Stock acquisitions, investor recognition, and announcement returns

Purpose – The purpose of this paper is to test the hypothesis that relative to a cash acquisition, a stock acquisition would increase the bidder’s investor base and lower Merton’s (1987) shadow cost, which in turn contributes positively to the bidder announcement return. Design/methodology/approach – Using the number of registered shareholders and measures of institutional ownership as the proxies for investor base and investor recognition, this paper compares their changes and the changes in shadow cost between bidders using different methods of payment. The authors examine the relation between the shadow cost reduction and bidder announcement return in a multivariate framework. Findings – This paper finds that given the target type, bidders using stocks experience significantly larger increases in their investor bases and investor recognition than bidders using cash. Additionally, only bidders using stocks experience significant decreases in their shadow costs. In a multivariate framework, the change in the shadow cost has a negative and significant effect on the bidder announcement return in the sample of stock acquisitions and the subsample of bidders using stocks to acquire private targets. These findings support the authors’ hypothesis and suggest that the less established bidders acquiring private targets in particular benefit from the shadow cost reduction. Originality/value – This paper provides the direct evidence that investor recognition matters in mergers and acquisitions. The findings also provide a complementary explanation for the documented positive bidder returns when bidders use stocks to acquire private targets.

Buyer and Seller at Odds: The Economic Consequences of Holding Appreciated Assets in a C Corporation

ABSTRACT: A business holding appreciated assets is worth less to its owner if it is held in a C corporation than the fair market value of the assets. This fact arises from the double tax imposed on C corporations. One naive solution to this issue is for the shareholder to structure the sale of the business as a sale of stock in the corporation. What is often overlooked with this suggestion, however, is that the buyer will demand a discount in the price of the business if the deal is structured as a purchase of stock as opposed to a direct purchase of the assets. This economic reality is driven by the fact that the buyer forgoes the future tax savings from the step-up in basis in the appreciated assets of the target corporation in a stock acquisition. To illustrate this economic reality, this case study requires students to determine the present value of the future forgone tax savings to the buyer and to use that information along with the tax consequences to the seller to negotiate a compromise final purchase/sale agreement between the parties.