Journal of Real Estate Finance and Economics, 8:167-182 (1994) 9 1994 Kluwer Academic Publishers

The Value of Control: Evidence from Full and Partial Acquisitions in the Real Estate Industry
FAYEZ A. ELAYAN Department of Finance and General Business, College of Business Administration, Southwest Missouri State University, Springfield, MO 65804 PHILIP J. YOUNG Department of Finance and General Business, College of Business Administration, Southwest Missouri State University, Springfield, MO 65804

Abstract

We investigatethe differentialwealth effects of (1) full and partial control acquisitions,(2) nonreal estate, real estate and REIT participants, and (3) single-and multiple-bidderevents. We find that target firms earn positive excess returns at the announcementof partial and full acquisitions,but acquisitionsthat result in control earn larger excess returns than noncontrolacquisitions.An examinationof industrydifferences shows that real estate firms or REITsdo not earn higher returns relativeto nonrealestate firms. Our analysisof market structure finds that biddersthat are not involvedin an acquisitionprogram earn greater announcement period returns than prior acquirors. For target firms, we find that those with a singleoffer earn nigher returns than those with subsequent offers. A cross-sectionalregressionanalysisshowsthat whilemarketstructureis importantin explainingreturns, the main determiningfactor for target firms is the degree of control sought.

1. Introduction
Several issues surrounding the market valuation effects of corporate combinations involving real estate firms remain unresolved. Prior evidence has consistently found that positive abnormal returns accrue to the target/selling firm's shareholders at the announcement of a proposed acquisition/sell-off (Glascock, Davidson and Sirmans (GDS), 1989, 1991, and McIntosh, Officer and Born, 1989). The evidence concerning acquiring/buying firms is mixed; Allen and Sirmans (1987) find that excess returns to REIT bidders are significantly positive while GDS (1989) find that bidders' excess returns are negligible. This paper examines three issues related to mergers and acquisitions involving firms in the real estate industry. The first is related to determining the source of gains associated with acquisitions; whether they result from a change in control or synergy. A change in control implies that the acquisition shifts strategic decision-making authority from target management to the bidder. This does not require that target management be replaced; target management may stay in place but decisions that affect the future performance of the firm will be made by the acquiror.1 Synergy implies that asset combinations give rise to synergies that take the form of economies of scale, enhancement of the competitive position through

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oligopolistic or monopolistic power, the complimentary nature of research, physical and human resources, increased market power, improved production, marketing and distribution techniques, and so on. We examine these sources by analyzing announcements of acquisitions of controlling and noncontrolling interests. While a gain based on synergy could be associated with either case, a gain from a change in control would only be associated with acquisition of a controlling interest. Our findings show that significant positive abnormal returns accrue to target shareholders in both cases, but returns are significantly larger when a controlling interest is sought. The second unresolved issue involves institutional characteristics of the real estate industry. It has been suggested by Gau (1987), Ravichandran and Sa-Aadu (1987), Jaffe and Sirmans (1984), and Allen and Sirmans (1987) that because of certain unique characteristics of the real estate industry (locality, segmentation, taxation) ? the distribution of any gains at the announcement of an acquisition involving a real estate firm and a nonreal estate firm will be skewed toward the real estate firm. Our tests of the real estate industry's institutional characteristics are the first to analyze differential excess returns to real estate and nonreal estate firms (both bidders and targets) in the same sample. Our results show, however, that the institutional characteristics of the real estate industry do not translate into higher returns to real estate firms or REITs compared to nonreal estate firms. The final issue relates to market structure. Schipper and Thompson (1983) contend that firms involved in acquisition programs earn abnormal returns only at the inception of such programs and not when specific acquisitions are announced. However, firms not involved in an acquisition program may earn abnormal returns at the announcement of a specific acquisition. Their results confirm that excess returns accrue to firms announcing an acquisition program. In another market structure test, GDS (1991) find that buyers making a single acquisition of real estate assets earn positive excess returns while those making multiple acquisitions do not. We also examine the market structure issue but with regard to both bidders and targets. We find that larger excess returns accrue to target firms attracting a single bid compared to targets with multiple suitors. This study contributes to and expands upon previous research in the following ways: first, we test the impact on returns of the acquisition of controlling versus noncontrolling interests. This allows us to differentiate the sources of gain; whether the gain is due to synergy or a change in control? Second, the aforementioned studies examine the returns to real estate firms or nonreal estate firms but not both in the same study. This approach neglects the effect of institutional characteristics of real estate firms relative to nonreal estate firms and makes it difficult to determine whether the result is due to factors related to merger and acquisition in general or to institutional factors. Our study addresses this problem by examining the returns to both real estate and nonreal estate firms in one sample and comparing the difference between the two groups to establish the uniqueness of the real estate market, if any exists. Third, we examine nonreal estate finns, real estate firms, and REITs in one sample. This will allow us to draw conclusions about the wealth effects of merger and acquisition announcements on REITs relative to nonreal estate and real estate firms, and to determine if the unique tax status of REITs entitles the stockholders of these firms to comparatively higher returns than nonreal estate firms and real estate firms. Fourth, our sample period, 1972-1987, contains more observations than most prior studies. GDS

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(1989) have only nine divestitures and GDS (1991) have 150 events (99 buyers and 51 sellers) relative to 245 (136 bidders and 109 targets) in our sample. The remainder of the paper is organized as follows: literature review and hypotheses are discussed in section 2; data and methodology are described in section 3; section 4 contains the results; and a summary is presented in section 5.

