Page 65 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.72, # 1, 2015, pp. 61-94

After the target is confirmed to be acquired, the bidder has to choose the type of

payment of the purchase. The acquirer may conduct the acquisition either by cash or

with stocks. In his research Walkling (1987) states that the abnormal returns of

target companies depends on whether the transaction was financed with equity or

debt and if it is merger or tender offer. His first conclusion is that companies that are

acquired in tender offer have higher CAR because the fair value paid by acquirer

obtained directly by the shareholders. Second observation is that type of financing in

acquisitions may result in different CARs due to tax considerations.

An important question that arises in the course of M&A process is whether the

managers of the acquiring company should also get significant ownership in the stock

of the acquired company. The main trick behind this idea is related to the agency

problem in corporate finance. Agency problem is the conflict of interest between

shareholders and management of the company due to the different priorities of each

group. While shareholders are interested in the value creation process, managers may

sometimes pursue various goals – increasing sales volume at the expense of

devaluation price-cuts for getting better business results. Therefore, M&A researches

have put significant attention to the question of ownership by management in M&A

process. By ensuring significant stake in the acquired company, the managers would

be directly interested in the value creation process and therefore, would bring

decisions based on the NPV criteria of investments. The incentive of management to

invest resources on positive Net Present Value projects would be much higher if they

would have significant stock ownership in the company they are managing. Thus,

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