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The impact of mergers and acquisitions on the wealth of shareholders continue to attract academic research in recent years. This empirical event study analyses the case study of HanesBrands (HBI) acquiring Maidenform Brands (MFB). The case study examines the movement of abnormal returns in the short-term surrounding the announcement date for HBI and MFB and in the long-term post-acquisition for HBI only. The horizontal acquisition was bought for $583 million in cash representing $23.50 per share resulting in a premium of 30% in MFB’s share price. The short-term results found that the acquisition led to statistically significant cumulative abnormal returns (CAR) of 13.07% and 24.38% for HBI and MFB shareholders respectively, leading to CARs of 37.45% for the combined entity in the 5-day event window. This increased the wealth of HBI and MFB shareholders by $665.57 million and $103.80 million respectively resulting in positive synergies of $769.38 million. We suggest that the market’s positive reaction was consistent with the expectation of operational synergies due to a horizontal acquisition, HBI’s successful past acquisition experience and using cash to finance the acquisition. Accordingly, the 30% premium was justified with value creation for both HBI and MFB shareholders. However, post-acquisition results for the 36- month period provided insignificant abnormal returns of 1.65% for the three-factor model showing evidence that the short-term benefits may have dissipated. Overall, we conclude that HBI’s decision to acquire MFB’s was motivated by operational synergies, diversification in product range and to allow MFB to exploit their discounted supply chain.
On 24th July 2013, HanesBrands (hereafter referred to as “HBI”) officially announced that it had entered into a definitive agreement to acquire Maidenform Brands (hereafter referred to as “MFB”), for $23.50 per share. This represented a premium of approximately 30% (to the 30 days of average trading price preceding the announcement) (Business Wire, 2013a). The transaction was valued at approximately $575 million and had been unanimously approved by the boards of directors of both companies (HanesBrands, 2013). In addition, on 3rd October 2013 over 99% of MFB’s shareholders voted in favour of the acquisition which represented 85.70% of MFB’s outstanding common stock at that point in time (Business Wire, 2013b). As a result, on the 7th October 2013, HBI finalised the acquisition buying MFB for $583 million in cash at which time MFB was officially removed from the New York Stock Exchange (Craver, 2013).
Based on the examination of the available literature in relation to acquisitions, the principal aim of this empirical event study is to analyse whether HBI acquisition of MFB was value creating or destroying for both sets of shareholders. This will be examined by analysing if any significant abnormal returns within the stock price existed in the short-term and long-term. Short-term referring to abnormal returns surrounding the announcement day (taken place on 24th July 2013) for both companies’ shareholders and long-term referring to three years following the completion day (taken place on 7th October 2013) for HBI shareholders only.
Previous studies in merger and acquisitions (M&A) have mainly focused on large sample studies that have provided “mixed, incomplete and sometimes, conflicting evidence” (Kaplan, 2000, p. 179). However, case study research has been much underutilised in research studies. We are certainly not arguing that this event study will change the overall landscape of M&A research or that decades of dominant large studies should be replaced by equally long case study hegemony. Rather, we argue large studies and case studies can be complementary in nature, which can produce synergistic contribution through more balance over time (Reddy, 2015). Case studies help readers to understand complex areas of M&As such as the characteristics of specific companies, which cannot be examined in much depth through large-sample studies (Reddy, 2015). This case study provides a detailed aspect of M&As by focusing on important features and theoretical aspects of a recent event. This forms the basis for our first motivation. Despite M&As being extremely popular as a growth strategy for companies, to the best of our knowledge, very few studies have paid attention to the apparel industry. This forms the basis for our second motivation. A further motivation behind this study is that it has the possibility to contribute by extending the depiction offered by other event studies to provide valuable comparisons between the results presented in this article and other relevant papers. Finally, this study tests a broader recent viewpoint by Alexandridis, Antypas and Travlos (2017) who found that important changes in acquiring firms are currently occurring for the first-time post-2009 whereby acquiring firms are creating significant shareholder value because of a reduction in hubristic behaviour in M&As. This paper examines if this ‘holds true’ in this article.
