Does the organisational form of the target influence market reaction to acquisition announcements? Australian evidence

Pacific-Basin Finance Journal 24 (2013) 89–108

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Does the organisational form of the target influence market reaction to acquisition announcements? Australian evidence☆ Syed M.M. Shams, Abeyratna Gunasekarage, Sisira R.N. Colombage ⁎ Monash University, Melbourne, Australia

a r t i c l e

i n f o

Article history: Received 24 October 2012 Accepted 5 April 2013 Available online 29 April 2013 JEL classification: G34 G12 G14 Keywords: Acquisitions Nature of the target Abnormal returns Method of payment Bid characteristics

a b s t r a c t Using public, private and subsidiary acquisitions, we examine whether abnormal returns to bidders depend on the organisational form of the target acquired. The evidence supports two main hypotheses: (i) bidders on private and subsidiary targets earn higher abnormal returns than bidders on public entities and (ii) bidders on private targets earn higher abnormal returns when the method of payment is stock. Acquisitions of unlisted public targets, privately negotiated acquisitions of private targets and acquisitions of subsidiaries from listed parents for cash are associated with higher abnormal returns. © 2013 Elsevier B.V. All rights reserved.

1. Introduction There have been an abundance of studies conducted across many markets examining the issue of whether acquiring firms earn abnormal returns around the announcement of a bid for a target (see, for example, Bruner, 2002; Bugeja and Walter, 1995; Casey et al., 1987; Gupta and Misra, 2007; Humphery-Jenner and Powell, 2011; Jensen and Ruback, 1983; Sudarsanam and Mahate, 2006). While this research has identified a number of bid

☆ The authors would like to thank Karen Benson, Esther Del Brio, Jerry Bowman, Christine Brown, David Power, Terry Walter and the participants of the AFAANZ 2012 Conference, University of Canberra seminar series, and 2011 4th International Accounting & Finance Doctoral symposium for their valuable comments and suggestions on earlier versions of this article. We are also thankful to the members of the Australian Takeover Panel and M&A specialists for their valuable opinions on the institutional setting of the Australian M&A market. ⁎ Corresponding author at: Monash University, Churchill, Victoria 3842, Australia. Tel.: +61 3 9902 6644; fax: +61 3 9902 6524. E-mail address: [email protected] (S.R.N. Colombage) 0927-538X/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.pacfin.2013.04.002

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and firm characteristics and other variables such as economic environment and takeover regulations that influence the returns generated by bidding firms, evidence of abnormal returns remains inconclusive. More recently, studies from the US and the UK have brought a new dimension to this debate, mounting the argument that the market reaction to acquisition announcements is also influenced by the organisational form of the target; being a public or a private firm. The evidence suggests that bidding firms acquiring private targets outperform their counterparts who acquire public targets in a statistically significant fashion (Ang and Kohers, 2001; Chang, 1998; Conn et al., 2005; Draper and Paudyal, 2006; Faccio et al., 2006; Fuller et al., 2002). In Australia, the acquisition market is dominated by publicly traded bidding firms acquiring private and subsidiary target firms. However, the question of how these bidding firms seeking an unlisted target perform around the announcement of the bid relative to those seeking a public target remains largely unexplored. Over an 11-year period from 2000 to 2010 inclusive, the Thomson Reuters SDC Platinum Mergers and Acquisitions database reported 8660 domestic acquisitions by public bidding firms in Australia, with a high proportion of these transactions (73.97%) being acquisitions of private and subsidiary targets. Fig. 1 plots the number of acquisitions in Australia categorised according to whether the target is a public, private or subsidiary company for the period 2000 to 2010 on a quarterly basis. Clearly the acquisition of private and subsidiary targets has outnumbered the acquisition of public targets in almost all quarters over the 11-year period. But as one would expect, the average annual deal value for acquisitions involving public targets is much higher than that for private and subsidiary targets (see Table 1, Panel B). This indicates that the acquisition of public targets plays an economically significant role in the Australian market. In this context, it is worthwhile examining whether Australian investors perceive a lower volume of economically significant acquisitions of public targets as value creating decisions or more frequent acquisitions of small scale private/ subsidiary companies as value creating decisions. To the knowledge of the authors, only one prior study has examined this issue in Australia. da Silva Rosa et al. (2004) analysed data for the period 1990 to 1998 and reported that listed firms bidding for a private target earn a significant abnormal return of 2.70% during the bid announcement period, while those bidding for a public target realise an insignificant return of 1.11%. However, their sample data contained only 140 acquisition events involving a private target, and their primary focus for the study was to investigate the monitoring hypothesis proposed by Chang (1998). In any event, no prior study has investigated the returns earned by firms bidding for a subsidiary target in the Australian market, despite subsidiary firms being more economically significant than private targets in terms of deal value.

300 250

A cq u isitio n s o f P u b lic T arg ets A cq u isitio n s o f P riv ate T arg ets A cq u isitio n s o f S u b sid iary T arg ets

150 100 50 0 Q1,00 Q2,00 Q3,00 Q4,00 Q1,01 Q2,01 Q3,01 Q4,01 Q1,02 Q2,02 Q3,02 Q4,02 Q1,03 Q2,03 Q3,03 Q4,03 Q1,04 Q2,04 Q3,04 Q4,04 Q1,05 Q2,05 Q3,05 Q4,05 Q1,06 Q2,06 Q3,06 Q4,06 Q1,07 Q2,07 Q3,07 Q4,07 Q1,08 Q2,08 Q3,08 Q4,08 Q1,09 Q2,09 Q3,09 Q4,09 Q1,10 Q2,10 Q3,10 Q4,10

No. of Deals

200

Quarterly Data Fig. 1. Australian M&A Market: 2000–2010. Source: the Thomson Reuters SDC Platinum Mergers and Acquisitions database.

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In this study, we analyse the announcement period returns of public bidding firms using a large sample of Australian acquisition events, categorised by the organisational form of the target: being a public, private or subsidiary firm. The three types of target firms differ in their size, nature of ownership, liquidity, business risk, the level of information asymmetry, the premium paid in acquisitions and the regulatory frameworks related to their acquisition processes. Due to these differing characteristics, it is worthwhile to include the three types of target firms as part of the investigation of the announcement period performance of bidding firms, and to compare their performance in the Australian context. Hence, the main objectives of this study are to assess the relative abnormal returns of bidding firms acquiring targets with different organisational forms and to evaluate the impact of bid characteristics and firm characteristics. Our study contributes to the literature in several ways. Firstly, it is the first study to use a large sample of Australian acquisition events to investigate whether firms bidding for a private or subsidiary target perform differently during the announcement period, compared to firms bidding for a public target. Second, the sample data is drawn from the period January 2000 to December 2010, which covers a complete business cycle and includes a fast growing period (2000 to mid-2007), a recessionary period (mid-2007 to end 2009) and a recovery period (2010). This facilitates an analysis of whether the economic environment has any effect on acquisition activities and bidding firm returns. Third, we examine and compare privately negotiated deals, the acquisition of unlisted public targets and the sale of a subsidiary by a listed parent company for cash. These aspects have not been investigated in prior studies. Finally, our study covers a period in which Australia experienced a noticeable rise in the number of acquisition deals to which break fees (either ‘target break fees’, ‘reverse/bidder break fees’ or both) are attached. 1 Curtis and Pinder (2007) found that the incidence of break fee agreements increased from 3.5% of the offers made in 2000 to 43.4% in 2006. Although the relationship between ‘target break fees’ and target shareholders' wealth has been examined in the Australian context (see, Chapple et al., 2007); the differential effects of ‘target break fees’ and ‘reverse break fees’ on bidders' return have not been analysed in this country. The remainder of the paper is organised as follows: Section 2 discusses relevant literature and develops the hypotheses tested in the study; Section 3 outlines the Australian institutional setting that motivates this empirical investigation; Section 4 describes the data; Section 5 explains the empirical approach; Section 6 discusses the findings; and finally, Section 7 offers conclusions. 2. Literature review and hypotheses development The extant literature on the market for corporate control provides contradictory and inconclusive evidence about the returns generated by bidding firms when they announce their intention to acquire a publicly listed target. Early studies that analysed returns over long event windows reported positive abnormal returns to bidding firms (see Asquith, 1983; Bradley, 1980; Dodd and Ruback, 1977; Ellert, 1976; Franks and Harris, 1989; Limmack, 1991). Subsequent studies analysing shorter event windows report insignificant or significant negative abnormal returns to bidders with consistent findings across numerous international markets. For example, Franks et al. (1991) provide evidence for the US market in which bidding firms achieve insignificant negative abnormal returns of − 1.02% around the announcement date, whereas Andrade et al. (2001) report that UK bidders earn insignificant abnormal returns of − 0.07% during the three-day announcement period. More recent investigations of the UK and the US markets (Antoniou et al., 2008; DeLong, 2001; Gupta and Misra, 2007; Sudarsanam and Mahate, 2006; Walker, 2000) provide evidence of significant negative abnormal returns for bidding firms. Alexandridis et al. (2010) argue that the returns to bidders should be a function of the degree of competitiveness of the market for corporate control. Acquirers tend to pay excessive premiums when the acquisition market is characterised by an intense competition while the premium paid is lower when the competition is less intense. Accordingly, they hypothesise that the potential for value creation for bidders 1 According to the Australian Takeover Panel's Guidance Note 7: Lock-Up Devices, issued in 2001, “a break fee is most commonly an arrangement entered into between a bidder or potential bidder and the target of a proposed takeover bid or merger” (paragraph 7.15, p. 4). In a ‘target break fee’ agreement, a specified amount is payable to the bidder by the target in an event of termination of transaction in certain circumstances in order to recover the costs associated with due diligence during acquisition. In a ‘reverse break fee’ agreement, a fee is payable by the potential acquirer, if it breaches the terms of the acquisition agreement or it is unable to complete the acquisition transaction due to the lack of financing or changing its mind to proceed in accordance with the terms and conditions of the agreement.

