Misadventure and the Form of Payment in Corporate Acquisitions
MGSM Working Paper No. 2006-11
19 Pages Posted: 14 Oct 2006
Date Written: October 2006
Abstract
The event of a rising share price for a firm following the announcement of its intentions to acquire another firm is generally recognised as a sign of market support for the deal. If the price continues to rise over the offer period, as the market fully digests various items of information related to the transaction, it can be interpreted that the market confidently expects the present value of synergies and other benefits to exceed the premium paid to acquire the target. In a transaction involving the exchange of a fixed number of shares in the acquiring firm as part or full consideration for the target, it seems often overlooked that a rising share price for the acquiring firm also impacts on the size of the premium paid to target shareholders. If the market overvalues expected synergies - or more specifically, if those structuring the deal set the share-exchange ratio at a level that underestimates the reaction of the market - it may be the case that the deal will destroy value for acquiring shareholders. We examine this issue within the context of a large corporate acquisition in Australia: the acquisition of Howard Smith Limited by Wesfarmers Limited.
Keywords: share-exchange, acquisition, transaction risk
JEL Classification: G34, M40, M41
Suggested Citation: Suggested Citation
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