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Cause and effect of mini-tender offers
The Quarterly Review of Economics and Finance 47 (2007) 521–534
Cause and effect of mini-tender offers Kim Gleason a , Jarrod Johnston b,∗ , Jeff Madura a a
Florida Atlantic University, Boca Raton, FL 33432, United States Appalachian State University, Boone, NC 28608, United States
b
Received 27 October 2004; received in revised form 1 November 2005; accepted 1 December 2005 Available online 19 April 2007
Abstract Mini-tender offers are unique because they are commonly made at an offer price below the prevailing market price. They appear to focus on quickly arbitraging investors who are irrational or uninformed and thus do not capitalize on their potential for governing the target. We find that firms targeted for minitender offers are relatively large and experience weaker performance than other same-industry firms. Sample firms subjected to mini-tender offers experience significant negative announcement effects. The negative announcement effects are more pronounced for firms that exhibit a higher level of stock volatility, a lower level of institutional ownership, and that have been the target of a recent lawsuit. © 2007 Board of Trustees of the University of Illinois. All rights reserved. JEL classification: G14; G32; G34 Keywords: Tender offers; Misrepresentation; Investor protection
1. Introduction A mini-tender offer reflects an offer by a bidder to a target’s shareholders to purchase less than 5% of the total shares outstanding, typically at a lower price than the price at which it trades at the time of the offer. Mini-tenders could reduce agency problems associated with diffuse ownership, and the bidder could potentially serve as a key blockholder and monitor of the target. Furthermore, they may signal the continual accumulation of shares, which should result in greater control and monitoring. However, because of the peculiar characteristics of mini-tender offers, the governance of the target is not necessarily improved. Many mini-tender offers seem focused on quickly arbitraging ∗
Corresponding author. Tel.: +1 828 262 2893; fax: +1 828 262 6612. E-mail address: [email protected] (J. Johnston).
1062-9769/$ – see front matter © 2007 Board of Trustees of the University of Illinois. All rights reserved. doi:10.1016/j.qref.2005.12.003
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investors who are irrational or uninformed. Shareholders tender their shares at less than the current market price, and then the bidder sells the shares on the open market immediately at the higher price without having to pay the tendering shareholders until the offer has closed. According to Burnham Pacific’s shareholder relations manager, “My concern is that some of our investors might believe the offer came from us, and they’ll just sign and return it. If they do, they stand to lose.”1 Our objective is to (a) identify characteristics that may subject a firm to a mini-tender attack, (b) measure the share price response of targets to announced mini-tender offers, and (c) determine what characteristics can cause variation in the share price response. We find that firms subjected to mini-tenders are larger, experience weaker performance than other firms in their corresponding industries, and are commonly the target of a lawsuit. When the mini-tender offer is announced, sample firms experience significant negative announcement effects. The effects are more pronounced for firms that exhibit a higher level of stock volatility and a lower level of institutional ownership and have been subject to a recent lawsuit. 2. Background on mini-tender offers Rules for traditional tender offers require bidders to disclose pertinent information about themselves, the offer, and the target company. Shareholders have the option to withdraw their shares while the offer remains open and to have their shares purchased on a pro-rata basis if the number of shares tendered exceeds the amount sought in the offer. Tender offers that attempt to acquire less than 5% of a company’s outstanding shares are termed mini-tender offers. The offers are typically below the current market price of the stock and are not subject to the rules regarding traditional tender offers. Because the proportion of shares bid is less than 5%, the bidder does not have to register the offer with the Securities and Exchange Commission (SEC) or inform the management of the target firm. Mini-tender offers are subject only to the SEC’s anti-fraud provision. Because these offers are frequently at prices below the current market price, charge fees to the tendering shareholders, are offered on a first-come basis, have no withdrawal rights for the shareholder, and may be canceled or extended at the discretion of the firm making the offer, they can send a negative signal to shareholders about the true value of the firm. The mini-tender process begins when the bidder notifies the Depository Trust Company (DTC), a securities depository, of the offer. The DTC then notifies its clients, mainly banks and brokerage firms, of the details of the offer. Although banks and brokerage firms are not required to forward the mini-tender offer to their customers, many feel it is their fiduciary duty to do so. The shareholders’ only exposure to this process is likely to be the receipt of the letter from their brokerage firm summarizing the offer and requesting a prompt response. There are a number of reasons shareholders may agree to tender their shares at below-market prices. First, shareholders may believe their brokerage firm is involved in the mini-tender offer and is suggesting the sale. Second, investors may confuse the mini-tender offer with a regular tender offer and believe that tendered shares can be withdrawn. Third, shareholders may be unaware of the current market price and believe the offer price includes a premium. In this case, shareholders may simply take advantage of the convenience of signing a paper to receive their check. Fourth, the firm may have received an acquisition bid within the past year and shareholders may confuse the mini-tender offer with an endorsement from management of a past takeover bid.
1 From the website of the International Council of Shopping Centers regarding a mini-tender offer on Burnham Pacific, a San Diego based REIT. http://www.icsc.org/srch/sct/current/sct9904/23.htm.
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As an example, Applied Materials was the target of a mini-tender offer by the TRC Capital Corporation on September 22, 2004. The offer was for up to 6 million shares, less than 1% of the outstanding common stock, at a price of $16.15 per share. The offer price was 8.39% below the $17.63 closing price on September 21. Applied Materials informed stockholders that the bid was below the market price and that TRC could amend the terms of the offer, including the offer price and the expiration date. The mini-tender offer process has three provisions that benefit the bidder. First, the bidder may withdraw the offer at his or her discretion. For instance, the offer may be withdrawn if the stock price rises above the offer price. Second, the expiration date of the offer may be extended without allowing withdrawal rights or payment for shares already tendered. Third, the bidder may not have to pay for the tendered securities until the offer closes. Therefore, the bidder may sell the shares just purchased and use the proceeds to make the payment to shareholders who tendered their shares, keeping the remaining funds as profit. The SEC has filed lawsuits against some individuals who have engaged in mini-tender offers. Generally, the SEC claims there has been a violation of the anti-fraud provisions in Sections 14(e) and 10(b) of the Exchange Act. The violations often involve the failure to disclose material information and the failure to promptly pay for tendered shares. However, many of the cases initiated by the SEC are resolved with a “cease and desist” agreement and occasionally a civil penalty that equals a fraction of the profits made from the offer. The SEC has also issued guidelines for investors on mini-tender offers.2 3. Related literature Numerous studies have been conducted on acquisitions. Dodd and Ruback (1977), Bradley, Desai, and Kim (1988), Lang, Stulz, and Walkling (1989), and several others substantiate the large abnormal returns to target shareholders. Studies have also attempted to assess the potential gains to bidders. Jensen (1986), Roll (1986), Morck, Shleifer, and Vishny (1990), Harford (1999), Shleifer and Vishny (2003), and others document the potential agency problems that may motivate firms to pursue acquisitions. Yet, Lang et al. (1989) find that firms that have high Q bidders gain more from tender offers than low Q bidders. Dong, Hirshleifer, Richardson, and Teoh (2006) suggest that takeover efforts commonly result when the target is undervalued by the market. Additional research on the acquisition of shares may offer useful insight that can establish hypotheses regarding the causes and effects of mini-tenders. Mikkelson and Ruback (1985) assessed partial acquisitions of 5% or more of the target’s ownership and documented favorable share price effects for the target and the acquirer. Walkling (1985) devised a logit model for predicting tender offer success. He found that success is dependent on previous acquirer ownership of target shares and the bid premium. Several studies, including that of Brickley, Lease, and Smith (1988), propose that shifts in ownership and voting power can affect control. Holderness and Sheehan (1988), Agrawal and Knoeber (1996), and others showed how shifts in ownership can affect the degree of monitoring. The managerial efficiency hypothesis suggests that partial acquirers can exert control over the partial target to reduce agency problems and increase the value of the partial target. Partial acquisitions carry the ultimate threat of a complete takeover to achieve full control. Choi (1991) found that partial acquisitions are especially valuable for targets that are ultimately acquired or subject to proxy fights or management turnover.
2
From the SEC website. http://www.sec.gov/investor/pubs/minitend.htm.