The results from this study presented that the initial market reaction on the announcement of the acquisition was considered favourable for both firms with statistically significant cumulative abnormal returns (CAR) of 13.07% and 24.38% for HBI and MFB shareholders respectively. This led to CARs of 37.45% for the combined entity during the 5-day event window which increased the wealth of HBI and MFB shareholders by $665.57 million and $103.80 million resulting in positive synergies of $769.38 million. We illustrated the possible reasons for the market’s positive reaction was consistent with the expectation of operational synergies due to a horizontal acquisition, HBI having past success in previous acquisitions and using cash to finance the acquisition. On the contrary, we also provided evidence that the post-acquisition results for the 36-month period caused insignificant abnormal returns at 1.65% for the three-factor model, which indicates that the short-term benefits may have dissipated.
The remainder of this paper is organised as follows. The next section describes the profiles of both companies and the motives for the acquisition. Section 3 provides a synthesised summary of the literature review relevant to this study, with critiques provided where appropriate. Section 4, 5 and 6 develops the hypotheses; data sources and collection; and the methodology of the short and long term to be used. Section 7 presents, interprets and analyses the empirical results for the short-term and long-term event study. Section 8 attempts to detect possible pitfalls in relation to the empirical work in this thesis and implications for future research. Finally, section 9 provides a summary and conclusion of this study.
2. Company Profiles and Motives for the Acquisition
HBI, founded in 1901 in the United States (U.S), is one of the leading firms in the apparel industry with a portfolio of established worldwide brands. HBI has a credible tradition and reputation for their innovative, quality and well-recognised apparel brands which allows them to use their ‘Innovate-to-Elevate’ strategy to become a unique organisation with their low-cost global supply chain to create product excellence. HBI splits its operations into four business segments including: innerwear, activewear, direct to consumer, and international. Innerwear is the biggest segment in terms of revenue accounting for over 50% in 2015. HBI currently have around 40 distribution centres internationally and sell their products in approximately 35 countries with almost 80% of its revenue from the U.S in 2015 (Vault, 2016).
Prior to 2006, HBI was organised as part of Sara Lee Corporation (SLE). SLE had a variety of business divisions such as the consumer goods and apparel division. HBI operated as a collection of separate business units within the apparel division for products such as socks and underwear. Each business unit in SLE had sole responsibility for its logistics network, financing and human resource departments (Arcieri, 2017). However, in 2006 SLE decided to remove the apparel division from its business and focus on the consumer goods industry. The CEO at the time for HBI, Richard Noll, decided to integrate all the separate business units for the apparel divisions together to form as an independent publicly traded organisation by paying SLE a one-time payment of $2.4 billion (Business Wire, 2006). This payment as well the negative effects of the financial crises created a substantial amount of debt for HBI around that time. Therefore, between 2006 and 2010, HBI decided to move several operations from high cost plants in the U.S to lower cost plants in countries such as Vietnam and Honduras. This created a stable business model for HBI to develop on. Accordingly, post-2010 HBI has been continuously investing in horizontal acquisitions to diversify its portfolio overseas to create strong brands in its less-tapped markets such as Asia and Europe. Besides the acquisition of MFB, they invested in Gear For Sports in 2010, DBA in 2014, Knights Holdco in 2015 and Champion Europe in 2016 etc. (Arcieri, 2017). Consequently, HBI profits have been dramatically increasing over the last decade due to its international expansion by the acquisitions abroad as well as domestic acquisitions. HBI recorded profit increases of over 44% from $395.8 million to $571.2 million between 2013 and 2016. As a result, in 2013 HBI rewarded its investors by paying its first dividend at $0.20 per share, which has since more than doubled as of 2017 (HanesBrands, 2017).