2. Literature and Review and Hypotheses

Recent studies have examined the wealth effects of mergers and acquisitions on the bidder and/or target firm(s) when one or both are engaged in the real estate industry. These include Allen and Sirmans (1987), GDS (1989, 1991), and Mcintosh, Officer and Born (1989). Allen and Sirmans (1987) examine the wealth effects to bidding REITs that acquire another REIT. They find that a significantly positive cumulative return accrued to the bidders. Furthermore, they conclude that tax motivations alone are not the cause of the wealth effect. Allen and Sirmans also examine whether improved management of acquired assets may be the cause of the wealth effect. They find that when the merger was between two REITs of the same type (mortgage or equity), the wealth effect was significantly greater than when the merger involved REITs of different types. Therefore, improved management of the target's assets was considered the most likely reason for the increase in the value of the bidder. In the present study, we extend Allen and Sirmans' (1987) examination of the sources of gains to target shareholders. In addition to improved asset management through a change in control, anticipated operational and financial synergies may contribute to gains associated with a business combination.4 To partition the gains from these two sources, we examine the wealth effects of both the targets and bidders when controlling and noncontrolling interests are sought. Because a change in control would occur only with the acquisition of a controlling interest, the incremental gain (if any) of the controlling interest group over the noncontrolling interest group is attributed to a change in control; and the gain (if any) for the noncontrol group is attributed to anticipated synergies.5 The proposed acquisition is classified as a control change if the acquisition will result in the bidder's control of over 50 percent of the target's outstanding shares. Mclntosh, Officer and Born (1989) examine the wealth effects on REIT targets of merger or acquisition announcements. They find that target REIT shareholders earn a significantly positive wealth effect at the announcement. When the sample is split between those that succeeded or failed, the successful group has a greater positive effect than the failures, but the difference is not significant. When the sample is divided between REIT and nonREIT bidders, no difference in wealth effect is found. GDS (1989, 1991) study the acquisition and disposition of real estate assets. In the first study, they find that firms that divested real estate assets and units had positive but insignificant returns. For firms involved in real estate purchases, the returns are negative but not significant. In their second study, GDS analyze the effect on finn value of sales of real estate assets or real estate divisions. They find that sellers received a significantly positive wealth effect. However, buyers as a whole do not experience any excess return. But when single acquirors (those finns with only one purchase) are separately analyzed, a significantly positive wealth effect is found. Firms with multiple acquisitions have insignificant wealth effects.

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Schipper and Thompson (1983) contend that firms engaging in an acquisition program have the expected value of future acquisitions impounded in share prices at the announcement of the program and that subsequent announcements of individual acquisitions contribute no new information, and, therefore, no excess return. Firms that are not engaged in an acquisition program, but that announce an acquisition, convey new information to the market and excess returns are expected. Schipper and Thompson examine the returns associated with the announcement of acquisition programs by conglomerates and find that significant cumulative abnormal returns accrue to firms announcing acquisition plans. The results reported by GDS (1991) are consistent with Schipper and Thompson (1983). We examine the announcement effect for target firms that attract single and multiple bidders. We expect that when only a single bidder is present, the gain associated with the acquisition will be divided between the bidder and target while the presence of two or more suitors pursuing a single target will lead to competitive bidding with most of the gain going to the target. Therefore, target firms attracting the interest of two or more bidders are expected to enjoy larger excess returns than those with only a single bidder.