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is limited when they acquire targets within highly competitive markets but benefits are possible when acquiring targets within less competitive markets. Their global study provides evidence of a significant negative relationship between the degree of competitiveness and abnormal returns to bidding firms. In particular, they find that announcement period abnormal returns are negative and significant for bidders in the US, the UK and Canada where the market for corporate control is highly competitive. In countries with less competitive markets such as Japan, South America and the rest of Europe, bidders earn positive and significant abnormal returns. The existing Australian studies also provide mixed results. An early investigation by Dodd (1976) found that the shareholders of Australian bidders earned positive cumulative abnormal returns of 4.3% during the announcement month. The evidence from Walter (1984) corroborates this finding; his sample of 271 successful bidders earned positive cumulative abnormal returns of 28.2% for the period from week −100 to week 0. By contrast, Casey et al. (1987) documented an abnormal return of −1.71% for a two-day event window. However, Bugeja and Walter (1995) and da Silva Rosa et al. (2004) reported statistically insignificant abnormal/excess returns for event windows of three to five days, whereas Shekhar and Torbey (2005) reported positive and significant abnormal returns of 1.02% for bidding firms over a three-day event window. Diepold et al. (2008) showed that bidders earn significant positive abnormal returns of 2.23% on the announcement date when there is no Australian Competition and Consumer Commission (ACCC) involvement but realise significant negative abnormal returns of −2.47% when there is ACCC involvement. The literature provides several theoretical explanations for why the market perceives an acquisition of a private or a subsidiary target as a value increasing decision compared with an acquisition of a public target. Fuller et al. (2002) propose the liquidity hypothesis, arguing that privately held firms and subsidiaries cannot be bought and sold as easily as publicly traded firms. Illiquid firms are less attractive targets and hence less valuable than their liquid counterparts. This provides an opportunity for bidders to capture the associated discounts in purchasing these firms. Therefore, bidders on private and subsidiary targets earn higher abnormal returns than the bidders on publicly held targets. Consistent with this argument, Ang and Kohers (2001) provide evidence that the acquirers of private targets earn significant positive abnormal returns irrespective of the method of payment. Similar evidence has been documented by Moeller et al. (2004), Hansen and Lott (1996) and Capron and Shen (2007) for the US market. Draper and Paudyal (2006) propose a managerial motive hypothesis. According to this hypothesis, managers' decisions to acquire small private firms that are less well-known by investors are likely to be associated with a strong motivation to enhance shareholder wealth. In contrast, their decisions to acquire large and well-known publicly quoted targets can be associated with an attempt to increase firm size and prestige. 2 Draper and Paudyal's study revealed that the acquirers of private targets earn significant positive abnormal returns during the announcement period, whereas the acquirers of public targets either break even or suffer a small loss. Officer (2007) argues that the decision to sell a subsidiary by a parent company is often motivated by the need to resolve immediate liquidity constraints and firms accept a significantly larger discount for their non-traded assets following a period of poor return performance and when the cost of financing from alternative sources is high. Shleifer and Vishny (1992) argue that the urgent need for liquidity and the constraints associated with alternative sources of financing weaken the bargaining power of the owner of the subsidiary and force them to dispose their assets at a significant discount. On the basis of this evidence, we propose the following hypothesis: H1. Bidders for private and subsidiary targets earn higher abnormal returns than bidders for public targets. According to the corporate monitoring hypothesis of Chang (1998), a target might become a substantial blockholder in the bidding firm if the bidder acquires a relatively large private target using equity as the method of payment. Consequently, shareholders of bidding firms can benefit from the potential reduction in agency costs as the new blockholder monitors management more closely. The existing evidence suggests that concentrated ownership has a positive influence on firm performance (Anderson and Reeb, 2003; Boone et al., 2011; Claessens et al., 2002; La Porta et al., 2002). Accordingly, Chang (1998) finds that the shareholders of bidding firms earn significant positive abnormal return (2.64%) when they use equity as the method of payment to acquire private targets. However, he observes insignificant abnormal returns in cash offers. Conn 2 The evidence suggests that executives in large, diversified firms with complex organisations seek to accumulate power and prestige rather than to create value for their investors (Agarwal, 1981; Jensen, 1986; Kostiuk, 1990; Mahoney, 1979).

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et al. (2005) corroborate this evidence in their study. Acquirers of private targets realised statistically significant abnormal returns of 1.41% in the case of non-cash offers but only 0.72% when the offers involved cash. Therefore, we propose the following hypothesis: H2. Bidders for private companies earn higher abnormal returns when the method of payment involves stock rather than cash. A parent company may sell a subsidiary at the time of a liquidity crisis or when the cost of financing its operations from alternate sources is very high (Officer, 2007; Shleifer and Vishny, 1992). In such circumstances, bidders could acquire a subsidiary at a higher discount when they use cash as the method of payment. On the basis of this argument, we propose the following hypothesis: H3. Bidders for subsidiaries earn higher abnormal returns when the method of payment involves cash rather than stock. In addition to testing the three hypotheses above, we examine the influence of bid characteristics and firm characteristics on bidders' abnormal returns. Numerous studies have suggested that in addition to the method of payment, several other bid characteristics may influence the returns generated by bidders during acquisition announcements. The evidence, however, is not entirely one way. A number of studies have found a positive association between the relative size of the target and abnormal returns to bidders (Ang and Kohers, 2001; Asquith et al., 1983; Capron and Shen, 2007; Franks and Harris, 1989). However, Kuehn (1975), who argued that the acquisitions of smaller targets are more value creating since such transactions are associated with lower acquisition/incorporation costs, uncovers a negative relationship. Even though many studies (Antoniou et al., 2007; Bradley et al., 1988; Fuller et al., 2002) find that single bidders earn higher abnormal returns than frequent bidders, Asquith et al. (1983) could not confirm such an assertion in their study. Some researchers have found that focused acquisitions are viewed positively by the capital market, whereas diversified acquisitions are viewed in a more negative light (Berger and Ofek, 1995; Goergen and Renneboog, 2004; Maquieira et al., 1998; Morck et al., 1990). However, Fan and Goyal (2006), Hubbard and Palia (1999), Matsusaka (1993) and Schipper and Thompson (1983) contradict these results. While many studies have found that hostile bids are associated with positive abnormal returns (Bradley et al., 1983; Jarrell and Bradley, 1980), and friendly bids are associated with negative abnormal returns (Sudarsanam and Mahate, 2006; Walker, 2000), Goergen and Renneboog (2004) uncovered evidence in the opposite direction. Numerous other influential bid characteristics can be identified for Australian acquisitions. These characteristics include whether the acquisitions involve privately negotiated deals, break fees, unlisted public targets and subsidiaries sold by publicly listed parents. Bidders may prefer privately negotiated deals to auctions in which they may be forced to pay a higher premium (Xie, 2009). Because these negotiations are held between the management teams of two companies, they are subject to less scrutiny from the capital market. The associated lower competition allows bidders to acquire private targets at a lower price (Hunt, 2009). Therefore, privately negotiated deals may be associated with higher abnormal returns. Target break fees can increase returns to bidding firms as they can offer special protection to ‘first movers’, increase the probability of a bid's success and thereby reduce the uncertainty associated with a bid's outcome. From an agency theory perspective, target management may secure a favourable outcome for themselves by granting break fees, but such personal benefits could lead to a lower premium paid to the target's shareholders as target break fees reduce the competition among competing bidders (Chapple et al., 2007). Thus, bidders can gain by acquiring targets at a lower deal value. Reverse break fees can have a positive impact on bidders' returns as they enable them to put a cap on the liability arising from bidders dishonouring the takeover agreement but they can also have a negative effect since they impose a financial cost on bidders (in addition to wasted management time), in the event of bidders' failing to finance the deal or walking away from it. Our sample also includes the acquisitions of unlisted public targets by listed bidders, which is a specific feature in the Australian context. In addition, our sample includes the sale of subsidiaries in the form of cash payments by publicly listed parent companies, which may arise from fire sales of assets (Officer, 2007). A number of prior studies have analysed the association between the financial attributes of the bidding firms and announcement period abnormal returns. For example, Moeller et al. (2004) have found that small acquirers earned higher abnormal returns than large acquirers for the US market. Humphery-Jenner and Powell (2011) uncover similar evidence for Australia. Capron and Shen (2007) argue that poorly performing bidding firms may attempt to conceal poor performance by making acquisition announcements. They find a