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Spencer, Akhigbe, and Madura (1998) show that the actions of a partial target following a partial acquisition can affect the values of their corresponding partial acquirers. Therefore, partial acquirers have a strong incentive to exercise some degree of control over their partial targets. Allen and Phillips (2000) document that firms subjected to block ownership experience an initial favorable stock price response and favorable operating performance. However, the aforementioned studies do not necessarily indicate how mini-tenders would affect the target firm’s value, because the incentive of the bidder involved in mini-tenders may not be to improve the governance of the target. 4. Hypotheses If the acquirer’s motive was to obtain sufficient control in order to enforce monitoring, the move could provide a more favorable long-term signal. The presence of a large shareholder could improve monitoring and performance (see Shleifer & Vishny, 1986; Weisbach, 1988). In addition, it could signal a higher likelihood of a complete acquisition (see Choi, 1991). However, the peculiar tendencies of mini-tender offers could prompt the target shareholders to question the motive and assess the prevailing governance and performance of the target.3 Thus, even if they decline the tender offer, they may attempt to interpret signals contained within the offer. If they believe the target firm was chosen because of weak organizational or governance characteristics, they may consider selling their shares in the open market. The mini-tender offer may also trigger a response by the target’s management, even if most shareholders are expected to retain their shares. Most target managers strongly oppose the offers and attempt to increase the awareness of their shareholders by questioning the ethics of the minitender offer and the firm making it. We hypothesize that the negative forces outweigh the positive forces on the target’s valuation because of the peculiar tendencies of mini-tender offers. 4.1. Likelihood of becoming a target of a mini-tender offer One possible motivation for a mini-tender offer is to increase value through the elimination of agency costs. In these cases, targets are likely to have poor corporate governance and operating performance. Another possible motivation is to entice naive investors into tendering their shares at below-market prices. Companies with low institutional ownership would more likely be targeted in these cases. The model specification is as follows: Target p = α + β1 SIZEj + β2 LAWSUITj + β3 LEVERAGEj 1 − Target + β4 LIQUIDITYj + β5 VOLATILITYj + β6 INSTOWNj + β7 GROWTHj + β8 EFFICIENCYj + εj
(1)
The variable descriptions follow below:
3 Julie Peters of Mackenzie Patterson (a firm that engages in mini-tender offers) stated in a personal interview on 9/29/03 that “sometimes they [the shareholders] have forgotten they even owned shares . . . they are glad to get rid of them”.
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4.1.1. Size Size is a relevant variable in terms of visibility of a firm. Larger firms may be more visible than smaller firms in the same industry and thus may attract the attention of the mini-tender bidder. Furthermore, if a fixed percentage of a firm’s shareholders are gullible, and mini-tender offers are motivated to take advantage of them, large firms would be more suitable targets. Thus, the sign of the size variable is expected to be positive. Size is measured by the assets owned and market value of the firm.4 4.1.2. Lawsuit A firm that has been the subject of recent litigation is likely to have negative sentiment surrounding it. Consequently, shareholders may be more likely to tender their shares without recognizing that the bid is below the market price. The lawsuit variable is assigned a value of 1 if the firm has been engaged in a lawsuit in the year prior to the offer and zero otherwise. 4.1.3. Leverage Firms with heavy debt loads are more risky and more likely to have low stock prices during industry downturns. Therefore, these companies may be more likely to be targets during poor performing periods. The debt-to-assets ratio is used to measure leverage.5 4.1.4. Liquidity Liquidity refers to balance sheet liquidity. A firm that has excess cash may be the target of a mini-tender offer if the acquirer believes that dividends can be increased. A large shareholder may be able to influence management into paying out the excess cash as dividends. Balance sheet liquidity is measured by the cash-to-assets ratio. 4.1.5. Volatility Shareholders of targets whose valuations are subject to more uncertainty may be more willing to accept a weak mini-tender offer. Therefore, firms characterized as having a higher degree of uncertainty may be targeted. The target’s stock volatility over the period from 100 days to 10 days before the offer date is used as a proxy. 4.1.6. Instown (institutional ownership) A target is subject to more shareholder monitoring if a higher percentage of its shares are held by institutional investors (see Agrawal & Knoeber, 1996; Brickley et al., 1988). The portfolio managers of financial institutions take bigger stakes in each investment and have more to lose. They also have the resources to monitor a firm and exert influence. According to Stulz, Walkling, and Song (1990), firms in which a smaller fraction of their shares are owned by institutional investors have more potential for improved control. In addition, institutional investors are presumed to be more informed than individual investors, and more likely to “vote with their feet” if they perceive that a value destructive corporate decision is made or signal received. Evidence that institutional investors vote with their feet is provided by Parrino, Sias, and Starks (2003). Therefore, we anticipate finding a negative relationship between institutional ownership and the likelihood of being 4
We also use total revenue as the size proxy. Our results are quantitatively similar to those reported in Table 3. We also conducted robustness tests using the ratio of total debt to total equity. The results are quantitatively similar to those reported in Table 3. 5
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targeted. Institutional ownership is measured as the percentage of shares owned by institutional investors. 4.1.7. Growth (growth potential) Firms with greater growth potential may be more likely to be targeted by those mini-tender offers motivated by decreased agency costs through a consolidation in ownership. Growth potential is measured by the price-to-book ratio for the firm.6 4.1.8. Efficiency Firms with low levels of efficiency may be more attractive targets for mini-tender offers, because negative sentiment about the target could convince target shareholders to tender their shares when prompted. Return on assets is used to proxy how efficiently the firm utilizes its assets. 4.2. Valuation effects of mini-tender offer announcement The valuation effects in response to mini-tender offers could be positive if a firm is likely to benefit from an increased concentration of ownership and the possibility of additional shares being acquired. Conversely, if the offer is an indication of poor management and poor future prospects and is attempting to acquire shares at below-market prices from na¨ıve or frustrated shareholders, it may elicit a negative market response. In the long run, returns may improve if managers feel that the mini-tender represents a negative signal. We measure both the short-run abnormal returns in the 3 days surrounding the mini-tender offer (i.e., (−1, +1), (−1, 0), and (0, 0)) and the long-run returns in the 6, 12, and 24 months following the announcement. 4.3. Variables influencing the valuation The valuation effects are expected to be worse for firms whose characteristics may prompt shareholder concerns about a general lack of monitoring. The regression model is specified below: CARj = α + β1 SIZEj + β2 LAWSUITj + β3 LEVERAGEj + β4 LIQUIDITYj + β5 VOLATILITYj + β6 RUNUPj + β7 DISCOUNTj + β8 IGj + β9 TRCj + εj (2) Variable definitions follow below: 4.3.1. Size Mini-tender offers targeting larger firms require a substantial amount of capital and are more likely to receive greater attention from analysts and the business press. Additionally, larger firms may have more uninformed shareholders willing to tender their shares. Therefore, larger firms
6 We also conduct robustness tests using the price to earnings (PE) ratio and the price to earnings to growth (PEG) ratio. We find that the PE ratio is insignificant at conventional levels, but that the PEG ratio is a significant determinant of the likelihood of being targeted. All other variables retain their sign and significance.
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are more likely to experience negative valuation effects due to a mini-tender announcement. Size is measured by the assets owned and market value of the firm. 4.3.2. Lawsuit Firms subject to lawsuits are more likely to be targeted because of the negative sentiment surrounding the company. This suggests the motive for the mini-tender offer is to acquire shares at below-market prices and quickly sell at market prices. Therefore, the presence of litigation should negatively impact the announcement valuations. The lawsuit variable is a dummy variable set equal to 1 if the target firm had been the subject of a lawsuit in the year prior to the offer and zero otherwise. 4.3.3. Leverage Firms with higher leverage are more likely to exhibit more unfavorable valuation effects on the announcement of a mini-tender offer, due to the risk associated with the firm. Leverage is measured by the debt-to-assets ratio.7 4.3.4. Liquidity Liquidity refers to balance sheet liquidity. Firms with excess cash may be more likely to use the cash to benefit shareholders if ownership becomes more concentrated. That is, a firm with excess cash may be targeted in the hopes of influencing the firm to pay out the cash in the future. The possibility of increased dividends or share repurchases should increase valuations. The cash-to-assets ratio is used to proxy balance sheet liquidity. 4.3.5. Volatility Targets whose valuations are subject to more uncertainty are more exposed to a potential negative market response to a mini-tender offer. The target’s stock volatility over the period from 100 days to 10 days before the offer date is used as a proxy. A higher volatility suggests a lack of a consensus about the target’s value. The mini-tender offer news could trigger greater concerns about a target whose value is presently viewed as fragile. 4.3.6. Runup Firms that have performed poorly are subject to more suspicion by their investors. They are expected to experience more unfavorable valuation effects in response to a mini-tender offer. The recent performance is proxied by runup, which is measured as the return for the 3-month period prior to the mini-tender offer. 4.3.7. Discount The signal about the target may be conditioned on the tender offer premium relative to the prevailing market price. An offer below the prevailing market price implies a discount, or a negative premium. The valuation effects are expected to be worse for mini-tender offers that exhibit a larger discount relative to the prevailing market price. The variable is measured as the percentage difference between the offer and the market price of the target at the time of the offer.
