Impact of earnout offers on the acquiring company wealth gains in cross border acquisitions

Abstract

The present study seeks to assess and compare the acquiring company shareholders announcement gains in earnout, cash and stock offers. For this purpose a sample of 202 cross border acquisitions comprise the sample set. Out of the total sample of 202 acquisitions, 103 are financed via cash (cash offers), 35 acquisitions are financed via earnout mechanism (earnout offers) while 15 offers are financed by exchanging shares of the acquiring companies with that of target companies’ shares (stock offers). For computing the announcement returns, standard event study methodology has been employed. Further, one way analysis of variance (ANOVA) has been applied to compare the announcement returns of the acquiring companies across different modes of payment. For this the announcement returns of three day window (day -1 to day +1) are taken as dependent variable. The results of event study for various sub periods reveal that market has given positive reaction to all cross border acquisitions irrespective of the mode of payment employed. The results of ANOVA show that there is a significant difference in the three day returns of cash, earnouts and stock offers. However, the post hoc analysis makes it evident that earnout offers have produced significantly higher returns only in comparison to the cash offers and not in comparison to stock offers during the three day event window. Thus, from the entire analyses it can be deduced that earnouts, that are specially designed to elude the risk of adverse selection in cross border acquisitions, do not generate any superior returns to the acquiring company shareholders compared to other modes of payment