Research Paper: Returns of Merger and Acquisition activities in the Restaurant Industry, 2011

1. ResearchPaper:Returns of Mergerand Acquisition activities in the
RestaurantIndustry, 2011
Authors: HYUN KYUNG CHATFIELD and MICHAEL C. DALBOR (William F. Harrah
College of Hotel Administration, University of Nevada, Las Vegas, Las Vegas, NV, USA)
COLLIN D. RAMDEEN (Division of Resort & Hospitality Management, Florida Gulf Coast
University, Fort Myers, FL, USA)
Literature review:
Studies show that returns of merger participants fluctuate over time. In general, target returns
are positive and higher than bidder returns. On the other hand, bidder returns shows mixed
results—some are positive and some are negative. There are several factors with a potential
to influence returns for both bidder and target companies.
There are many possible motivations for mergers, including synergy, tax considerations,
purchase of assets below their replacement costs, diversification, and gaining control over
other firms. This study specifically focuses on the synergy, agency, and hubris motives. The
synergy motive applies when economic gains result from combining the assets of two firms.
The agency motive is when the acquiring firm’s management gains and the acquiring firm’s
shareholders lose. The hubris motive is when managers overvalue a takeover target and
synergistic gains do not justify the bid price.
M&A studies show target firms normally gain positive and higher returns than acquirers.
Franks, Harris, and Titman (1991) studied 399 large U.S. acquisitions from the 1970s to the
1980s. The authors found that following the merger announcement, target shareholders
gained 28% on average. Schwert’s (1996) empirical research shows abnormal returns (ARs)
to targets of successful offers averaging 35% to 40% from the mid 1970s to the early 1990s.
The empirical research of You, Caves, Smith, and Henry (1986) also supported these
conclusions. The results of their frequency distribution analysis showed the excess return to
target companies for 133 mergers from 1975 to 1984 was about 20%, although there was
actually a wide range of returns for target firms.
M&A studies show mixed results for bidder returns. Bidder returns are generally lower than
target returns and are close to zero. Studies show bidder returns have a slight tendency to
decline for the period between the 1960s and 1990s. It appears that bidder returns were higher
(more positive) in the 1960s and 1970s than in the 1980s and 1990s. Bradley, Desai, and Kim
(1988) examined returns to bidders during the 1960s, 1970s, and 1980s. They argued that
during the 1980s, the rapid development of new financing techniques, new defensive
strategies, and a more relaxed antitrust attitude toward horizontal mergers encouraged more
competing bids than in the previous two decades. In addition, according to Moeller,
Schlingemann, and Stulz (2003), bidders’ returns dramatically declined from 1997 to 2001.
The authors found that following the merger announcement, bidder returns were close to
zero. The stock price of bidder companies decreased by 1% but was not statistically
significant. The empirical research of You et al. (1986) also supported these conclusions.

2. Jensen and Ruback (1983) concluded that “corporate takeovers generate positive gains”. The
authors found that target firms in M&As typically receive positive returns, and bidding firms
returns broke even.
Berkovitch and Narayanan (1993) claimed that if a takeover is motivated by synergy, the
target can achieve some of the synergy if it resists the takeover or if there are multiple
bidders. In that case, it is assumed that the higher the synergy, the higher the target gain if
everything else is the same.
Walkling and Long (1984) showed that managerial resistance to takeovers is determined by
their expected wealth changes from the takeover. Resistance by target management generally
leads to higher legal costs and delay for the bidder. This may cause a higher offer to
encourage target shareholders to sell.
Kim (2001) studied the wealth effect of M&As in the lodging industry and found that targets
of non-casino hotel shareholders earn 5.2% and targets of casino hotel shareholders earn
16.1% in a 3-day window (−1 to 1). Canina (2001) found 1.28% AR to acquirer and 8.9%
target return in the lodging industry.
