The literature review draws on the mainstream corporate governance literature in finance as its base and highlights the differences in motives between real estate and non-real estate related merger activity.
REAL ESTATE MERGER MOTIVES:AN ANALYTICAL REVIEW OF THE LITERATURERandy I. AndersonUniversity of Central Florida Orlando and EBS Business SchoolHenrik MedlaEBS Business SchoolNico B. RottkeEBS Business School and University of Central Florida OrlandoDirk SchiereckTech University Darmstadt and EBS Business SchoolAbstractThis paper examines the dominant theories, motives, methodologies, and results ofthe existing literature on the rationale for real estate related mergers. The literaturereview draws on the mainstream corporate governance literature in ﬁnance as its baseand highlights the differences in motives between real estate and non-real estaterelated merger activity. The studies highlight that the homogeneity of real estate ﬁrms,especially as they pertain to the highly regulated real estate investment trust (REIT)industry, is expected to reduce the availability of revenue and overall corporatesynergies, but might allow for the ability of some ﬁrms to more readily be able totake advantage of scale efﬁciencies. In addition to summarizing past studies, thereview concludes with a discussion of the need for continued research in this evolvingliterature.In the ﬁnance literature, there exists a plethora of studies that examine boththeoretically and empirically the issues surrounding mergers and acquisitions (M&A).1The traditional approach has been to examine, utilizing event study methodology, thewealth implications for the bidder and target ﬁrms. The same approach has also beenpredominantly applied on real estate related M&A studies. Womack (2012) is the ﬁrstto determine the combined ﬁrm returns for a sample spanning nearly three decadesof real estate mergers. Prior real estate merger studies analyzed bidder and/or targetreturns but did not evaluate the combined wealth effects. Target returns wereconsistently found to be positive but relatively small compared to those evidenced instudies outside the real estate industry. Results concerning bidder returns are lessconclusive and vary greatly depending on the analyzed time frame [i.e., before orafter the Tax Reform Act of 1986 and/or the Real Estate Investment Trust (REIT)Modernization Act of 1999], as well as on the types of ﬁrms (i.e., REITs vs. all realestate ﬁrms, equity REITs vs. all REITs, public targets vs. private and public targets,etc.) studied in the individual sample of the studies. Most studies, however, showslightly negative returns to bidding ﬁrms around the merger announcement, at leastfor mergers with public targets.2However, as depicted in Ling and Petrova (2011) and Anderson, Medla, Rottke, andSchiereck (2011), there are very few studies that assess ‘‘why’’ mergers in the real 37
38 JOURNAL OF REAL ESTATE LITERATUREestate industry (or really any other market for that matter) occur. And, perhaps justas important, the current literature is largely inconclusive or at best inconsistent acrossstudies and sectors, leaving many unanswered questions. The majority of studiesattempting to determine the rationale behind mergers in the real estate industry mainlydraw on ﬁndings from studies analyzing merger motives outside the real estateindustry. More recently, a number of studies build on the observation that hostiletakeovers among real estate ﬁrms are extremely rare and use this as the motivationto exam why mergers then occur. The ﬁndings that hostile takeovers among real estateﬁrms are extremely rare, as well as the many other peculiarities of the real estatemarket, cast doubt on the assumption that the reasons for takeovers in the real estateindustry are basically the same as for those outside the industry.Moreover, the role of synergies as a motive for mergers and acquisitions in the realestate industry and especially for REIT mergers is a particularly controversial questionamong academics and practitioners, even though the size-related beneﬁts in REITsare well documented in the literature.3 The common skepticism concerning therelevance and existence of synergies can mainly be ascribed to the observation thatseveral studies measuring abnormal returns for bidding and target ﬁrms in real estatemergers document wealth effects of materially lower magnitude than those detectedin studies for other sectors. The lower magnitude of returns is thereby regularlyexplained by the limited potential for synergistic gains from real estate mergers.Eichholtz and Kok (2008), for example, argue that the homogeneity of assets of realestate companies decreases the potential for synergistic proﬁts emerging from mergedoperations. They also reason that the homogeneity of operations in real estate mergersdoes not allow for large value-creating synergies. Campbell, Ghosh, and Sirmans(2001) suggest that the required uniformity of REIT asset composition largelyeliminates the potential for vertical integration synergies through mergers. In a recentstudy, Anderson, Medla, Rottke, and Schiereck (2011) show that the expectedmagnitude of total synergies for REIT mergers is lower than those found in othersectors. They, however, also ﬁnd that for the same homogeneity reasons, REITs areable to ﬁnd greater synergies than non-REIT ﬁrms on the operating cost side and, assuch, can take considerable advantage of economies of scale. The results of theirstudy therefore challenge the notion that synergies do not play a major role as amotive for REIT mergers.This paper provides a detailed review of the literature beginning with the theoreticalbackground that motivates mergers, followed by a detailed discussion of the real estatefocused studies. Studies that merely analyze wealth effects in real estate mergers arenot covered here and the authors do not attempt to determine the rationale behindthose takeovers, as those effects are already sufﬁciently documented in a recent studyby Womack (2012). The paper concludes with a brief summary and discussion of theneed for additional research in this emerging literature.The main ﬁndings suggest that it is ﬁrst and foremost important to study real estatemergers separately and distinctly from non-real estate related ﬁrms. This is even morerelevant when dealing with publically traded REITs that have very speciﬁc regulatoryguidelines. These guidelines tend to homogenize REITs making synergistic gains fromVOLUME 20, NUMBER 1, 2012
REAL ESTATE MERGER MOTIVES: AN ANALYTICAL REVIEW OF THE LITERATURE 39mergers more difﬁcult, while at the same time providing opportunities for readilyavailable greater gains from economies of scale in operating costs.THEORETICAL BACKGROUND OF MERGER MOTIVESThe motives for takeovers can be numerous and true veriﬁcation is often ambiguousand/or impossible to fully ascertain. A reasonable and compelling differentiationbetween the diverse merger motives is to distinguish between neoclassical theories onthe one hand and agency and behavioral theories on the other (Bernile and Bauguess,2010). According to neoclassical theories, mergers occur mainly as a result of externalshocks, either in the form of economic, technological, ﬁnancial, regulatory, or politicalshocks (Harford, 1999, 2005) and are made to sustain or create competitive advantages(Jensen, 1988). Mergers under the neoclassical perspective are mostly motivated bysuch shocks and are expected to lead to proﬁt optimization and shareholder valuecreation, assuming managers are aligned with shareholders’ interests (Martynova andRenneboog, 2008). Following this logic, merged ﬁrms should be able to operate moreefﬁciently than the individual standalone entities through the realization of synergies.In contrast, agency and behavioral theories allow for the possibility that takeovers arevalue-destroying transactions. Inherent agency conﬂicts between ﬁrms’ insiders andinvestors or biases affecting managers are thereby credited as motives to engage inM&A transactions (Jensen, 1986; Roll, 1986; Shleifer and Vishny, 1991; Berkovitchand Naryanan, 1993). According to those theories, managers may seek to build anempire through vast acquisitions while shareholders want the management to increasethe value of the ﬁrm. According to Mueller (1969), management salaries, bonuses,stock options, and promotions tend to be more associated with corporate size than tothe ﬁrm’s proﬁtability. Likewise, the power and prestige of managers are moreassociated with the growth and size of the ﬁrm than to its proﬁtability. Jensen (1986)also found that managers have an incentive to grow ﬁrms beyond their optimal sizesince their compensation is positively related to sales growth. Roll (1986) reasons thatmanagerial hubris makes overconﬁdent managers overestimate the creation ofsynergetic value, thereby tempting them to engage in value-destroying mergers.Another recently popular theory is market timing, whereby insiders attempt to exploittemporary market ‘‘misvaluations’’ (Rhodes-Kropf, Robinson, and Viswanathan, 2005;Dong, Hirshleifer, Richardson, and Teoh, 2006). The theory is based on Myers andMajluf (1984), who argue that managers