Selling to Buy: Asset Sales and Mergers and Acquisitions

204 Pages·2017·1.53 MB·English

“Selling to Buy: Asset Sales and Mergers and
Acquisitions”

by

Nathan P. McNamee

Submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy (PhD) in Finance

Surrey Business School
Faculty of Arts and Social Sciences
University of Surrey

Supervisors:
Professor Dimitris Petmezas
Dr. Christos Mavis

© Nathan P. McNamee 2017
Declaration of Originality

"This thesis and the work to which it refers are the results of my own efforts. Any ideas,
data, images or text resulting from the work of others (whether published or unpublished) are
fully identified as such within the work and attributed to their originator in the text,
bibliography or in footnotes. This thesis has not been submitted in whole or in part for any
other academic degree or professional qualification. I agree that the University has the right
to submit my work to the plagiarism detection service TurnitinUK for originality checks.
Whether or not drafts have been so-assessed, the University reserves the right to require an
electronic version of the final document (as submitted) for assessment as above."

Nathan P. McNamee
July 2017

Selling to Buy: Asset Sales and Mergers and Acquisitions i Nathan P. McNamee
Abstract (Summary of Thesis)
This thesis studies the effects of using proceeds from asset sales as a source of funding
for mergers and acquisitions (M&As).
The first empirical chapter investigates the financing decisions made by acquiring firms
and seeks to test a new theoretical framework proposed by Edmans and Mann (2017) which
models a firm’s funding choice between asset sales and equity offerings. Their theory identifies
settings in which a firm may prefer to select one financing source over the other, which may
result in deviations from traditional financing theories. The predictions of this framework are
empirically tested in an M&A setting.
The second empirical chapter provides evidence that mergers and acquisitions occur as
part of asset restructuring, in which asset sale proceeds are associated with increased
acquisition probability. Economically, firms with asset sales have a 17.02% higher likelihood
to subsequently make acquisitions. These results are consistent with the notion that asset sales
enhance firm capital liquidity, and asset sale proceeds can be used to fund acquisitions,
particularly for financially constrained firms. Finally, firms conducting acquisitions after sales
of unrelated assets are more likely to experience improvement in long-run operating efficiency.
The third empirical chapter establishes that asset sale proceeds are an economically
important omitted variable that determines the method of payment in acquisitions. Specifically,
the results show that firms with asset sales are more likely to subsequently conduct cash
acquisitions, which translates into 42.76% higher likelihood to use cash method of payment.
This finding is attributed to increased cash liquidity offered by asset sales. This study highlights
the importance of asset sales on the crucial choice of payment method in acquisitions.
Overall, the findings of this thesis provide strong evidence that asset sales are an important,
but commonly overlooked, source of funds in mergers and acquisitions.
Selling to Buy: Asset Sales and Mergers and Acquisitions ii Nathan P. McNamee
Acknowledgements
I would like to express my deep gratitude and appreciation to my primary supervisor,
Professor Dimitris Petmezas, and to my secondary supervisor, Dr. Christos Mavis, who have
both provided consistent and meaningful support during my PhD studies. Their willingness to
give of their time and to respond to my questions, anytime both day and night, is very much
appreciated.
Additionally, I would like to thank my friend Dr. Nikolaos Karampatsas for his support
and willing guidance on econometric issues related to my research. I would also like to thank
Professor Nickolaos G. Travlos, my co-author, who gave particularly valuable direction while
pursuing the publication of articles inspired by this thesis. Additionally, I am very grateful to
all those who provided comments on the various versions of the chapters of this thesis as well
as the associated articles.
Furthermore, I express my gratitude to the Surrey Business School at the University of
Surrey for providing me with an outstanding PhD experience and a pleasant environment to
work and study. In particular, I appreciate the encouraging support of Professor Paul Guest,
the Head of the Department of Finance and Accounting.
Finally, I would like to thank my wife, Tasha, and my children, Ethan, Maxwell, and
Aelie, for their patience and unwavering support throughout my studies. I especially thank my
wife for her willingness to listen to me ramble on about every aspect of my research and for
her willingness to meticulously read through my thesis to offer sound grammatical advice.
All shortcomings of this work are my sole responsibility.
Selling to Buy: Asset Sales and Mergers and Acquisitions iii Nathan P. McNamee
Table of Contents
Table of Contents
Declaration of Originality i
Abstract (Summary of Thesis) ii
Acknowledgements iii
Table of Contents iv
List of Tables ix
List of Figures xi
Abbreviations & Glossary xii
1. Introduction 1
2. Literature Review 7
Asset Sales 7
2.1.1. Asset Characteristics 8
2.1.2. Asset Seller 14
2.1.3. Asset Buyer 26
Sources of Financing in Mergers and Acquisitions 29
2.2.1. Sources of Financing 29
2.2.2. Method of Payment 34
2.2.3. Synergies 37
2.2.4. Acquisition Premiums 40
2.2.5. Target Characteristics 40
2.2.6. Mode of Acquisition 41
2.2.7. Timing After Asset Sale 42
Selling to Buy: Asset Sales and Mergers and Acquisitions iv Nathan P. McNamee
Table of Contents
Conclusion 42
Tables for the Literature Review 43
3. Financing Through Asset Sales: Evidence from M&As 46
Introduction 46
Theory 55
3.2.1. Balance Sheet Effect 55
3.2.2. Camouflage Effect 56
3.2.3. Correlation Effect 57
Sample and Data 58
3.3.1. Asset Sale Measure 59
3.3.2. Equity Measure 60
3.3.3. Sample Statistics 61
Balance Sheet Effect or Pecking Order? 62
3.4.1. Main Results for the Balance Sheet Effect 62
3.4.2. Endogeneity Control for the Balance Sheet Effect 64
Camouflage Effect Findings 68
3.5.1. Main Results for the Camouflage Effect 68
3.5.2. Endogeneity Control for the Camouflage Effect 69
Correlation Effect Findings 71
3.6.1. Main Results for the Correlation Effect 71
3.6.2. Endogeneity Control for the Correlation Effect 72
Selling to Buy: Asset Sales and Mergers and Acquisitions v Nathan P. McNamee
Table of Contents
Theoretical Extension for Debt and Additional Robustness Tests 74
3.7.1. Theoretical Extension for the Choice of Debt Financing 74
3.7.2. Additional Auxiliary Tests 75
Conclusion 77
Appendix for Chapter 3 79
Tables for Chapter 3 81
4. Asset Sales and Merger & Acquisitions 100
Introduction 100
Sample and Data 106
4.2.1. Asset Sale Measures 106
4.2.2. Sample Statistics 109
Empirical Findings 109
4.3.1. Asset Sales and Acquisitions 110
Endogeneity Control 111
4.4.1. Granger Causality Test 112
4.4.2. Coefficient Stability Approach 113
4.4.3. Instrumental Variable (IV) Approach 115
4.4.4. Propensity Score Matching (PSM) 116
Further Findings 117
4.5.1. Long-run Operating Performance 117
Implications at the Industry Level 119
Selling to Buy: Asset Sales and Mergers and Acquisitions vi Nathan P. McNamee
Table of Contents
Robustness Tests 122
Conclusion 123
Appendix for Chapter 4 125
Tables for Chapter 4 128
5. Asset Sales and Method of Payment in M&As 136
Introduction 136
Sample and Data 140
5.2.1. Sample Selection Criteria 140
5.2.2. Measures of Asset Sales 141
5.2.3. Variables 143
5.2.4. Sample Statistics 144
Empirical Findings 147
Controlling for Endogeneity 149
5.4.1. Instrumental Variable (IV) Approach 149
5.4.2. Propensity Score Matching 153
5.4.3. Impact Threshold for a Confounding Variable 154
Robustness Tests 155
5.5.1. Choice of Method of Payment with Target Firm Control Variables 155
5.5.2. Method of Payment, Corporate Governance, and Ownership 156
5.5.3. Asset Sale Measurement Comparison 157
5.5.4. Other Auxiliary Tests 158
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Table of Contents
Conclusion 158
Appendix for Chapter 5 160
Tables for Chapter 5 162
6. Conclusion 172
Summary and Implications 172
Limitations and Opportunities for Future Research 175
References 178