Some takeovers may be motivated by the self-interest of management. Several reasons are
offered to explain this, including diversification of management’s personal portfolio (Amihud
& Lev, 1981), increasing firm size through free cash flow (Jensen, 1986), and increasing the
firm’s dependence on management through acquisition of assets (Shleifer & Vishny, 1989).
Gorton, Kahl, and Rosen (2002) argued that managers prefer that their firms remain
independent rather than be acquired by other firms. If their firm is acquired, the managers of
the acquired firm may play a subordinate role in the new firm or lose their job. Expanding in
size through acquisitions can reduce the probability of being acquired by another firm. Thus,
managers wishing to maintain firm control may engage in unprofitable defensive acquisitions
to increase their firm size and minimize the probability of their firm being targeted.
Hasbrouck (1985), Palepu (1986), and Ambrose and Megginson (1992) found the probability
of being a target is decreasing in a firm’s size.
The hubris motivation for M&A activity is caused by managers’ excessive self-confidence
and arrogance. Managers of bidding firms may overestimate the value of the target firms, or
they may overestimate their ability to run the target firms and thus overpay for targets.
Morck, Shleifer, and Vishny (1990) and Roll (1986) both offered this as an explanation for
the overpayment for targets in some acquisitions.
Findings: study of M&A activity in the restaurant industry between 1985 and 2005 shows
that targets had significant positive returns but that bidder returns are close to zero.
Consistent with many studies (Bradley et al., 1988; Franks et al., 1991; Jensen & Ruback,
1983; Lang, Stulz, & Walking, 1989; Loughran & Vijh, 1997; Sullivan, 1989). Restaurant
industry bidding firm CARs are positive, but not statistically significant (µ = 1.19% and
0.68% without outlier). The restaurant industry is characterized by high competition and
many failures. This tremendous industry competitiveness may pressure companies to be more
aggressive bidders, thus contributing to lower returns for restaurant bidders.

3. Halibozek and Kovacich (2005) claimed that more than half of M&As fail to accomplish the
anticipated or planned results. Pernsteiner (2000) found that the larger the bidder relative to
the target, the higher the premium paid in hotel M&As.
To examine whether M&As are successful in the long term, post-acquisition performance
would need to be studied. There are many reasons for failing M&As, including hubris,
overpayment, overconfidence of management, agency problems, cultural differences, and
technology problems.
References:
Ambrose, B. W., & Megginson, W. L. (1992). The role of asset structure, ownership
structure, and takeover defenses in determining acquisition likelihood. Journal of Financial
and Quantitative Analysis, 27(4), 575–589.
Amihud, Y., & Lev, B. (1981). Risk reduction as managerial motive for conglomerate
mergers. Bell Journal of Economics, 12(2), 605–617.
Berkovitch, E., & Narayanan, M. P. (1993). Motives for takeovers: An empirical
investigation. Journal of Financial and Quantitative Analysis, 28(3), 347–362.
Bradley, M., Desai, A., & Kim, E. H. (1988). Synergistic gains from corporate acquisitions
and their division between the stockholders and target and acquiring firms. Journal of
Financial Economics, 21(1), 3–40.
Canina, L. (2001). Good news for buyers and sellers: Acquisitions in the lodging industry.
Cornell Hotel and Restaurant Administration Quarterly, 42, 47–54.
Franks, J. R., Harris, R. S., & Titman, S. (1991). The postmerger share-price erformance of
acquiring firms. Journal of Financial Economics, 29(1), 81–96.
Halibozek, E. P., & Kovacich, G. L. (2005). Mergers and acquisitions security: Corporate
reorganizations and security management. Burlington, MA: Elsevier.
Hasbrouck, J. (1985). The characteristics of takeover targets: q and other measures. Journal
of Banking and Finance, 9(3), 351–362.
Jensen, M. (1986). Agency cost of free cash flow, corporate finance, and takeovers.
American Economic Review, 76(2), 323–329.