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negative relation between the level of profitability of the bidding firm and abnormal returns. Additionally, the bidding firm's leverage is positively associated with announcement period abnormal returns (Ghosh and Jain, 2000). The amount of excess free cash flow held by bidders also influences the managers' bidding decisions (Lang et al., 1991); in particular, cash-rich firms are more likely to be involved in value decreasing acquisitions (Harford, 1999; Jensen, 1986). 3. Institutional and regulatory framework Numerous institutional features and the regulatory framework underpinning M&A activities in Australia indicate a comparison among public, private and subsidiary target acquisitions as an interesting area of research. Firstly, the Australian takeover market is relatively unique as it restricts M&A more than other capitalist economies (DeMott, 1987; Mannolini, 2002). Hutson (2002) described the Australian takeover market as a hybrid of the UK and the USA systems and one of the most restrictive in the world due to the unique features associated with the current regulatory framework which makes the acquisition of listed firms both risky and relatively expensive. For example, compared to the British system, the lower takeover threshold of 20% prevents Australian companies from acquiring a significant controlling equity stake in both listed and unlisted public targets before initiating a formal acquisition offer. 3 Henry (2005) asserts that takeover activities in Australia are highly regulated because of the existence of a number of monitoring bodies and legislation (such as Competition and Consumer Act, Takeover Panel, Listing Rules of the Australian Stock Exchange). These regulations overemphasize the protection of target shareholders making the acquisition of public targets costly and uncertain. Moreover, the amendments made to the Australian takeovers legislation in 1986 have restricted partial takeovers and made hostile takeovers more difficult to implement (Lange et al., 2000). This environment may encourage bidders in their value enhancing acquisition decisions to search for private targets to which such provisions do not apply. Secondly, the contribution of Australian listed companies to the country's economy is relatively small compared with other Western economies (Stapledon, 1999). According to Dignam (2007), only one-third of Australia's largest companies are listed on the stock exchange, whereas approximately two-thirds of the UK's largest companies and nearly all the largest companies in the US are listed on their exchanges. As per the Australian Bureau of Statistics (ABS), there were more than 2.1 million businesses in Australia as of June, 2011, but only approximately 2000 companies (0.1%) were listed on the ASX. This large pool of unlisted firms provides Australian bidders with a diverse menu of investment opportunities. Additionally, according to a recent publication by the Reserve Bank of Australia (Bilston and Watson, 2010), a majority of Australian unlisted businesses exhibit a more stable level of profitability than their listed counterparts in recent years. While the acquisition of unlisted targets may bring stability to acquirers' profits, whether they really create value for the bidder is questionable as these well-performing unlisted targets can be expected to receive a fair value from bidders when they are acquired. Thirdly, according to Section 6.6 of the Corporations Act, acquirers must follow takeover regulations when they acquire unlisted targets with more than 50 members. According to the discussion paper by the Australian Treasury (2007), an unlisted public company is a firm that has more than 50 nonemployee members and the ability to raise money from the public. The bidders for private targets, that typically have less than 50 members, can bypass costly procedures involved with a formal takeover offer, whereas these procedures are compulsory in acquisitions of both listed and unlisted public targets. Therefore, the bidders on private targets can have an advantage as the relative cost of complying with takeover regulations of acquiring private targets is lower than that of public targets. Finally, unlike in the UK where both public and private companies must submit audited financial statements prepared under the prevailing accounting standards (Ball and Shivakumar, 2005), small Australian private companies are not bound by the same requirement and are not required to submit audited financial statements. 4 The absence of audited financial statements may discourage many bidders 3

See Curtis and Pinder (2007) for a detailed discussion on this point. According to the Australian Securities and Investments Commission (ASIC), to be defined as a small private company, a firm should satisfy at least two of the following requirements: (i) consolidated revenue of less than $25 million, (ii) consolidated gross assets of less than $12.5 million and (iii) number of employees less than 50. See http://www.asic.gov.au/asic/asic.nsf/byheadline/ Financial+Reports?openDocument#1. 4

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due to the difficulty in valuing the target, which in turn may reduce the level of competition for acquisitions of privately held targets. This situation should allow Australian bidders to acquire private targets at a lower price and therefore such acquisitions should be associated with a positive market response. A counter argument is that the acquisition of private targets can be associated with wider range of valuation errors on the part of bidders as less public information is available for the purpose of deriving their values (Easley and O'Hara, 2004). If the market's interpretation is in this line, then the market response to such acquisitions should be negative. During the sample period, three additional regulatory reforms occurred that may have significantly impacted the bidding firms' performances. First, the Corporate Law Economic Reform Program Act (the CLERP ACT 1999) was amended on 13 March 2000, giving additional powers to the Takeover Panel 5 to resolve takeover disputes in a more effective manner. Second, the Takeover Panel introduced Guidance Note 7: Lock-up Devices in December 2001 with the objective of providing the market with guidance of criterions relating to break fees in order to ensure takeover transactions occur in an efficient, competitive and informed manner (Curtis and Pinder, 2007). Mayanja (2002) identifies this provision as the most effective method of ensuring that a takeover offer will be successful. Third, capital gains tax reform that was passed in December 1999 allows target shareholders to defer taxation until the subsequent sale of the shares that they received in any stock swap at the time of acquisition. However, the capital gain realised in a cash-financed acquisition is subject to immediate tax. After the new amendment, bidders may be required to pay a higher premium in cash offers as a compensation for the immediate tax burden faced by the target shareholders. Therefore, this tax reform may have encouraged bidders to use stock as a method of payment in the acquisition of targets. These new features of the Australian M&A market provide an interesting background for investigating the return performance of bidding firms. 4. Sample and data To compile a comprehensive sample of acquisitions by listed Australian companies during a very recent (but post regulatory-change) period, we search the Thomson Reuters SDC Platinum Mergers and Acquisitions database for the 11-year period from January 2000 to December 2010. To be included in the sample, announcements must satisfy the following criteria: First, the announcements must involve domestic acquisitions of public, private and subsidiary targets made by Australian listed bidders. 6 Second, bid characteristic information such as the deal value and the method of payment must be available. Finally, share price and financial statement information must be available. This screening procedure results in a final sample of 2665 acquisition announcements. Compared with samples used in prior Australian studies (da Silva Rosa, 2004; Hutson, 2000; Maheswaran and Pinder, 2005; Shekhar and Torbey, 2005), this sample is very comprehensive. Details about various bid characteristics and deal types are gathered from the Thomson Reuters SDC Platinum Mergers and Acquisitions database. Table 1 provides information on various deal attributes for the final sample. Panel A shows a year-by-year analysis in which the number of domestic acquisitions made by Australian companies has gradually increased from 191 in 2000 to 385 in 2007. However, this trend reversed in 2008 and a decline in the number of acquisitions can be observed thereafter, most likely due to the global financial crisis (GFC). This trend is consistent with the view of Alexandrou and Sudarsanam (2001) that merger and acquisition activity peaks in periods of economic boom due to an abundance of current investment opportunities and optimism about future investment prospects: “Sellers will have more valuable uses for the funds they raise from divestment and the buyers can put their purchases to more valuable use in an economic boom than in a recession” (p. 240). In our sample, there is a tendency for Australian firms to focus on acquisitions of related businesses. On average, 56.88% of target firms are in related industries; both the acquirer and the target in this group 5 According to the ASIC, “The Takeovers Panel (formerly the Corporations and Securities Panel) is the primary forum for resolving disputes about a takeover bid until the bid period has ended. The Panel is a peer review body, with part time members appointed from the ASIC active Members of Australia's takeovers and business communities” (source: http://www.asic.gov.au/asic/asic.nsf/ byheadline/Takoevers+Panel?openDocument). 6 The public target category includes both listed (596) and unlisted (47) firms. We keep them together due to their similarities, such as (i) the applicability of similar takeover regulations, (ii) the need to submit audited financial statements and (iii) the ability to raise equity funds from the general public.