MFB, founded in 1922 in the U.S, was one of the leading apparel companies internationally with a portfolio of leading brands, quality products, and an iconic heritage. MFB created, delivered and marketed a variety of intimate apparel goods. They became a publicly traded corporation in July 2005 after a lengthy restructuring program between the end of the 1900s and beginning of 2000s. Throughout its 91-year history, MFB had created an excellent reputation for its brands globally due to its continued investment in product innovation and advertising, focusing mainly on increasing brand awareness for generations of women (Maidenform Brands, 2013). The company previously distributed products in approximately 63 countries outside of the U.S. 90% of MFB sales have focused around its wholesale segment in the U.S and internationally with the other 10% on retail operations from a diverse channel including its company outlet stores and its website. A breakdown of MFB’s product sale range consists of 55% of bras, 38% of shapewear and 7% of panties (Vault, 2012). MFB much like HBI have had profit increases but on a much smaller scale for example between 2009 and 2012, MFB profits increased by over 35% from $24.7 million to $33.5 million. Accordingly, in 2012, MFB planned to continue growing and improving their brand recognition and product lines by investing in research and development to increase market share and remain competitive. These plans transferred to HBI once it announced that is was going to acquire MFB on the 24th July 2013 (Maidenform Brands, 2013).
The main motive for the all-cash transaction between HBI and MFB was that HBI expected operational synergies to occur as it was a horizontal acquisition whereby both companies operated in the apparel industry. Consequently, HBI anticipated creating growth and cost saving opportunities over the long run by incorporating the respective strengths and skills of MFB into one portfolio. Moreover, HBI predicted to further its product innovation and increase marketing and sales to widen its market segments across channels globally. Subsequently, the acquisition was expected to generate more than $500 million in incremental annual sales and to recuperate the cost of the acquisition within three years (HanesBrands, 2013). In addition, a further motive for the acquisition was for HBI to allow MFB to exploit its in-house discounted supply chain (which is rare for most apparel companies) to lower the costs of products to consumers and retailers and remain more competitive (prior to the acquisition, MFB products were sourced by more expensive external manufacturers) (Business Wire, 2013). A final motive was that HBI anticipated the acquisition to supplement their ‘Innovate-to-Elevate’ strategy, such as HBI’s panty products integrating with MFB’s shapewear products to complement each other. This allows for greater diversification in HBI’s product range to satisfy consumers demands (HanesBrands, 2013).
The need for constant change in the present dynamic business environment drives companies towards development through M&A activity to create value greater than the cost of the acquisition. The general consensus is that M&A is an extremely complex transaction due to the differences in characteristics attributed to the bidder and target involved in each individual acquisition. Although finding a perfect match may not be possible, a close match can generate substantial value for both sets of shareholders (Shah and Arora, 2014). The expectation to produce significantly positive abnormal returns has seen a substantial increase in M&As over recent years by companies to accelerate growth and remain competitive post financial crises (Elad and Bongbee, 2017). According to Alexandridis et al. (2017) between 2010 and 2015, 3,811 deals valued at $3.07 trillion (exceeding the GDP of several large countries) were completed in the U.S alone.
Central to M&As is the question regarding the benefits for both sets of shareholders involved in the deal (Golubov, Petmezas and Travlos, 2012). In the majority of cases, the main goal is for both firms to create value for their shareholders. The general consensus is for the combined entity to generate significantly positive abnormal returns around the announcement day (Wang and Xie, 2009). However, the share of wealth effects is not equal amongst both sets of shareholders with target shareholders enjoying the majority of the gains (Bradley, Desai and Kim, 1988; Craninckx and Huyghebaert, 2015). Goergen and Renneboog (2003), who sampled 228 European M&As for the period between 1993 to 2000, found beneficial wealth effects for target shareholders to be generally unanimous: statistically significant positive abnormal returns in the short-term (Bauguess et al., 2009; Shah and Arora, 2014). Goergen and Renneboog indicated target shareholders received a premium between 20% to 40% on average above the share price pre-announcement which was an intuitive finding given the hefty premiums offered by acquirers. In addition, Hogan, Olson, and Capella (2015) who sampled 875 U.S M&As in the apparel industry between 2000 to 2009 also observed that the average target firm consists of statistically significant abnormal returns.
