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Cash talks


Targets of unsuccessful cash-based takeover offers are revalued 15 per cent higher after deal failure, while targets of failed stock bids show no rise, says study co-authored by Cambridge Judge Business School academic.

Money on hands.

Dr Farzad Saidi
Dr Farzad Saidi

Cash talks when it comes to unsuccessful takeover bids, according to a newly published study co-authored by an academic at Cambridge Judge Business School.

Targets of cash-based offers are revalued upward by an average of 15 per cent after a proposed deal falls through, while targets of stock-based bids revert to their level prior to the bid announcement, says the study based on hundreds of failed U.S. takeover bids over a 29-year period (1980 to 2008).

The likely reason for the difference: Targets of cash-based bids are undervalued prior to the takeover offer, so the choice of cash in making the bid “reveals information to the market about the stand-alone value of the entities involved,” says the study published in the Journal of Financial Economics.

The study reached this conclusion by detailed analysis that found no difference following bid failure between cash- and stock-based offers in terms of the likelihood or value of future offers for the target company, and also no operational differences such as CEO turnover.

Some previous studies had suggested that shares rise in companies targeted unsuccessfully in cash bids due to anticipation of a future successful acquisition. The new study found, however, that while the targets of both failed cash and stock bids were significantly more likely to receive a subsequent new bid, “cash and stock targets exhibit no differential takeover activity over the next 20 years” following the failed takeover attempt.

“The study highlights the informational effect of the currency – cash rather than stock – of takeover bids,” said co-author Farzad Saidi, University Lecturer in Finance at Cambridge Judge Business School. “There seems to be a difference in the assessment of cash and stock targets with regards to private information that the acquirer may possess about the target.”
The study entitled “Target revaluation after failed takeover attempts; Cash versus stock” is co-authored by Ulrike Malmendier and Marcus M. Opp of the University of California, Berkeley, and Farzad Saidi of Cambridge Judge Business School.