7 We also use the ratio of total debt to total equity to proxy for leverage. The results are quantitatively similar to those shown in Table 5 using total debt to total assets.
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4.3.8. Firms The firm making the mini-tender offer may have a certification effect or a reputation based on previous mini-tender offers. A firm with a history of acquiring shares in a company and exercising positive influence should put upward price pressure on the offer announcement. Firms more likely to sell tendered shares immediately should have a negative effect on valuations. Firms that have been cited by the SEC for making mini-tenders should have a negative wealth effect. A dummy variable is set equal to 1 if the firm listed has a history of engaging in mini-tender offers. Ira Gains8 (IG) has made numerous mini-tender offers and has been repeatedly cited by the SEC. TRC Capital (TRC), which has also made many mini-tender offers, has not been cited by the SEC. We would expect less negative wealth gains if the bidder is TRC Capital. 5. Sample The sample was compiled by searching for transactions using Lexis-Nexis. The resulting sample contained 120 announcements in which an offer below the current market value of the firm for less than 5% of shares was made. To qualify for the sample, the firm had to be publicly traded and share price data had to be available from CRSP. We then obtained financial data on the targets from Standard and Poor’s Research Insight database. Descriptive statistics for the sample of the mini-tender offers is summarized in Table 1. There were more mini-tenders in 1999 than in any other year of our sample, although 2002 was a popular year as well. The sample is spread across various sectors, as shown in Panel B of Table 1. Mini-tenders have been most popular in the following industries: manufacturing (SIC 2000), transportation, communications and utilities (SIC 4000), and financial services (SIC 6000). Panel C shows that bidding for mini-tenders are concentrated within a small group of firms. Panel D of Table 1 summarizes the percentage discount in the bid price relative to the market price. The majority of the bids were in the discount range from zero to 40%, but 14 (12%) of the bids had discounts exceeding 40%. Panel E of Table 1 summarizes the proportion of shares that the bidder attempted to acquire. The operating characteristics of the target companies are summarized in Table 2. These characteristics are compared to a set of control firms selected based on industry, size, and book-to-market ratio, following the method of Barber and Lyon (1997). Firms with the same three-digit SIC code as each sample firm are identified. From this group, the firm closest in size and book-to-market ratio is selected as the matching firm. If a matched firm did not have data available for the full time period of the analysis, returns were used until the delisting, and then the returns for next best match were used for the remainder of the time period. The size of the target firms is larger on average than the control firms.9 The earnings as measured by EBITDA, ROA, and ROE are generally higher for the sample of targets than the control firms, but the difference is only significant for EBITDA. The price-to-book ratio and debt ratio of the target firms is lower than that of control firms, but the difference is not significant. The Altman’s Zscore of the target firms is significantly lower for target firms, suggesting that their characteristics
8 Ira Gains operates under various corporate names. We obtained the phone number for one of his companies “Peachtree Partners”, and called the office on 9/30/03. We requested to speak to Ira Gains and were transferred by the secretary to his extension. However, he was unwilling to speak to us. 9 We do not match on size or price to book because these may be important variables in determining which firms are targeted. The majority of the control firms selected based on SIC code were in the same NAICS code as the sample firm.
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Table 1 Sample descriptive statistics Number
Percent of total
Panel A: year 1998 1999 2000 2001 2002 2003 Total
21 39 14 14 21 11 120
17.50 32.50 11.67 11.67 17.50 9.17 100.00
Panel B: SIC 1000–1999 2000–2999 3000–3999 4000–4999 5000–5999 6000–6999 7000–7999 8000–8999 Total
13 23 17 20 7 33 5 2 120
10.83 19.17 14.17 16.67 5.83 27.50 4.17 1.67 100.00
Panel C: mini-tender firm bidder IG holdings (Ira Gains) Peachtree holdings (Ira Gains) TRC capital Summit ventures Mackenzie and Patterson Other Total
46 3 51 6 6 11 120
38.23 2.50 42.50 5.00 5.00 9.17 100.00
Panel D: percent discount below market price discount 0.0–4.9 5.0–19.9 20.0–40.0 Above 40 NA Total
22 43 35 14 6 120
18.33 35.83 29.17 11.67 5.00 100.00
Percent of shares
Number of mini-tenders
Panel E: proportion of shares sought through the mini-tender offer 0.1–1.0 17 1.1–2.0 39 2.1–3.0 29 3.1–4.0 24 4.1–5.0 11 Total 120
Percent of total 14.17 32.50 24.17 20.00 9.17 100.00
Number of mini-tender offers separated by year, SIC code, firm making the offer, size of the discount of the mini-tender offer price below the market price, and the percentage of shares sought through the mini-tender offer.
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Table 2 Target operating characteristics Characteristic
Sample mean (median)
Control mean (median)
T-statistic (Z-score)
Assets (millions of $) Market value (millions of $) Debt to assets (%) Cash to assets (%) Institutional ownership (%) Price to book ROA (%) ROE (%) EBITDA margin (%) Altman’s Z-score
8081 (1855) 5464 (1500) 33.83 (29.77) 36.00 (4.25) 30.34 (27.93) 6.01 (1.85) 2.41 (3.23) 11.59 (9.86) 17.18 (16.35) 3.66 (2.73)
1681 (469) 942 (372) 53.53 (33.63) 15.72 (4.07) 46.04 (38.27) 18.75 (1.53) 2.83 (3.14) 5.05 (8.61) 6.36 (13.49) 20.74 (2.14)
3.04*** (3.02)*** 3.90*** (3.60)*** −0.92 (−0.43) −1.00 (1.24) −2.65** (−3.42)*** −0.98 (−1.00) −0.64 (−1.30) 0.74 (−1.49) −0.60 (−2.36)** −0.94 (2.17)**
Control operating characteristics of targets in the year prior to the mini-tender offer. *** Significant at the 0.01 level. ** Significant at the 0.05 level.
are more indicative of impending bankruptcy. The cash level of targets is not significantly different from that of control firms, whereas the institutional ownership is significantly lower. 6. Methodology We first attempt to identify the characteristics of firms that have been the target of mini-tenders in a multivariate framework. We use logit analysis on mini-tender firms and their control firms. To measure valuation effects, we also examine the announcement-date impact of the mini-tender offer using standard event study. We use Eventus (Cowan, 2003) to test the market reaction to the announcement of the mini-tender.10 We utilize the ordinary least squares market model, and the expansion announcement day is labeled day zero. A 120-day period immediately preceding day-10 is chosen to estimate the market model parameters.11 Cumulative average excess returns (CARs) for the (−1, +1) and (−1, 0) windows and for day zero are estimated. The CRSP equally-weighted index is used as the market proxy.12 To examine long-run returns, we compute long-horizon average holding period abnormal returns. Using the Barber and Lyon (1997) procedure, we estimate industry-matched sample adjusted long-horizon average holding period abnormal returns (AHARs) for our sample target firms. Average holding period abnormal returns (AHARs) are calculated starting with the month after the announcement date for 6-, 12-, and 18-month holding periods.
10 There are some overlaps of events within the event windows but not for any one participating target. We adjust for this situation by using the time series standard deviation method option in Eventus (Cowan, 2003). This method calculates a single-variance estimate for the entire portfolio, thus avoiding the problem of the cross-sectional correlation of security returns. The results are similar to those for the standardized cross-sectional method (Boehmer, Musumeci, & Poulsen, 1991) adapted for serial correlation (Cowan, 2003) and results with Scholes-Williams betas, which accounts for nonsynchronous trading. 11 We omitted the few days prior to day zero to avoid possible confounding effects in the estimation of the market model parameters. Also, the estimation period was sequentially increased to 150 days with very minor, insignificant changes in the abnormal returns. 12 All the tests in the study were replicated using the CRSP value-weighted index and the results remained the same.