3. Data Description and Method of Analysis

3.1. Data Description
Firms included in this study either acquired another firm or were acquired between January 1972 and December 1987. Our sample comes from the real estate section of the special tabulation column in Predicast's Funk and Scott Index of Corporate Changes, and from MergerStat Review. Firms included in the final sample satisfied the following criteria: 6 1. Of the bidder and target firms, at least one is a real estate firm. Firms are classified as real estate if so classified by Predicast's and/or by MergerStat Review and confirmed by at least one of the following sources: a. The firm's SIC code indicates real estate. b. The firm is classified as real estate by Standard & Poor's Stock Guide. c. The firm generates at least 50 percent of its income from real estate activities as reported by Standard & Poor's Stock Report, Moody's, or Value Line. 2. The announcement of the acquisition is mentioned in The Wall Street Journal Index; 3. Common stock returns must be available on the CRSP tape from 250 days before the merger announcement through 20 days following; and 4. No other major announcement was made by either finn during a five day window around the acquisition announcement ( t - 2 to t+2). Table 1, panel A shows the distribution of the bidders and targets by year of the announcement. A total of 136 bidders and 109 targets satisfied the above criteria. Panel B shows the classification of the final samples of bidder and target firms by real estate industry segment. The bidder sample includes 57 nonreal estate firms that acquired real estate firms, 54 real estate firms, and 25 REITs. The target sample includes 19 nonreal estate firms acquired by real estate firms, 67 real estate firms, and 23 REITs.

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Table 1.

Panel A. Summary Distribution of Bidders and Targets by Year of Announcement Year 72 73 74 75 76 77 78 79 Total Bidders 10 10 8 2 5 6 8 10 Year 80 81 82 83 84 85 86 87 Bidders 8 15 5 7 15 13 9 5 136 Year 72 73 74 75 76 77 78 79 Targets 4 5 1 2 0 1 4 6 Year 80 81 82 83 84 85 86 87 Targets 17 9 13 11 16 10 6 4 109

Panel B. Classification of the Final Sample of Bidder and Target Real Estate Firms by Industry Segment Business Category 1. Development of land and construction of residential, commercial, institutional, industrial, and community buildings 2. Management and operation of real estate properties including resorts, hotels, timeshares, restaurants, shopping centers, and chain stores 3. Real estate brokerage or mortgage 4. Mortgage and equity Real Estate Investment Trusts (REITs) 5. Other real estate 6. Nonreal estate Total Bidders 24 12 14 25 3 57 136 Panel C. Summary Distribution of the Final Sample by Controlling Interest Acquired Bidders Sample/Subsample Controlling Interest Noncontrolling Interest Total Nonreal Estate 47 10 57 Real Estate 68 11 79 Targets Nonreal Estate 9 10 19 Real Estate 39 51 90 Targets 30 12 20 23 5 19 109

Table 1, panel C shows the distribution o f controlling interest a c q u i r e d by the b i d d e r firms. For nonreal estate bidders there are 47 a n n o u n c e m e n t s o f controlling interest and ten a n n o u n c e m e n t s of noncontrolling interest (controlling interest is defined as acquisition o f 50 p e r c e n t o r m o r e o f the target equity). F o r real estate bidders (including REITs) there are 68 announcements of controlling interest and 11 announcements of noncontrolling interest. F o r nonreal estate targets there are nine controlling and ten noncontrolling, while for real estate targets there are 39 a n n o u n c e m e n t s of controlling interest and 51 announcements o f noncontrolling interest.

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3. 2. M e t h o d o f A n a l y s i s

The market model is used to estimate the abnormal reponse associated with acquisition announcements. This model assumes that realized returns are represented by the following:
Ri, t = ot i -b BiRm, t -b 6.i,t

(1)

where
Ri, t = the rate of return on security (i) over the period (t), which is one day; Rm, t = the rate of return on the equally weighted market index;

oti = the intercept of the linear relationship for security (i) and is given by
E(Ri) Bi =

BiE(Rm);

6i,t

the slope of the linear relationship between security (i) and the return on the market index; and the unsystematic component of security i's return at day t.

The estimated expected return for security (i) at time t given the realized market return is given by the following equation:
Ri,t : ~i d- niRm,t
(2)

where ~ and B are estimates of c~i and B i. These estimators are obtained using 130 daily returns from day t - 2 5 0 through day t-121. The time horizon of the announcement period includes the period from t - 2 0 to t + 2 0 around the announcement day (tO). The excess return for each security i at time t is given by the following equation:
ERi,t = Ri,t -- gi,t

(3)

where ERi, t = the excess return for security i at time t. The market model is applied to all firms in the sample and excess returns are calculated for each day relative to the announcement day. The average return for the portfolio of N firms is given by

AER t = ~
i=1

ERi, t

(4)

where t = t - 2 0 . . . t+20. The AER t are summed over event time to obtain a cumulative average excess return (CAERt) for each of the 41 days in the announcement period beginning with t - 2 0 . A ttest is employed to evaluate the statistical significance of abnormal performance over various

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173

intervals. The variance of the cumulative average excess return is calculated from t-120 through t-21. The following formula allows for any possible first order serial dependence in the excess returns: Var (CAERh,t2) = (T) Var (AER o + 2 ( T - l ) Cov (AERt, AERt+I) where T =t 2 -tl
t-21

+ 1,

Var(AERt) = ~
t - 120 t-21

(AERt - AER)2/99,

A E R = ~_~ AERt/100, and

t - 120 t-21

Cov(AERt, AERt+I) = Z
t - 120

(AER t - AER)(AERt+ 1 -- AER)/99.

