Takeover Finance
Cash premia?

In Discussion Paper No. 200, John Franks, Robert Harris and Programme Director Colin Mayer analyse the means of payment used in 2,500 corporate acquisitions in the United Kingdom and United State, from 1955 to 1985. There has been a substantial increase in the proportion of acquisitions financed with cash in the US over this period, while in the UK bids involving a mixture of cash and equity have become more common. The authors find that bid premia have been significantly larger in cash-financed than in equity-financed acquisitions and that cash acquisitions also display a better post-acquisition performance. But changes in tax incentives in the two countries do not explain the increase in acquisitions financed wholly or partly with cash. Instead, the authors suggest that mispricing of equities may explain the inferior performance of equity acquisitions; an acquiring firm has an incentive to make an equity offer when its shares are overvalued, and subsequent falls in its share price may reflect the market's reassessment of its true value.

Colin Mayer has discussed this research more fully in a recent lunchtime talk and in his article at the beginning of this Bulletin.

Means of Payment in Takeovers:
Results for the UK and US
John Franks, Robert Harris and Colin Mayer

Discussion Paper No. 200, August 1987 (ATE)