The effect of initial offer precision on takeover contests

Abstract

OBJECTIVES OF THE STUDY:

In this thesis, I study the precision of the initial takeover offers and analyse whether the initial offer precision affects the takeover contest outcomes. I examine to which extent offer prices per share are clustered at certain decimal fractions and whether the clustering depends on the nominal offer price size or the minimum tick size of the US stock exchanges. Most importantly, I study whether the initial offer price precision affects the success probability of the initial offer, the degree of price adjustment between offers within a takeover contest, the duration of the takeover contests and finally acquirer announcement returns.

DATA AND METHODOLOGY:

My sample consists of 2 673 initial control offers and related takeover contests on US based listed targets from 1980 to 2012. I form the takeover contests out of control offers where the acquirer aims to achieve majority ownership of the target. Moreover, I measure the offer price precision by the number of trailing zeroes and by selected decimal fractions based on the prior psychological, corpus and finance literature. The clustering analysis compares the offer price decimal distributions to distributions according to Benford's law. The analysis of contest outcomes is performed with univariate analysis, ordinary least squares and logistic regressions as well as with specific Cox proportional hazard model for the contest duration.

FINDINGS OF THE STUDY:

The results indicate that offer price per share are heavily clustered at decimal fractions of 00, 25, 50 and 75 and other multiples of ten cents. Almost 88 % of the offer prices have a decimal fraction of 00, 25, 50 or 75. The degree of clustering appears to be much greater than in the case of share prices. In addition, the clustering increases with the nominal offer price size.

Precise initial offers are up to 10 % more likely to be completed at their initial terms. Furthermore, univariate analysis indicates that precise initial offers are less often challenged or revised. The contests initiated with precise initial offers are up to 5 % less likely to contain an upward adjustment of the offer price and the adjustment is on average one percentage point smaller. Moreover, the results indicate that precise initial offers significantly shorten the contest duration. Finally, the announcers of precise initial offers have 1.8 percentage points greater announcement returns but unlike in the case of other analyses the effect is not significant for all precision variables.