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Case Study

Social Connections, Reference Point and Acquisition

Jie (Michael) Guo; Xi Li; Nicolas Cisternas Seeger (Durham University Business School); and Evangelos Vagenas-Nanos (University of Glasgow)

In life we tend to assume that inside knowledge brings better deals — an issue that hasn’t escaped the notice of academics.

Academics have long theorised that in merger and takeover deals there is benefit to the acquiring business in terms of the acquisition premium (the difference between the value of the target company and the price paid) where there is an established connection between the two companies.

Now a team of researchers led by Dr Michael Guo from Durham University Business School has attempted to quantify that old saying: Its not what you know but who you know. They analysed social connections in mergers and acquisitions so as to evaluate the importance of social connections.

Though their main focus was on the acquisition premium, they also looked at timing and method of payment, considering all of these in relation to a standard reference in takeover deals, the highest share value of the target company over the previous 12 months (the 52-week reference point).

Evaluating social connections

So how do you evaluate the impact of social connections? Dr Guo and his team approached it by looking at data for over a thousand merger and acquisition deals in the United States over a period of 11 years. They selected a sample of publicly-quoted deals worth at least $10m and divided these into groups, in one of which there was an identified social connection and the other not.

The first group was subdivided into what they describe as first-degree (business ties between the firms, with at least one person on the boards of both target and targeting companies) and second degree (where there was some kind of social/educational/employment connection between two individuals, one in each company).

This done, they conducted statistical analysis on these subsets, looking for evidence of an impact of social connections upon the acquisition premium, timing and method of payment and seeing how the results related to the usual benchmark - the 52-week reference point.

So does it matter who you know?

Does it matter who you know? Apparently so. The results of the analysis indicated that where there was a social connection, the acquisition premium favoured the overtaking firm. This was particularly significant where there was a first degree (in other words, business-related) connection.

There was also a marked difference in terms of both the timing of the bid and the nature of the payment, while the acquisition price was less closely related to the 52-week reference point than in cases where there was no social connection.

The study is the first to attempt to measure the implications of social connections against the 52-week reference point. Its findings demonstrate, in line with previous research, that a close social connection is strongly beneficial to the acquiring company because it enhances knowledge and allows a more informed bid.