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Table 1 Sample information. Panel A: Year-by-year analysis No. of acquisitions Proportion

% of shares Average deal Method of payment: Proportion Bidders' average market Bidders' average acquired value ($m) value of equity ($m) raw return (%) Related (%) Unrelated (%) Cash only (%) Stock only (%) Cash & stock (%) Other (%)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Avg.

191 171 152 214 248 246 277 385 249 259 273 242

41.88 50.29 51.32 53.74 56.85 54.47 53.79 62.08 63.86 71.81 65.56 56.88

58.12 49.71 48.62 46.26 43.15 45.53 46.21 37.92 36.14 28.19 34.44 43.12

87.09 89.59 84.16 73.81 81.11 83.98 84.90 85.99 83.93 78.42 81.51 83.14

164.80 92.67 51.29 75.67 101.76 110.49 108.71 124.02 202.54 107.65 82.60 111.11

27.74 27.48 32.89 42.99 22.17 31.70 26.71 28.05 22.89 28.57 29.30 29.14

29.84 34.50 35.52 27.57 41.12 26.42 33.21 30.64 37.75 40.15 32.60 33.57

31.41 25.14 24.34 23.36 35.88 36.58 35.37 34.80 33.73 27.41 32.23 30.93

10.99 12.86 7.23 6.07 0.80 5.28 4.69 6.49 5.62 3.86 5.86 6.34

1474.39 1274.29 592.55 590.02 863.79 933.66 841.03 1223.79 1057.41 1923.37 514.47 1026.25

7.99 7.99 4.70 23.56 12.29 12.10 14.42 10.10 −6.93 39.25 36.74 14.75

Panel B: Classification by target status (public vs private vs subsidiary) Public targets (N = 643)

(%) of shares acquired Deal value ($m) Bidder's market value of equity ($m) Bidder's raw return (%)

Private targets (N = 1310)

Subsidiary targets (N = 712)

Mean

Median

St dev.

Mean

Median

St dev.

Mean

Median

St dev.

59.38 384.57 2805.88 5.53

79.00 23.39 205.79 0.42

40.27 1492.40 10,197.08 29.22

93.69 16.61 261.38 20.76

100.00 3.32 18.77 3.98

19.26 60.88 1404.27 103.57

87.57 46.94 869.65 14.40

100.00 2.71 23.00 1.76

26.47 240.05 5097.03 64.28

Note: Panel A reports the number of acquisitions, the proportions of related and unrelated acquisitions, the percentage of targets' shares acquired by bidding firms, the average deal value, the proportions of each method of financing, bidders' average market value one month prior to the acquisition announcement and bidders' average cumulative raw return for the 51-day period around the announcement. Panel B reports selected bid characteristics for the bidders for public targets, private targets and subsidiary targets separately.

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share the same four-digit SIC code. A substantial increase in acquisitions among related firms can be observed during the period of the global financial crisis (2007 to 2009). The average percentage of outstanding equity acquired by the bidding firms ranges from a minimum of 74% in 2003 to a maximum of 90% in 2001 with an 11-year average of 83%. A typical acquisition deal has a value of $111.11 million. The methods of payment are stock (34%), followed by cash (29%), a combination of cash and stock (31%) and other forms of settlement (6%). The cumulative raw returns reported in the last column indicate that Australian bidders have realised positive returns during the 51 days around the announcement time of acquisition deals. Further analysis (un-tabulated) reveals that approximately one quarter of these deals occurred in the mining sector. Acquisitions of targets in the business services sector constitute 14% and acquisitions in the investment and commodity industry constitute 10.5% of deals. The bidding firms in air transportation/ shipment and legal services industries have concentrated solely on acquisitions of related firms. Those in the repair services, soaps/cosmetics/personal care products and other financial sectors have adopted a more diversified approach. The average deal value is highest in the commercial banks, credit institutions, insurance and bank holding company sector even though this sector accounted for only 2% of the total acquisitions. Additionally, the bidders in this sector are large in terms of market value. The bidders in many industries reported positive returns around the announcement date. In Panel B of this table, the total sample is divided into three subgroups (bidders on public, private and subsidiary targets) and descriptive statistics are reported for four main bid characteristics. Panel B reveals several interesting points. First, this market is dominated by the acquisition of private entities (1310 out of 2665 or 49%); the acquisition of subsidiaries is second (712 out of 2665 or 27%) and public firms are third (643 out of 2665 or 24%). Second, bidders tend to acquire a high proportion of outstanding equity in private and subsidiary targets (94% and 88%, respectively) compared with their stakes in public targets (59%). Third, the lowest average deal value is paid to private targets, whereas the highest deal value is paid to public targets. Fourth, in terms of average market capitalisation, the bidders for public targets are approximately 11 times larger than their counterparts who seek to take over private targets. Finally, bidders for private targets earn the highest returns around the acquisition event, whereas bidders for public targets earn the lowest returns. Datastream is used to collect daily share price information for the bidding firms and daily values of ASX All Ordinaries Index. Then, daily stock returns and returns for the market index are calculated. The Australian Financial Markets Association (AFMA) Bank Accepted 30-day Bill rate is collected from the Reserve Bank of Australia's (RBA) website. 7 Data relating to the market value of equity, book value of equity, net debt, net profit and free cash flow are collected for every bidder company from Datastream. Most of these variables are required on an annual basis. 5. Methodology Jensen's alpha is estimated as the measure of abnormal returns, calculated for a three-day event window – from day − 1 to day + 1 – where day 0 is the announcement day. This approach is used instead of the market model approach because a substantial number of companies in the sample are involved in multiple bids, which makes it difficult to have an event-free estimation period for generating market model parameters to estimate expected returns. Specifically, the following equation is estimated:
 Ri;t −Rf ;t ¼ α þ β1 Rm;t −Rf ;t þ εi;t

ð1Þ

where Ri,t is the buy and hold return generated by the acquiring firm i during the three-day announcement period, Rf,t is the buy and hold return from the risk free asset for the same period, and Rm,t is the buy and hold return for the market index (ASX All Ordinaries Index) during the announcement period. A statistically significant value of α indicates that significant abnormal returns have been earned by the sample companies during the announcement period.

7 The Bank Accepted Bill rate is the rate of interest charged on short-term loans made between banks. Although the rate is not strictly risk free, it is often used as a proxy for the short-term risk-free rate.