Selling to Buy: Asset Sales and Mergers and Acquisitions viii Nathan P. McNamee
List of Tables
Table 2.1 Motivation and uses of proceeds from asset sales 43
Table 2.2 Sources of financing in acquisitions 44
Table 2.3 Payment methods in acquisitions 45
Table 3.1 Financing source by year 81
Table 3.2 Sample descriptive statistics by financing source 82
Table 3.3 Financing choice and the balance sheet effect 83
Table 3.4 Endogeneity control for the balance sheet effect 84
Table 3.5 Financing choice and the camouflage effect 86
Table 3.6 Endogeneity control for the camouflage effect 87
Table 3.7 Financing choice and the correlation effect 89
Table 3.8 Endogeneity control for the correlation effect 90
Table 3.9 Debt financing and the balance sheet, camouflage, and correlation effects 92
Table 3.10 Financing choice and the balance sheet effect with continuous relative size 93
Table 3.11 Financing choice and the camouflage effect with asset sale liquidity 96
Table 3.12 Financing choice and the correlation effect with conglomerate measures 97
Table 3.13 Financing choice with controls for financial constraint or firm distress 98
Table 3.14 Financing choice excluding financial firms and regulated utilities 99
Table 4.1 Sample descriptive statistics by asset sale 128
Table 4.2 Asset sales and acquisition likelihood 129
Table 4.3 Granger causality test for asset sales and acquisition probability 130
Table 4.4 Sensitivity to unobservable characteristics 131
Table 4.5 Endogeneity control for asset sales and acquisition probability 132
Table 4.6 Propensity score matching (PSM) 133
Table 4.7 3 year long-run operating returns and focus increasing asset sales 134
Selling to Buy: Asset Sales and Mergers and Acquisitions ix Nathan P. McNamee