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What Really Determine the Payment Methodsin M&A Deals.

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What Really Determine the Payment Methods in M&A Deals 1. Introduction In recent years, the level of corporate acquisition activity has been increasing dramatically. Much work, as a result, has been done in terms of the exploration of Merger and Acquisition (M&A) activities from an individual country's perspective or that of international comparisons. Issues such as the Foreign Direct Investment through M&A, the post-acquisition performance of both bidders and targets, and other aspects, have attracted the most attention for the study in this field over the past years. Among the previous literature, there are several studies by far having attempted to investigate the determinants of payment methods in M&A deals. However, a review of the studies shows that only some specific hypotheses related to the methods of payment have been documented. Moreover, little has been done in this respect attempting to find out and analyze the financing trend in the UK market in the 1990s. The main objective of this paper is intended to fill the lacuna by exploring what determines the payment methods in M&A deals chosen by both participants---bidders and targets. To investigate the determinants of payment methods in mergers and acquisitions, a number of hypotheses related to these determinants are addressed. Accordingly, statistics analyzed methods of factor analysis and discriminant analysis are employed in this study. The paper is set out as follows. The next section reviews recent theoretical developments and empirical research concerning payment methods in M&A deals with critical comments. Section 3 proposes testable hypotheses in this study. Section 4 describes data selection, data sample, and presents descriptive statistics for the sample and sub-samples. Empirical results from applying factor analysis and discriminant analysis are presented in Section 5. Finally, Section 6 draws conclusions from the study and makes suggestions for further research. 2. Review of Previous Research Over the past two decades, many different theories explaining the payment alternatives in M&A transactions have been developed in the literature. ...read more.


Meanwhile, based on the study of the UK market, in this paper we attempt to illustrate the issue further on the determinants of payment methods in M&A. 3. Testable Hypotheses As outlined above, a number of hypotheses have been advanced to explain the choice of payment methods, given some alternatives in M&A deals. The suggestions presented by these previous empirical studies indicate that the payment methods chosen in M&A transactions might be related to information asymmetry, taxation, M&A regulations, accounting treatment, and some other factors in terms of both acquirer and target's financial performance. However, these key elements, on which payment methods are generally considered dependent, do not hold in any circumstances. Moreover, empirical results from testing the hypotheses are quite different among the previous studies. The inclusiveness in this respect, therefore, provides support for further scrutiny in this paper - some key elements will also constitute the foundation for related studies. Summarising the literature and considering the current state of research in the area, we propose to test the following set of hypotheses with specific reference to the choice of payment methods in M&A. We feel that to organise and test the hypotheses in a systematic way will help achieve consistent results. Hypothesis 1. The Relative Size Hypothesis - The bigger the size of the target relative to the acquirer, the more likely the share financing is used. This hypothesis is based on the proposition of Martin (1996), Ghosh and Ruland (1998) and Grullon, Michaely and Swary (1998). In view of the inconsistent results among them, this study proposes further investigation into the exchange mediums chosen in M&A deals with regard to the relative size hypothesis. The relative size in this study is measured as the ratio of the target assets (or market value of its equity) to those of acquirer's. It is a quite popular view that the bigger size of the target relative to the acquirer will make share financing more preferably. ...read more.


In addition, the results also confirm the hypotheses that: (1) The higher the dividend payout of the acquirer, the more preferable cash offer will be used in the deals; (2). The higher the return on equity of acquirer's, the more likely cash is used to finance the deal; and (3) The better performance of the acquirer's share on the stock market, the more likely the deal will be financed by share exchange. Factor analysis and discriminant analysis confirm that the relative size of target to acquirer, the acquirer's dividend payout, and its share performance on the stock exchange are relatively more important in explaining the variations. Meanwhile, these variables are the main factors in segregating cash financing from share exchange. We have found that neither target nor acquirer's share ownership is important in analysing the choice of payment methods in M&A activities. Some findings in the study, however, contradict those of previous studies. For example, the results in terms of the ownership variable are not confirmed in the study. Results indicate that there is no clear evidence showing that the payment method is closely related to the fractions of ownership held by the two participants - acquirer and target. It seems difficult to explain this result that the ownership variables of the acquirer as well as the target do not have meaningful explanatory power in determining the payment methods in M&A deals. The empirical results in the study suggest at least two directions for further study in this respect. First, future research on the determinants of payment methods could benefit from applying econometric models, e.g., the multinomial logit model, to explore the close relationship between payment methods and the financial variables, thereby deciding which payment alternative is preferable in M&A transactions under particular circumstances. Second, post-acquisition performance with regard to the choice of payment methods deserves attention in order to uncover whether a particular exchange medium is rationally chosen by the two parties and is justifiable in the long run. ...read more.

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