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Table 3 Likelihood of being targeted Variable
Model 1
Model 2
Intercept Size Lawsuit Leverage Balance sheet liquidity Volatility Institutional ownership Growth potential Efficiency N Chi-square
−1.819 (7.56)*** 0.272 (10.70)*** 0.883 (6.32)*** −0.003 (0.28) −0.450 (0.15)
−1.796 (6.46)*** 0.217 (5.78)*** 1.019 (7.39)*** 0.001 (0.87) −0.365 (0.08) 0.263 (2.90)** −1.258 (4.61)*** 0.107 (1.64) 0.005 (0.51) 222 29.34***
227 31.15***
This table provides the coefficients of the logit regressions explaining the characteristics of firms being targeted by mini-tender offers. *** Significant at the 0.01 level. ** Significant at the 0.05 level.
7. Results The results of the logit analysis are disclosed in Table 3. Two models are applied. The results of the restricted model in column 2 are referred to as Model 1. This model focuses on key variables but excludes some other control variables that could distort the results for each variable because of collinearity. The results of the unrestricted model in column 3 are referred to as Model 2. This model includes all control variables. For the variables that are included in Model 1 and Model 2, the results are qualitatively similar. The size variable is positive and significant, which indicates that larger firms are more likely to receive a mini-tender bid. Larger firms are more likely to have higher numbers of investors, some of which are uninformed, and may be more visible, attracting the attention of mini-tender bidders. The lawsuit variable is positive and significant, suggesting that firms subject to a shareholder lawsuit are more likely to receive a mini-tender offer. This indicates that firms that are poorly governed may be more likely to frustrate investors. The volatility variable is positive and significant, suggesting a higher level of volatility for the firms that are subjected to mini-tender offers. Firms with volatile share prices are likely to have risen above that which uninformed shareholders are aware. The institutional ownership variable is negative and significant, which implies that firms with a lower level of institutional ownership are more likely candidates for mini-tender offers. Thus, minitender offers are more likely to take place for firms with a larger percentage of retail investors, who may be uninformed. Overall, these results support the hypothesis that mini-tender offers are motivated to take advantage of uninformed investors. The mean announcement effects of mini-tenders are disclosed in Table 4. Three different event windows are used to measure the effects, and the fourth column provides the proportion of events that were positive versus negative based on the (−1, +1) window. For the full sample, the results are generally negative and significant. Forty-seven events elicited positive effects, versus 73 with negative effects, and the difference is significant. This supports the hypothesis that mini-tender offers are solely to profit from uninformed investors tendering their shares at below-market prices. It appears that the market does not anticipate that the mini-tender
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Table 4 Announcement abnormal returns
Full sample
(−1, 0)
(0, 0)
(−1, +1)
Pos:Neg
N
−0.51 (−1.84)*
−0.60 (−2.13)**
−0.72 (−1.49)
47:73 (−1.98)**
120
Cumulative abnormal returns estimated using the market adjusted model for stocks at mini-tender acquisition announcement. ** Significant at the 0.05 level. * Significant at the 0.10 level.
offers will improve the governance of the target company and that the market views mini-tenders as a negative signal regarding the performance of the firms. Table 5 discloses the results of the cross-sectional analysis of announcement effects. The size variable is negative and significant, which implies that larger firms experience more negative announcement effects. The volatility variable is negative and significant, which indicates more pronounced negative announcement effects for target firms that have higher volatility levels. The lawsuit variable is negative and significant, which indicates more adverse announcement effects for target firms that are subject to a lawsuit; shareholders may be more willing to tender their shares when they feel that they have been mistreated. The TRC Capital variable is positive and significant, which indicates that the market reaction is dependent on the firm behind the offer. TRC Capital may be more likely to exercise a less negative influence on the firm after shares have been acquired because it has not been subject to SEC warnings as Ira Gains has. The discount variable is not significant, suggesting that the market response is not conditioned on the degree to which the bid price is below the prevailing stock price. Long-run buy and hold returns are presented in Table 6.
Table 5 Cross-sectional analysis
Intercept Size Lawsuit Leverage Balance sheet liquidity Volatility Runup Discount Ira Gains TRC capital N Adj. R2 F-statistic
Model 1
Model 2
0.012 (1.04) −0.003 (−2.06)**
0.011 (1.01) −0.002 (−1.76)* −0.015 (−3.30)*** −0.001 (−0.78) −0.001 (−1.32) −3.416 (−2.59)** −0.007 (−0.47) 0.001 (0.51) 0.001 (0.03) 0.015 (2.25)** 98 19.50 3.62**
−0.001 (−0.51) −0.001 (0.18) −3.458 (−2.52)** 0.004 (0.24) 0.001 (0.18) 0.001 (0.16) 0.017 (2.41)** 98 10.10 2.39**
This table provides the coefficients of multivariate regressions explaining the abnormal returns upon mini-tender announcements. *** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level.
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Table 6 Long-run performance Time frame
Coefficient
6 months 12 months 24 months
−7.85 (−1.34) −27.65 (−2.38)** −21.02 (−1.96)*
Matched sample buy and hold returns for various time periods. ** Significant at the 0.05 level. * Significant at the 0.10 level.
Returns are negative and significant for the 12-month and 24-month period following a minitender offer. This offers further support for the hypothesis that mini-tenders do not improve the monitoring of the firm. 8. Conclusions Mini-tender offers are usually made with an offer price that is below the prevailing market price. We find that mini-tender firms exhibit weaker performance than other firms in their corresponding industries. They have frequently been subject to a recent lawsuit. When the mini-tender is announced, sample firms experience significant negative announcement effects. The effects are more pronounced for firms that exhibit a higher level of stock volatility and a lower level of institutional ownership and have been subject to a recent lawsuit. Overall, mini-tenders appear to be instigated to take advantage of investors who are irrational or uninformed, as they do not lead to an improvement in monitoring. Our results imply that if market participants are willing to sell shares of the firms they own for under market value, perhaps additional regulation of mini-tender activity by the SEC is necessary. Furthermore, in order to avoid becoming the target of a mini-tender attack, firms with the characteristics of those targeted – illiquidity, high volatility, poor performance, and a recent lawsuit – may want to make an additional investment in their investor relations function, so that they are able to communicate effectively with shareholders that they should not accept the mini-tender offer. We leave it to future researchers to uncover the characteristics of shareholders who accept mini-tender offers, as well as the relationship between mini-tender offers and corporate governance events such as the removal of top level management. References Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31, 377–397. Allen, J. W., & Phillips, G. M. (2000). Corporate equity ownership, strategic alliances, and product market relationships. Journal of Finance, 55, 2791–2815. Barber, B. M., & Lyon, J. D. (1997). Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. Journal of Financial Economics, 43, 341–373. Boehmer, E., Musumeci, J., & Poulsen, A. B. (1991). Event-study methodology under conditions of event-induced variance. Journal of Financial Economic, 30, 253–273. Bradley, M., Desai, A., & Kim, E. H. (1988). Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms. Journal of Financial Economics, 21, 3–40. Brickley, J., Lease, R., & Smith, C. (1988). Ownership structure and voting on antitakeover amendments. Journal of Financial Economics, 20, 267–292.
