I always feel bad bringing you academic papers because inevitably they’ve been on SSRN for, like, two years, but this one is new to me anyway and good glaven are these charts clever:
So these guys (Kenneth Ahern and Denis Sosyura of Michigan) went and looked at a bunch of stock-for-stock mergers. And they looked at the uptick in news coverage after those mergers were announced – and, far more interestingly, before they were announced but after negotiations had started (which they found out by reading the “Background” in the merger proxy) . Then they divided those mergers into (1) fixed exchange ratio mergers, where the acquirer could minimize the price it paid by pumping up its stock just before signing the merger (because buying a $540mm company for AAPL shares requires 1mm shares now, but would require many more/fewer if AAPL were not so over/underpriced, take your pick), and (2) variable exchange ratio mergers (“we’ll give you $540mm worth of stock based on whatever our stock price at closing” or more complicated versions thereof), where the acquirer could minimize the price it paid by pumping up its stock just before closing the merger. Then they charted where there were more – largely positive, company-driven, press-release-based – articles than usual. And lookit that!
Or if you like, like, words and numbers:
Our first set of empirical results shows that bidders in fixed exchange ratio stock mergers increase the number of press releases after they privately begin merger negotiations and before the public announcement of the merger, during the period when the stock exchange ratio is established. In contrast, floating exchange ratio acquirers show little difference in press release issuance during this time. In difference-in-difference regressions, we find that fixed ratio acquirers issue 9 extra press releases during the average negotiation period, a 10 percent increase compared to baseline averages.
The increase in media coverage has a significant and positive effect on stock returns, consistent with prior studies, but also has real implications for the merger. The abnormal increase in newswire coverage during negotiations is associated with an estimated savings for an average fixed exchange ratio bidder of $230 million to $558 million, or between 5 percent and 12 percent of the takeover price in an average deal, compared to floating ratio bidders.
You could feel a vague sense of unease about some of this. Like, in general, do people really know 60 days before a deal is announced that it will be a stock deal where they pay with a floating exchange ratio? Should I be at all bothered that the standard deviation of the number of articles about a company in the sample is 3x the mean? Is is possible that the timing of announcement is influenced by where stock price is, rather than the reverse (i.e. you’ve been negotiating for two months but when your stock price peaks you really motivate to sign it up quick). And, just, more broadly: really? You can make your stock price go up just by issuing more press releases? Shouldn’t that … like … shouldn’t that not work?
I dunno. But the paper sounds smart and careful and a lot of potential sins are washed out just by the gaps between those lines above: whatever you think about absolute whatevers, the relative whatevers between fixed and variable ratios strike me as compelling, and as probably explainable by some form of conscious or semi-conscious desire to put out stock-price-enhancing news when it will do you the most good.
I tend to have a pretty simplistic model of how corporate executives think about their stock price: they want it to go up! Because (1) they tend to own a lot of stock and (2) that’s kind of, like, their thing: they are measured and rewarded and praised or blamed based on their stock price so it going up is a good thing and it not going up is a bad thing. This paper I guess doesn’t exactly refute that – nobody is, like, cutting back drastically on saying nice things about their companies; even in the variable-exchange-ratio case the number of puffy press releases goes up a little bit. But it sure gives it some nuance: you push your stock up more when it gets you some actual value, in the form of cheaper acquisitions, for your company. And you optimize at least your timing, if not the total volume of nice things you say about your company, around when it most directly benefits you. (And it works. That in itself strikes me as interesting/confounding.)
Of course if you were cynical what you’d want to do is extend this result to the reverse situation: do companies strike a more dour pose when they could benefit from a low stock price? Is Warren Buffett not telling who his successor is because he’s hoping to buy back stock cheap? Do executives who are paid in stock try to talk down the stock towards the grant date, so that their dollar value gets translated into more shares?
Who Writes the News? Corporate Press Releases During Merger Negotiations [SSRN]
Do Firms Manipulate Their Stock Prices? Causal Evidence from M&A [Thing at Harvard Law school with name so long that it is impossible to describe in these link captions but it's in my RSS because it has lots of good stuff like this, though usually, again, like 2 years after it's on SSRN]