take advantage of temporarily overvaluedequity as cheap currency for acquiring real assets.Prior research reveals that none of those theories are mutually exclusive; meaningthose ﬁrms and their insiders may simultaneously have more than one motive whenengaging in takeovers (Berkovitch and Narayanan, 1993). The empirical evidence alsoindicates that no single theory can fully explain the occurrence of M&A activity andthe pattern of takeover waves. Martynova and Renneboog (2008) show in acomprehensive literature review on corporate takeovers of the last century that themost consistent ﬁnding regarding the reasons for takeovers is that they are motivateddifferently depending on the stage of the merger wave they are executed in, and that
40 JOURNAL OF REAL ESTATE LITERATUREwealth effects also vary depending on whether they take place in the earlier or laterpart of a wave. The combined companies are thereby expected to create synergisticgains when the merger occurs in the ﬁrst half of a takeover wave. In contrast, themajority of value-destroying acquisitions take place in the second half of a wave.The same theories discussed above are commonly used to explain the occurrence ofM&As among real estate ﬁrms. The real estate industry, however, exhibits uniqueaspects that cast doubt on whether this approach is reasonable and should be acceptedwithout in-depth validation. The most relevant difference to other industries is thedominance of REITs in the real estate market.4 Those ﬁrms avoid the double taxationof typical corporations in exchange for meeting a strict list of ownership, asset,income, and dividend payout requirements.5 The strict rules REITs have to complywith in order to obtain and subsequently maintain their status should have an impacton the relevancy of the individual theories explaining takeover activity in the realestate industry.In this context, Allen and Sirmans (1987) propose that some classic corporate mergermotives can be precluded for REITs due to their unique structure and their institutionalenvironment. As an example, they point out that ‘‘it is unlikely that a businesscombination of REITs would create any monopolistic power’’ (p. 177), because thevast majority of REIT income must come from passive sources such as rents andmortgages. Moreover, other peculiarities of the real estate market, such as thecoexistence of a large private market that competes directly against ﬁrms for theownership of real estate assets, are also expected to have various implications. Thefact that hostile takeovers among real estate ﬁrms are extremely rare also casts doubton the assumption that the reasons for takeovers in the real estate industry are basicallythe same than for those outside the industry and that the market for corporate controlworks in essentially the same way (Eichholtz and Kok, 2008; Womack, 2012).LITERATURE REVIEW OF REAL ESTATE MERGER MOTIVE STUDIESThe latest relevant research on real estate mergers mainly builds on the almost entireabsence of hostile takeovers among real estate ﬁrms.6 In this context, Womack (2012,p. 2) raises these questions: ‘‘Does the above [i.e., the fact that hostile takeoversamong real estate ﬁrms are extremely rare] imply that management ofunderperforming ﬁrms are not held accountable for their results? If not, then why doreal estate mergers occur?’’ In order to investigate why real estate mergers occur, hetests for three merger motives: the empire building hypothesis, the over-valuedinformation signal hypothesis, and the inefﬁcient management hypothesis. His resultsindicate that the motivation for real estate mergers is consistent with the inefﬁcientmanagement hypothesis. According to this hypothesis, ﬁrms with superiormanagement acquire other ﬁrms that possess unexploited opportunities to cut costsand increase earnings. The study, however, only tests for three popular merger motiveswithout taking into account other important potential motivations. The methodologyused to test for the motives based solely on abnormal returns around the takeoverannouncement only allows for an analysis on the meta level without gaining detailedinsights into the expected sources underlying real estate merger gains.VOLUME 20, NUMBER 1, 2012