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Gaunt (2004) finds that compared with CAPM, the three-factor model proposed by Fama and French (1996) performs better in explaining stock returns in Australia. Therefore, the following three-factor model is also estimated:
 Ri;t −Rf ;t ¼ α þ β1 Rm;t −Rm;t þ β2 SMBt þ β3 HMLt þ εi;t

ð2Þ

where SMB is the difference in the buy and hold returns between the portfolios of small and large companies and HML is the difference in the buy and hold returns between the portfolios of securities with a high book-to-market and low book-to-market ratio. 8 Draper and Paudyal (2006) modify Fama and French's (1996) three-factor model to include an additional variable, the 30-day average return prior to the announcement period. This variable accounts for the possible information leakage about the intended acquisition prior to the announcement. Following this approach, we estimate the following model:
 Ri;t −Rf ;t ¼ α þ β1 Rm;t −Rf ;t þ β2 SMBt þ β3 HMLt þ β4 M30t þ εi;t

ð3Þ

where M30 is the cumulative raw return generated by the bidding firm during the 30-day period prior to the announcement period (i.e., from day − 31 to day − 2). To test the influence of bid characteristics and bidders' financial characteristics discussed in Section 2, we modify Eq. (2) and estimate the following multivariate regression: Ri;t −Rf ;t ¼ α þ

3 X j−1

βj MF j;i;t þ

12 X j−1

βjþ3 BC j;i;t þ

4 X

βjþ15 FC j;i;t þ β20 FGP j;i;t þ β21 GFC j;i;t þ εi;t

ð4Þ

j−1

where the vector of MF variables contains the explanatory variables used to capture the effect of market factors with a vector of β1 − 3 coefficients; the vector of BC variables contains the control variables used to capture the effect of bid characteristics with a vector of β4 − 15 coefficients, the vector of FC variables contains the control variables used to capture firms' financial characteristics with a vector of β16 − 19 coefficients, and FGP and GFC are dummy variables that capture the effects of fast growth period (FGP) and global financial crisis (GFC) period respectively. The eleven bid characteristics used in the study are as follows: a cash-only deals dummy, a stock-only deals dummy, the natural logarithm of the relative size of the deal (derived by dividing the deal value by the bidder's market value of equity one month prior to the announcement), an unrelated acquisitions dummy (which takes the value of one if the acquisition is a diversifying acquisition and zero otherwise), a multiple bid dummy (which takes the value of one if a bidder has acquired more than one target during the sample period and zero otherwise), a deal attitude dummy (which takes the value of 1 if the bid is hostile and zero otherwise), a private deal dummy (which takes the value of one if the deal is privately negotiated and zero otherwise), a target break fee dummy (which takes the value of one if a break fee is attached to the deal by the target and zero otherwise), a bidder break fee dummy (which takes the value of one if a break fee is attached to the deal by the bidder and zero otherwise), a two-way break fee dummy (which takes the value of one if break fees are attached to the deal by both the bidder and the target and zero otherwise), an unlisted public target dummy (which takes the value of one if the target is an unlisted public company and zero otherwise) and a public parent 8 To construct SMB and HML portfolios, the book value of equity and the market value of equity data are collected for all the ASX companies; this population contained both surviving and dead companies. Beginning in 1999, companies are ranked at the end of every year based on their market capitalisation and the top 50% of companies with the highest market capitalisation are designated as a large portfolio and the bottom 50% are designated as a small portfolio. Then, the return difference between the small firms' portfolio and the large firms' portfolio (SMB factor) is calculated on a daily basis for the following year. Similarly, companies are ranked at the end of every year using their book-to-market (BM) value and the top 30% are assigned to a high BM portfolio, and the bottom 30% are assigned to a low BM portfolio. Then, the return difference between the high BM portfolio and the low BM portfolio (HML factor) is generated on a daily basis for the following year. This process is repeated until 2010. Faff (2001) identifies the Australian market as an example in which the compilation of sufficiently extensive and reliable data to form the Fama and French factors is challenging. We used data for 546 companies in 1999 to form the SMB and HML factors. This population increased to 1799 in 2010.

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cash dummy (which takes the value of one if the subsidiary is sold by a public company for cash and zero otherwise). The four firm characteristics include the natural logarithm of the bidder's market value of equity one year prior to the acquisition announcement as the size measure; the return on assets as the profitability measure (calculated by dividing the net income by total assets of the most recent financial year); the debt ratio as the leverage measure (calculated by dividing net debt, i.e., total debt minus cash, by total assets of the most recent financial year); the free cash flow-to-assets ratio as a measure of cash richness (calculated by dividing net cash receipts from operations by total assets of the most recent financial year). We also consider the effects of fast growth period and the GFC period on the process: the period from January 2000 to June 2007 is defined as the fast growth period while the period from July 2007 to December 2009 is defined as the GFC period. 9 Eq. (4) is estimated using White's (1980) correction procedure for heteroscedastic standard errors. The un-tabulated Spearman rank-order correlations matrix reveals that there is no significant problem from multicollinearity among the independent variables in the model. 10

6. Empirical findings 6.1. Announcement period abnormal returns Table 2 reports announcement period abnormal returns to the bidding firms. In this table, the sample is separated into three groups: bidders for public targets, bidders for private targets and bidders for subsidiary targets. According to the statistics reported in this table (columns 2 to 4), Australian bidders earn significant positive abnormal returns during the three-day announcement period regardless of the type of the target acquired. This conclusion also applies irrespective of the type of the model employed to generate abnormal returns. The generally accepted view that bidders earn insignificant or negative abnormal returns (Andrade et al., 2001; Bugeja and Walter, 1995; Carow et al., 2004; Casey et al., 1987; Sudarsanam and Mahate, 2006) is rejected according to this evidence. Clearly, Australian investors interpret all types of acquisitions as value enhancing decisions. However, the magnitude of the alphas generated by all three models for the bidders for both private companies and subsidiaries is larger than that generated for the bidders for public targets. For example, according to the three factor model, the bidders on private targets have earned significant positive abnormal returns of 4.82%, followed by the bidders for subsidiary targets (4.45%) and the bidders for public targets (1.97%). This finding provides evidence in support of the argument that the organisational form of the target influences the abnormal return earned by the bidding firm. To test H1, we add two dummy variables that represent private target acquisitions and subsidiary target acquisitions to Eqs. (1) to (3) and estimate the regression using the full sample. The resultant outputs are reported in the last column of Table 2. In all three models estimated, the coefficients of ‘private target dummy’ and ‘subsidiary target dummy’ variables are consistently positive and are significant at the 1% level, indicating that the bidders for such targets earn higher abnormal returns than their counterparts bidding for public targets. These multifactor regression estimates support H1, which states that the bidders for private and subsidiary targets earn higher abnormal returns than the bidders for public targets. In contrast to the findings of studies on the US and the UK markets (Ang and Kohers, 2001; Chang, 1998; Draper and Paudyal, 2006) the results of this study provide evidence that Australian bidders for all three types of targets earn, on average, positive abnormal returns during the announcement period. Our findings also differ from those of Fuller et al. (2002), who reported the largest abnormal returns for the acquirers of subsidiary targets in the US market. In this study, results generated by the single factor model are not different from the multifactor findings in which market factors such as SMB, HML and prior stock returns (M30) are controlled for. The finding that bidders for private and subsidiary targets earn higher 9 The majority of advanced economies experienced a recession that began in late 2007 and lasted until the end of 2009 (see Claessens et al., 2010). 10 The highest correlation of 0.75 exists between the free cash flow variable and the profitability variable. According to Gujarati (1995), the multicollinearity problem is present if the correlation between independent variables is above 0.80. We also analysed variance inflation factors (VIFs). The VIF scores were found to be less than 4, indicating the absence of the multicollinearity problem in our dataset.

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Table 2 Announcement Period abnormal returns for bidders for different targets. Public targets

Private targets

Subsidiary targets

Full sample

Single factor model α Rm − Rf (β1) Private targets dummy Subsidiary targets dummy

0.0227⁎⁎⁎ (3.38) 1.2765⁎⁎⁎ (4.21) – –

0.0578⁎⁎⁎ (8.71) 0.9203⁎⁎⁎ (3.04) – –

0.0532⁎⁎⁎ (6.19) 1.2097⁎⁎⁎ (3.31) – –

0.0198⁎⁎⁎ 1.0907⁎⁎⁎ 0.0406⁎⁎⁎ 0.0314⁎⁎⁎

Three-factor model α Rm − Rf (β1) SMB (β2) HML (β3) Private targets dummy Subsidiary targets dummy

0.0197⁎⁎⁎ (2.89) 1.3218⁎⁎⁎ (3.48) 0.8053⁎ (1.84) −0.2981 (−0.49) – –

0.0482⁎⁎⁎ (5.77) 1.1273⁎⁎⁎ (3.30) 2.5164⁎⁎⁎ (4.64) −0.4428 (−0.65) – –

0.0445⁎⁎⁎ (5.98) 1.4599⁎⁎⁎ (3.68) 2.3933⁎⁎⁎ (3.47) −0.3338 (−0.44) – –

0.0130⁎⁎ (2.43) 1.2758⁎⁎⁎(5.94) 2.0449⁎⁎⁎(6.04) −0.3623 (−0.89) 0.0399⁎⁎⁎ (6.74) 0.0305⁎⁎⁎ (4.51)

Four-factor model α Rm − Rf (β1) SMB (β2) HML (β3) M30 (β4) Private targets dummy Subsidiary targets dummy Sample size

