Pre-publication: Acquisitions of divested assets in the software industry – Seller distress, economic situation and acquirer returns
From Software Business Community
Acquisitions of divested assets in the software industry – Seller distress, economic situation and acquirer returns
SUBMITTED, UNDER REVIEW
Authors
Purpose
Submitted to EURAM 2009 conference's mergers and acquisitions track.
Abstract or summary
Mergers and acquisitions have been shown to benefit mostly target shareholders, whereas returns to the acquiring firm’s shareholders are on average zero. However, there exists relatively little research regarding divested assets as acquisition targets and the shareholder performance of these acquisitions. This paper studies 220 acquisitions of divested assets in the US software industry between 1998 and 2007. Abnormal returns to acquirer shareholders are measured using the event study methodology with two different event window lengths. The results indicate that short-term returns to buyer shareholders are on average positive. Buyer returns are also higher when the seller is financially distressed and during economic downturns. This paper posits that distressed firms often have to sell the assets at a discount to their fair value, especially during market downturns when access to financing is difficult and the liquidity of the assets is low. The results give valuable new insight to M&A research by identifying one potential factor contributing to acquisition performance.
How this relates to software business
Inorganic growth through mergers and acquisitions is a popular means of corporate growth and renewal also for software firms. One way to measure the success of an acquisition is to determine its impact on the firm's value by using the event study methodology. Studies using this method show that on average M&As do not improve the buying firm's value, and can therefore be seen as failures from the shareholders' perspective.
This paper studies acquisitions made by public software companies in the US, and identifies distinct factors that affect shareholder returns positively. When considering an acquisition the manager of a software firm should also pay attention to its effect on the firm's market value. The results therefore give managers some new insight in identifying which acquisition may benefit the acquiring firm the most in terms of shareholder value maximization. The paper also opens up novel and interesting topics for further research.