REAL ESTATE MERGER MOTIVES: AN ANALYTICAL REVIEW OF THE LITERATURE 41Womack’s (2012, p. 2) approach builds on the assumption that ‘‘because each mergertheory generates a testable hypothesis about the stock market’s response to the newsof a merger announcement, the returns for each of these ﬁrms collectively can beutilized to test which theory is best supported by the data.’’ Following his argument,takeovers under the inefﬁcient management hypothesis would generally be wealth-creating events. The hypothesis predicts the following abnormal returns: target(positive), bidder (non-negative), and combined ﬁrm (non-negative). The appliedexperimental design does not allow for controlling whether the inefﬁcient managementhypothesis is really the dominant theory that predicts this kind of announcementeffect. The synergy hypothesis stating that merged ﬁrms should be able to operatemore efﬁciently than individual standalone entities by cutting redundant costs andadditionally increasing earnings, for example, should lead to a similar capital marketreaction. The inference of motivations underlying mergers based exclusively on thereturns around the deal announcement does not enable consideration of the fact thatthere may be other theories that predict the same, or at least a very similar returnpattern.7 Some of the other ﬁndings that are used to support the inefﬁcientmanagement hypothesis may be driven by alternative explanations. Womack’s results,for example, indicate that bidders typically do not seek geographical diversiﬁcation.He ascribes this ﬁnding to the fact that effective managerial focus is more difﬁcultwhen properties are widely spread apart. However, this result could be alternativelyassociated with bidders’ aims to generate material cost synergies, which is more likelyto be accomplished in focused mergers where the bidder is located in the same stateas the target and the potential for cutting redundant costs is consequently higher.Allen and Sirmans (1987) mention tax motivations (i.e., the purchase of operatinglosses to offset the acquiring REIT’s capital gains) and the opportunity to replaceinefﬁcient management as potential motives for REIT mergers. Only six out of the31 events in their study with complete information involves one or the other trusthaving experienced an operating loss in a previous period. A differential means testbetween the two subsamples does also not reveal any signiﬁcant differences. Theyconclude that on the basis of these observations, tax motivations alone are notimportant motives in REIT combinations. However, they ﬁnd that related mergers(i.e., bidder and target are both equity/mortgage REITs and/or have the same propertyfocus or geographic focus) yield statistically signiﬁcant higher abnormal returnsaround the announcement than unrelated combinations. They paraphrase this ﬁndingas evidence for the inefﬁcient management hypothesis. An alternative explanationwould yet be that synergies are likely to be higher for related business combinations.Elayan and Young (1994) extend Allen and Sirmans’ (1987) examination of thesources of gains to target shareholders. They note that ‘‘in addition to improved assetmanagement through a change in control, anticipated operational and ﬁnancialsynergies may contribute to gains associated with a business combination’’ (p. 169).In order to partition the gains from these two sources, they examine the wealth effectsof both the targets and bidders when controlling (i.e., acquisitions that result in thebidder’s control of over 50% of the target’s outstanding shares) and noncontrollinginterests are sought. Their hypothesis builds on the assumption that while a gain basedon synergies could be associated with either form of combination, a gain from a
42 JOURNAL OF REAL ESTATE LITERATUREchange in control would exclusively be associated with an acquisition of a controllinginterest. Their results show that the signiﬁcant positive abnormal returns that accrueto target shareholders in both cases are signiﬁcantly larger when a controlling interestis sought and infer that this is consistent with the realization of greater efﬁciencyassociated with a change in control (i.e., evidence for the inefﬁcient managementhypothesis).The authors bring a new approach into play and their ﬁndings reveal interestingresults. However, the underlying assumption in the study is that synergies can be(fully) realized in cases only when partial control is obtained in an acquisition iscritical. Savings in many expense categories can only be realized if the two combiningﬁrms are in fact fully integrated. Savings in duplicative public company expenses,which can be expected to be substantial for the relatively small ﬁrms in Elayan andYoung’s (1994) sample period from 1972 to 1987, can for example only be realizedif both companies are fully integrated. Bradley, Desai, and Kim (1993), for example,use a threshold of 70% as a prerequisite for the generation of