Serial acquirers and decreasing returns: Do bidders’ acquisition patterns matter?

• Published date: 01 August 2021
• Author: Thibaut G. Morillon
• Date: 01 August 2021
• DOI: http://doi.org/10.1111/fire.12253

DOI: 10.1111/fire.12253

ORIGINAL ARTICLE

Serial acquirers and decreasing returns: Do

bidders’ acquisition patterns matter?

Thibaut G. Morillon

Department of Finance, Elon University, North

Carolina, USA

Correspondence

ThibautG. Morillon, Koury Business Center,

ElonUniversity, 2075 Campus box Elon, NC

27244.

Email:tmorillon@elon.edu

Abstract

This paper examines the phenomenon of declining

announcement returns of serial acquirers. Using a clas-

sification of acquirers based on their patterns of acquisition,

I find that decreasing returns occur mostly within “blocks”

of acquisitions. This trend is driven by bidders who acquire

targets quickly in chunks. In contrast, I find no evidence of

any such decline in returns for the most active acquirers

in the market of corporate control. I test several theories

proposed by the prior literature to explain declining returns

and find evidence consistent with temporary overvaluation,

agency costs, and bidder learning as likely drivers.

KEYWORDS

acquirer returns, decreasing returns, mergers and acquisitions,

serial acquirers

JEL CLASSIFICATION

G34

1INTRODUCTION

The takeover marketis of great interest to researchers as mergers and acquisitions (M&As) are among the most eco-

nomicallysignificant events in corporate finance. Bidders acquiring multiple targets during a specified time window are

referred to as “serial acquirers.” These actors have received lots of attention lately,especially the most active among

them that acquire dozens, or evensometimes hundreds of targets. Indeed, although 35% of all bidders qualify as serial

acquirers, they conduct roughly 80% of the deals for an averagereported value of $329 million.1

Fuller, Netter, and Stegemoller (2002) is the first study to investigate the performance of serial acquirers in the

market for corporate control. They find evidence that serial acquirers experience a pattern of declining returns

over successive acquisitions. Consistent with this finding, Moeller, Schlingemann, and Stulz (2005) find that serial

1Theaverage deal value is calculated based on the deals for which the value is available (50.1% of the sample).

Financial Review. 2021;56:407–432. wileyonlinelibrary.com/journal/fire ©2020 The Eastern Finance Association 407

408 MORILLON

acquirers often experience value-destroying deals after a sequence of value-increasing deals. More recently,Karolyi

and Taboada(2015) confirm that this pattern of shrinking announcement returns applies to serial acquirers around

the world.

Despite this consensus about the occurrence of decreasing returns, there is much less agreement regarding the

factors driving this phenomenon and we havelittle understanding of how this process occurs. Moreover, despite serial

acquirers’ prevalence in the takeover market,few papers have paid attention to their patterns of acquisition. In one

such study, Macias, Rau, and Stouraitis (2016) propose to stratify bidders based on their acquisition patterns. The

authors find significant differences across bidder categories and observe that a firm’s ex-ante characteristicsallow to

predict the type of acquirer it will eventually become, providinga framework for acquirer classification.

In this study,I investigate whether bidders’ acquisition patterns impact the phenomenon of declining returns. I aug-

mentMaciasetal.(2016)’s classification system to define acquirers as one of five types: loners,occasional acquirers,

joggers,sprinters,andmarathoners.Iaddthejogger category to capture differences in acquirer behavior by differen-

tiating bidders that are selective (joggers), from bidders that acquire targets in chunks (sprinters), from bidders that

absorb targets virtually continuously (marathoners).My empirical evidence suggests that joggers are distinct from the

other four groups. The purpose of this paper is not to improve upon Macias et al., although I build on their foundation;

rather,its focus is to provide evidence about the pattern of declining returns in M&As.

Theidea behind this classification is to differentiate acquirers based on their degree of selectivity and the frequency

at which they conclude deals.2Past studies haveidentified overvaluation, hubris, management learning, agency prob-

lems, and relative deal size as potential channels for decreasing returns. However, it seems unlikely each channel

impacts all acquirers equally.For example, if a temporary mechanism drives the decline in returns (e.g., overvaluation),

it seems logical that acquirers completing several deals quickly reap more benefits. Similarly,mechanisms driven by

experience (e.g.,learning) should be more prominent for frequent acquirers and lead to stronger decreasing patterns.

Results are consistent with this intuition, suggesting these channels do not impact all bidders equally. I discuss each

channel in depth in the hypothesis section.

The literature on serial acquirers suffers from two specific weaknesses. As pointed out by Macias et al. (2016), the

first weakness is that there is no clear and established definition of what it means to be a serial acquirer.At what point

does a bidder become a serial acquirer? Moreover, if serial bidders experienceever-decreasing returns, it is unclear

why the most active bidders keepon acquiring dozens, sometimes hundreds of targets.

The second weakness of the literature is the lack of consensus regarding how to measure and quantify declining

returns. Paststudies have used different methods to analyze returns, sometimes by comparing single acquirers to mul-

tiple acquirers (Billett & Qian, 2008; Ismail, 2008), and sometimes by taking a point in the distribution of acquisitions

to observe returns before and after a selected cutoff point (Fuller et al., 2002; Karolyi and Taboada, 2015). Moreover,

not all bidders are equally active, and they use different acquisition strategies. Do acquisition patterns play a role in

the phenomenon of declining return?

Toaddress this question, in this paper I introduce two new variables designed to capture the impact of bidder acqui-

sition patterns as well as the timeliness of their bids on value creation. On the one hand, the relative position (RP)of

an acquisition captures the global “trend” of an acquirer’s returns over time with each successive acquisition. On the

other hand, the relative position of an acquisition within a “block” of acquisitions (RPWB)3captures the impact of bid-

der acquisition patterns on value creation, allowing us to disentangle the effect of time from that of strategy.

Ifind evidence that serial bidders’ announcement returns follow a sequential sawtooth pattern (though decreasing),

as opposed to a monotonic decrease as some previous studies suggest. I report that returns decline in concomitance

with “blocks” of acquisitions, indicating that firms acquiring severaltargets in a short period drive the phenomenon of

2SeeAppendix B.1 in the Supporting Information for a graphical display of the classification system along dimensions of interest. This appendix is available in

thesupporting materials section online.

3I follow Macias, Rau, and Stouraitis (2016) and define a “block” of acquisitions as acquisitions completed by the bidder within a certain window (see

Section2).