Serial company acquirers, like elite Olympic runners but unlike serial killers, can easily be profiled in advance, finds new academic study co-authored at Cambridge Judge Business School.
Like elite Olympic runners but unlike serial killers, “serial acquirers” who mount repeated takeover bids can easily be profiled in advance, finds a new academic study co-authored by Raghavendra Rau, Sir Evelyn Rothschild Professor of Finance at Cambridge Judge Business School, University of Cambridge.
While serial killers do not appear intrinsically different from other violent offenders, elite runners often have innately superior skills that are obvious at an early age. The new study – based on 56,000 acquisitions of US targets by more than 9,000 unique acquirers in 1984-2013 – finds that acquirers who become serial acquirers, like champion athletes, can be accurately predicted in advance, at the very start of their acquisition activity.
“We show that, similar to runners but unlike serial killers, acquirers are intrinsically and predictably different in their characteristics and their propensities to acquire” says the study. “Like top athletes but unlike serial killers, serial acquirers can indeed be profiled ex ante,” or in advance.
The study, entitled “Can serial acquirers be profiled?” – shows that serial acquirers are not homogeneous. Looking at factors such as number, spacing and intensity of takeover activity, the study classifies acquirers into four distinct groups: loners, occasional acquirers, sprinters and marathoners.
The insight into serial acquirers is significant because just 11 per cent of the acquirers studied, made nearly half (49 per cent) of all acquisitions in the 30-year period. The 577 “marathoners” (6.3 per cent of the sample) who acquire targets almost continuously and 1,988 “sprinters” (22 per cent) who run acquisition streaks each account for 36 per cent of all transactions.
The study developed a model that identified the characteristics of firms likely to become serial acquirers – including companies with high operating performance and (at the time of their very first acquisition) low internal research and development activity relative to their peers, and those that appear to ignore stock market reaction to their acquisition announcements.
Using only information from the first acquisition by the acquirer – and then comparing it later to actual outcomes – the model correctly predicted which of the four distinct groups that acquirer will develop into, and the accuracy rate is 78 per cent for firms that become “marathoners.”
Among the study’s well-known “marathoners” are Cisco Systems with 166 transactions during the study period, Microsoft (127), Oracle (101), Google (96), Coca-Cola (60) and Procter & Gamble (54). The “sprinters” include Aetna (16), Whole Foods Market (15) and Hershey Foods (15), while “occasional acquirers” include Neiman Marcus Group (4) and “loners” include Samsonite (1).
“The study provides practical intelligence to help predict which firms are likely to become serial acquirers,” said co-author Raghavendra Rau. “These results are really useful to a firm trying to shop itself around, because it helps them identify potential acquirers likely to engage in serial acquisitions and who might be interested in them.”
“The study is also valuable to hedge fund managers engaged in merger arbitrage,” says Professor Rau. In a cash merger, for example, the arbitrageur buys the stock of the target in advance and makes a gain if the acquirer ultimately buys the stock. Predicting the acquirers can help fund managers also forecast likely acquisition activity by these acquirers ahead of their deal announcements.
The study was co-authored by Dr Antonio Macias of the Hankamer School of Business at Baylor University, Raghavendra Rau of University of Cambridge Judge Business School, and Professor Aris Stouraitis of Hong Kong Baptist University School of Business.
The study defines a serial acquirer as one likely to undertake a large number of transactions either over relatively continuous periods or in “bursts” of acquisitions the authors term “acquisition blocks.” While the average time between subsequent acquisitions over the entire sample is 376 days, the average time is only 152 days within defined acquisition blocks – a measure of acquisition intensity that helped identify members of the four groups. To be included in the study sample, bidders must seek to acquire more than 50 per cent ownership of the target.