potential synergies intheir study examining synergies across multiple industries. They base their selectionof the 70% threshold on the fact that some corporate charters require a two-thirds orhigher majority to effect a formal combination of two ﬁrms.Campbell, Gosh, and Sirmans (1998) infer, based on their ﬁnding of negativeannouncement returns of acquiring equity REITs, that hubris or self-dealing may bethe rationale behind those mergers. They base this assessment purely on the observedwealth effect and do not further elaborate on their interpretation.Eichholtz and Kok (2008) supplement the existing studies by investigating 95takeovers of property companies all over the world. Especially worth remarking isthat they thereby measure bidder and target performance prior to the takeoverannouncement, which had not been done for real estate mergers before. To determinethe effectiveness of the market for corporate control, they study the characteristics oftargets and bidders compared to a control sample using a multinomial logisticapproach. They ﬁnd that targets are mainly ﬁnancially underperforming, small targetcompanies have a low market-to-book value, and that weak operating and stockperformance of real estate companies are positively related to the likelihood of atakeover. The authors interpret this evidence as in line with the inefﬁcient managementhypothesis. Moreover, they compare their results between REIT takeovers and non-REIT takeovers, which are mainly takeovers involving non-U.S. entities, and ﬁnd thattargets in non-REIT mergers have a signiﬁcantly negative coefﬁcient for market-to-book value, whereas this result does not hold for REITs. Based on this ﬁnding forthe subsample of REITs, one can see that the overall obtained results may not berepresentative for REIT M&A deals in general.Another notable exception to the wealth effect based merger motive studies is a recentpaper by Ling and Petrova (2011). The authors identify the characteristics of publicly-traded REITs associated with an increased probability of being the target of anannounced takeover. They also examine whether certain target characteristics inﬂuencethe probability of a bidder being a private versus a public ﬁrm. They ﬁnd that REITsthat are more likely to become acquisition targets relative to the rest of public REITsVOLUME 20, NUMBER 1, 2012
REAL ESTATE MERGER MOTIVES: AN ANALYTICAL REVIEW OF THE LITERATURE 43are generally smaller and more cash restricted with relatively high dividend yieldsand institutional ownership and no umbrella operating partnership. The differencesbetween the target ﬁrms in public-to-public versus going private acquisitions are alsodocumented. More precisely, the authors deliver evidence that the targets of privateacquirers have lower leverage, interest coverage ratios, and proﬁtability, but higherdividend yields. Their results therefore provide evidence for different motivations forprivate versus public acquirers. Private bidders tend to focus on proﬁt maximizationand hence are bidding on cash restricted, underlevered, and underperforming targetREITs. Public bidders are eager to increase market power and are therefore morefocused on acquiring proﬁtable and higher levered REITs with higher dividend yields.Their ﬁnding that in the case of acquisitions by private ﬁrms, but not by public ﬁrms,targets are typically underperforming with low leverage, deliver important insightsinto the merger motives of public real estate acquirers and shows that the inefﬁcientmanagement hypothesis does not seem to hold unrestrictedly for staying publicmergers.Most of the recent studies by now focus on the inefﬁcient management hypothesis toexplain takeovers in the real estate industry, thereby mostly neglecting the neoclassicalview that mergers indeed have the potential to create incremental value through therealization of synergies even in absence of inefﬁcient management of targets. At thebottom line, a precise separation between gains from synergies on the one hand andfrom those from the replacement of inefﬁcient management on the other does notseem to be always possible. Whether gains simply stem from cutting previously above-average expenses at the target level or real incremental gains (i.e., synergies) are infact generated by the combination of two previously independent entities cannotalways be evaluated from an outsider’s perspective. Even in those mergers where themanagement of the bidding ﬁrm explicitly forecasts the synergies expected from themerger, the management could, for example, include cost savings in their forecaststhat also