This dissertation analyses the cumulative abnormal return (CAR) to Swedish and German bidders and the impact of method of payment. Cash and Stock as means of financing have been discussed widely in the last decades. More recently the contingent payment form earnout has come to focus of research which will be further investigated in this dissertation. The study involves a sample of 927 transactions of which 346 bids are made by German and 581 bids are made by Swedish acquirers. Moreover, the sample compromises 24 German and 49 Swedish earnout deals. The sample period is chosen from 01/01/1986 to 31/12/2012 whereby a German or Swedish company acquires a domestic or foreign target of any listing status. The univariate analysis shows marginally significant results for the outperformance of earnout over non-earnout in cross industry acquisitions (CIAs) and insignificant results for a combination of cash and earnout over cash-only. Furthermore, it provides evidence that earnout deals with a small relative earnout value (REAV) and a short earnout length (EAL) significantly outperform earnout deals with a large REAV and a long EAL. In addition, a multivariate regression is performed to control for the impact of several factors that previously have been found to determine bidder CAR. In conformity with existing studies of the UK and US takeover market, the multivariate analysis provides evidence that earnout currency is a mean to mitigate valuation risk and offers higher value gains to bidder shareholders than non-earnout currency. It further shows that a combination of cash and earnout is a superior means of financing than cash-only payments. Besides, the multivariate analysis supports the univariate results with respect to REAV and EAL and it is shown that earnout measures (EAMs) as profit and sales are important value determinants, which both offer positive and significant value gains to bidder shareholders in earnout deals.
Table of Contents
1. Introduction
2. Literature Review
2.1. Problems in Mergers and Acquisitions
2.1.1. Adverse Selection and Moral Hazard
2.1.2. Company Specifics
2.2. Implications for the Method of Payment
2.2.1. Stock and Cash
2.2.2. Earnout
2.3. Empirical Evidence
2.3.1. Cash and Stock
2.3.2. Earnout
3. Hypothesis Development
4. Data and Methodology
4.1. Data Collection
4.2. Sample Description
4.3. Methodology
5. Results
5.1. Univariate Analysis
5.2. Multivariate Analysis
5.3. Limitations and Areas of Further Research
6. Conclusion
Research Objectives and Themes
This dissertation investigates the impact of earnout payment structures on bidder shareholder wealth within the German and Swedish M&A markets. The primary research goal is to determine whether earnout contracts—as a contingent payment method—effectively mitigate valuation risk and information asymmetry, thereby enhancing abnormal returns for acquiring firms compared to traditional cash or stock financing.
- The role of earnouts in mitigating adverse selection and moral hazard in corporate acquisitions.
- Empirical analysis of bidder shareholder abnormal returns in German and Swedish M&A transactions.
- The influence of earnout contract components: relative earnout value (REAV) and earnout length (EAL).
- Performance determinants of earnout deals, specifically financial measures like profit and sales.
- Comparative effectiveness of mixed financing (cash combined with earnouts) versus cash-only payments.
Excerpt from the Book
2.2.2. Earnout
Earnout currency is another form of contingent payment. Acquisition payments involving earnouts consist of a two component payment to target shareholders. Firstly, there is an upfront fixed payment and secondly, additional future payments that are conditional on some performance measure (Cain et al. (2011)). The latter component is commonly known as earnout (Barbopoulos and Sudarsanam (2012)). Bruner and Stiegler (2001) state that the upfront payment is equal to the value on which both bidder and target agree on and the second payment reflect the degree of valuation differences of the two parties. Moreover, earnouts can also be regarded as similar to a call option on the fair value of the target company (Caselli et al. (2006)).
Although the application of earnouts does not directly solve the problem of resource evaluation, it does mitigate the effects of mis-valuation by transferring part of the risk from bidder to target (Reuer et al. (2003)). In addition, earnouts allow the target to signal confidence about the value of its resources (Reuer (2005); Martin et al. (2011)). Moreover, according to the standard principal agent theory, earnout contracts can motivate target managers, in the case that they are also shareholders, because their payoffs are tied to observable measures of target performance (Cain et al. (2011); Hölmstrom (1979)). Recent studies have found earnout contracts to be complex and multidimensional, designed in many different ways with respect to the REAV; EAL and EAM (Frankel (2005); Cain et al. (2011)).
Summary of Chapters
1. Introduction: Presents the M&A landscape, introduces earnouts as a risk-mitigation tool in valuation, and outlines the thesis structure focused on Germany and Sweden.
2. Literature Review: Examines theoretical foundations regarding information asymmetry, moral hazard, and the implications of various payment methods like cash, stock, and earnouts.
3. Hypothesis Development: Formulates specific hypotheses regarding the superior value gains of earnout deals and the impact of contract terms like REAV and EAL.
4. Data and Methodology: Details the criteria for sample selection from SDC, describes the data collection process, and explains the adjusted market model for calculating abnormal returns.
5. Results: Provides a comprehensive statistical analysis using both univariate and multivariate methods to test the established hypotheses concerning bidder wealth.
6. Conclusion: Synthesizes the empirical findings, confirming that earnout deals and specific contract structures positively influence bidder shareholder returns in the studied markets.
Keywords
Mergers and Acquisitions, M&A, Earnout, Bidder Shareholder Wealth, Cumulative Abnormal Return, Valuation Risk, Information Asymmetry, Relative Earnout Value, Earnout Length, Contingent Payment, Germany, Sweden, Market Adjusted Model, Moral Hazard, Adverse Selection
Frequently Asked Questions
What is the fundamental focus of this research?
The research focuses on the economic impact of earnout contracts on the wealth of acquiring firms in the German and Swedish M&A markets, specifically analyzing how this contingent payment method influences shareholder returns.
What are the primary thematic fields covered?
The study spans the fields of corporate finance, M&A strategy, risk management, and contract theory, with a focus on how payment methods resolve information gaps between bidders and targets.
What is the primary objective of the study?
The primary objective is to test whether earnout-based acquisitions provide superior abnormal returns to bidders by mitigating valuation risks, compared to traditional non-earnout or cash-only transactions.
Which scientific methods are employed?
The study utilizes an event study approach using the adjusted market model to calculate cumulative abnormal returns (CARs), alongside univariate analysis and Ordinary Least Squares (OLS) multivariate regressions.
What does the main body of the work treat?
The main body covers a literature review of M&A problems, a development of testable hypotheses, a rigorous explanation of data collection and sample selection, and a detailed statistical presentation of findings.
How can this work be characterized by its keywords?
The work is characterized by keywords relating to corporate acquisition mechanics, particularly contingent payment structures, shareholder wealth creation, and financial econometrics within a European context.
How do German and Swedish legal systems influence earnout usage?
The study notes that the civil-law legal systems in these countries, which may offer different levels of investor protection compared to Anglo-Saxon environments, may impact the enforceability and usage frequency of earnout contracts.
Why are REAV and EAL critical to the analysis?
REAV (Relative Earnout Value) and EAL (Earnout Length) are critical because they represent the degree of risk-sharing and maturity of the performance-based component, which the study finds directly correlates with the market's perception of the deal's success.
- Citar trabajo
- Silke Schmid (Autor), 2013, Earnouts as Payment Currency and Value Gains to Bidder Shareholders., Múnich, GRIN Verlag, https://www.grin.com/document/266470