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Choi, D. (1991). Toehold acquisitions, shareholder wealth, and the market for corporate control. Journal of Financial and Quantitative Analysis, 26, 391–407. Cowan, A. (2003). Eventus Version 7. 1 User’s Guide. Ames: Iowa State University Press. Dodd, P., & Ruback, R. (1977). Tender offers and stockholder returns: An empirical analysis. Journal of Financial Economics, 5, 351–373. Dong, M., Hirshleifer, D., Richardson, S., & Teoh, S. H. (2006). Does investor misvaluation drive the takeover market. Journal of Finance, 61, 725–762. Harford, J. (1999). Corporate cash reserves and acquisitions. Journal of Finance, 54, 1969–1997. Holderness, C., & Sheehan, D. (1988). The role of majority shareholders in publicly held corporations. Journal of Financial Economics, 17, 317–346. Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76, 323–329. Lang, L., Stulz, R., & Walkling, R. (1989). Managerial performance, Tobin’s Q, and the gains from successful tender offers. Journal of Financial Economics, 24, 137–154. Mikkelson, W., & Ruback, R. (1985). An empirical analysis of the interfirm equity investment process. Journal of Financial Economics, 14, 523–553. Morck, R., Shleifer, A., & Vishny, R. (1990). Do managerial objectives drive bad acquisitions? Journal of Finance, 45, 31–48. Parrino, R., Sias, R., & Starks, L. (2003). Voting with their feet: Institutional investors and CEO turnover. Journal of Financial Economics, 68, 3–31. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59, 197–216. Shleifer, A., & Vishny, R. (1986). Large shareholders and corporate control. Journal of Political Economy, 94, 461–488. Shleifer, A., & Vishny, R. (2003). Stock market driven acquisitions. Journal of Financial Economics, 70, 295–311. Spencer, C., Akhigbe, A., & Madura, J. (1998). Impact of partial control on policies enacted by partial targets. Journal of Banking and Finance, 22, 425–445. Stulz, R. M., Walkling, R. A., & Song, M. H. (1990). The distribution of target ownership and the division of gains in successful takeovers. Journal of Finance, 45, 817–833. Walkling, R. A. (1985). Predicting tender offer success. Journal of Financial and Quantitative Analysis, 20, 461–479. Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 431–460.
Cause and effect of mini-tender offers Kim Gleason a , Jarrod Johnston b,∗ , Jeff Madura a a
Florida Atlantic University, Boca Raton, FL 33432, United States Appalachian State University, Boone, NC 28608, United States
b
Received 27 October 2004; received in revised form 1 November 2005; accepted 1 December 2005 Available online 19 April 2007
Abstract Mini-tender offers are unique because they are commonly made at an offer price below the prevailing market price. They appear to focus on quickly arbitraging investors who are irrational or uninformed and thus do not capitalize on their potential for governing the target. We find that firms targeted for minitender offers are relatively large and experience weaker performance than other same-industry firms. Sample firms subjected to mini-tender offers experience significant negative announcement effects. The negative announcement effects are more pronounced for firms that exhibit a higher level of stock volatility, a lower level of institutional ownership, and that have been the target of a recent lawsuit. © 2007 Board of Trustees of the University of Illinois. All rights reserved. JEL classification: G14; G32; G34 Keywords: Tender offers; Misrepresentation; Investor protection
1. Introduction A mini-tender offer reflects an offer by a bidder to a target’s shareholders to purchase less than 5% of the total shares outstanding, typically at a lower price than the price at which it trades at the time of the offer. Mini-tenders could reduce agency problems associated with diffuse ownership, and the bidder could potentially serve as a key blockholder and monitor of the target. Furthermore, they may signal the continual accumulation of shares, which should result in greater control and monitoring. However, because of the peculiar characteristics of mini-tender offers, the governance of the target is not necessarily improved. Many mini-tender offers seem focused on quickly arbitraging ∗
Corresponding author. Tel.: +1 828 262 2893; fax: +1 828 262 6612. E-mail address: [email protected] (J. Johnston).
1062-9769/$ – see front matter © 2007 Board of Trustees of the University of Illinois. All rights reserved. doi:10.1016/j.qref.2005.12.003
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investors who are irrational or uninformed. Shareholders tender their shares at less than the current market price, and then the bidder sells the shares on the open market immediately at the higher price without having to pay the tendering shareholders until the offer has closed. According to Burnham Pacific’s shareholder relations manager, “My concern is that some of our investors might believe the offer came from us, and they’ll just sign and return it. If they do, they stand to lose.”1 Our objective is to (a) identify characteristics that may subject a firm to a mini-tender attack, (b) measure the share price response of targets to announced mini-tender offers, and (c) determine what characteristics can cause variation in the share price response. We find that firms subjected to mini-tenders are larger, experience weaker performance than other firms in their corresponding industries, and are commonly the target of a lawsuit. When the mini-tender offer is announced, sample firms experience significant negative announcement effects. The effects are more pronounced for firms that exhibit a higher level of stock volatility and a lower level of institutional ownership and have been subject to a recent lawsuit. 2. Background on mini-tender offers Rules for traditional tender offers require bidders to disclose pertinent information about themselves, the offer, and the target company. Shareholders have the option to withdraw their shares while the offer remains open and to have their shares purchased on a pro-rata basis if the number of shares tendered exceeds the amount sought in the offer. Tender offers that attempt to acquire less than 5% of a company’s outstanding shares are termed mini-tender offers. The offers are typically below the current market price of the stock and are not subject to the rules regarding traditional tender offers. Because the proportion of shares bid is less than 5%, the bidder does not have to register the offer with the Securities and Exchange Commission (SEC) or inform the management of the target firm. Mini-tender offers are subject only to the SEC’s anti-fraud provision. Because these offers are frequently at prices below the current market price, charge fees to the tendering shareholders, are offered on a first-come basis, have no withdrawal rights for the shareholder, and may be canceled or extended at the discretion of the firm making the offer, they can send a negative signal to shareholders about the true value of the firm. The mini-tender process begins when the bidder notifies the Depository Trust Company (DTC), a securities depository, of the offer. The DTC then notifies its clients, mainly banks and brokerage firms, of the details of the offer. Although banks and brokerage firms are not required to forward the mini-tender offer to their customers, many feel it is their fiduciary duty to do so. The shareholders’ only exposure to this process is likely to be the receipt of the letter from their brokerage firm summarizing the offer and requesting a prompt response. There are a number of reasons shareholders may agree to tender their shares at below-market prices. First, shareholders may believe their brokerage firm is involved in the mini-tender offer and is suggesting the sale. Second, investors may confuse the mini-tender offer with a regular tender offer and believe that tendered shares can be withdrawn. Third, shareholders may be unaware of the current market price and believe the offer price includes a premium. In this case, shareholders may simply take advantage of the convenience of signing a paper to receive their check. Fourth, the firm may have received an acquisition bid within the past year and shareholders may confuse the mini-tender offer with an endorsement from management of a past takeover bid.
1 From the website of the International Council of Shopping Centers regarding a mini-tender offer on Burnham Pacific, a San Diego based REIT. http://www.icsc.org/srch/sct/current/sct9904/23.htm.
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As an example, Applied Materials was the target of a mini-tender offer by the TRC Capital Corporation on September 22, 2004. The offer was for up to 6 million shares, less than 1% of the outstanding common stock, at a price of $16.15 per share. The offer price was 8.39% below the $17.63 closing price on September 21. Applied Materials informed stockholders that the bid was below the market price and that TRC could amend the terms of the offer, including the offer price and the expiration date. The mini-tender offer process has three provisions that benefit the bidder. First, the bidder may withdraw the offer at his or her discretion. For instance, the offer may be withdrawn if the stock price rises above the offer price. Second, the expiration date of the offer may be extended without allowing withdrawal rights or payment for shares already tendered. Third, the bidder may not have to pay for the tendered securities until the offer closes. Therefore, the bidder may sell the shares just purchased and use the proceeds to make the payment to shareholders who tendered their shares, keeping the remaining funds as profit. The SEC has filed lawsuits against some individuals who have engaged in mini-tender offers. Generally, the SEC claims there has been a violation of the anti-fraud provisions in Sections 14(e) and 10(b) of the Exchange Act. The violations often involve the failure to disclose material information and the failure to promptly pay for tendered shares. However, many of the cases initiated by the SEC are resolved with a “cease and desist” agreement and occasionally a civil penalty that equals a fraction of the profits made from the offer. The SEC has also issued guidelines for investors on mini-tender offers.2 3. Related literature Numerous studies have been conducted on acquisitions. Dodd and Ruback (1977), Bradley, Desai, and Kim (1988), Lang, Stulz, and Walkling (1989), and several others substantiate the large abnormal returns to target shareholders. Studies have also attempted to assess the potential gains to bidders. Jensen (1986), Roll (1986), Morck, Shleifer, and Vishny (1990), Harford (1999), Shleifer and Vishny (2003), and others document the potential agency problems that may motivate firms to pursue acquisitions. Yet, Lang et al. (1989) find that firms that have high Q bidders gain more from tender offers than low Q bidders. Dong, Hirshleifer, Richardson, and Teoh (2006) suggest that takeover efforts commonly result when the target is undervalued by the market. Additional research on the acquisition of shares may offer useful insight that can establish hypotheses regarding the causes and effects of mini-tenders. Mikkelson and Ruback (1985) assessed partial acquisitions of 5% or more of the target’s ownership and documented favorable share price effects for the target and the acquirer. Walkling (1985) devised a logit model for predicting tender offer success. He found that success is dependent on previous acquirer ownership of target shares and the bid premium. Several studies, including that of Brickley, Lease, and Smith (1988), propose that shifts in ownership and voting power can affect control. Holderness and Sheehan (1988), Agrawal and Knoeber (1996), and others showed how shifts in ownership can affect the degree of monitoring. The managerial efficiency hypothesis suggests that partial acquirers can exert control over the partial target to reduce agency problems and increase the value of the partial target. Partial acquisitions carry the ultimate threat of a complete takeover to achieve full control. Choi (1991) found that partial acquisitions are especially valuable for targets that are ultimately acquired or subject to proxy fights or management turnover.