would have been realized without a merger, thereby inﬂating merger-relatedsynergistic gains.8 Both sources of merger gains, however, on balance lead to moreefﬁcient operations of the combined entities. The potential complications withdifferentiating between the gains from the two sources should therefore not lead toserious concerns as they both have very similar effects on the performance of thenewly combined ﬁrms. From an academic perspective, a precise separation isnevertheless of interest, since the ﬁndings can have important implications foracademics, as well as for practitioners engaged in the ﬁeld of real estate M&A.Anderson, Medla, Rottke, and Schiereck (2011) attempt to distinguish between thegains from the two different sources whenever the data and applied methodologyallow. The authors provide some insights into why REIT mergers occur by analyzinghand-collected synergy forecasts provided by merging ﬁrms’ insiders for a sample ofmerger announcements where the bidder is a publically-traded REIT in the U.S. Theneoclassical view that characterizes mergers as ﬁrms’ rational, efﬁciency-enhancingreaction to a changing environment is thereby a priori accepted as the dominant theory.The approach to focus on synergies as a merger motive has the advantage thatevidence for, but also against synergies as motive can be interpreted twofold. Thismeans that if there is no evidence for potential synergies in the takeover, other motives
44 JOURNAL OF REAL ESTATE LITERATUREmust have been the decision criterion. They hypothesize that expected synergies arein fact an important merger motive for REITs and therefore expect that synergies arequoted and quantiﬁed more often in REIT mergers than in mergers in the rest of thecorporate world. Their ﬁnding that management forecasts of synergies are publiclyavailable in 35% of the REIT mergers in their sample and therefore for a materiallyhigher proportion of deals than evidenced in other studies analyzing synergy forecastsin samples across multiple industries supports their contention. However, the availablesample size is quite small and thus limits the robustness of the ﬁndings.Anderson, Medla, Rottke, and Schiereck (2011) also investigate the determinants ofinsiders’ forecasts of synergies and thereby attempt to explain the variation in theestimated present value of synergies using the variables that are predicted to inﬂuencethose values. The results of their cross-sectional analyses using OLS regressions showthat the factors suggested by the literature to proxy for the potential existence ofsynergies explain a considerable share of the variation in the estimated present valueof synergies. Managerial synergy forecasts in REIT mergers therefore seem to beeconomically signiﬁcant and profound. The results are consistent with more generalﬁndings on economies of scale in REITs, demonstrating that general andadministrative (G&A) expenses and to a lesser extent also interest expenses are themost relevant sources for cost savings. The results of the study also provide additionalinsights into the synergy motivation; however, the experimental design is not set-upto allow for a comprehensive controlling for the potential existence of alternativetheories. The potential (co-)existence of agency and/or behavioral theory basedmotivations consequently cannot be assessed.CONCLUSIONThis paper reviews the dominant theories, motives, methodologies, and results of theexisting literature on the rationale for real estate related mergers. The theoreticalbackground that motivates mergers is presented and neoclassical theories andbehavioral theories thereby discussed, followed by a detailed discussion of the realestate focused studies. The literature review thereby draws on the mainstreamcorporate governance literature in ﬁnance as its base and highlights the differences inmotives between real estate and non-real estate related merger activity. The ﬁndingsshow that the existing literature is largely inconclusive, leaving many unansweredquestions. The majority of studies attempting to determine the rationale behindmergers in the real estate industry mainly draw on ﬁndings from studies analyzingmerger motives outside the real estate industry. More recently, a number of studiesbuild on the observation that hostile takeovers among real estate ﬁrms are extremelyrare and therefore focus on the inefﬁcient management hypothesis to explain takeoversin the real estate industry. The focus on the inefﬁcient management hypothesis toexplain takeovers in the real estate industry, however, neglects the neoclassical viewthat mergers indeed have the potential to create incremental value through therealization of synergies even in absence of inefﬁcient management of targets. The paststudies also highlight that the homogeneity of real estate ﬁrms, especially as theypertain to the highly regulated REIT industry, is expected to reduce the availabilityVOLUME 20, NUMBER 1, 2012
