years and affect their behavior and value creation. Mergers are in part driven by deep firm characteristics which are set when the firm is created by the entrepreneur.
Overall, our work suggests that an active market for corporate assets is important in facilitating the growth of the most productive firms. Regulations that make mergers more difficult during waves are likely to be socially costly.
The full paper is available for download here.
