Merger Waves

Richard Roll, Director of the Fink Center for Finance & Investments and Japan Alumni Chair in Finance (Bio)
Mergers are much in the financial news these days. Investment banks have reported record activity. Also, scholars have produced a very large literature about mergers - but not all that much about waves. So merger waves represent something of a puzzle. Why do they occur and what import do they have for the financial community?

To explore this, we provide an academic perspective from J. Fred Weston, Distinguished Professor of Finance, Emeritus Recalled at UCLA Anderson. Fred has written many peer-reviewed papers on mergers and conducts a very popular executive program on the subject. He has been investigating the merger phenomenon for over 50 years.

A practitioner view of merger waves is offered by Kit Lokey, a founder and principal of Houlihan, Lokey, Howard & Zukin - one of the largest investment banking firms in the merger business. It is probably the world's leading firm in mergers among small and medium sized businesses, so Kit brings a perspective from long experience of practical involvement in merger activity.

The CFI Bulletin is a place for scholars and practitioners to converge on timely issues in finance. Future issues will look at hedge funds, investment management, dividends and other distributions of capital, and financial innovations such as collateralized debt obligations, credit derivatives, international stock exchange mergers and 24-hour trading. >>PLEASE SEND YOUR COMMENTS

In Theory ...
The Outlook for Merger Activity

J. Fred Weston, Distinguished Professor of Finance, Emeritus Recalled
UCLA Anderson School of Management (Bio)
Each of the major merger movements in history reflected some underlying economic or technological factors. The movement in the 1890s was triggered by the completion of the transcontinental railroads, which made the United States the first large common market. This was the major force behind the horizontal mergers that consolidated regional firms into national firms. The vertical mergers of the 1920s were stimulated by the impact of radio and autos on distribution systems. The conglomerate mergers of the 1960s reflected the view that good managers could manage unrelated activities. The use of differential P/E ratios to augment earnings growth in the near term produced spectacular stock price movements for major conglomerates such as ITT and Litton Industries. The deal decade of the 1980s was fueled by unwinding conglomerate diversification. >>READ PAPER

In Practice ...
2006: The Perfect Storm for M&A?

Kit Lokey (MBA '67), Chairman, Houlihan Lokey Howard & Zukin
The pace of M&A activity in 2005 resulted in announced transactions topping $1 trillion for the first time since the last major M&A boom in 2000. With interest rates on the rise and indications that corporate default rates will also increase, what will the direction be for M&A activity in 2006? So far, 2006 is shaping up to top 2005, with announced transactions of $273.1 billion in the first quarter, up from $253.3 billion in the first quarter of 2005¹. At the end of the first quarter of 2006, Houlihan Lokey Howard & Zukin's value of current engagements was 43% ahead of Q1 2005. >>READ PAPER

Events at CFI

R.O.I. in NYC
Featuring a discussion with renowned investors
Fall 2006 - Details to follow

Select Working Papers

The Joint Dynamics of Liquidity, Returns, and Volatility Across Small and Large Firms
Tarun Chordia, Asani Sarkar & Avanidhar Subrahmanyam

This paper explores liquidity spillovers in market-capitalization based portfolios of NYSE stocks. Return, volatility, and liquidity dynamics across the small and large cap sector are modeled by way of a vector autoregression model, using data that spans more than 3000 trading days. We find that volatility and liquidity innovations in either sector are informative in predicting liquidity shifts in the other. Impulse responses indicate the existence of persistent liquidity, return, and volatility spillovers across the large and small cap sectors. Lead and lag patterns across small and large cap stocks are stronger when spreads in the large cap sector are wider. Consistent with the notion that private informational trading in large cap stocks is transmitted to other stocks with a lag, order flows in large cap stocks decile significantly predict both transaction price-based and mid-quote returns of small cap deciles when large-cap spreads are high. >>READ PAPER (PDF)

Risk and Return in Fixed Income Arbitrage: Nickels in Front of a Steamroller?
Jefferson Duarte, Francis A. Longstaff & Fan Yu

We conduct an analysis of the risk and return characteristics of a number of widely used fixed income arbitrage strategies. We find that the strategies requiring more "intellectual capital" to implement tend to produce significant alphas after controlling for bond and equity market risk factors. These positive alphas remain significant even after taking into account typical hedge fund fees. In contrast with other hedge fund strategies, many of the fixed income arbitrage strategies produce positively skewed returns. These results suggest that there may be more economic substance to fixed income arbitrage than simply "picking up nickels in front of a steamroller." >>READ PAPER (PDF)

