An investigation into the drivers of Australian REIT merger and acquisition announcements
| DOI | https://doi.org/10.1108/JPIF-02-2013-0012 |
| Date | 02 August 2013 |
| Published date | 02 August 2013 |
| Pages | 441-461 |
| Author | Chris Ratcliffe,Bill Dimovski |
| Subject Matter | Property management & built environment |
ACADEMIC PAPER
An investigation into the drivers
of Australian REIT merger and
acquisition announcements
Chris Ratcliffe and Bill Dimovski
School of Accounting, Economics and Finance,
Deakin University, Geelong, Australia
Abstract
Purpose – The purpose of this paper is to use Australian Real Estate Investment Trust (A-REIT)
data to empirically examine potential influencing factors on A-REITs becoming a bidder or a target in
the mergers and acquisitions (M&A) area.
Design/methodology/approach – This study uses logistic regression analysis to investigate the
odds of publically traded A-REITs being either a bidder or a target as a function of a number of
financial and corporate governance variables.
Findings – Prior research in the US REIT M&A area has shown that target size is inversely related
to takeover likelihood; in contrast, the authors’ Australian results show that size has a positive impact.
Prior research on share price and asset performance has shown that underperformance increases the
odds of an entity becoming a target, but this paper’s results further support these findings and provide
confirmation of the inefficient management hypothesis. For acquirers it was found that leverage, cash
balances, management structure, the level of shares held by related parties and the global financial
crisis have an important impact on bidder likelihood.
Practical implications – Given that the literature suggests that investors can earn significant
positive abnormal returns by owning targets, but incur significant abnormal losses by owning
bidders, at announcement, this study will be useful to fund managers and other investors in A-REITs
by investigating the characteristics of those firms that become targets and bidders.
Originality/value – This paper adds to the recent US REIT M&A literature by examining the
second biggest REIT market in the world and reporting a number of factors that might influence
A-REITs to become targets or bidders.
Keywords Acquisitionsand mergers, Australia, Real estate, Investments, Trusts,
Real estate investmenttrusts, A-REITs,
Paper type Research paper
1. Introduction
Early work by Manne (1965) and Jensen and Ruback (1983) suggest the merger and
acquisition (M&A) market, or market for corporate control, as providing useful
motivation for managers to maximise shareholder wealth. A great deal of literature has
followed examining M&As, with much of the literature evaluating the reasons for the
M&A, such as inefficient management, increased market power and excess liquidity or
free cash flow (Jensen, 1986, 1988).
The large majority of the research in the real estate sector has concentrated on the
returns around the announcement of a M&A, for example, Ooi et al. (2011), Ratcliffe et al.
(2009), Campbell et al. (2001) and Sahin (2005). However, there has been minimal
empirical research on the characteristics of REITs associated with an increased
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received February 2013
Accepted April 2013
Journal of Property Investment &
Finance
Vol. 31 No. 5, 2013
pp. 441-461
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-02-2013-0012
Australian
REIT M&A
announcements
441
probability of being a target in a M&A announcement, only three papers to date have
empirically investigated this area (Eichholtz and Kok, 2008; Frank et al., 2011; Ling and
Petrova, 2011) who focused their investigations on the US REIT market. The aim of this
paper is to add to this literature and to extend the investigation to the Australian real
estate investment trust (A-REIT) sector. Given that the literature advises that investors
can earn significant positive abnormal returns by owning targets but incur significant
abnormal losses by owning bidders at announcement, it would be quite useful if we
could learn about the characteristics of those firms that become targets and bidders.
Results of the logistic model show target share price return is negatively related to a
M&A announcement, providing support for the inefficient management hypothesis.
We find that a 1 per cent decrease in a firms share price return increases the odds of the
A-REIT being a target by almost 25 per cent. Interestingly, we find that size is
positively related to takeover likelihood, this result is in contrast to prior real estate
literature (Frank et al., 2011; Ling and Petrova, 2011). This result supports the growth
maximisation hypothesises in that bidding firm managers may be more focused on
maximising the firms size rather than shareholders wealth.
Results for acquiring firms shows that the level of cash has a positive impact on the
odds of an A-REIT being a bidder, that is, a 1 million dollar increase in cash holdings
increases the odds of a A-REIT being a bidder by 3.2 per cent. We find that the degree of
leverage has a negative relationship, a 1 per cent increase in the level of leverage
decreases the odds that the A-REIT will be a bidder by almost 97 per cent. Additionally,
the study finds the number of shares held by related parties has a negative impact on
bidder likelihood, while internally managed A-REITs demonstrate substantially higher
odds of being a bidder. These two results combined may be due to externally managed
A-REITs, on average, having higher levels of shares held by related parties, thus
externally managed A-REITs are unable to compete with their internally managed
counterparts in offering target shareholders the best price, due to management fee
leakage.
The remainder of the paper is organised as follows. In Section 2 we discuss the
institutional background of A-REITs, Section 3 provides a discussion of the prior
literature. Section 4 contains a description of the study sample and the methodology
employed, while Section 5 presents our empirical results and discussions. Finally,
Section 6 provides concluding discussions of the main findings.
2. Institutional background
The A-REIT sector is recognised as a world leader in securitised property, operating in
an established regulatory environment providing investors with governance and
liquidity (Higgins and Ng, 2009). The A-REIT sector sits third behind the USA and the
UK in the Jones Lang LaSalle Global Transparency Index ( JLL, 2012).
The A-REIT sector is a significant component of domestic financial markets
accounting for approximately 6 per cent of the market capitalisation of the Australian
Stock Exchange (ASX) as at November 2012 (Dimovski et al., 2013). Over the past decade
the A-REIT sector has grown from a market capitalisation of approximately $10 billion
to a peak of $147 billion in October 2007 prior to the global financial crisis (GFC). The
GFC had a significant impact on the A-REIT sector with the market capitalisation falling
68.7 per cent to $46 billion in February 2009, since then the A-REIT sector has rallied to
over $87 billion market capitalisation in December 2012. Securitised property trusts
JPIF
31,5
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