0.0229⁎⁎⁎ (3.31) 1.3856⁎⁎⁎ (3.67) 0.9425⁎ (2.08) −0.2178 (−0.36) −1.6094⁎ (−1.95) – – 643

0.0459⁎⁎⁎ (6.34) 1.0794⁎⁎⁎ (3.16) 2.4651⁎⁎⁎ (4.47) −0.5345 (−0.78) 0.0174 (0.85) – – 1310

0.0457⁎⁎⁎ (5.59) 1.4950⁎⁎⁎ (3.72) 2.4293⁎⁎⁎ (3.49) −0.3098 (−0.41) −0.0056 (−0.33) – – 712

0.0126⁎⁎ (2.35) 1.2666⁎⁎⁎(5.91) 2.0557⁎⁎⁎(6.04) −0.3714 (−0.91) 0.0026 (0.16) 0.0395⁎⁎⁎(6.79) 0.0302⁎⁎⁎(4.46) 2665

(3.84) (5.71) (6.84) (4.64)

Note: The table reports coefficient estimates for Eqs. (1), (2) and (3) together with their relevant t-values (in brackets). These models are estimated for the three subsamples and full sample (i.e. bidders for public targets, bidders for private target and bidders for subsidiary targets and bidders for all targets) separately. A (⁎⁎⁎), (⁎⁎), and (⁎) indicate statistical significance at the (1%), (5%), and (10%) levels.

abnormal returns than bidders for public targets supports the predictions of the managerial motive and liquidity hypotheses. The market reaction detected at the time when acquisitions are announced indicates that investors believe that Australian managers create value when taking over other entities. Turning to the other coefficients, we find that the coefficients of the Rm − Rf and SMB variables are consistently positive and significant in all three models estimated. However, the HML and M30 coefficients are insignificant in respective models. For this reason, we report the findings generated using the three-factor model in the remaining analyses.

6.2. Method of payment and abnormal returns Prior studies have provided evidence that the abnormal returns generated by bidding firms can be sensitive to the method of payment used in the acquisition. For example, numerous studies have documented that cash bids are more favourably received than stock bids across several markets (Andrade et al., 2001; Faccio et al., 2006; Franks et al., 1991; Travlos, 1987). In Australia, researchers have found that cash bids are associated with insignificant abnormal returns, whereas stock bids give rise to significant negative abnormal returns (Bellamy and Lewin, 1992; da Silva Rosa et al., 2000). Despite this unfavourable market reaction to equity financed acquisition deals, the evidence in this study (see Table 1, Panel A) reveals that stock financing is a more prominent method of payment than cash financing in Australian acquisitions. This popularity may result from the change in the treatment of capital gains tax which allows target shareholders to defer their immediate tax burden (see Section 3). 11 We identify four methods used by the Australian bidders in settling their deal values: cash payment, stock swap, a combination of cash and stocks and other methods (see Table 1). The last category comprises the settlements made using a 11 There is some evidence to suggest that cash financing was more popular than stock financing prior to the change in capital gains tax treatment. According to Thomson Reuters SDC Platinum Mergers and Acquisitions database, during the period 1990–1999, 19.42% of deals were financed by cash while only 8.17% were financed by stock issues.

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combination of common stock, cash, debt, preferred stock and convertible securities, which is classified as “other” by the database. Table 3 reports the results in relation to the association between the method of payment and abnormal returns. In Panel A of this table, the alpha values generated by the three-factor model for each category of payment method (together with their associated t-values and respective sample sizes) are reported for the three groups of acquisitions investigated. An inspection of this table reveals several interesting points. First, the bidders for private targets earn positive and significant abnormal returns during the announcement period irrespective of the method of payment used. This finding indicates that Australian investors perceive acquisitions of private targets as value enhancing decisions. However, the magnitude of alpha generated for stock-financed acquisitions (7.21%) of this sample is larger than that generated for cash-financed acquisitions (3.38%). Second, the acquisitions of public targets are associated with significant abnormal returns (3.61%) only when the method of payment involves stock. Third, the bidders for subsidiary targets earn significant abnormal returns when the method of payment is either ‘stock only’ or ‘cash and stock’ (i.e. 8.39% and 6.35%, respectively). The Australian market appears to perceive stock-financed acquisitions more favourably than cash-financed acquisitions. Our findings do not lend support for the argument that stock-financed acquisitions are made by overvalued bidders to acquire relatively less overvalued targets and therefore such acquisitions should be associated with negative returns (Shleifer and Vishny, 2003). However, the market's more positive response to stock-financed acquisitions of private and subsidiary targets lends support for the argument that stock financing acts as a mean of mitigating information asymmetry about the target and therefore such acquisitions are associated with higher abnormal returns when the target is an unlisted firm which is relatively difficult to value compared to a public target (Officer et al., 2009). To test H2 and H3, we modify Eq. (3) by adding method of payment dummies and re-estimate the regression. The relevant coefficient estimates are presented in Panel B of Table 3. In the ‘private targets’ subsample, the coefficient of the stock-only dummy is positive (0.0373) and significant at the 1% level, indicating that stock-financed acquisitions of private targets earn higher abnormal returns than cash-financed acquisitions. As Chang (1998) hypothesises, the market may value the possible agency benefits associated with the monitoring role of target shareholders when they become concentrated owners of the bidding firm that acquires the target through a stock swap. More than 90% of the bidders for private targets in our sample Table 3 Method of payment and announcement period abnormal return. Public targets Panel A: α values generated by three factor model Cash only (α) 0.0014 (0.26) [270] Stock only (α) 0.0361⁎⁎⁎ (2.98) [239] Cash and stock (α) 0.0277 (1.50) [103] Others (α) 0.0060 (0.10) [31]

Private targets

Subsidiary targets

0.0338⁎⁎ (2.07) [272] 0.0721⁎⁎⁎ (2.84) [449] 0.0381⁎⁎⁎ (4.02) [501] 0.0959⁎⁎⁎ (2.88) [88]

0.0158 (1.50) [226] 0.0839⁎⁎ (2.57) [205] 0.0635⁎⁎⁎ (4.02) [230] 0.0256 (0.70) [51]

Panel B: Three factor model estimates with method of payment dummies α 0.0061 (0.99) 0.0298⁎⁎⁎ (3.10) 1.3511⁎⁎⁎ (3.55) 1.1529⁎⁎⁎ (3.39) Rm − Rf (β1) 0.7845⁎ (1.79) 2.4724⁎⁎⁎ (4.63) SMB (β2) HML (β3) −0.2707 (−0.45) −0.3536 (−0.52) Cash only dummy – – Stock only dummy 0.0257⁎⁎⁎ (2.87) 0.0373⁎⁎⁎ (3.15) Cash and stock dummy 0.0176 (1.47) 0.0072 (0.76) Other dummy 0.0378 (1.42) 0.0514⁎⁎ (2.42) Sample size 643 1310

0.0583⁎⁎⁎ (4.68) 1.5067⁎⁎⁎ (3.78) 2.4130⁎⁎⁎ (3.52) −0.2745 (−0.37) −0.0349⁎⁎⁎ (−2.65) – 0.0035 (−0.23) −0.0155 (−0.63) 712

Note: Panel A reports alpha values generated by three factor model together with t-values (in brackets) and sample sizes [in brackets]. Panel B reports coefficient estimates for the extended model of Eq. (2) where the method of payment dummies are included in addition to market factors. This model is estimated for each category of method of payment under three subsamples (i.e. bidders for public targets, bidders for private target and bidders for subsidiary targets). A (⁎⁎⁎), (⁎⁎), and (⁎) indicate statistical significance at the (1%), (5%), and (10%) levels.