2
From the SEC website. http://www.sec.gov/investor/pubs/minitend.htm.
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Spencer, Akhigbe, and Madura (1998) show that the actions of a partial target following a partial acquisition can affect the values of their corresponding partial acquirers. Therefore, partial acquirers have a strong incentive to exercise some degree of control over their partial targets. Allen and Phillips (2000) document that firms subjected to block ownership experience an initial favorable stock price response and favorable operating performance. However, the aforementioned studies do not necessarily indicate how mini-tenders would affect the target firm’s value, because the incentive of the bidder involved in mini-tenders may not be to improve the governance of the target. 4. Hypotheses If the acquirer’s motive was to obtain sufficient control in order to enforce monitoring, the move could provide a more favorable long-term signal. The presence of a large shareholder could improve monitoring and performance (see Shleifer & Vishny, 1986; Weisbach, 1988). In addition, it could signal a higher likelihood of a complete acquisition (see Choi, 1991). However, the peculiar tendencies of mini-tender offers could prompt the target shareholders to question the motive and assess the prevailing governance and performance of the target.3 Thus, even if they decline the tender offer, they may attempt to interpret signals contained within the offer. If they believe the target firm was chosen because of weak organizational or governance characteristics, they may consider selling their shares in the open market. The mini-tender offer may also trigger a response by the target’s management, even if most shareholders are expected to retain their shares. Most target managers strongly oppose the offers and attempt to increase the awareness of their shareholders by questioning the ethics of the minitender offer and the firm making it. We hypothesize that the negative forces outweigh the positive forces on the target’s valuation because of the peculiar tendencies of mini-tender offers. 4.1. Likelihood of becoming a target of a mini-tender offer One possible motivation for a mini-tender offer is to increase value through the elimination of agency costs. In these cases, targets are likely to have poor corporate governance and operating performance. Another possible motivation is to entice naive investors into tendering their shares at below-market prices. Companies with low institutional ownership would more likely be targeted in these cases. The model specification is as follows: Target p = α + β1 SIZEj + β2 LAWSUITj + β3 LEVERAGEj 1 − Target + β4 LIQUIDITYj + β5 VOLATILITYj + β6 INSTOWNj + β7 GROWTHj + β8 EFFICIENCYj + εj
(1)
The variable descriptions follow below:
3 Julie Peters of Mackenzie Patterson (a firm that engages in mini-tender offers) stated in a personal interview on 9/29/03 that “sometimes they [the shareholders] have forgotten they even owned shares . . . they are glad to get rid of them”.
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4.1.1. Size Size is a relevant variable in terms of visibility of a firm. Larger firms may be more visible than smaller firms in the same industry and thus may attract the attention of the mini-tender bidder. Furthermore, if a fixed percentage of a firm’s shareholders are gullible, and mini-tender offers are motivated to take advantage of them, large firms would be more suitable targets. Thus, the sign of the size variable is expected to be positive. Size is measured by the assets owned and market value of the firm.4 4.1.2. Lawsuit A firm that has been the subject of recent litigation is likely to have negative sentiment surrounding it. Consequently, shareholders may be more likely to tender their shares without recognizing that the bid is below the market price. The lawsuit variable is assigned a value of 1 if the firm has been engaged in a lawsuit in the year prior to the offer and zero otherwise. 4.1.3. Leverage Firms with heavy debt loads are more risky and more likely to have low stock prices during industry downturns. Therefore, these companies may be more likely to be targets during poor performing periods. The debt-to-assets ratio is used to measure leverage.5 4.1.4. Liquidity Liquidity refers to balance sheet liquidity. A firm that has excess cash may be the target of a mini-tender offer if the acquirer believes that dividends can be increased. A large shareholder may be able to influence management into paying out the excess cash as dividends. Balance sheet liquidity is measured by the cash-to-assets ratio. 4.1.5. Volatility Shareholders of targets whose valuations are subject to more uncertainty may be more willing to accept a weak mini-tender offer. Therefore, firms characterized as having a higher degree of uncertainty may be targeted. The target’s stock volatility over the period from 100 days to 10 days before the offer date is used as a proxy. 4.1.6. Instown (institutional ownership) A target is subject to more shareholder monitoring if a higher percentage of its shares are held by institutional investors (see Agrawal & Knoeber, 1996; Brickley et al., 1988). The portfolio managers of financial institutions take bigger stakes in each investment and have more to lose. They also have the resources to monitor a firm and exert influence. According to Stulz, Walkling, and Song (1990), firms in which a smaller fraction of their shares are owned by institutional investors have more potential for improved control. In addition, institutional investors are presumed to be more informed than individual investors, and more likely to “vote with their feet” if they perceive that a value destructive corporate decision is made or signal received. Evidence that institutional investors vote with their feet is provided by Parrino, Sias, and Starks (2003). Therefore, we anticipate finding a negative relationship between institutional ownership and the likelihood of being 4
We also use total revenue as the size proxy. Our results are quantitatively similar to those reported in Table 3. We also conducted robustness tests using the ratio of total debt to total equity. The results are quantitatively similar to those reported in Table 3. 5
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targeted. Institutional ownership is measured as the percentage of shares owned by institutional investors. 4.1.7. Growth (growth potential) Firms with greater growth potential may be more likely to be targeted by those mini-tender offers motivated by decreased agency costs through a consolidation in ownership. Growth potential is measured by the price-to-book ratio for the firm.6 4.1.8. Efficiency Firms with low levels of efficiency may be more attractive targets for mini-tender offers, because negative sentiment about the target could convince target shareholders to tender their shares when prompted. Return on assets is used to proxy how efficiently the firm utilizes its assets. 4.2. Valuation effects of mini-tender offer announcement The valuation effects in response to mini-tender offers could be positive if a firm is likely to benefit from an increased concentration of ownership and the possibility of additional shares being acquired. Conversely, if the offer is an indication of poor management and poor future prospects and is attempting to acquire shares at below-market prices from na¨ıve or frustrated shareholders, it may elicit a negative market response. In the long run, returns may improve if managers feel that the mini-tender represents a negative signal. We measure both the short-run abnormal returns in the 3 days surrounding the mini-tender offer (i.e., (−1, +1), (−1, 0), and (0, 0)) and the long-run returns in the 6, 12, and 24 months following the announcement. 4.3. Variables influencing the valuation The valuation effects are expected to be worse for firms whose characteristics may prompt shareholder concerns about a general lack of monitoring. The regression model is specified below: CARj = α + β1 SIZEj + β2 LAWSUITj + β3 LEVERAGEj + β4 LIQUIDITYj + β5 VOLATILITYj + β6 RUNUPj + β7 DISCOUNTj + β8 IGj + β9 TRCj + εj (2) Variable definitions follow below: 4.3.1. Size Mini-tender offers targeting larger firms require a substantial amount of capital and are more likely to receive greater attention from analysts and the business press. Additionally, larger firms may have more uninformed shareholders willing to tender their shares. Therefore, larger firms
6 We also conduct robustness tests using the price to earnings (PE) ratio and the price to earnings to growth (PEG) ratio. We find that the PE ratio is insignificant at conventional levels, but that the PEG ratio is a significant determinant of the likelihood of being targeted. All other variables retain their sign and significance.
