REIT mergers and acquisitions: a meta‐analysis
| Published date | 20 April 2012 |
| Date | 20 April 2012 |
| DOI | https://doi.org/10.1108/14635781211223815 |
| Pages | 241-256 |
| Author | Christopher Ratcliffe,William Dimovski |
| Subject Matter | Property management & built environment |
REIT mergers and acquisitions:
a meta-analysis
Christopher Ratcliffe and William Dimovski
School of Accounting, Economics and Finance, Deakin University,
Geelong, Australia
Abstract
Purpose – Mergers and acquisitions in the real estate investment trust (REIT) sector have been
studied in distinct periods and locations, often leading to findings which are relevant only for the period
and/or location investigated. The purpose of this paper is to examine the merger and acquisition studies
in aggregate using meta-analysis so that broader findings of factors influencing the returns by targets
and bidders are divulged.
Design/methodology/approach – Using a methodology similar to Veld and Veld-Merkoulova a
sample of 15 REIT studies with 35 observations for bidders and 25 observations for targets is
analysed. A variety of potential factors influencing the returns for bidders and targets are explored.
Findings – Consistent with prior non-REIT research, the evidence shows targets enjoy positive and
significant gains in a merger. There is also evidence that acquirers earn significant wealth when all
previous studies are examined in aggregate. Meta-analysis results show targets experience higher
wealth gains by accepting cash financed deals, but share total gains when both parties are REITs.
Additionally, acquirers enjoy improved abnormal returns when the target is privately listed and the use
of scrip and/or a combination of scrip and cash produces higher wealth gains for bidding REITs.
Originality/value – This paper aggregates the merger and acquisition literature of REITs to
understand better factors influencing returns made by bidders and targets.
Keywords Real estate investmenttrusts, Acquisitions and mergers,Real estate, Trusts,
Abnormal returns,Cumulative abnormal returns, Meta-analysis
Paper type Research paper
Introduction
Jensen and Ruback (1983) identify the merger and acquisition market, or market for
corporate control, “as a market in which alternative managerial teams compete for the
rights to manage corporate resources” (p. 6) and it is this competition that may limit
managerial departures from the maximisation of the owners (shareholders) wealth
objective. Manne’s (1965) seminal paper on the market for corporate control ident ifies
that M&As provide some guarantee of effective competition between managers and
thus provides strong protection to the interests of non-controlling shareholders.
Studies into the wealth creation of M&As within the REIT sector have attracted
attention in the academic research area. Studies of the US market have found that
shareholders of target firms earn significant positive excess returns aroun d the
announcement day, ranging from 10.86 percent (Eichholtz and Kok, 2008) to 1.48 percent
(McIntosh et al., 1989). However, research on the excess returns to bidding shareholders
has demonstrated a contraction in cumulative abnormal returns (CARs). Early studies
by Allen and Sirmans (1987) reported significant positive excess returns of 5.78 percent
around the announcement day, while more recent studies have reported significant
negative CARs of 1.21 percent (Sahin, 2005).
The purpose of this study is to employ a meta-analysis approach to investigate the
empirical literature and identify the impact of various factors on the excess returns
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REIT mergers
and acquisitions
241
Journal of Property Investment
& Finance
Vol. 30 No. 3, 2012
pp. 241-256
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211223815
in M&As for both targets and acquirers. Stanley (2001) describes meta-analysis as a
body of statistical methods for evaluating and reviewing empirical research results.
When independent studies have been performed on a specific subject that utilises
different methods and data sets, then employing meta-analysis to combine:
[...] their results can furnish more insight and greater explanatory power than the mere
listing of the individual results [...] Such studies can also suggest potentially fruitful lines for
future inquiry and offer a prediction of the results that such new research will find (Stanley,
2001, pp. 131-2).
Glass (2000) notes that 25 percent of articles published in the Psychological Bulletin have
“meta-analysis” in the title. Meta-analysis has been extensively employed in the social
sciences areas such as organisational theory, marketing, strategic management,
economics, finance (Datta et al., 1992) accounting and auditing (Hay, 2010). Hunt (199 7)
describes meta-analysis as how science takes stock, by its very nature quantitative
methodology is systematic and explicit, hence “its results can be independently
evaluated and replicated in a manner not possible with traditional literature reviews”
(Stanley and Jarrell, 1989, p. 167).
Results from the multivariate meta-analysis regression model suggest target REITs
enjoy higher wealth creation when cash is used to finance the acquisition, but total gains
are shared between both parties in a REIT-REIT transaction. Acquiring REITs
experience improved wealth effects when the target is privately listed and the use of
scrip and/or combination of cash and scrip as mode of payment produces bidding
shareholder wealth.
The other reason this study could prove interesting is as follows, Andrade et al. (2001)
identify two main catalysts for M&A activity featured in the literature; first, mergers
occur in waves and second, within each wave, there is a strong clustering by industry.
This suggests that unexpected shocks to an industry’s structure may result in an
increase in merger activity. These shocks lead to a restructuring by industries as a
reaction, often via merger or takeover. The impact of the global financial crisis (GFC) on
the market values of the global listed real estate sector, namely the Real Estate
Investment Trust (REIT) sector, could well be considered an industrial shock. According
to the National Association of Real Estate Investment Trusts (NAREIT) the market
capitalisation of the US REIT sector fell from a high of US$445billion in February 2007 to
a low of US$129 billion in March 2009, a fall of over 70 percent. This industry shock may
pave way for a wave of M&As in the future as the global property sector recovers (Klijn,
2009). A number of authors have highlighted the possibility of increased merger activity
in the near future. Psaltis and Chubb (2008) note that if underlying property market
fundamentals can be sustained, vulnerable REITs offer good value for money, however,
many acquires “are being held back by lack of finance and nervousness around market
volatility, covenants and ‘poison pills’” (p. 7). Carroll and Torto (2009) posit that “well
capitalised REITs likely to acquire weaker REITs, single assets, and portfolios at very
attractive pricing levels post-credit crisis” (p. 19). Finally, Combs (2009) notes that the:
[...] merger and acquisition activity, which was synonymous with the industry’s boom, may
play a key role in its recovery. This time around, the deals aren’t based on high property
valuations and easily available capital, but rather depressed prices (p. 104).
The remainder of this paper is structured as follows. The next section provides a
theoretical overview of wealth creation in M&As, we then discuss the seven key factors
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