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intended to gain a controlling stake by acquiring more than 50% of outstanding equity. The findings support the claim of H2 that stock-financed acquisitions of private targets are associated with higher abnormal returns than cash-financed acquisitions. Our finding of significant positive abnormal returns for stock-financed acquisitions of private targets does not support the results of the prior Australia study by da Silva Rosa et al. (2004) who found insignificant excess returns for bidding firms in stock-financed acquisitions of private targets. However, the significant negative coefficient generated for the cash-only dummy (−0.0349) for the subsidiary targets sample suggests that cash-financed acquisitions of subsidiary targets earn significantly lower abnormal returns compared with stock-financed acquisitions. This finding does not support H3. Our finding that stock-financed acquisitions are associated with significantly higher abnormal returns compared to cash-financed acquisitions, irrespective of the organisational form of the target acquired, contradicts the findings of prior Australian studies such as Bellamy and Lewin (1992), da Silva Rosa et al. (2000) and da Silva Rosa et al. (2004). The differences in methodologies, sample sizes and time periods between our study and their studies may explain this. In the Australian market, stock-financed acquisitions are perceived more favourably than cash-financed acquisitions as the ‘stock only’ dummy variable is positive and significant for both ‘public targets’ and ‘private targets’ samples while ‘cash only’ dummy is negative and significant in ‘subsidiary targets’ sample. As suggested by Bugeja and da Silva Rosa (2010), the tendency for Australian acquirers to use stock swaps as a popular method of payment for their acquisitions, and the associated high abnormal returns in such transactions, may indicate that the change in capital gains tax has impacted the market's reaction to acquisition announcements. 6.3. The influence of bid and firm characteristics The results of our estimation of Eq. (4) are presented in Table 4. Several observations follow from the results generated for the three samples. First, the constant term is positive and significant at conventional levels in all three acquisition samples; irrespective of the target's organisational form, Australian investors perceive acquisitions as value creating decisions. Second, the magnitudes of the constant terms are much higher compared with those reported in Table 2, indicating the importance of incorporating these control variables in the analysis of abnormal returns generated by bidding firms. Third, the coefficients for two market variables [(Rm − Rf) and SMB] are consistently positive and significant in all three samples analysed. Fourth, acquisitions of Australian private and subsidiary targets are more value creating compared with such acquisitions in the US market. For example, Fuller et al. (2002) report 4.2% (8.5%) abnormal returns for acquirers of private targets (subsidiary targets) for a five-day event window, whereas our sample generates three-day abnormal returns of more than 10% for acquisitions of private and subsidiary targets. Finally, the relative size variable generates a significant positive coefficient for firms bidding for private and subsidiary targets, indicating the market's positive assessment of possible synergies associated with the acquisition of relatively large private and subsidiary targets. The findings also indicate that stock-financed acquisitions of private targets are associated with significant positive excess returns. The method of financing does not seem to have a significant influence on the excess returns for bidders on public and subsidiary targets. The ‘cash-only dummy’ mainly generates insignificant coefficients for bidders on all types of targets. The market does not seem to either reward or penalise cash-financed acquisitions in a significant fashion. As Draper and Paudyal (1999) argue based on the ‘competitive takeover market hypothesis’, the market's neutral response to cash offers may indicate that it views cash-financed acquisitions as zero net present value transactions. Our findings contrast with both the US and the UK evidence that has found equity financed acquisitions to be associated with significantly negative abnormal returns (see Draper and Paudyal, 1999; Moeller et al., 2004; Song and Walkling, 2005; Travlos, 1987). The finding of a positive and statistically significant coefficient for the stock-only dummy variable in the ‘private targets’ sample supports the view that the emergence of blockholders and the monitoring benefits associated with such transactions are valued positively by the capital market (Chang, 1998). The literature associates unrelated acquisitions and multiple bid attempts with agency considerations and/or hubris motives of managers; such acquisitions are argued to be influenced by managerial motives such as empire building and prestige rather than creating value for shareholders (Agarwal, 1981; Berger and Ofek, 1995; Goergen and Renneboog, 2004; Kostiuk, 1990; Mahoney, 1979; Maquieira et al., 1998).

Table 4 Multiple regression estimates (bid and firm characteristics). Independent variable

Acquisition of private targets

Acquisition of subsidiary targets

Eq. (1)

Eq. (2)

Eq. (1)

Eq. (2)

Eq. (1)

Eq. (2)

0.0630⁎⁎⁎ (2.94) 1.2073⁎⁎⁎ (3.28) 0.7815⁎⁎ (1.79)

0.0538⁎⁎⁎ (2.58) 1.3386⁎⁎⁎ (3.74) 0.9128⁎⁎ (2.18)

−0.5552 (−0.84) −0.0241⁎⁎ (−2.01) −0.0100 (−0.73) 0.0010 (0.46) 0.0111 (1.35) −0.0096 (−1.08) 0.0113 (0.88) – – – – – – −0.0062⁎⁎⁎ (−2.73) 0.0027 (0.27) −0.0173 (−1.19) −0.0036 (−0.13) 0.0040 (0.43) −0.0004 (−0.03) 4.36⁎⁎⁎ 643 0.07

−0.5892 (−0.93) −0.0137 (−1.13) −0.0146 (−1.10) 0.0000 (0.03) 0.0086 (1.08) −0.0101 (−1.17) 0.0101 (0.78) −0.0274⁎⁎⁎ (−2.64) 0.0035 (0.12) 0.0089 (0.66) −0.0590⁎ (−1.78) 0.0831⁎⁎⁎ (2.80) – −0.0045⁎⁎ (−2.07) 0.0101 (0.97) −0.0270⁎ (−1.88) −0.0039 (−0.16) 0.0037 (0.40) 0.0056 (0.50) 5.71⁎⁎⁎ 643 0.13

0.1064⁎⁎⁎ (6.53) 1.2116⁎⁎⁎ (3.55) 2.1897⁎⁎⁎ (4.28) 0.0418 (0.06) 0.0103 (1.05) 0.0205⁎⁎ (1.99) 0.0156⁎⁎⁎ (6.07) 0.0019 (0.22) 0.0028 (0.31) – – – – – – – −0.0076⁎⁎⁎ (−2.99) 0.0084 (0.91) −0.0190 (−1.58) 0.0299 (1.37) −0.0178⁎ (−1.66) 0.0172 (1.29) 11.08⁎⁎⁎ 1310 0.10

0.1025⁎⁎⁎ (6.31) 1.1251⁎⁎⁎ (3.29) 2.1914⁎⁎⁎ (4.33) −0.0270 (−0.04) 0.0085 (0.87) 0.0177⁎ (1.73) 0.0150⁎⁎⁎ (5.85) 0.0020 (0.24) 0.0038 (0.43) – 0.1781⁎⁎⁎ (2.73) 0.2686⁎ (1.63) −0.0771 (−0.35) N/A – – −0.0076⁎⁎⁎ (−3.01) 0.0087 (0.94) −0.0196⁎ (−1.63) 0.0293⁎ (1.35) −0.0156 (−1.45) 0.0166⁎⁎ (1.25) 10.12⁎⁎⁎ 1310 0.11

0.1004⁎⁎⁎ (4.52) 1.4313⁎⁎⁎ (3.70) 2.1106⁎⁎⁎ (3.25) −0.6147 (−0.83) −0.0036 (−0.29) 0.0039 (0.27) 0.0135⁎⁎⁎ (4.65) 0.0140 (1.20) −0.0008 (−0.08) – – – – – – – −0.0107⁎⁎⁎ (−3.52) −0.0004 (−0.03) −0.0110 (−0.60) 0.0188 (0.65) 0.0141 (1.05) 0.0140 (0.95) 6.81⁎⁎⁎ 712 0.10

0.1031⁎⁎⁎ (4.53) 1.4150⁎⁎⁎ (3.66) 2.1208⁎⁎⁎ (3.25) −0.6118 (−0.82) −0.0130 (−1.08) 0.0045 (0.32) 0.0144⁎⁎⁎ (4.79) 0.0133 (1.14) −0.0011 (−0.11) – −0.0557 (−0.72) −0.0749⁎⁎ (−2.32) 0.0065 (−0.29) −0.0337 (−0.56) – 0.0449⁎ (1.81) −0.0102⁎⁎⁎ (−3.29) −0.0004 (−0.03) −0.0108 (−0.59) 0.0196 (0.68) 0.0152 (1.10) 0.0076 (0.52) 5.32⁎⁎⁎ 712 0.10

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Constant Rm − Rf SMB HML Cash only dummy Stock only dummy Ln relative size Unrelated dummy Multiple bid dummy Deal attitude dummy Private deal dummy Target break fee dummy Bidder break fee dummy Two-way break fee dummy Unlisted public target dummy Public parent cash dummy Ln market value Profitability Leverage Free cash flow FGP dummy GFC dummy F-Statistics N Adjusted R2

Acquisition of public targets

Note: The table reports coefficient estimates and their respective t-values (in brackets) for the regression Eq. (4). The dependent variable is the bidder's three-day buy and hold excess return and the independent variables included in the model are three market variables, traditional bid characteristics, bid characteristics specific to Australia and the financial characteristics of the bidding firm. A (⁎⁎⁎), (⁎⁎), and (⁎) indicate statistical significance at the (1%), (5%), and (10%) levels. The issue of heteroscedasticity was addressed by using White's adjustment procedure.