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are more likely to experience negative valuation effects due to a mini-tender announcement. Size is measured by the assets owned and market value of the firm. 4.3.2. Lawsuit Firms subject to lawsuits are more likely to be targeted because of the negative sentiment surrounding the company. This suggests the motive for the mini-tender offer is to acquire shares at below-market prices and quickly sell at market prices. Therefore, the presence of litigation should negatively impact the announcement valuations. The lawsuit variable is a dummy variable set equal to 1 if the target firm had been the subject of a lawsuit in the year prior to the offer and zero otherwise. 4.3.3. Leverage Firms with higher leverage are more likely to exhibit more unfavorable valuation effects on the announcement of a mini-tender offer, due to the risk associated with the firm. Leverage is measured by the debt-to-assets ratio.7 4.3.4. Liquidity Liquidity refers to balance sheet liquidity. Firms with excess cash may be more likely to use the cash to benefit shareholders if ownership becomes more concentrated. That is, a firm with excess cash may be targeted in the hopes of influencing the firm to pay out the cash in the future. The possibility of increased dividends or share repurchases should increase valuations. The cash-to-assets ratio is used to proxy balance sheet liquidity. 4.3.5. Volatility Targets whose valuations are subject to more uncertainty are more exposed to a potential negative market response to a mini-tender offer. The target’s stock volatility over the period from 100 days to 10 days before the offer date is used as a proxy. A higher volatility suggests a lack of a consensus about the target’s value. The mini-tender offer news could trigger greater concerns about a target whose value is presently viewed as fragile. 4.3.6. Runup Firms that have performed poorly are subject to more suspicion by their investors. They are expected to experience more unfavorable valuation effects in response to a mini-tender offer. The recent performance is proxied by runup, which is measured as the return for the 3-month period prior to the mini-tender offer. 4.3.7. Discount The signal about the target may be conditioned on the tender offer premium relative to the prevailing market price. An offer below the prevailing market price implies a discount, or a negative premium. The valuation effects are expected to be worse for mini-tender offers that exhibit a larger discount relative to the prevailing market price. The variable is measured as the percentage difference between the offer and the market price of the target at the time of the offer.
7 We also use the ratio of total debt to total equity to proxy for leverage. The results are quantitatively similar to those shown in Table 5 using total debt to total assets.
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4.3.8. Firms The firm making the mini-tender offer may have a certification effect or a reputation based on previous mini-tender offers. A firm with a history of acquiring shares in a company and exercising positive influence should put upward price pressure on the offer announcement. Firms more likely to sell tendered shares immediately should have a negative effect on valuations. Firms that have been cited by the SEC for making mini-tenders should have a negative wealth effect. A dummy variable is set equal to 1 if the firm listed has a history of engaging in mini-tender offers. Ira Gains8 (IG) has made numerous mini-tender offers and has been repeatedly cited by the SEC. TRC Capital (TRC), which has also made many mini-tender offers, has not been cited by the SEC. We would expect less negative wealth gains if the bidder is TRC Capital. 5. Sample The sample was compiled by searching for transactions using Lexis-Nexis. The resulting sample contained 120 announcements in which an offer below the current market value of the firm for less than 5% of shares was made. To qualify for the sample, the firm had to be publicly traded and share price data had to be available from CRSP. We then obtained financial data on the targets from Standard and Poor’s Research Insight database. Descriptive statistics for the sample of the mini-tender offers is summarized in Table 1. There were more mini-tenders in 1999 than in any other year of our sample, although 2002 was a popular year as well. The sample is spread across various sectors, as shown in Panel B of Table 1. Mini-tenders have been most popular in the following industries: manufacturing (SIC 2000), transportation, communications and utilities (SIC 4000), and financial services (SIC 6000). Panel C shows that bidding for mini-tenders are concentrated within a small group of firms. Panel D of Table 1 summarizes the percentage discount in the bid price relative to the market price. The majority of the bids were in the discount range from zero to 40%, but 14 (12%) of the bids had discounts exceeding 40%. Panel E of Table 1 summarizes the proportion of shares that the bidder attempted to acquire. The operating characteristics of the target companies are summarized in Table 2. These characteristics are compared to a set of control firms selected based on industry, size, and book-to-market ratio, following the method of Barber and Lyon (1997). Firms with the same three-digit SIC code as each sample firm are identified. From this group, the firm closest in size and book-to-market ratio is selected as the matching firm. If a matched firm did not have data available for the full time period of the analysis, returns were used until the delisting, and then the returns for next best match were used for the remainder of the time period. The size of the target firms is larger on average than the control firms.9 The earnings as measured by EBITDA, ROA, and ROE are generally higher for the sample of targets than the control firms, but the difference is only significant for EBITDA. The price-to-book ratio and debt ratio of the target firms is lower than that of control firms, but the difference is not significant. The Altman’s Zscore of the target firms is significantly lower for target firms, suggesting that their characteristics
8 Ira Gains operates under various corporate names. We obtained the phone number for one of his companies “Peachtree Partners”, and called the office on 9/30/03. We requested to speak to Ira Gains and were transferred by the secretary to his extension. However, he was unwilling to speak to us. 9 We do not match on size or price to book because these may be important variables in determining which firms are targeted. The majority of the control firms selected based on SIC code were in the same NAICS code as the sample firm.
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Table 1 Sample descriptive statistics Number
Percent of total
Panel A: year 1998 1999 2000 2001 2002 2003 Total
21 39 14 14 21 11 120
17.50 32.50 11.67 11.67 17.50 9.17 100.00
Panel B: SIC 1000–1999 2000–2999 3000–3999 4000–4999 5000–5999 6000–6999 7000–7999 8000–8999 Total
13 23 17 20 7 33 5 2 120
10.83 19.17 14.17 16.67 5.83 27.50 4.17 1.67 100.00
Panel C: mini-tender firm bidder IG holdings (Ira Gains) Peachtree holdings (Ira Gains) TRC capital Summit ventures Mackenzie and Patterson Other Total
46 3 51 6 6 11 120
38.23 2.50 42.50 5.00 5.00 9.17 100.00
Panel D: percent discount below market price discount 0.0–4.9 5.0–19.9 20.0–40.0 Above 40 NA Total
22 43 35 14 6 120
18.33 35.83 29.17 11.67 5.00 100.00
Percent of shares
Number of mini-tenders
Panel E: proportion of shares sought through the mini-tender offer 0.1–1.0 17 1.1–2.0 39 2.1–3.0 29 3.1–4.0 24 4.1–5.0 11 Total 120
Percent of total 14.17 32.50 24.17 20.00 9.17 100.00
Number of mini-tender offers separated by year, SIC code, firm making the offer, size of the discount of the mini-tender offer price below the market price, and the percentage of shares sought through the mini-tender offer.
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Table 2 Target operating characteristics Characteristic
Sample mean (median)
Control mean (median)
T-statistic (Z-score)
Assets (millions of $) Market value (millions of $) Debt to assets (%) Cash to assets (%) Institutional ownership (%) Price to book ROA (%) ROE (%) EBITDA margin (%) Altman’s Z-score
8081 (1855) 5464 (1500) 33.83 (29.77) 36.00 (4.25) 30.34 (27.93) 6.01 (1.85) 2.41 (3.23) 11.59 (9.86) 17.18 (16.35) 3.66 (2.73)
1681 (469) 942 (372) 53.53 (33.63) 15.72 (4.07) 46.04 (38.27) 18.75 (1.53) 2.83 (3.14) 5.05 (8.61) 6.36 (13.49) 20.74 (2.14)
3.04*** (3.02)*** 3.90*** (3.60)*** −0.92 (−0.43) −1.00 (1.24) −2.65** (−3.42)*** −0.98 (−1.00) −0.64 (−1.30) 0.74 (−1.49) −0.60 (−2.36)** −0.94 (2.17)**
Control operating characteristics of targets in the year prior to the mini-tender offer. *** Significant at the 0.01 level. ** Significant at the 0.05 level.
are more indicative of impending bankruptcy. The cash level of targets is not significantly different from that of control firms, whereas the institutional ownership is significantly lower. 6. Methodology We first attempt to identify the characteristics of firms that have been the target of mini-tenders in a multivariate framework. We use logit analysis on mini-tender firms and their control firms. To measure valuation effects, we also examine the announcement-date impact of the mini-tender offer using standard event study. We use Eventus (Cowan, 2003) to test the market reaction to the announcement of the mini-tender.10 We utilize the ordinary least squares market model, and the expansion announcement day is labeled day zero. A 120-day period immediately preceding day-10 is chosen to estimate the market model parameters.11 Cumulative average excess returns (CARs) for the (−1, +1) and (−1, 0) windows and for day zero are estimated. The CRSP equally-weighted index is used as the market proxy.12 To examine long-run returns, we compute long-horizon average holding period abnormal returns. Using the Barber and Lyon (1997) procedure, we estimate industry-matched sample adjusted long-horizon average holding period abnormal returns (AHARs) for our sample target firms. Average holding period abnormal returns (AHARs) are calculated starting with the month after the announcement date for 6-, 12-, and 18-month holding periods.