Prior literature shows very little consensus on the wealth effects for the acquiring firms’ shareholders in the short and long term (Reis, Carvalho, and Ferreira, 2015). Traditional literature had suggested significantly negative or insignificant abnormal returns in the short run (Mandelker, 1974; Malatesta, 1983; Limmack, 1991). However, according to Alexandridis et al. (2017), who sampled 26,078 U.S M&A deals announced between 1990 and 2015, found that we are starting to see past this traditional viewpoint as value creation has evolved recently for acquisitions and the quality of investment decisions are improving rapidly. Alexandridis et al. found between 2010 to 2015 that the acquiring firm on average gained statistically significant abnormal returns of 4.51% around the announcement date, whilst between 1990 to 2009 the acquiring firm earned an insignificant average loss of 1.08%. Consequently, shareholder value is increasing for acquiring firms on a considerable scale leading to significantly positive abnormal returns in the short run (Martynova and Renneboog, 2008; Elad and Bongbee, 2017). This is in line with the apparel industry as the average acquirer received significantly positive abnormal returns (Hogan et al., 2015).
The method of payment (stock, cash or mixed) is one of the most important factors of acquisition returns in the short run. It provides useful insights into the confidence level of the manager for the acquiring firm (Golubov et al., 2012). Cash transactions are more likely to occur if the acquiring manager believes the target firms share price is undervalued and vice versa for equity offers (Travlos, 1987). Hence, equity offers are more likely to incur lower premiums ceteris paribus, as it indicates the acquiring firm manager has less confidence on the success of the acquisition and vice versa for cash offers (Fuller, Netter and Stegemoller, 2002). Accordingly, as investors are mindful of these actions, they alter the share price appropriately (King, 2004). The net effect has shown that cash offers are more advantageous to both sets of shareholders in the short-term (Campbell, Sirmon, and Schijven, 2015). This is reinforced by Loughran and Vijh (1997) who indicated that firms with cash offers can earn significantly positive abnormal returns (up to 61.70%) whilst stock offers earn significantly negative abnormal returns (up to 25%).
Acquiring firms’ success is also dependent on previous acquisition experience (Duncan and Mtar, 2006). Although no two acquisitions are the same, the processes are recurrent. Therefore, the acquiring firm will have enhanced key skills through previous experience. Haleblian, Kim, and Rajagopalan (2006) found this experience had been rewarded in most occasions because firms have generated significantly positive abnormal returns with past success in strong acquisition performance compared to acquiring firms who have had zero or negative experience in previous acquisitions.
Long-horizon studies have been the subject of academic debate for many years. Cartwright and Schoenberg (2006) argued most long-term event studies show either significantly negative or, at best, insignificant abnormal returns. According to Mitchell and Stafford (2000) who used a sample of 4,911 U.S M&As between 1958 to 1993, found significantly negative abnormal returns for acquiring ﬁrms’ shareholders in the long-term. In addition, Agrawal, Jaffe and Mandelker (1992) suggested acquiring firms shareholders suffer a significantly negative loss of around 10% in the long-term. Burt and Limmack (2001) who used a sample of 227 M&A deals between 1982 and 1996 found that for the retail sector the long-term abnormal returns showed significantly negative abnormal returns of 14.61%. However, Franks, Harris and Titman (1991) concluded that long-term returns resulted in insignificant abnormal returns as previous findings of significantly negative abnormal returns were due to the result of benchmark portfolio errors rather than mispricing at the time of the acquisition (Bessembinder and Zhang, 2013).