Jensen, M., & Ruback, R. (1983). The market for corporate control: The scientific evidence.
Journal of Financial Economics, 11(1–4), 5–50.
Kim, S. H. (2001). An analysis of wealth effect to shareholders of the lodging industry in
mergers and acquisitions (Master’s Theses, University of Nevada, Las Vegas, UMI No.
1409035).
Lang, L., Stultz, R. M., & Walkling, R. A. (1989). Managerial performance, Tobin’s Q, and
the gains from successful tender offers. Journal of Financial Economics, 24(1), 137–154.

4. Loughran, T., & Vijh, A. (1997). Do long-term shareholders benefit from corporate
acquisitions? Journal of Finance, 52(5), 1765–1790.
Moeller, S., Schlingemann, F., & Stulz, R. (2003). Do shareholders of acquiring firms gain
from acquisitions? Dice Center Working Paper No. 2003-4. Retrieved September 2, 2005,
from http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 383560/.
Mukherjee, T. K., Kiymaz, H., & Baker, H. K. (2004). Merger motives and target valuation:
A survey of evidence from CFOs. Journal of Applied Finance, 14(2), 7–24.
Palepu, K. G. (1986). Predicting takeover targets: A methodological and empirical analysis.
Journal of Accounting and Economics, 8(1), 3–35.
Pernsteiner, C. A. (2000). Factors influencing the payment of premiums in hotel mergers and
acquisitions 1995–1999. (Doctoral Dissertation, Nova Southeastern University). Retrieved
from Pro Quest Dissertations and Theses database.
Schwert, G. W. (1996). Markup pricing in mergers and acquisitions. Journal of Financial
Economics, 41(2), 153–192.
Shleifer, A., & Vishny, R. W. (1989). Managerial entrenchment: The case of managerspecific
investments. Journal of Financial Economics, 25(1), 123–139.
Sullivan, M. J. (1989). Tax issues in mergers and acquisitions (Doctoral dissertation, Florida
State University). Retrieved from Pro Quest Dissertations and Theses database.
Weston, J. F., Siu, J. A., & Johnson, B. A. (2001) Takeovers, restructuring, & corporate
governance (3 rd ed.). Upper Saddle River, New Jersey: Prentice Hall.
Walkling, R., & Long, M. (1984). Agency theory, managerial welfare, and takeover bid
resistance. Rand Journal of Economics, 15(1), 54–68.
Comparisonof Post-Mergerperformance ofAcquiring Firms (India)
involved in Domestic and Cross-borderacquisitions
Authors: Sidharth Saboo Bocconi University, Italy and Sunil Gopi Bocconi University,
Italy
Literature Review
Mergers and acquisitions as a subject has been a point of discussion among the circles of
analysts. In late history various writing and papers have been explored on the effect of M&A
on corporate capital union and a few hypotheses have been proposed to comprehend the exact
approval of such effects. A portion of the impacts that have been generally contemplated are
the profits to investors following the merger and securing and the post merger execution of
the business unit. Compatible of this few measures have been hypothesized to comprehend
and measure the execution of the organization following M&A. These incorporate the long
and short term effects of declaration, the impact of threatening takeovers and so forth.

5. USA and a few European markets were explored in few research papers to assess the
corporate execution of the associations following any mergers and acquisitions. A few such
inquires have demonstrated that the fundamental explanation behind the better execution of
the procuring firms have been because of a few operational and specialized cooperative
forces between the aquiring and the acquired company . Healy, Palepu, Ruback inspected
the execution of 50 US mergers post aquisition utilizing the criteria of income execution and
found that the working execution of those organizations were particularly better after
acquisitions. However, the other claim that the operating income execution did not enhance
following acquisitions was asserted by Ghosh in his paper.
