DOES DISTANCE MATTER IN MERGERS AND ACQUISITIONS?

• Published date: 01 March 2017
• Author: Patty Bick,Brian R. Walkup,Andrew A. Lynch,Matthew D. Crook
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/jfir.12115

DOES DISTANCE MATTER IN MERGERS AND ACQUISITIONS?

Patty Bick and Matthew D. Crook

The University of Tulsa

Andrew A. Lynch

The University of Mississippi

Brian R. Walkup

The University of Tulsa

Abstract

Using a sample of mergers and acquis itions from 1985 to 2014, we examine the

impact of proximity between target and ac quirer as a measure of information

asymmetry. We find geographic distance ha s a significant impact on acquisitio ns

premiums and time to completion, conditional on th e size of the target firm. Small

targets receive lower premiums and have a fas ter time to completion the closer they

are to their acquirer. Conversely, la rge targets have a slower time to deal comple tion

the closer their proximity. We conclude geo graphic distance has a substantial impact

on acquisitions.

JEL Classification: G34

I. Introduction

Acquisitions are an important, but controversial, channel for firm growth. Acquirers use

estimated synergies and technological needs (e.g., Andrade, Mitchell, and Stafford 2001;

Bena and Li 2014; Higgins and Rodriguez 2006) to justify external growth. However,

growth through acquisition often leads to substantial wealth destruction for the acquirer’s

shareholders (e.g., Morck, Schleifer, and Vishny 1990; Moeller, Schlingemann, and

Stulz 2005; Malmendier and Tate 2008). Poor performance resulting from external

growth is not surprising given its cost. Betton, Eckbo, and Thorburn (2008) show the

median acquisition premium paid is 39% higher than the target’s market value.

Understanding the factors that influence acquisition premiums has become vital to

understanding what makes a more successful acquisition.

A considerable literature examines the determinants of acquisition premiums,

focusing on the role of managers and board members. For instance, the characteristics

of acquirer CEOs, such as overconfidence and personal connections, often increase

the acquisition premium (e.g., Higgins and Rodriguez 2006; El-Khatib, Fogel, and

We are grateful for assistance and comments from Drew Winters (editor) and Randy Heron (associate editor).

All errors and omissions are our own.

The Journal of Financial Research Vol. XL, No. 1 Pages 33–54 Spring 2017

33

© 2017 The Southern Finance Association and the Southwestern Finance Association

RAWLS COLLEGE OF BUSINESS, TEXAS TECH UNIVERSITY

PUBLISHED FOR THE SOUTHERN AND SOUTHWESTERN

FINANCE ASSOCIATIONS BY WILEY-BLACKWELL PUBLISHING

Jandik 2015).

1

However, asymmetric information between the acquirer and target also

has a substantial impact on acquisition premiums (e.g., Moeller, Schlingemann, and

Stulz 2007; Officer, Poulsen, and Stegemoller 2009; Zhu and Jog 2012).

A growing literature has identified geographic proximity as a factor that might

mitigate information asymmetry for a subset of investors. Coval and Moskowitz (2001)

suggest local investors possess an informational advantage when trading local assets.

Ragozzino and Reuer (2011) find that acquirers closer to targets are better positioned to

assess the resources of target firms and have a lower risk of adverse selection in an

acquisition. The authors suggest that remote acquirers are more likely to “lack key

relationships and find appraisals of such soft information problematic”(p. 879). This

suggests geographic distance between acquirer and target, by mitigating information

asymmetry for the acquirer, may influence several facets of the acquisition, including the

premium and time to completion.

In this study, we examine how geographic distance between the headquarters of

a target and its acquirer influences acquisitions. Dionne, La Haye, and Bergeres (2015)

find that the presence of informed bidders in acquisitions may either increase or decrease

acquisition premiums, depending on the magnitude of information asymmetry around

the target firm. When the target firm has low information asymmetry (private knowledge

of the firm is not much higher than common, shared knowledge of the firm in the market)

informed bidders have only a small marginal advantage over uninformed bidders, and the

uniformed bidders know this. The uninformed bidders therefore bid vigorously and drive

the final price (premium) higher.

2

Large firms, due to analyst coverage and high investor

attention, have relatively high common knowledge (see, e.g., Frankel and Li 2004).

Therefore, we expect informed bidders (close proximity) to hold little advantage when

bidding, resulting in higher premiums when they acquire large firms.

Conversely, Dionne, La Haye, and Bergeres (2015) find that acquisition

premiums are lower when there are informed bidders in an acquisition of a target with

high information asymmetry (low common knowledge). Uninformed bidders know little

about the target relative to the informed bidder and are aware of this informational deficit.

The winner’s curse becomes a very real concern for the uninformed bidder (see, e.g.,

Kagel and Levin 1986), and they either choose not to bid or do not bid aggressively. The

result is the informed bidder is more likely to win the auction and will pay a lower

premium for the target when they do. Small firms, with less analyst coverage and lower

investor attention, have relatively low common knowledge. Therefore, we expect

informed bidders (close proximity) to hold a considerable informational advantage,

resulting in lower premiums when they acquire small firms.

Given the amount of common knowledge of all firms has increased over time, we

additionally examine the relation between informed bidders and premiums over time.

1

Additionally, Datta, Iskandar-Datta, and Raman (2001) find managers with low equity-based compensation

also pay larger premiums, and Huang et al. (2014) find that investment bankers on the acquirer’s board reduce

premiums.

2

In other words, uninformed bidders, facing both the winner’s curse and loser’s curse, find the loser’s curse

much more severe than the winner’s curse when the difference between their common knowledge and the informed

bidder’s private knowledge is low.

34 The Journal of Financial Research