Motives for M&As have been long debated in academia. Different studies have found opposing outcomes. According to Reis et al. (2015), M&As can serve a variety of motives such as synergy creation. But, numerous studies have shown that acquiring firm shareholders are worse off on average in the long run calling into question M&As being inspired by agency and/or hubris rather than synergy considerations (Berkovitch and Narayanan, 1993). These three motives will now be reviewed in this section.
Generally, the most important reason for M&As is due to synergy creation (Golubov, et al., 2012). Previous academic research regarding synergies has examined the relationship between the type of acquisition and performance for the combined firms. Hoberg and Phillips (2010) propose firms are much more likely to pursue horizontal acquisition than other types because companies understand the organisational culture better which can lead to an improvement in management. Thus, evidence shows the most significant synergies result from horizontal acquisitions (Fee and Thomas, 2004). In addition, according to the efficiency theory operational synergies have been the main driver in horizontal acquisitions as they benefit from an increase in companies’ efficiency. This can be realised by revenue enhancement or cost-reduction synergies by creating value either through achieving economies of scale/scope or eliminating duplicate activities. Overall, value creation for both sets of shareholders are more likely in M&As that exploit the benefit of synergies because the combined value of both firms together is greater than if the firms continued to be independent (Bradley et al., 1988). This has often been represented by the expression ‘1+1=3’ effect (Golubov et al., 2012).
The agency hypothesis has been regarded as “unquestionably the single most important theory in corporate governance” (Thomsen and Conyon, 2012, p. 14). This suggests the organisation is perceived to have a nexus of contracts in which all individuals involved act rationally at the same time to maximise their own interests (Nicholson and Kiel, 2007). The agency theory is based on the principle-agent problem and is focused on the conflicts of interests between shareholders (principles) and managers (agents). Evidence of this is seen in the free cash flow theory (Jensen, 1986) which relates to the ‘excess’ cash once profitable projects have been financed which can result in managerial entrenchment – the process whereby, managers have an incentive to undertake activities such as M&As (even if they are value-destroying) to make it difficult and expensive for the owners of the company to replace them (Bebchuk, Cohen, and Ferrell (2009).
Finally, the hubris hypothesis implies that the acquiring firms’ managers make mistakes in evaluating target firms and go ahead with acquisitions even though synergies are non-existent (Roll, 1986). Managers have a habit to overemphasize their abilities compared to their peers which reinforce individual overconﬁdence (Malmendier and Tate, 2008). For instance, managers may pursue acquisitions to receive a higher compensation instead of targeting firms which can create the most value for the firms’ shareholders (Grinstein and Hribar, 2004).
Overall, prior academic research has regarded these three motives as the most dominant for engaging in M&As (Ratcliffe, Dimovski and Keneley, 2017). It is important to understand that previous research have struggled to select one underlying motive as the primary driver for M&As. Berkovitch and Narayanan (1993), found value creating acquisitions often benefit from synergy hypothesis and that value destroying acquisitions often suffer from agency hypothesis and/or hubris hypothesis. On the contrary, recent evidence from Alexandridis et al. (2017) suggests there has been a turnaround in the behaviour of acquiring firm’s managers because of better aligned compensation schemes targeted at creating shareholder value. As a result, hubristic behaviour is diminishing significantly in recent years causing value creation to increase and synergistic benefits to more than double compared to the past. Rau and Vermaelen (1998) argue that such motivations differ over time as the market reassesses and gains more information regarding M&As. Therefore, these different hypotheses are not mutually exclusive as they can overlap. None are all-inclusive as each can be relevant in a particular context. The vital issue is to adopt the perspective that is appropriate to the M&A under review (Golubov et al., 2012).
In this section, we develop several testable hypotheses in relation to the corporate event by detecting the abnormal performance of HBI and MFB. All the hypotheses stated below are based on section 3 and future expectations in line with the principle aim. Hypothesis 1 is concerned with the abnormal returns for the combined entity around the announcement of the acquisition being significantly positive (Wang and Xie, 2009).