The t-statistic for the CAER over various intervals from tl to t2 is

t
=

CAERtl,t2/tI(CAERtl,t2).
t(CAERtl,t2)

(5)

If tl = t2,

is equivalent to the t-statistic for AERt.

4. Results
4.1. Real Estate versus N o n r e a l Estate

Table 2 presents the cumulative average excess returns and associated t-statistics for various intervals for both target firms (Panel A) and bidder firms (Panel B). With regard to the target firms, the announcement period CAER of 5.12 percent (t = 14.55) is significantly positive and indicates that shareholders of target firms (including REITs, real estate firms, and nonreal estate firms being acquired by a real estate firm or REIT) enjoy a large wealth increase. This result agrees with the general findings in the corporate sector with regard to targets and with that of Mclntosh, Officer and Born [1989] with regard to REIT targets. Our target group contains nonreal estate firms being acquired by real estate firms or REITs, real estate firms, and REITs. Institutional characteristics may cause the market to view these firms differently.7 Table 2 also contains the results of separate analyses by type of target. As shown in Panel A, nonreal estate target firms acquired by REITs or real estate firms experience a significantly positive announcement period CAER of 6.2 percent (t = 5.76). Real estate target finns also experience a significantly positive CAER of 5.3 percent

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Table 2. Cumulative average excess returns (CAER) over different intervals for all, nonreal estate, real estate, and REIT targets (panel A) and bidders (panel B) (T-statistics in parentheses).

Sample/ Subsample

t-

l, t0

t-

1, t + 1

t-5,

t+5

t-20,

t+20

t-20,

t-2

t+2, t+20

Panel A: Targets 1. All 109 5.123 (14.546) 6.223 (5.761) 5.290 (12.371) 3.727 (5.212) 5.235 (12.119) 6.618 (4.893) 5.292 (10.667) 3.239 (3.625) 6.256 (7.548) 7.231 (2.708) 6.518 (6.673) 4.689 (2.666) 9.955 (6.217) 5.832 (1.122) 12.935 (6.889) 4.681 (1.368) 6.034 (5.537) 0.733 (0.208) 8.269 (6.457) 3.902 (1.681) -1.313 (-1.205) -1.519 (-0.431) -0.861 (-0.673) -2.460 (-1.059)

2. Nonreal Estate 3. Real Estate

19 67

4. REIT

23

Panel B: Bidders 1. All 136 0.478 (1.722) 0.443 (1.122) 0.361 (0.782) 0.816 (1.299) 0.479 (1.389) 0.611 (1.295) 0.492 (0.866) 0.148 (0.187) 1.130 (1.680) 0.359 (0.414) 1.834 (1.678) 1.367 (0.864) 0.470 (0.360) 0.109 (0.066) 2.446 (1.158) -2.971 (-0.962) -0.273 (-0.308) 0.023 (0.020) -0.314 (-0.218) -0.860 (-0.411) 0.265 (0.299) -0.525 (-0.463) 2.267 (1.578) -2.230 (-1.080)

2. Nonreal Estate 3. Real Estate

57 54

4. REIT Bidders

25

(t = 12.37). The announcement period CAER for the target REITs is a significantly positive 3.7 percent (t = 5.21). Although the CAER is not as large as for the first two groups, our finding with respect to target REITs agrees with that of Mclntosh, Officer and Born [1989]. To examine whether the market views the types of target firms differently, a test of mean differences was performed on the announcement period CAERs of the three target subgroups. We find that the mean difference in CAER between nonreal estate and real estate targets is 0.930 percent (t = 0.71), which is not statistically significant. Concerning target REITs, one might expect this group to have a higher CAER relative to real estate targets (due to their unique tax treatment) and a higher CAER relative to nonreal estate targets (due to the institutional characteristics of real estate firms). The mean difference in the two-day announcement period CAER between target REITs and real estate targets is - 2 . 5 0 0 percent (t = - 2 . 9 8 3 ) , while the mean difference between target REITs and nonreal estate firm targets is -1.560 percent (t = -3.080). Both differences are statistically significant at the five percent level. These results show that the difference in the CAER between real estate and nonreal estate firms is negative, a result that is not consistent with the hypothesis that real estate firms earn higher abnormal returns relative to nonreal estate due to their institutional characteristics. The result also shows that the tax status of REIT targets does n o t translate into higher excess returns to REITs relative to non-REITs.

