Essay on Mergers and Acquisitions.

Abstract

This dissertation examines two important issues of mergers and acquisitions. The first chapter structurally estimates acquiring managers' private benefits in takeovers. It shows that acquiring managers overvalue targets by 63% of target capitalization. As a result, acquiring managers pick targets that provide no synergy gains in 17% of takeovers and overbid by 13% of target capitalization in the rest. Private benefits sought by acquiring managers amount to $9 million on average and vary substantially across firms. Agency problems are more severe for larger bidders that have greater free cash flows and chase larger targets. However, an independent board can reduce private benefits and mitigate agency conflicts for acquiring firms. The second chapter examines the impact of financial sponsor competition on corporate buyers. It shows that corporate acquirers who purchase targets that financial buyers also bid on outperform corporate acquirers who buy targets bid on by corporate firms only. Deals characteristics, acquirer abilities, and observable target characteristics cannot explain this difference in returns. Corporate acquirers have higher returns when they follow a first bid by a financial buyer rather than a first bid by another corporate buyer. The results suggest that financial buyers identify targets with high potential for value improvement and winning corporate bidders are competent in exploiting this potential.