Ho: Around the announcement of the corporate event, the combined abnormal returns of HBI and MFB will be statistically insignificant resulting in neither value creation or destruction for the shareholders’ wealth effects combined. Ha: Around the announcement of the corporate event, the combined abnormal returns of HBI and MFB will be significantly positive resulting in value creation for the shareholders’ wealth effects combined.
Hypothesis 2 is based on the acquires/targets abnormal returns. We stated the target/ acquirer firm shareholders for apparel industries will receive significantly positive abnormal returns individually in the short-term (Hogan et al., 2015). Moreover, we stated the premium paid by the bidder results in significantly positive abnormal returns for the target firm (Goergen and Renneboog, 2003). In addition, we expected significantly positive abnormal returns for the acquiring firm because of the anticipated synergy creation due to a horizontal acquisition having past success in previous acquisitions and using cash to finance the acquisition (Fee and Thomas, 2004; Haleblian et al., 2006; Campbell et al., 2015; Alexandridis et al. 2017).
Ho: Around the announcement of the corporate event, the abnormal returns for HBI/MFB will be statistically insignificant resulting in neither value creation or destruction for their shareholders’ wealth effects. Ha: Around the announcement of the corporate event, the abnormal returns for HBI/MFB will be significantly positive resulting in value creation for their shareholders’ wealth effects.
Hypothesis 3 is based on the long-term abnormal returns for the acquiring firm. We stated despite many authors finding evidence of significantly negative abnormal returns for the long-term (Agrawal et al., 1992), these were due to benchmark portfolio errors rather than mispricing at the time of the acquisition (Franks et al., 1991). Accounting for this adjustment, we expect insignificant abnormal returns for the acquiring firm in the long-term.
Ho: After the completion date in the long-term, the abnormal returns for HBI will be statistically insignificant resulting in neither value creation or destruction for their shareholders’ wealth effects. Ha: After the completion date in the long-term, the abnormal returns for HBI will be significantly positive/negative resulting in value creation or destruction for their shareholders’ wealth effects.
5. Data Collection and Sources
This study has used a data range from 2012 to 2016 to incorporate the short-term and long-term event study. Methodologically, the sources employed for data collection included: EconLit, Google Scholar and Social Science Research Network. To select the studies from these sources, the search explored the title, abstract and keywords of relevant studies. To confirm that the studies were appropriate, we screened the entire article to eliminate any articles which were not relevant to our study. Specific interest was given to event studies to grasp previous literature and future expectations of this study. Furthermore, to ensure the validity of the articles we primarily concentrated on the journals’ impact factors that were highly ranked in Harzing’s journal quality list (2018) such as the Journal of Finance. Also, we varied the date range suitably to ensure we had an appropriate balance between a mixture of recent and preceding journal articles.
For our data sources, we used Factiva to find the announcement date, completion date, check for any significant confounding events etc. The study focused on credible sources within Factiva such as Dow Jones and Business Wire to increase the validity of information in our study by cross-checking if one source was simultaneous to other sources. DataStream was the main source for collecting quantitative data and variables for both companies with Wharton Research Data Services and the Fama French database compensated where DataStream failed to provide applicable information for the long-term event studies.
In some instances, we were able to retrieve data items directly from DataStream such as the US Treasury Bill (T-Bill) and the Standard & Poor’s (S&P) 1500 Composite Index. However, for variables such as Equity Returns as it wasn’t directly available on DataStream. We first needed to retrieve the Return Index as it is adjusted for dividend and stock split unlike direct share price (the data item), to calculate Equity Return (the variable). Likewise, to calculate the book-to-market (BTM) ratio, we first needed to retrieve the market capitalisation and shareholder equity (the data items) to calculate the BTM (the variable).
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