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Results for bidder firms are presented in panel B of table 2. The CAER for days - 1 and 0 (the announcement period) of 0.478 percent is marginally significant at the 10 percent level (t = 1.72). This indicates that on the whole, shareholders of bidder firms (including REITs, real estate firms, and nonreal estate firms acquiring a REIT or real estate firm) enjoy a small wealth increase. However, as with targets, investors may not view all types of bidder firms in the same light. Panel B of table 2 also contains the results by type of bidder. The announcement period CAER for nonreal estate firms acquiring a real estate firm or REIT is positive but not significant (t = 1.12). The second group, real estate firms, also experienced a positive but insignificant announcement period CAER (t = 0.78). These results are consistent with those from the corporate finance literature (Asquith, 1983, Eckbo and Langohr, 1986, Jensen and Ruback, 1983, and GDS, 1989). The third group, REITs, also experience positive but insignificant announcement period returns of 0.8 percent (t = 1.30). This finding is contrary to that of Allen and Sirmans (1987) who found an announcement period CAER of 5.78 percent (t = 5.10) for bidder REITs acquiring other REITs. Except for the fact that our sample of bidder REITs is not limited to those acquiring other REITs, we have no explanation for the vastly different results. Because the CAER is not significant for any subgroup, we must conclude that bidders do not earn abnormal returns around merger announcements. To examine differences in the CAERs between real estate, nonreal estate, and REIT bidders, we calculate the mean difference between each possible pair of groups; none of these differences are statistically significant. This leads us to reject the hypothesis that investors view real estate bidders differently due to their institutional characteristics. We also reject the tax argument, which indicates that the tax status of REITs entitles them to a higher CAER relative to non-REITs. The distributions of announcement period CAERs for both bidder and target firms are presented in table 3. Both distributions appear to be reasonably normal with no outliers. Therefore, we are confident our results are not driven by one or two large observations.

4.2. Controlling versus Noncontrolling Interest

The magnitude of the announcement period excess returns is expected to depend on the amount of control sought. Certainly the impact of an announcement concerning the acquisition of a controlling interest should produce greater excess returns than the acquisition of a minority interest if the market believes a change of control will improve future prospects. To test this assertion, we divide our samples of target and bidder firms according to whether the bidder intends to acquire more or less than a 50 percent interest in the target. We further divide the control and noncontrol groups into nonreal estate and real estate (including REITs) subgroups to examine whether control and institutional characteristics are interrelated. The results for target firms classified by the degree of controlling interest are presented in table 4. The announcement period CAER when controlling interest was sought is 8.0 percent (t = 14.72); much larger than the 2.9 percent CAER (t = 5.51) when a noncontrolling interest was sought. Although both are significantly positive, the mean difference between controlling and noncontrolling interest is 5.13 percent (t = 9.82) and is statistically

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Table 3. Frequency of cumulative average excess returns (CAER) from t-1 through tO for the total sample of 136 bidders and 109 targets. Range of CAER to Bidder (%) -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 Total Mean Value of CAER Mean Value CAER Standard Deviation Minimum Value Maximum Value < CAER < CAER _.< CAER -< CAER < CAER <_- CAER < CAER < CAER < CAER -< CAER < CAER --- CAER < CAER < CAER < < < < < < < < < < < < < < -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 Number of Announcements 1 0 3 9 17 32 40 19 5 3 4 1 0 2 136 0.476% 0.300 3.850 - 10.700 15.800 Range of CAER to Targets (%) -15 -10 -5 0 5 10 15 20 25 30 35 < CAER < CAER -< CAER < CAER < _ CAER _ < CAER < CAER _< CAER _ _ CAER _ < CAER < CAER < < < < < < < < < < < -10 -5 0 5 10 15 20 25 30 35 40 Number of Announcements 1 3 26 36 19 12 3 5 2 1 1

109 5.122% 2.800 8.674 - 12.200 39.10

Table 4. Cumulative average excess returns (CAER) over different intervals for targets classified by the degree of controlling interest for all, nonreal estate, and real estate firms (including REITs) (T-statistics in parentheses). Sample/ Subsample 1. All Controlling 2. All Noneontrolling 3. Nonreal Estate Controlling 4. Nonreal Estate Noncontrolling 5. Real Estate Controlling 6. Real Estate Noncontrolling

N 48 61 9 10 39 51

t-

1, t0

t-

l,t+ 8.049 (12.217) 3.020 (4.666) 10.453 (5.602) 3.167 (2.104) 7.495 (10.200) 2.991 (4.553)

t-5,

t+5

t-20, t+20 11.904 (4.973) 8.422 (3.419) 5.592 (0.809) 6.045 (1.053) 13.360 (5.151) 8.888 (3.608)

t-20, t-2 5.748 (3.522) 6.258 (3.742) -1.116 (-0.237) 2.397 (0.615) 7.332 (4.134) 7.016 (4.189)

t+2, t +20 -1.894 ( - 1.161) -0.856 (-0.512) -3.745 (-0.796) 0.484 (0.124) -1.467 (-0.827) -1.119 (-0.668)