10 There are some overlaps of events within the event windows but not for any one participating target. We adjust for this situation by using the time series standard deviation method option in Eventus (Cowan, 2003). This method calculates a single-variance estimate for the entire portfolio, thus avoiding the problem of the cross-sectional correlation of security returns. The results are similar to those for the standardized cross-sectional method (Boehmer, Musumeci, & Poulsen, 1991) adapted for serial correlation (Cowan, 2003) and results with Scholes-Williams betas, which accounts for nonsynchronous trading. 11 We omitted the few days prior to day zero to avoid possible confounding effects in the estimation of the market model parameters. Also, the estimation period was sequentially increased to 150 days with very minor, insignificant changes in the abnormal returns. 12 All the tests in the study were replicated using the CRSP value-weighted index and the results remained the same.
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Table 3 Likelihood of being targeted Variable
Model 1
Model 2
Intercept Size Lawsuit Leverage Balance sheet liquidity Volatility Institutional ownership Growth potential Efficiency N Chi-square
−1.819 (7.56)*** 0.272 (10.70)*** 0.883 (6.32)*** −0.003 (0.28) −0.450 (0.15)
−1.796 (6.46)*** 0.217 (5.78)*** 1.019 (7.39)*** 0.001 (0.87) −0.365 (0.08) 0.263 (2.90)** −1.258 (4.61)*** 0.107 (1.64) 0.005 (0.51) 222 29.34***
227 31.15***
This table provides the coefficients of the logit regressions explaining the characteristics of firms being targeted by mini-tender offers. *** Significant at the 0.01 level. ** Significant at the 0.05 level.
7. Results The results of the logit analysis are disclosed in Table 3. Two models are applied. The results of the restricted model in column 2 are referred to as Model 1. This model focuses on key variables but excludes some other control variables that could distort the results for each variable because of collinearity. The results of the unrestricted model in column 3 are referred to as Model 2. This model includes all control variables. For the variables that are included in Model 1 and Model 2, the results are qualitatively similar. The size variable is positive and significant, which indicates that larger firms are more likely to receive a mini-tender bid. Larger firms are more likely to have higher numbers of investors, some of which are uninformed, and may be more visible, attracting the attention of mini-tender bidders. The lawsuit variable is positive and significant, suggesting that firms subject to a shareholder lawsuit are more likely to receive a mini-tender offer. This indicates that firms that are poorly governed may be more likely to frustrate investors. The volatility variable is positive and significant, suggesting a higher level of volatility for the firms that are subjected to mini-tender offers. Firms with volatile share prices are likely to have risen above that which uninformed shareholders are aware. The institutional ownership variable is negative and significant, which implies that firms with a lower level of institutional ownership are more likely candidates for mini-tender offers. Thus, minitender offers are more likely to take place for firms with a larger percentage of retail investors, who may be uninformed. Overall, these results support the hypothesis that mini-tender offers are motivated to take advantage of uninformed investors. The mean announcement effects of mini-tenders are disclosed in Table 4. Three different event windows are used to measure the effects, and the fourth column provides the proportion of events that were positive versus negative based on the (−1, +1) window. For the full sample, the results are generally negative and significant. Forty-seven events elicited positive effects, versus 73 with negative effects, and the difference is significant. This supports the hypothesis that mini-tender offers are solely to profit from uninformed investors tendering their shares at below-market prices. It appears that the market does not anticipate that the mini-tender
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Table 4 Announcement abnormal returns
Full sample
(−1, 0)
(0, 0)
(−1, +1)
Pos:Neg
N
−0.51 (−1.84)*
−0.60 (−2.13)**
−0.72 (−1.49)
47:73 (−1.98)**
120
Cumulative abnormal returns estimated using the market adjusted model for stocks at mini-tender acquisition announcement. ** Significant at the 0.05 level. * Significant at the 0.10 level.
offers will improve the governance of the target company and that the market views mini-tenders as a negative signal regarding the performance of the firms. Table 5 discloses the results of the cross-sectional analysis of announcement effects. The size variable is negative and significant, which implies that larger firms experience more negative announcement effects. The volatility variable is negative and significant, which indicates more pronounced negative announcement effects for target firms that have higher volatility levels. The lawsuit variable is negative and significant, which indicates more adverse announcement effects for target firms that are subject to a lawsuit; shareholders may be more willing to tender their shares when they feel that they have been mistreated. The TRC Capital variable is positive and significant, which indicates that the market reaction is dependent on the firm behind the offer. TRC Capital may be more likely to exercise a less negative influence on the firm after shares have been acquired because it has not been subject to SEC warnings as Ira Gains has. The discount variable is not significant, suggesting that the market response is not conditioned on the degree to which the bid price is below the prevailing stock price. Long-run buy and hold returns are presented in Table 6.
Table 5 Cross-sectional analysis
Intercept Size Lawsuit Leverage Balance sheet liquidity Volatility Runup Discount Ira Gains TRC capital N Adj. R2 F-statistic
Model 1
Model 2
0.012 (1.04) −0.003 (−2.06)**
0.011 (1.01) −0.002 (−1.76)* −0.015 (−3.30)*** −0.001 (−0.78) −0.001 (−1.32) −3.416 (−2.59)** −0.007 (−0.47) 0.001 (0.51) 0.001 (0.03) 0.015 (2.25)** 98 19.50 3.62**
−0.001 (−0.51) −0.001 (0.18) −3.458 (−2.52)** 0.004 (0.24) 0.001 (0.18) 0.001 (0.16) 0.017 (2.41)** 98 10.10 2.39**
This table provides the coefficients of multivariate regressions explaining the abnormal returns upon mini-tender announcements. *** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level.
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Table 6 Long-run performance Time frame
Coefficient
6 months 12 months 24 months
−7.85 (−1.34) −27.65 (−2.38)** −21.02 (−1.96)*
Matched sample buy and hold returns for various time periods. ** Significant at the 0.05 level. * Significant at the 0.10 level.
Returns are negative and significant for the 12-month and 24-month period following a minitender offer. This offers further support for the hypothesis that mini-tenders do not improve the monitoring of the firm. 8. Conclusions Mini-tender offers are usually made with an offer price that is below the prevailing market price. We find that mini-tender firms exhibit weaker performance than other firms in their corresponding industries. They have frequently been subject to a recent lawsuit. When the mini-tender is announced, sample firms experience significant negative announcement effects. The effects are more pronounced for firms that exhibit a higher level of stock volatility and a lower level of institutional ownership and have been subject to a recent lawsuit. Overall, mini-tenders appear to be instigated to take advantage of investors who are irrational or uninformed, as they do not lead to an improvement in monitoring. Our results imply that if market participants are willing to sell shares of the firms they own for under market value, perhaps additional regulation of mini-tender activity by the SEC is necessary. Furthermore, in order to avoid becoming the target of a mini-tender attack, firms with the characteristics of those targeted – illiquidity, high volatility, poor performance, and a recent lawsuit – may want to make an additional investment in their investor relations function, so that they are able to communicate effectively with shareholders that they should not accept the mini-tender offer. We leave it to future researchers to uncover the characteristics of shareholders who accept mini-tender offers, as well as the relationship between mini-tender offers and corporate governance events such as the removal of top level management. References Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31, 377–397. Allen, J. W., & Phillips, G. M. (2000). Corporate equity ownership, strategic alliances, and product market relationships. Journal of Finance, 55, 2791–2815. Barber, B. M., & Lyon, J. D. (1997). Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. Journal of Financial Economics, 43, 341–373. Boehmer, E., Musumeci, J., & Poulsen, A. B. (1991). Event-study methodology under conditions of event-induced variance. Journal of Financial Economic, 30, 253–273. Bradley, M., Desai, A., & Kim, E. H. (1988). Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms. Journal of Financial Economics, 21, 3–40. Brickley, J., Lease, R., & Smith, C. (1988). Ownership structure and voting on antitakeover amendments. Journal of Financial Economics, 20, 267–292.
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