Three empirical studies on the performance of firms involved in M&As and IPOs
This PhD thesis consists of three empirical papers. Each paper can be read independently. However, all three papers investigate different factors affecting the performance of firms involved in mergers and acquisitions (M&As) and initial public offerings (IPOs). A private firm seeking to become listed and who also wish to grow through acquisition can do so with an IPO followed by acquisitions or a reverse takeover (RT). In a RT, a private firm is acquired by a public firm, but the private firm controls the combined public entity after completion of the deal. Chapter 2, “Post-acquisition performance when firms list and acquire simultaneously versus sequentially: Reverse takeover versus IPO-M&As”, examines the differential performance of firms conducting an IPO prior to undertaking follow-on acquisitions (IPO-M&As) versus firms that combine the process of obtaining the listing and acquiring another firm by conducting a RT. I investigate how acquirers’ choices affect their post-acquisition performances. In this paper, I also investigate the impact of board structure changes on firm performance in IPO-M&A and RT deals. This event study covers RTs and acquisition-motived IPOs listed on the London Stock Exchange during 1995-2012. Challenging the theoretical expectation that IPOs increase the likelihood of optimal exercise of acquisition options by reducing valuation uncertainty, my results show that an IPO does not alleviate the stock market underperformance of acquirers within 3 years post-acquisition. Private firms seem to self-select into different listing-and-acquisition routes depending on firm-specific characteristics and the board members keep the same level of control preference. However, the choice of listing-and-acquisition does not appear to significantly affect performance. I find no significant difference in the post-acquisition performance of firms undertaking IPO-M&As or RTs. Chapter 3, “Post-acquisition performance of target firms: The impact of management turnover”, investigates the efficiency of the takeover market and the impact of management turnover on target firm performance. Investigating separately the operating performance of targets and acquirers in U.K. domestic acquisitions during 2006-2014, I find that the post-acquisition peer-adjusted profits significantly improve in the unprofitable targets but do not change significantly in profitable targets. Both profitable and unprofitable targets experienced high management turnovers, but the improvement in profits does not appear to be driven by the management turnover. The reason of management turnovers is more complex than the acquisitions’ market discipline function or resource-based management hypothesis. However, a complete turnover of top management in target firms seems to hurt the post-acquisition performance of acquirers, suggesting target management team may possess valuable information to facilitate the integration process. This study sheds light on the post-acquisition restructuring of target firms and their management teams, especially in private targets. Chapter 4, “Identifying leaders among IPO firms: a content analysis of analyst coverage reports”, investigates how analysts identify firms as a leader and whether leader firms go on to generate superior operating performance to non-leaders. Using a content analysis approach, I extract sentences including the keyword “lead” from initial coverage reports and pick out sentences where the IPO firm is identified as either an “industry leader” or “partial leader”. I examine the textual content of initial coverage reports on U.S. IPOs during 1999-2012 and find that lead-underwriter analysts appear not to be more optimistic than non-lead-underwriters in their leadership identification of IPO firms, however, nor are they more accurate than non-lead-underwriters in identifying leader firms. I find that neither firms identified by analysts as industry leaders nor firms identified as having partial leadership advantages tend to generate superior peer-adjusted net sales or profit margins compared to non-leaders. The Global Settlement in 2003 significantly reduced the likelihood, frequency and intensity of partial leadership identification. Although there is no explicit regulation requirement on the text content in analyst reports, analysts have become more conservative in identifying a firm as a leader after the Global Settlement. This study helps investors to understand the incremental information of leadership identification in analyst reports, beyond the quantitative outputs such as stock recommendations.