7.992 (14.719) 2.865 (5.511) 9.183 (6.035) 3.559 (2.947) 7.717 (12.566) 2.728 (5.126)

8.589 (6.902) 4.421 (3.486) 12.318 (3.441) 2.653 (0.898) 7.729 (5.694) 4.767 (3.748)

significant at the one percent level. The result for the noncontrolling interest group is consistent with a market reaction to increased synergies and the significant difference between

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the noncontrolling and controlling interest groups is consistent with a market reaction to a change in control. When the target firms are further divided between nonreal estate and real estate (including REITs), the result holds (see table 4). Whether the target was a real estate firm or not, the planned acquisition of a controlling interest resulted in a much larger positive wealth effect. This result is consistent with the realization of greater efficiency resulting from a change in control. Table 5 contains the results for bidder firms classified by the degree of controlling interest desired. When controlling interest was sought, the announcement period CAER for bidders was 0.58 percent (t = 1.865) compared to a CAER of -0.05 percent (t = -0.06) when a noncontrolling interest was sought. Although the result for the control group was significant at the 10 percent level, the mean difference between all controlling and all noncontrolling bidders is 0.63 percent (t = 1.423) and is not statistically significant. However, the controlling group captures the larger CAER which is consistent with a return related to a change in control. Even though target firms seem to earn the largest share of any increase in value, bidders appear to earn a small excess return as long as control is sought. When the bidder firms are further divided between real estate and nonreal estate, the nonreal estate firms had insignificant announcement period excess returns whether or not control was sought. When real estate firms (including REITs) were analyzed (see table 5), those seeking a controlling interest experienced an insignificant positive announcement period CAER while a negative but insignificant CAER was found for noncontrol seekers. However, an analysis of the difference between the controlling and noncontrolling subgroups reveals that for real estate bidders the control and noncontrol subgroups are significantly different; the mean difference in CAER is 1.70 percent (t = 2.056). This result is consistent with greater gains accruing to the bidder when a change in control of the target's assets is likely.
Table 5. Cumulative average excess returns (CAER) over different intervals for bidders classified by the degree of controlling interest for all, nonreal estate, and real estate firms (including RE/Ts) (T-statistics in parentheses).

Sample/ Subsample 1. All Controlling 2. All Noncontrolling 3. Nonreal Estate Controlling 4. Nonreal Estate Noncontrolling 5. Real Estate Controlling 6. Real Estate Noncontrolling

N 115 21 47 10 68 11

t-

1, t0 0.575 (1.865)

t-

1, t + 1 0.675 (1.765)

t-5,

t+5

t-20,

t+20

t-20,

t-2

t+2, t+20 0.387 (0.393) -0.403 (-0.166) -0.753 (-0.561) 0.544 (0.139) 1.174 0.898) - 1.264 (-0.612)

1.206 (1.618) 0.711 (0.383) 0.575 (0.558) -0.655 (-0.220) 1.643 (1.656) 1.952 (1.189)

1.165 (0.805) -3.332 (-0.941) 1.063 (0.543) -4.376 (-0.759) 1.235 (0.642) 1.952 (1.189)

0.103 (0.105) -2.333 (-0.963) 1.102 (0.882) -5.059 (-1.288) -0.587 (-0.449) 0.136 (0.066)

-0.052 (-0.062) 0.439 (0.915) 0.445 (0.353) 0.668 (1.627) -0.504 (-0.524)

-0.597 (-0.594) 0.713 (1.257) 0.128 (0.082) 0.648 (1.273) - 1.255 (-1.185)

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4.3. Market Structure

FAYEZ A. ELAYAN AND PHILIP J. YOUNG

The results of our analysis of the market structure issue are presented in table 6. Of the 136 observations in the bidder group, 121 are firms with a single acquisition while the remaining 15 observations represent firms with more than one acquisition. Schipper and Thompson [1983] noted that firms wtih multiple acquisitions are likely involved in an acquisition program and predicted that these firms would earn abnormal returns at the announcement of such programs and not at the announcement of specific acquisitions. However, firms making a single acquisition would likely earn an abnormal return at the announcement. Our results show that bidders with only a single acquisition earn an announcement period CAER of 0.51 percent (t = 1.797). This is statistically significant at the 10 percent level. Firms making multiple acquisitions have an announcement period CAER of only 0.25 percent, which is not significant. The mean difference is 0.260 percent (t = 0.634) and is not statistically significant. Our results support those previously reported by Schipper and Thompson [1983] and GDS [1991]. We also examine the effect of single and multiple bidders on the abnormal returns for target firms. A priori, the presence of multiple bidders is expected to increase the price paid for the target firm due to competitive bidding. Therefore, we expect the presence of multiple bidders to be associated with larger announcement period CAERs. A search of the Wall Street Journal Index found that out of 109 target firms, 79 were pursued by only a single bidder and 30 had multiple suitors. While both groups enjoy large announcement period CAERs, the CAER for the single bid group is significantly larger. The mean difference in the two-day CAER is 1.630 percent (t = 3.38) and is statistically significant at the five percent level. Although this result seems contrary to expectations, we cannot rule out the possibility that other factors (institutional characteristics, control) may have impacted the result. To examine the possibility that the results of the analysis of market structure for target firms are affected by the control issue, CAERs are reported in table 7 for targets classified
Table 6. Cumulative average excess returns (CAER) over different intervals for targets/bidders classified by single or multiple bidders/acquisition (T-statistics in parentheses).

