1 American Finance Association Meetings, January 5, 2002 Discussion of What Do Returns To Acquiring Firms Tell Us? Evidence From Firms That Make Many Acquisitions Kathleen Fuller, Jeffry Netter, Mike Stegemoller University of Georgia by Sanjai Bhagat University of Colorado

2 Major Finding : Table 3 Bidder Returns (%) All CashStock Public Targets Private Targets Innovation to extant literature: Consider bidders that make multiple acquisitions. Larger sample size. Paper is well motivated and written. Empirical analysis is careful and thorough.

3 Why are announcements of acquisitions of private targets greeted more favorably by the market than that of public targets? Bidder returns are a function of Merger synergy. Premium offered (how gains are shared). Revelation bias: revelation of bidder’s value unrelated to takeover. Authors consider bidders that have acquired public and private targets. This has the potential to control for revelation bias. However, control is likely to be inadequate.

4 Why are announcements of acquisitions of private targets greeted more favorably by the market than that of public targets? Authors suggest bidders get a better price when they buy private targets compared to public targets. “This could be due to a liquidity effect.” Shares of public companies are obviously more liquid than shares of private companies. But the question is: Is it easier to buy/sell (majority) control in a private or public company? Private firms: More likely to have large blockholders. More difficult valuation.

5 Revelation Bias Bidder’s return at the time of bid gives a wrong estimate of the market’s valuation of the bidder’s gain from takeover, because Some bidders deliberately time bid announcement with unrelated negative announcements. Wall Street’s version of Wag the Dog (WSJ 12/18/98). Some bidders deliberately time bid announcement with unrelated negative announcements. Wall Street’s version of Wag the Dog (WSJ 12/18/98). The form of the offer and the very fact of an offer may convey information about the bidder’s stand- alone value. Analysis of public and private acquisitions by the same bidder, at least partially, addresses this concern. The form of the offer and the very fact of an offer may convey information about the bidder’s stand- alone value. Analysis of public and private acquisitions by the same bidder, at least partially, addresses this concern.

6 It's Wall Street's version of `Wag the Dog’ “Over the past week, both Mattel and Coca- Cola have announced acquisitions on the same day they also issued warnings about disappointing earnings.... No one is suggesting that either company unveiled its acquisition solely to divert attention from its problems... But it is also clear that the acquisitions, like the [Iraq] bombings, helped shift attention away from other less favorable developments.'' WSJ, `Heard on the Street', 12/18/98, p. C1

7 problems Solution to Revelation Bias problems Focuses on the returns to the bidder when something happens (while the bid is outstanding) that changes the probability of success of the bidder.

8 What might change the probability of success of a bidder? Litigation by target firm. Arrival of other bidders. Objection by a government regulatory agency (FTC, Dept. of Justice). Defensive measures by target (poison pill, lock-up provision).

9 The Effect of Takeovers on Shareholder Value Sanjai Bhagat University of Colorado, David Hirshleifer Ohio State University, Robert Noah Analysis Group (Cambridge, MA)

10 In conclusion Paper is well motivated and written. Empirical analysis is careful and thorough. Paper makes an important contribution. Strongly recommend it to researchers interested in corporate control.