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This study did not find evidence in support of this argument; the coefficients of unrelated dummy and multiple bid dummy enter into the regression model with insignificant coefficients across all three samples. We find that the break fee variable has differential impacts on the three samples investigated. The target break fee variable's impact is positive and significant (at the 10% level) for the excess returns generated by firms acquiring private targets, significantly negative (at the 5% level) for firms acquiring subsidiary targets and insignificant for firms acquiring public targets. The positive coefficient generated for the firms bidding on a private target suggests that, as predicted by the agency theory, these firms are able to use break fees to ensure the success of a bid and to acquire private targets at an attractive price. The bidder break fee variable enters into regression models with insignificant coefficients implying the market's indifferent response to attachment of ‘bidder break fees’ to acquisition deals. The two-way break fee variable has a significant negative influence on the return of the bidders for public targets. The differential findings uncovered for the break fee variable, in particular for the firms bidding on a public or a private target, may be related to the difference in information asymmetry between these two categories of firms. As the degree of information asymmetry is high for private targets, by entering into a break fee agreement the bidding firms may be signalling to the market that they are locking in a valuable deal. In the case of competing bids, the superior bidder will need to compensate the target firm for the cost of the break fee. They will only be willing to pay this premium if they feel that the private target is undervalued. In public targets subsample, we find a significant positive coefficient for unlisted public targets dummy. The market seems to favour such acquisitions perhaps because of the bargaining power that the bidders can enjoy when negotiating with an unlisted public target because of information asymmetry associated with such targets and the resultant weak competition. Faccio et al. (2006) document similar evidence for European markets, which they term the ‘listing effect’. The bidders for private targets generate higher excess returns when they make acquisitions through privately negotiated deals. For this sample, the ‘private deals’ dummy generates a positive coefficient that is significant at the 1% level. This finding could also be attributable to the greater information asymmetry and lower competition that allow bidders to acquire the target at an attractive price. However, when bidders acquire public targets through privately negotiated deals, market perceives such acquisitions as value destroying decisions. When a bidder acquires a subsidiary from a listed parent for cash, such a bidder generates significantly higher excess returns. This finding is particularly interesting as the ‘cash payments dummy’ generates an insignificant coefficient for this category of acquisitions. One possible explanation for this result is that even though not all the subsidiary acquisitions funded by cash are value creating, those that are sold by publicly listed parents to fund their liquidity needs are interpreted as value enhancing acquisitions by the capital market. This finding provides partial support for the liquidity hypothesis proposed by Officer (2007) and the fire sale of assets argument of Shleifer and Vishny (1992). Turning to bidders' financial characteristics, we find that the coefficient of the pre-acquisition size variable is negative and significant in all three subsamples. The announcement period abnormal returns are negatively related to the size of the bidding firm. This finding is in line with the most recent Australian evidence (Humphery-Jenner and Powell, 2011). The pre-acquisition leverage variable generates negative coefficients across all three samples but it is significant only in ‘public target acquisitions’ sample. According to the predictions of agency theory/free cash flow theory (Jensen, 1986; Jensen and Meckling, 1976), the managers of highly levered firms should make value creating decisions that include acquisitions. However, our findings do not support the above argument; the market does not perceive levered firms' acquisition decisions more positively. This view can be further justified based on the insignificant coefficients generated for the free cash-flow variable across all three samples. Even though acquisition activities appear to be influenced by the business cycle (see Table 1, column 2), we find no evidence to suggest that the abnormal returns earned by bidding firms are affected by it. Almost all the coefficients of FGP and GFC dummies remain insignificant across three samples. 6.4. Robustness tests To ensure the robustness of our findings, we performed a number of tests to examine if they are sensitive to methodological and estimation issues. First, using the market-adjusted buy-and-hold return for the three-day announcement period as an alternative measure of abnormal return, the three samples generate the following abnormal returns which are significant at the 1% level: acquirers of public targets

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1.95%; acquirers of private targets 6.87%; and acquirers of subsidiary targets 6.47%. The magnitudes of these abnormal returns are higher than those generated by the three factor model. The coefficient estimates of Eq. (4), when this measure of abnormal return is used as the dependent variable, remain qualitatively similar to those reported in Table 4. Second, the three factor model was estimated using two longer event windows of five days and seven days respectively, to assess the sensitivity of the reported results to the length of the event window. All three samples generate positive and significant alpha values; however these alpha values are larger in magnitude than those reported for the three-day event window. Third, Eq. (2) was estimated for the pre-announcement period (day t − 26 to day t − 2), and for the post-announcement period (day t + 2 to day t + 26). This resulted in α values that are larger in magnitude for the pre-announcement period and smaller in magnitude for the post-announcement period compared with those reported for the announcement period. However, no values were significant, implying that the information content of acquisition announcements is impounded into share prices during the announcement period. Fourth, the sample period was divided into three sub-periods (2000–03, 2004–07 and 2008–10) and abnormal returns were estimated for each of these periods. Firms bidding on private and subsidiary targets earned significant abnormal returns in all three sub-periods, while firms bidding on public targets realised insignificant abnormal returns. Fifth, the influence of important industries on our findings was examined. In Section 4 it was reported that some industries (i.e. mining; business services; investment and commodity; air transportation and shipment; legal services; repair services; soaps, cosmetics and personal care products; other financial; commercial banks, credit institutions, insurance and bank holding) made a disproportionate contribution to some sample characteristics. To evaluate the impact of these industries on our main results, Eq. (4) was re-estimated with dummy variables for each of these industries, with the results found to be not different. Sixth, Eq. (4) was estimated again, but without the free cash-flow variable, which has a strong correlation (0.75) with the profitability variable. The results remain qualitatively similar to those reported in Table 4. Finally, the subsidiary targets sample was divided into two groups according to the organisational form of the seller — (i) public parents; and (ii) private parents. Both groups earned significant positive abnormal returns; for example, they earn 5.0% and 3.6% respectively when the three factor model was re-estimated. In summary, all these analyses show that the results remain robust to alternative measures of abnormal return, longer event windows, sub-period analyses and other possible methodological issues. We do not report these findings to conserve the space but they are available from the authors upon request. 7. Conclusion This study is motivated by the lack of empirical evidence on bidding firms' market performance around the time of an announcement of a bid on private and subsidiary targets in Australia. Although there is a high volume of acquisitions of private and subsidiary targets, no prior study has conducted a comparative analysis between such targets and public targets. To fill this void, we analysed a large sample of acquisitions divided into three groups on the basis of their organisational form: public, private and subsidiary targets. Risk adjusted abnormal returns were generated using the single factor model, Fama and French three-factor model and a four-factor model. The study's main finding is that the announcement period abnormal returns earned by bidding firms depend on the organisational form of the target acquired. Firms bidding for private companies and subsidiaries earn higher positive abnormal returns than firms bidding on public targets. This finding is confirmed by all three models used to generate abnormal returns. Therefore, the findings of the study support our first hypothesis that the firms bidding for private and subsidiary targets earn higher abnormal returns than firms bidding for public targets. Australian acquirers more frequently use stock as a payment method in acquisitions of all types of targets. This popularity may result from the capital gains tax reform introduced in December 1999. We find that bidders earn higher abnormal returns when the method of payment is stock compared with cash settlements. However, when the influences of other bid and financial characteristics are controlled for, we find a statistically significant association between stock-financed deals and abnormal returns only for the sample of private target acquisitions. This finding provides strong support for the second hypothesis that firms bidding for private companies earn higher abnormal returns when the method of payment involves stock rather than cash. The market perceives agency benefits arising from the monitoring role of target shareholders (i.e. blockholders) when bidding firms acquire private entities through stock swaps.

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With respect to specific bid characteristics examined in this study, we find that attempts made by public target bidders to acquire unlisted firms are rewarded with positive abnormal returns. Such transactions seem to create value for the bidding firms because of the strong bargaining power possessed by bidding firms over the target due to greater information asymmetry associated with unlisted targets and resultant weak competition. Similarly, privately negotiated deals initiated by firms bidding for private targets are also associated with positive abnormal returns. This may be attributable to efficiency gains and associated favourable outcomes as bidding firms may have to negotiate with only a few individual investors and they are then in a position to offer different premiums for different shareholders of the target. Surprisingly, we find that the attachment of break fees to acquisition deals by targets has differential effects on the three types of targets analysed. 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