Value is in the Eye of the Beholder: The Relative Valuation Roles of Earnings and Book Value in Merger Pricing
Author: MaryJane Rabier
Publication: The Accounting Review, Vol. 93, No. 1, 2018, pp. 335-362
Gupta and Gerchek (2002) argue that different acquirers can arrive at different equity valuations for the same target depending on their strategic intent. A reason for acquirers' equity valuations to vary, holding target fundamentals constant, may be that individual acquirers place different weights on underlying fundamentals. I examine this possibility using Burgstahler and Dichev (1997)'s theoretical framework. They argue that the relative importance of earnings and book value depends on expected adaptation, which is the likelihood that the existing earnings generating process will be altered. Using restructuring costs to proxy for expected adaptation at the individual acquirer level, I find that the association between the target's earnings (book value) and acquirers' bid prices is decreasing (increasing) in expected adaptation, consistent with theoretical predictions. These findings are less pronounced during merger waves and intense bid competition for the target.
Read full article: The Accounting Review
Author: MaryJane Rabier
Publication: Strategic Management Journal, Vol. 38, No. 13, 2017
I examine how acquisition motives relate to the distribution of post-acquisition performance. I argue that acquisitions motivated by operating synergies have the potential to experience greater gains than acquisitions driven by financial synergies but are harder to value and implement, making them more uncertain. Using SEC filings, conference calls and press releases to capture acquisition motives, I find that acquirers pursuing operating synergies are more likely to experience highly positive and highly negative long-term returns than acquirers pursuing financial synergies.
I also find that acquisition experience and geographic proximity to targets soften acquirers' extreme downside outcomes in operating synergy acquisitions. My theory and results suggest that approaches that emphasize average outcomes for acquirers and use industry classifications to capture acquisition motives may be incomplete.
Managers engage in acquisitions for various reasons. In this study, I find that reasons related to operating synergies (e.g., revenue growth through new product offerings or cost savings through economies of scale) are more likely to result in extreme high and low performance outcomes for the acquiring firm compared to reasons related to financial synergies (e.g., diversification of cash flow streams).
In addition, I find that the acquirer's prior acquisition experience and the geographic proximity between the target and acquirer help soften the extreme low performance outcomes related to operating synergies.
Read full article: Strategic Management Journal
Authors: Bapna, R., Ramaprasad , J., Umyarov , A.
Publication: MIS Quarterly, 42(3), 719-735
Making sustainable profits from a baseline zero price and motivating free consumers to convert to premium subscribers is a continuing challenge for all freemium communities. Prior research has causally established that social engagement (Oestreicher-Singer and Zalmanson 2013) and peer influence (Bapna and Umyarov 2015) are two important drivers of users converting to premium subscribers in such communities. In this paper, we flip the perspective of prior research and ask whether the decision to pay for premium subscription causes users to become more socially engaged. In the context of the Last.fm music listening freemium social community, we establish, using a novel 41 month long panel dataset, a look-ahead propensity score matching (LA-PSM) procedure coupled with a difference-in-difference estimator of the treatment effect, that payment for premium leads to more social engagement. Specifically, we find that paying for premium leads to an increase in both content-related and community-related social engagement. Free users who convert to premium listen to 287.2% more songs, create 1.92% more playlists, exhibit a 2.01% increase in the number of forum posts made, and gain 15.77% more friends. Thus, premium subscribers create value not only for themselves by consuming more content, but also for the community and site by organizing more content and adding more friends, who are subsequently engaged by the social diffusion emerging from the focal user’s activities.
Read full abstract: MISQ, December 15, 2016
Authors: Trivedi, M., Gauri, D.K., Yu, M.
Publication: Management Science, Vol. 63, No. 10, October 2017