Sample/ Subsample Bidders I. Single Acquisition 2. Multiple Acquisitions Targets 3. Single Bidder 4. Multiple Bidders

t-

1, tO

t-

1, t + 1

t-5,

t+5

t-20,

t+20

t-20,

t-2

t+2, t+20

121 15

0.506 (1.797) 0.251 (0.312)

0.494 (1.428) 0.354 (0.383)

0.859 (1.291) 3.318 (2.085)

0.735 (0.572) -1.669 (-0.562)

-0.146 (-0.167) -1.298 (-0.633)

0.387 (0.443) -0.726 (-0.354)

79 30

5.570 (13.517) 3.945 (5.859)

5.660 (11.284) 4.115 (4.863)

6.794 (7.136) 4.842 (2.884)

9.265 (5.054) 11.773 (3.599)

4.684 (3.749) 9.589 (4.322)

- 1.079 (-0.863) -1.931 (-0.871)

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179

Table 7. Cumulative average excess returns (CAER) over different intervals for targets classified by control (single v. multiple bidder) and noncontrol (single v. multiple bidder) (T-statistics in parentheses).

Sample/ Subsample Control l. One Bidder 2. Multiple Bidders Noncontrol 3. One Bidder 4. Multiple Bidders

t-

l, t0

t-

1, t + 1

t-5,

t+5

t-20,

t+20

t-20,

t-2

t+2, t+20

37 11

8.176 (13.408) 7.373 (6.533)

8.595 (11.552) 6.218 (4.533)

9.097 (6.421) 6.883 (2.651)

9.618 (3.522) 19.593 (3.920)

3.142 (1.689) 14.514 (4.260)

-2.119 (-1.139) -1.139 (-0.334)

42 19

3.274 (5.386) 1.960 (2.062)

3.075 (4.110) 2.898 (2.406)

4.765 (3.301) 3.660 (1.517)

8.955 (3.207) 7.245 (1.537)

6.042 (3.181) 6.737 (2.111)

-0.162 (-0.085) -2.390 (-0.749)

both by the degree of control sought and by market structure (single v. multiple bidders). For the group with one bidder seeking control, the CAER is 8.176 percent (t = 13.408), which is higher than the 7.373 percent (t = 6.533) earned by the group with multiple bidders seeking control. The difference of 0.803 percent is significant at the one percent level (t = 4.92). For targets with less than a controlling interest sought, the mean difference between the CAER of 3.274 percent (t = 5.386) to the single bidder group and the CAER of 1.960 percent (t = 2.062) to the multiple bidder group is 1.314 percent, which also is significant at the one percent level (t = 9.879). Therefore, we conclude that the issue of control does not mitigate the results of the market structure analysis for target firms.

4.4. Cross-Sectional Analysis

It is difficult to determine whether the announcement period CAERs are associated with institutional characteristics, control, or market structure in the univariate tests above. For instance, the classification of the sample by single versus multiple bidders does not account for institutional differences (real estate versus nonreal estate). In an effort to sort out the effects of these factors the following cross-sectional multivariate regression model is utilized. CAERt-I,t0 = B0 + B1 C O N T R L + B 2 R E S T A T E + B 3 REIT + B 4 SBIDS + ei where CAERt_I,t 0 = The cumulative average excess returns over the announcement period t - 1 through tO. C O N T R L = D u m m y variable which takes a value of one if the announcement is for controlling interest.

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FAYEZ A. ELAYANAND PHILIP J. YOUNG

RESTATE = Dummy variable which takes a value of one if the company is a real estate firm. REIT = Dummy variable which takes a value of one if the company is a Real Estate Investment Trust (REIT). SBID = Dummy variable which takes a value of one if a target has only a single bidder or a bidder is involved in a single acquisition. The results for the target finns presented in table 8 show that only the variable representing control is significant in explaining abnormal returns. The parameter estimate is positive, which means that abnormal returns are greater when a controlling interest is sought. None of the variables representing real estate firms, REITs or single bidders are significant. This confirms our belief that the larger CAER for targets with single bidders shown in tables 6 and 7 are more closely related to the control issue rather than market structure. The regression for the bidder firms is inconclusive. None of the independent variables are successful in explaining the variance of the abnormal returns for bidders.