Hubris, Learning, and M&A Decision: Empirical Evidence
Nihat Atkas, Eric de Bodt & Richard Roll

Recent empirical results have found a declining trend in the cumulative abnormal return (CAR) of acquiring firms during an M&A program. Should one conclude that CEOs undertaking M&As are infected by hubris and unable to learn? We first confirm the existence of this declining trend. However, we find a positive CAR trend for CEOs most likely to be infected by hubris and a negative (and significantly different) trend for likely rational CEOs. This supports the learning hypothesis and conforms to the theoretical analysis of Aktas et al. (2005). Moreover, the empirical evidence is broadly consistent with theoretical predictions about the implications of learning for the time between successive M&A deals. We conclude that CEO behavior reveals substantial learning during acquisition programs. >>READ PAPER (PDF)

>>VISIT THE FINANCE WORKING PAPER ARCHIVE

Faculty Spotlight

Mark Garmaise is an Assistant Professor of Finance at UCLA Anderson. In 2005, he received the Dean George W. Robbins Assistant Professor Teaching Award. >>MORE

Francis Longstaff received the 2005 Barclay's Global Investors Michael Brennan Award for the Best Paper in the Review of Financial Studies. >>READ PAPER

Alumni Spotlight

Morningstar recently named Tad Rivelle ('90) 2005 Fixed Income Manager of the Year. Rivelle is chief investment officer and a founding partner of Metropolitan West Asset Management. >>MORE

Finance Seminars

April 28
Bubble Investors: What Were They Thinking?
Will Goetzmann, Yale

May 5
Corporate Event Waves.
Raghu Rau, UCLA & Purdue

May 12
Investor Information, Long-run Risk and the Duration of Risky Cash Flows.
Sydney Ludvigson, NYU

May 19
Conflicts of Interest and Scrutinization.
Chris Mayer, Columbia

June 2
An Empirical Analysis of the Pricing of Collateralized Debt Obligations
Francis Longstaff, UCLA Anderson

June 9
A General Stochastic Volatility Model for the Pricing and Forecasting of Interest Rate Derivatives
Anders Trolle, UCLA & Københavns Universitet

UCLA Anderson Finance Faculty Presentations
Summer 2006

June 8
Rational and Irrational Prices, Returns and Strategies. Michael Brennan. Stockholm, Sweden

June 9
Parametric Portfolio Policies: Exploiting Characteristics in the Cross Section of Equity Returns. Pedro Santa-Clara with Michael Brandt and Rossen Valkanov. Bergen, Norway

June 23
Motivating Entrepreneurial Activity in a Firm. Antonio Bernardo with Hongbin Cai and Jiang Luo. Keystone, CO

June 29-30
A Model of R&D and the Design of Research Incentives Eduardo Schwartz with Jason Hsu. Waterloo, Canada

Recent Applied Management Research (AMR) Projects

Dorchester Capital Advisors is a fund of hedge funds with approximately $1 billion in assets under management. The AMR team examined several issues, including the broad fixed income market and the risk return characteristics of various arbitrage portfolios.

Pan Asian Mortgage is a financial services company based in Hong Kong that acts as a "securitization conduit" for residential mortgages. The AMR team evaluated China's residential real estate market and the regulatory environment in order to identify the market potential and recommend an appropriate market entry strategy for Pan Asian Mortgage.

2006 Ph.D. Placements

Juhani Linnainmaa, University of Chicago

Bruno Calista Miranda, Indymac Bank (Pasadena)

Eric Neis, Barclays Global Investors (San Francisco)

Alessio Saretto, Purdue University

2005 MBA Placements
Full-time and Internships

Deloitte Consulting - 21
Mattel, Inc. - 14
Walt Disney Company - 13
Lehman Brothes - 12
Yahoo! Inc. - 12
Amgen Inc. - 11
Countrywide - 8
IBM - 7
Intel Corporation - 7
McKinsey & Company - 7
Toyota Motor Sales USA - 7
Boston Consulting Group - 6
Citigroup - 6
Harrah's Entertainment - 6
Warner Bros. - 6
Gap - 5
Hewlett-Packard - 5
Honeywell International - 5
Monitor Group - 5
Nestle USA - 5
Olson Company - 5
Roll International - 5
Taco Bell - 5
Toyota Financial Services - 5
Twentieth Century Fox - 5

Streaming Video

Compliance with FAS 123 - Richard Roll

Hybrid Funding Models for R&D - Eduardo Schwartz