The Journal of Finance

The Success of Acquisitions: Evidence from Divestitures

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03980.x

STEVEN N. KAPLAN, MICHAEL S. WEISBACH

This paper studies a sample of large acquisitions completed between 1971 and 1982. By the end of 1989, acquirers have divested almost 44% of the target companies. We characterize the ex post success of the divested acquisitions and consider 34% to 50% of classified divestitures as unsuccessful. Acquirer returns and total (acquirer and target) returns at the acquisition announcement are significantly lower for unsuccessful divestitures than for successful divestitures and acquisitions not divested. Although diversifying acquisitions are almost four times more likely to be divested than related acquisitions, we do not find strong evidence that diversifying acquisitions are less successful than related ones.

Why Are Buyouts Levered? The Financial Structure of Private Equity Funds

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01473.x

ULF AXELSON, PER STRÖMBERG, MICHAEL S. WEISBACH

Private equity funds are important to the economy, yet there is little analysis explaining their financial structure. In our model the financial structure minimizes agency conflicts between fund managers and investors. Relative to financing each deal separately, raising a fund where the manager receives a fraction of aggregate excess returns reduces incentives to make bad investments. Efficiency is further improved by requiring funds to also use deal‐by‐deal debt financing, which becomes unavailable in states where internal discipline fails. Private equity investment becomes highly sensitive to aggregate credit conditions and investments in bad states outperform investments in good states.

Actual Share Reacquisitions in Open‐Market Repurchase Programs

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.115194

Clifford P. Stephens, Michael S. Weisbach

Unlike Dutch auction repurchases and tender offers, open‐market repurchase programs do not precommit firms to acquire a specified number of shares. In a sample of 450 programs from 1981 to 1990, firms on average acquire 74 to 82 percent of the shares announced as repurchase targets within three years of the repurchase announcement. We find that share repurchases are negatively related to prior stock price performance, suggesting that firms increase their purchasing depending on its degree of perceived undervaluation. In addition, repurchases are positively related to levels of cash flow, which is consistent with liquidity arguments.

Information Disclosure and Corporate Governance

Published: 01/17/2012   |   DOI: 10.1111/j.1540-6261.2011.01710.x

BENJAMIN E. HERMALIN, MICHAEL S. WEISBACH

Public policy discussions typically favor greater corporate disclosure as a way to reduce firms' agency problems. This argument is incomplete because it overlooks that better disclosure regimes can also aggravate agency problems and related costs, including executive compensation. Consequently, a point can exist beyond which additional disclosure decreases firm value. Holding all else equal, we further show that larger firms will adopt stricter disclosure rules than smaller firms and firms with better disclosure will employ more able management. We show that mandated increases in disclosure could, in part, explain recent increases in both CEO compensation and CEO turnover rates.

Determinants of Cross‐Border Mergers and Acquisitions

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01741.x

ISIL EREL, ROSE C. LIAO, MICHAEL S. WEISBACH

The vast majority of cross‐border mergers involve private firms outside of the United States. We analyze a sample of 56,978 cross‐border mergers between 1990 and 2007. We find that geography, the quality of accounting disclosure, and bilateral trade increase the likelihood of mergers between two countries. Valuation appears to play a role in motivating mergers: firms in countries whose stock market has increased in value, whose currency has recently appreciated, and that have a relatively high market‐to‐book value tend to be purchasers, while firms from weaker‐performing economies tend to be targets.

The Cash Flow Sensitivity of Cash

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00679.x

Heitor Almeida, Murillo Campello, Michael S. Weisbach

We model a firm's demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm's propensity to save cash out of cash flows (the cash flow sensitivity of cash). We hypothesize that constrained firms should have a positive cash flow sensitivity of cash, while unconstrained firms' cash savings should not be systematically related to cash flows. We empirically estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory.

Do Acquisitions Relieve Target Firms’ Financial Constraints?

Published: 03/27/2014   |   DOI: 10.1111/jofi.12155

ISIL EREL, YEEJIN JANG, MICHAEL S. WEISBACH

Managers often claim that target firms are financially constrained prior to being acquired and that these constraints are eased following the acquisition. Using a large sample of European acquisitions, we document that the level of cash that target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline, while investment increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. Our findings suggest that acquisitions relieve financial frictions in target firms, especially when the target firm is relatively small.

Indirect Incentives of Hedge Fund Managers

Published: 12/21/2015   |   DOI: 10.1111/jofi.12384

JONGHA LIM, BERK A. SENSOY, MICHAEL S. WEISBACH

Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow‐performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.

Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

Published: 07/26/2013   |   DOI: 10.1111/jofi.12082

ULF AXELSON, TIM JENKINSON, PER STRÖMBERG, MICHAEL S. WEISBACH

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross‐sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy‐wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

The Influence of Institutions on Corporate Governance through Private Negotiations: Evidence from TIAA‐CREF

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00055

Willard T. Carleton, James M. Nelson, Michael S. Weisbach

This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to influence. It relies on a private database consisting of the correspondence between TIAA‐CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA‐CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements.

Measuring Institutional Investors’ Skill at Making Private Equity Investments

Published: 05/06/2019   |   DOI: 10.1111/jofi.12783

DANIEL R. CAVAGNARO, BERK A. SENSOY, YINGDI WANG, MICHAEL S. WEISBACH

Using a large sample of institutional investors’ investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors’ skill affects their returns. Bootstrap analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen, we estimate that a one‐standard‐deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.

Discount‐Rate Risk in Private Equity: Evidence from Secondary Market Transactions

Published: 01/15/2023   |   DOI: 10.1111/jofi.13202

BRIAN H. BOYER, TAYLOR D. NADAULD, KEITH P. VORKINK, MICHAEL S. WEISBACH

Measures of private equity (PE) performance based on cash flows do not account for a discount‐rate risk premium that is a component of the capital asset pricing model (CAPM) alpha. We create secondary market PE indices and find that PE discount rates vary considerably. Net asset values are too smooth because they fail to reflect variation in discount rates. Although the CAPM alpha for our index is zero, the generalized public market equivalent based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.