5. Summary
This paper examines the effects of merger and acquisition announcements on the shareholder wealth of bidder and target finns when the bidder or target is a real estate company. We find that statistically significant abnormal returns accrue to shareholders of target firms while the cumulative average excess returns for bidder firms is positive but not statistically significant. Target and bidder firms were divided into three subgroups (nonreal estate firms acquired by real estate firms or REITs, real estate finns, and REITs) to examine the effects of institutional characteristics. We find that all three target subgroups experienced significantly positive announcement period CAERs. In a test of mean differences, we find that the CAERs for nonreal estate firms were not significantly different than for real estate firms, but that both nonreal estate and real estate earned significantly larger excess returns than REITs.
Table 8.

Cross-sectional model estimation for target and bidder finns. Targets Bidders Parameter Estimate - 0.002 0.006 -0.001 0.005 0.002 T-Statistic - 0.178 0.665 -0.168 0.554 0.137 0.59 % -2.45 0.19 136

Variable Intercept CONTROL RESTATE REIT SBID R-square Adjusted R-square F-value N

Parameter Estimate 0.029 0.049 -0.006 -0.011 0.011

T-Statistic 1.114 3.008 -0.285 -0.548 0.598 9.44 % 5.96 2.71 109

THE VALUE OF CONTROL

181

W h e n bidder firms were similarly sorted, we find that all subgroups had positive but insignificant CAERs. The test of the m e a n difference in C A E R b e t w e e n n o n r e a l estate and real estate firms, and b e t w e e n REITs a n d the other two groups is insignificant. We conclude that institutional characteristics of real estate firms and the special tax treatment of REITs do not entitle real estate firms or REITs to earn higher returns relative to n o n r e a l estate firms. In our examination of how the extent of control sought effects announcement period returns we find that target firm's a n n o u n c e m e n t period CAERs were significantly greater w h e n control was sought. This result was virtually unchanged w h e n the target sample was further subdivided b e t w e e n n o n r e a l estate a n d real estate (including REITs). We believe this is consistent with the realization of greater efficiency associated with a change in control. T h e control issue was also examined for bidding firms. For all bidders (nonreal estate a n d real estate) who sought a controlling interest, an insignificant positive wealth effect was reported. The difference between the control and noncontrol subgroups also was insignificant. W h e n the bidders were further divided into nonreal estate and real estate (including REITs) subgroups, a n n o u n c e m e n t period CAERs were not significant. However, real estate bidders earned a larger r e t u r n if control was sought. Finally, the issue of market structure was examined. O u r findings for bidder firms are consistent with prior studies; firms m a k i n g a single acquisition earn higher a n n o u n c e m e n t period returns than those involved in an acquisition program. For target firms, we find that those with a single b i d d e r e a r n a larger excess return than those with multiple suitors. This result is not sensitive to the issue of control. A cross-sectional regression analysis confirms our suspicion. While our unl"variate tests show that both institutional characteristics and market structure are important in explaining returns, the m a i n determining factor for target f i n n s is the degree of control sought.

No~s 1. For a comprehensive analysis of the acquisition of full control, see Loderer and Martin (1990). 2. Market locality implies that real estate firms are likely to be familiar with and have an informational advantage regarding the local real estate market relative to nonreal estate (Gau, 1987, and Ravichandran and Sa-Aadu, 1987). Market segmentation postulates that real estate firms specializing in a specific real estate segment have a comparative advantage over nonreal estate as a result of the superior management expertise acquired over time (Jaffee and Sirmans, 1984, Miles and McCue, 1984, and Ravichandran and Sa-Aadu, 1987). Concerning taxation, Allen and Sirmans (1987) point out that it is advantageous for a REIT to acquire an existing trust since net operating losses to the target can be used to offset capital gains tax liabilities of the bidding trust. 3. It is not clear whether the GDS (1989, 1991)data includes announcements of bidders seeking control, though we are certain that their data includes announcements of buyers seeking partial acquisitions such as divisions or subsidiaries. 4. Operating synergies arise from economies of scale, enhancement of competitive position through oligopolistic or monopolistic power, the complementary nature of research, physical and human resources, managerial and administrative efficiency, and reduction of business risk. Financial synergies include diversification potential and increased debt capacity. 5. For a discussion of the issue of corporate control as applied to the corporate sector, see Dodd (1980), Jarre11 and Bradley (1980), and Asquith, Bruner, and Mullins (1983). 6. MergerStat Review is published by W.T. Grimm. 7. REITs pay no federal tax on income or gains provided they fully comply with sections 856 through 860 and related sections of the Internal Revenue Code. The principal requirement is that REITs pass approximately 95 % of net annual earnings to shareholders.

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FAYEZ A. ELAYAN AND PHILIP J. YOUNG

References
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