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SESSION III-2 : MERGERS & ACQUISITIONS I (20/12/2007 à 14h00)

Paul André (ESSEC)

Acquisition Values and Optimal Financial (In)Flexibility

Auteurs : HEGE Ulrich (Hec Paris) and HENNESSY Christopher (Uc Berkeley) Email :

Intervenants : HEGE Ulrich (Hec Paris)

We analyze optimal financial structure for an incumbent and potential entrant accounting for
feedback effects in secondary asset markets. By issuing sufficient debt, the incumbent creates
overhang and credibly commits against acquiring entrant assets. This depresses asset values
and entrant returns, thus reducing the likelihood of entry. The cost of debt overhang is that
the incumbent fails to make positive NPV acquisitions if entry deterrence fails. The implied
trade-off between ex post efficiency and entry deterrence explains why growth firms eschew debt
while value firms issue public debt. Contrary to the traditional view, if predation is feasible,
the case for shallow pockets is potentially stronger, since an unlevered incumbent prefers to
acquire whereas a levered incumbent responds to entry with predation. Since predation reduces
entrant returns and acquisitions raise them, the entry deterrence benefit from shallow pockets is
magnified if predation is feasible. Optimal entrant contracts depend upon incumbent financial
structure, with higher debt capacity and stronger financier ownership rights if the incumbent has
deep pockets.

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An empirical model of merger and acquisitions timing

Auteurs : KASTRINAKI Zafeira and STONEMAN Paul (The University of Warwick) Email :

Intervenants : KASTRINAKI Zafeira (The University of Warwick)

Rapporteurs : TRABELSI Donia (University of Paris 1 Panthéon-Sorbonne)

An empirical model of merger timing is constructed combining different micro-perspectives
into a single framework that endogenises the merger process and illuminates the dynamics
of merger activity. The model is estimated using survival analysis upon a uniquely constructed
UK panel data set covering merger activity in twelve major industrial sectors over the period
from 1990 to 2004. The findings provide strong empirical evidence for the endogenous
character of mergers, especially as regards herd and preemption effects. The results also
indicate that, mergers are strategic complements in the sense that by reducing competition
in the market, merger activity today can dampen future competitive response and as a
consequence mergers can become more profitable as merger activity proceeds. It is
further shown that firm specific characteristic play an important role in merger timing.
Specifically firms that are low growth but resource-rich, high growth but resource-poor,
pay low dividends, have low investment opportunities or are small, are all considered ‘
attractive’ targets and are more likely to be acquired. The relative importance of these
micro-forces may differ at different stages of a merger wave, causing in this way the
bandwagon rolling at full speed. These results provide answers to the long-standing
question regarding the dynamics of merger activity and its wave like behavior.

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Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria

Auteurs : LOBE Sebastian and SCHENK Nils-Christian (University of Regensburg) Email :

Intervenants : LOBE Sebastian (University of Regensburg)

Rapporteurs : CARPENTIER Cécile (Laval University)

In this paper, we provide the first empirical evidence of fairness opinions in Europe.
Legal requirements concerning the use of fairness opinions in mergers and acquisitions
are significantly different in Germany, Switzerland, and Austria. We examine the
determinants of target fairness opinions in these various regulatory settings and, moreover,
investigate the impact of such opinions on abnormal target returns. Whilst in Germany and
Austria market participants do not deem fairness opinions important, they do create value
for shareholders in Switzerland. Because conflicts of interest between target board and
bidder are a main determinant of fairness opinions in Switzerland, we conclude that, when
target management faces such conflict, external expert advice replaces the board’s opinion
on the offer.

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