October 11, 2012
SPACs: The Finance Article (Part 3, Acquisitions)
Posted by Usha Rodrigues

Even the Glom faithful may well have forgotten, but way back in August I promised a 3-part series on SPACs, the fruits of a recent article I co-authored with Mike Stegemoller.  The first post focused on IPO underpricing, and the second on the underwriting discount.  With this post, I'll conclude by shifting to the second phase of a SPAC's lifecycle: the acquisition.

Once the SPAC is up and running, it has a limited amount of time to identify a target and negotiate a deal.  Once that's done, the SPAC announces the proposed acquisition to the market, and SPAC shareholders have a chance to veto the deal or (as the form evolved) exit if they disapprove of the acquisition. 

The finance  literature has focused much attention on the effect of an acquisition announcement on the acquiror's stock, generally trying to answer the question whether acquisitions are positive for the acquiring firm's shareholders or represent something deleterious, like costly empire building.

Generally in an acquisition, where a typical firm buys another typical firm, there's a lot going on that is embedded in the market's reaction to the acquisition announcement.  For example, the change in the acquiring firm's stock price may contain information about overpayment because of hubris (driving the stock price down).  In addition, and pushing in the opposite direction, stock price returns could reflect synergies that make the deal worth doing, even if in the presence of some overbidding.  Further, the synergy value is hard to quantify, as is the question of how much of the synergy value is split between the target and the acquiror. 

Enter the SPAC.  An empty shell, it offers no synergy value to a target.  Empire building should not drive the managers, many of whom will be replaced if and when the deal goes through.  Even if some of the SPAC managers suffer from hubris, the shareholder voice on the ultimate acquisition serves as a corrective.  Given the reduction in potential managerial agency costs, we hypothesized that SPACs overbid for targets less than typical firms.  Thus, if acquirer returns for SPACs are higher than those of traditional acquirers, that finding tells us something about mispricing in typical acquisitions: they tend to contain detrimental components that reduce the value to acquiring shareholders, even given the potential for synergies. 

Our results: SPACs acquirers experience higher returns than traditional acquirors in a time and industry matched sample.  Which suggests that in typical acquisitions, even if there are gains to be had from synergies between the firms, there are also losses that may outweigh those gains. In other words, we offer new evidence that traditional acquirors tend to overbid. 

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