Aurora Borealis
1 January 2017 CFA Institute Journal Review

Dual Ownership, Returns, and Voting in Mergers (Digest Summary)

  1. Neeti Goyal

A financial conglomerate that owns both bonds and equity in a target via its different entities is more likely to vote in favor of a merger. Bondholders and equityholders belonging to the same conglomerate make merger and acquisition (M&A) decisions together even if doing so implies a lower equity premium and higher bond returns.

What’s Inside?

Prior research on this subject implicitly assumes that each investor holds either stocks or bonds but not both types of securities together. The authors note, however, that a significant percentage of the equity of many US-listed corporations is owned by financial conglomerates whose affiliates are also the same companies’ bondholders. When affiliated fund managers coordinate their actions for merger and acquisition (M&A) deals, financial conglomerates with dual ownership of target equity and debt (“dual holders”) have considerations different from those of pure shareholders or pure creditors. The reason is that dual holders must make decisions from the point of view of the group.

How Is This Research Useful to Practitioners?

The authors analyze the implications of a financial conglomerate’s dual ownership of equity and debt in an M&A target. They offer their main results as well as implications for corporate finance.

They find that dual holders are willing to accept a lower M&A equity premium when they own a large quantity of equity in the target because both equity and debt increase in value when a more risky target company is acquired by a less risky bidder. A financial group makes decisions as a whole. Dual holders accept a lower premium on their equity because they also benefit from the appreciation of their bond positions.

Dual holders are, in effect, bondholders with some voting rights in the target company, which affords them better protection in takeovers compared with pure bondholders. The authors substantiate that the larger the presence of dual holders among target shareholders, the larger the abnormal bond returns in M&A transactions.

Dual holders generate gains from both equity and bonds, so they have a stronger motive than pure shareholders to materialize the deal, which is why dual holders vote in favor of the merger proposal. The authors confirm that when affiliated bond funds hold target bonds, equity mutual funds holding target shares are more likely to support the merger proposal.

How Did the Authors Conduct This Research?

The authors obtain equity ownership data from SEC Form 13F filings and bond ownership data from Lipper eMAXX for 536 M&As between 1999 and 2009. All affiliates under one conglomerate are assigned one unique name to determine dual ownership at the group level. For their analysis, the authors use a tabulation of descriptive statistics on the distribution of dual ownership across all firms and a sample of M&A targets, including control variables. Using these data, the authors compute certain ratios and conduct a regression analysis to test their hypotheses about dual holders. They also analyze the behavior of dual mutual fund holders that vote for M&A proposals. For a robustness check, the authors further investigate the probable incentives for dual holders in M&As. The only constraint on their results is the fact that their analysis cannot cover all M&As with dual holders.

Abstractor’s Viewpoint

The authors offer several implications for corporate finance; for example, the conflict between shareholders and debtholders is not as severe as is often thought. In many publicly listed companies, some investors hold positions in both types of securities, which tends to reduce the asset substitution problem. The authors state that the computation of returns should be from the perspective of the total portfolio, in which all the holdings across different types of securities are taken into account.

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