Ownership Structures, Payment Methods and the Premiums Paid for Mergers and Acquisitions

This paper examines how ownership structure and payment methods influence mergers and acquisitions premiums offered in Taiwanese financial industry in the period between the 4th quarter of 2001 and the year end of 2005. Our investigation of the factors that determine bid premiums paid for targets focuses on the importance of affiliation of both acquirers’ and targets’ ultimate controllers, payment methods, the divergence of control right and cash flow right of acquirer’s ultimate controller, and control leverage created by the acquirer. Different from traditional studies on mergers and acquisitions, this research centers on the relation between premiums and the ways of mergers and acquisitions.
Previous studies show that there is a premium paid for stock over cash. With nonparametric statistic methods, our evidences also show that acquirer pays higher extra price-to-book ratios in mergers and acquisitions with stock payment, though there is no significant difference in terms of extra price-to-earning ratios. Our results further reveal that divergence of acquirer’s ultimate controller is significantly positive correlated with premiums measured in extra price-to-earning ratios. The results are consistent with Lu (2003) who suggests that acquirer with lower divergence is expected to pay lower premiums to the target. However, there is no significant relationship between divergence of acquirer’s ultimate controller and extra price-to-book ratios.
When the acquirer enters mergers and acquisitions at a higher level of control chain (or pyramid), he will be willing to pay higher premiums for the target’s control with larger control leverage and divergence over the target. Our evidence supports this hypothesis when the premiums are measured in terms of extra price-to-book ratios. For the affiliation of both acquirers’ and targets’ ultimate controllers, we find higher extra price-to-earning ratios to the target in an internal merger and acquisition deal.
This research contributes to the theory and practice of mergers and acquisitions in that the relationship between premiums paid and the ownership structure of the bidders as well as the targets has not been studies in the literature before. More statistical inferences may be made possible provided that the sample size is large enough.