Valuation shocks and merge & acquisitions activities
How do singular landmark merge & acquisitions (M&A) deals with seemingly excessive valuation and high public visibility influence M&A markets? We analyze how M&A market activity and deal characteristics behave in the presence of these landmark deals (LMDs). Deals like Facebook buying Whatsapp in 2014 for 19bn USD or the prevalent valuation of “unicorn” companies like Uber with a high degree of public attention are not necessarily driven by “classic” reasons behind M&A transactions such as low interest rate levels, high stock market valuations, technological change, booming economy or only happen as parts of M&A wave deal activity frenzies. We believe that two major questions come along with these kind of LMDs: first, what are the characteristics of those LMDs and how frequently do they occur? Second, do these LMDs influence the characteristics of other M&A deals and/or perhaps the market as a whole?
Data/Methods
In order to answer the two research questions, we analyze the universe of US based M&A transaction data from the Thomson One M&A database for the time period 1994 to 2014. After industry and deal specific clean-ups, our sample includes 107,499 M&A deals. Financial information are drawn from CRSP and Compustat. Press coverage is based on LexisNexis. We identify 124 LMDs which are private M&A deals (not publicly listed) with a high valuation (above the 95% percentile of total deal value within an industry) and a high perception in the market (above the 75% percentile of press coverage within top valued deals in the industry). We analyze the impact of LMDs by performing uni- and multivariate tests (difference-in-medians tests and OLS regressions) by comparing the M&A market before and after the occurrence of such deals. In addition, by using simultaneous equation models we overcome a potential problem of collinearity between the occurrence of LMDs and market characteristics or environment.
Results
Our results show that both valuation levels and M&A activity are significantly influenced by these deals in the cross-section and over time: misvaluation and deal activity increase, while M&A premia decrease. Although the effect is especially strong in the short- and medium-term for the industries in which the landmark deals occur, our results also show spillover effects into other industries. The occurrence of the landmark deals itself is not driven by M&A activity, as perhaps suggested by M&A wave theories, but instead by venture capital activity and mutual funds flows.