REAL ESTATE MERGER MOTIVES: AN ANALYTICAL REVIEW OF THE LITERATURE 45of revenue and overall corporate synergies, but might allow for the ability of someﬁrms to more readily be able to take advantage of scale efﬁciencies.Future research should ascribe a higher importance to the role of synergies as rationaleto engage in real estate mergers, taking into account the unique characteristics of theindustry and in particular those that the REIT structure inevitably brings along.Synergies are recognized as a central merger motive in the general ﬁnance literaturebut have been largely overlooked in real estate M&A research for the sake of focusingon the inefﬁcient management theory to explain the almost entire absence of hostiletakeovers among real estate ﬁrms. Looking forward, the currently rising number oftakeovers in the real estate industry will allow for analyses in the near future notpossible to date due to an insufﬁcient number of observations and time periods that aretoo short. Finance studies show that the patterns of takeover activity vary signiﬁcantlyacross takeover waves, with different motives being the dominant rationale to mergein each wave. Even though the real estate M&A market exhibits the same cyclicalwave pattern, this aspect has not been further analyzed to date. It will be interestingto see whether the motives differ in the earlier years of the REIT industry comparedto those in the modern REIT era. Potential events that can be expected to have hadan impact on the dominant reasons to merge are the Tax Reform Act of 1986 (REITsno longer were required to have external management), the establishment of the‘‘look-through’’ provision in 1993 (allowance concerning the ‘‘ﬁve or fewer’’ rule ofREITs with regard to the number of investors represented by a pension or mutualfund), and the REIT Modernization Act of 1999 (relaxed restrictions on the ancillarybusinesses that REITs could be engaged in to some extent).ENDNOTES1. The terms ‘‘takeover,’’ ‘‘merger,’’ ‘‘acquisition,’’ and ‘‘M&A’’ are used interchangeably throughout this paper.2. Please refer to Womack (2012) for a comprehensive review of the literature on the wealth effects of real estate related mergers and acquisitions.3. See Anderson, Lewis, and Springer (2000) for a literature review on the operating efﬁciencies in real estate.4. Real estate ﬁrms not structured as REITs, also known as real estate operating companies (REOCs), are not constrained by these regulations and are similar in most aspects to ﬁrms outside of the real estate industry. Their relevance for the publicly-listed real estate market in the U.S. is rather small in comparison to REITs.5. See, for example, Allen and Sirmans (1987) for a summary of the key provisions a REIT must meet to be qualiﬁed. Please also refer to Feng, Price, and Sirmans (2011) for a comprehensive documentation of the publicly-traded equity REIT universe.6. Allen and Sirmans (1987) ﬁnd that only one event in their sample of 38 REIT mergers could be classiﬁed as a hostile takeover. Campbell, Gosh, and Sirmans (1998) ﬁnd no single successful hostile takeover in the 27 transactions studied. Campbell, Gosh, and Sirmans (2001) also ﬁnd none in their sample of 85 REIT mergers. Eichholtz and Kok (2008) investigate 95 takeovers of property companies all over the world and ﬁnd that only two are hostile. Womack (2012) ﬁnds that only 1 out of the 94 mergers of public real estate ﬁrms studied can be classiﬁed as a hostile takeover.
46 JOURNAL OF REAL ESTATE LITERATURE7. The synergy theory is not controlled for in Womack’s (2012) study. Berkovitch and Narayanan (1993) use a similar research design to test for three merger theories in the regular corporate world (synergy, agency, and hubris). They additionally design a formal test to distinguish between agency and hubris motives for takeovers, thereby allowing for the potential coexistence of more than one theory, by analyzing the correlations between target, bidder, and total gains.8. Houston, James, and Ryngaert (2001) point out this complication in their study of large U.S. bank mergers and explicitly name one merger for which security analysts note that a material fraction of the forecasted cost savings is attributable to a