About the execution of aggregate firms, Weston and Mansingka ,in their paper , found that
the distinction between the execution of the control test gathering and the organizations were
unimportant as time goes on. Marina, OOsting and Renneboog explored the corporate
takeovers in Europe and their effect on the financial performance furthermore, found that
both the gaining and obtained organizations were beating the normal organizations before any
takeover endeavor, however this productivity diminished once the takeover was effectively
finished. Blended outcomes were appeared by Ikeda and Doi as they examined the execution
of the mergers of Japanese assembling firms utilizing the measure of ROE and found that a
large portion of the test had their ROE expanded post M&A and ROA expanded down the
middle the cases. However finished the % year time frame both these productivity measures
demonstrated an expansion in the greater part the firms, demonstrating that there was an
alteration period where the securing firms figure out how to oversee the new association.
Kruse stop and Suzuki analyzed the long haul working execution of Japanese organizations
where the specimen utilized was 56 fabricating associations amid the period 1966-97. This
investigation demonstrated a change of the working execution over a 5 year period and that
pre merger and post merger execution are profoundly related. Research writing has
demonstrated to us that the working execution of the gaining firms have indicated blended
outcomes as far as the contrast between the post merger and pre merger execution. In this
manner it would be to a great degree hard to close whether the M&A can be utilized as an
impetus by obtaining firms to accomplish better working execution
As per India has been a place for some notable M&A bargains in the course of recent years
particularly since the progression of exchange 1991. However the look into on the mergers
and procurement has been similarly constrained. Kaur analyzed the pre merger and post
merger execution of organizations utilizing an arrangement of money related proportion.
They inferred that benefit and productivity declined post securing however there was to
measurably unique execution. However Pawaskar who attempted a similar report with firms
amid 1992-95 and proportions of benefit, development, use and liquidity reasoned that
aquiring firms performed better then industry normal regarding productivity. When he played
out a relapse investigation, he found that despite what might be expected of before finding,
there was no increment in present merger benefits thought about on the business normal.
Pramod Mantravadi and A Vidyadhar Reddy investigated the post merger execution of
gaining association's distinctive enterprises in India. The investigation found that there are
minor differences in terms of effect on working execution following mergers, in various
ventures in India. Observational testing of post merger execution of Indian organizations has
so far been demonstrated uncertain keeping in mind the end goal to determine any significant
surmising. The examinations were likewise exceptionally skewed for a specific area
particularly fabricating ones and have an era inclination as just brief time interims were
measured the execution.
Key Findings:

6. The examination was to test whether the aquisition has distinctive impact on the execution of
the aquiring firm. The outcome and examination of the key financial proportions of the
obtaining firms demonstrates that the effect of merger was diverse for domestic acquiring
firm. The sort of aquisition seems to play an essential part in the execution of the
organizations and it makes a distinction
References
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value from Mergers and Acquisitions’, July 2007
Pramod Mantravadi and A Vidyadhar Reddy, (2008): ‘Post-Merger Performance of
Acquiring Firms from Different Industries in India’, International Research Journal of
Finance
and Economics ISSN 1450-2887 Issue 22 (2008)
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acquisitions?’ Journal of Corporate Finance 7 pp 151-178
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Conglomerate Firms’, Journal of Finance, September, pp 919-936
Marina Martynova, Sjoerd Oosting and Luc Renneboog, (2007): ‘The long-term operating
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1990: Quantitative Analysis and Recent Research’, G. Gregoriou and L. Renneboog (eds.),
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– a comparative perspective’, working paper 355, February, CDS, Trivandrum
Timothy A. Kruse, Hun Y. Park, Kwangwoo Park, and Kazunori Suzuki, (2003): ‘Longterm
Performance following Mergers of Japanese Companies: The Effect of Diversification and
Affiliation’, presented at American Finance Association meetings in Washington D.C, pp 1-
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(2006): ‘Exploring the Improvement of Corporate Performance after Mergers – The Case of
Greece’, International Research Journal of Finance and Economics, Issue 6, pp 184-92. The
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