The conclusion whereat these researchers have arrived is that there is a negative mathematical relation between the probability of success of an M&a and the target company's leverage. An increasing leverage shows that equity is slowly substituted with debt, which reduces the fraction of voting right controlled by management and therefore affects the bidder's gain. Stultz finds that the probability of success of a takeover bid is decreasing as the debt-to-equity ratio increases.
Harris and Raviv (1988) have studied the same phenomenon from a different point-of-view. They have examined the effects of capital structure change, when it is used and an anti-takeover defense. Substituting debt for equity increases the bargaining power of the target companies. These conclusions were also obtained by way of empirical research (Raad and Ryan (1995), Assem and Titman (1999), and Schwert (2000)): the negative relation between the probability of takeover success and the target's leverage is sometimes modified, in a sense that ratios such as debt-to-asset (Raad and Ryan, 1995) or debt-to-equity (Schwert, 2000) have been used.
The importance of a bid premium is noticed by Walkling (1985), who states that the size of the bid premium influences in a positive way the rate of success of the tender offer. Walking also believes that previous researches, which have minimized the importance of the bid premium, are wrong due to the fact that the premium specification was incorrect (Pelligrino, 1972; Hoffmeister and Dyl, 1981).
Another important factor in establishing the success of a merger or acquisition is the degree of resistance of the target. The mangers' cash flow modifications are obviously negatively related to the resistance of the target company (Walkling and Long (1984), Mikkelson and Partch (1989) and Cotter and Zenner (1994)). It would seem that the lowest success rate is attributed to unnegotiated hostile offers (Schwert, 2000).
One helpful element in predicting the success or failure of merger attempts is the analysis of target stock price movements, for both stock swap mergers and cash tender offers. The higher the target stock price movement, the more probable the success. It would seem that there is a cyclical improvement of the market's accuracy, which acts monotonically (i.e. merger period). There is also a direct relation between the target stock price during the offer period and the estimated price at the consummation date.
There are also other factors that are explored by the literature. For instance, there is a positive relation between success of takeover efforts and the book-to-market ratios (Schwert, 2000). The sooner the target is contacted by the bidder, the higher the rate of success. Other studies indicate a relation between the purchase by the informed arbitrageurs and the success rate of takeovers.
The conclusion that may be drawn from this literature review is that managers should prepare with great care all stages of a merger or acquisition, before and after the actual operation has taken place, in order to avoid failure, or if success is achieved, to avoid ulterior complications that risk to damage in a severe way the entire process.
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