cost-cutting program already under way. The authors also note that it is not clear whether management is unaware of the biased nature of the forecasts and conclude that these tendencies do on balance tend to exaggerate the valuation estimates used in their paper.REFERENCESAllen, P., and C.F. Sirmans. An Analysis of Gains to Acquiring Firm’s Shareholders: The SpecialCase of REITs. Journal of Financial Economics, 1987, 18, 175–84.Anderson, R.I., D. Lewis, and T.M. Springer. Operating Efﬁciencies in Real Estate: A CriticalReview of the Literature. Journal of Real Estate Literature, 2000, 8:1, 3–20.Anderson, R.I., H. Medla, N.B. Rottke, and D. Schiereck. Why Do REIT Mergers Take Place?Evidence from Synergistic Forecasts. Working Paper, EBS Business School, 2011.Berkovitch, E. and M.P. Narayanan. Motives for Takeovers: An Empirical Investigation. Journalof Financial and Quantitative Analysis, 1993, 28:3, 347–62.Bernile, G. and S.W. Bauguess. Do Merger Synergies Exist? Working Paper, University ofMiami. Available at SSRN: http: / / ssrn.com / abstractϭ642322. 2010.Bradley, M., A. Desai, and E.H. Kim. The Rationale behind Interﬁrm Tender Offers: Informationor Synergy? Journal of Financial Economics, 1983, 21:1, 3–40.Campbell, R.D., C. Ghosh, and C.F. Sirmans. The Great REIT Consolidation: Fact or Fancy?Real Estate Finance, 1998, 15:2, 45–54.——. The Information Content of Method of Payment in Mergers: Evidence from Real EstateInvestment Trusts (REITs). Real Estate Economics, 2001, 29, 360–87.Dong, M., D. Hirshleifer, S. Richardson, and S.H. Teoh. Does Investor Misvaluation Drive theTakeover Market? Journal of Finance, 2006, 61:2, 725–62.Eichholtz, P.M.A. and N. Kok. How Does the Market for Corporate Control Function forProperty Companies? Journal of Real Estate Finance and Economics, 2008, 36:2, 141–63.Elayan, F.A. and P.J. Young. The Value of Control: Evidence from Full and Partial Acquisitionsin the Real Estate Industry. Journal of Real Estate Finance and Economics, 1994, 8, 167–82.Feng, Z., S.M. Price, and C.F. Sirmans. An Overview of Equity Real Estate Investment Trusts(REITs): 1993–2009. Journal of Real Estate Literature, 2011, 19:2, 307–43.Harford, J. Corporate Cash Reserves and Acquisitions. Journal of Finance, 1999, 54:6, 1969–97.——. What Drives Merger Waves? Journal of Financial Economics, 2005, 77:3, 529–60.Houston, J., C. James, and M. Ryngaert. Where Do Merger Gains Come From? Bank Mergersfrom the Perspective of Insiders and Outsiders. Journal of Financial Economics, 2001, 60, 285–331.Jensen, M.C. Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. AmericanEconomic Review, 1986, 76:2, 323–29.VOLUME 20, NUMBER 1, 2012
REAL ESTATE MERGER MOTIVES: AN ANALYTICAL REVIEW OF THE LITERATURE 47——. Takeovers: Their Causes and Consequences. Journal of Economic Perspectives, 1988, 2,21–48.Ling, D.C. and M.T. Petrova. Why Do REITs go Private? Differences in Target Characteristics,Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions. Journal of RealEstate Finance and Economics, 2011, 43:1, 99–129.Martynova, M. and L. Renneboog. A Century of Corporate Takeovers: What Have We Learnedand Where Do We Stand? Journal of Banking and Finance, 2008, 32:10, 2148–77.Mueller, D.C. A Theory of Conglomerate Mergers. Quarterly Journal of Economics, 1969, 83:4, 643–59.Myers, S. and N. Majluf. Corporate Financing and Investment Decisions When Firms HaveInformation that Investors Do Not Have. Journal of Financial Economics, 1984, 13, 187–221.Rhodes-Kropf, M., D. Robinson, and S. Viswanathan. Valuation Waves and Merger Activity:The Empirical Evidence. Journal of Financial Economics, 2005, 77:3, 561–603.Roll, R. The Hubris Hypothesis of Corporate Takeovers. Journal of Business, 1986, 59, 197–216.Shleifer, A. and R.W. Vishny. Takeovers in the ‘60s and the ‘80s: Evidence and Implications.Strategic Management Journal, 1991, 12, 51–59.Womack, K.S. (2012). Real Estate Mergers: Corporate Control & Shareholder Wealth. Journalof Real Estate Finance and Economics, forthcoming.Randy I. Anderson, University of Central Florida Orlando, FL 32816-1400 and EBSBusiness School, Wiesbaden, 65189 Germany or firstname.lastname@example.org.Henrik Medla, EBS Business School, Wiesbaden, 65189 Germany or email@example.com.Nico B. Rottke, EBS Business School, Wiesbaden, 65189 Germany and University ofCentral Florida Orlando, FL 32816-1400 or firstname.lastname@example.org.Dirk Schiereck, Tech University Darmstadt, D-64289 Darmstadt, Germany and EBSBusiness School, Wiesbaden, 65189 Germany or email@example.com.
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