This PhD thesis consists of three essays which are interlinked by two themes - the problem of risk and information asymmetry in cross-border mergers and acquisitions carried out by UK investors. Majority of empirical research in finance, and in particular in mergers and acquisitions focuses on the US outward investments. However, UK investors are the second most active when it comes to international acquisitions. The country's physical proximity to continental Europe and common legal system make UK transactions a particularly interesting dataset. In the first essay we try to understand how UK investors decide in which country to invest. We investigate in which cases increased level of risk and higher information asymmetry are desired by UK investors and find that higher corporate governance standards, more stringent accounting standards and strong creditor and shareholder protection deter investors. Legal system seems to be of no statistical significance indicating that the law of the host country does not fully reflect the level of such standards, while lack of significance of media coverage indicates that investors are not concerned about the public scrutiny. The second paper looks at how increased risk and information asymmetry impact the likelihood of using a contingent payout agreement and if investors always will use this method to reduce the risk of overpaying for the target. The evidence shows that deal-specific features reflecting higher asymmetry of information and risk increase the chances of using an earnout contract. However, cross-border transactions do not involve earnout contracts more often than the domestic ones which is most likely due to potential enforcement issues resulting from different legal systems. The last chapter of this thesis looks at the ways in which the acquirer can structure the transaction to reduce the risk that the offer will be rejected. Our results stress the importance of bilateral negotiations. Although the size of the premium is significant, its importance is fairly negligible when compared with the impact of hostile transactions, competing bids and the inclusions of a termination fee. From the above we can infer that carefully planned bilateral negotiations leading to a high premium would maximise the chances of deal completion. Recapitulating, in this collection of essays we try to answer the questions of how risk and information asymmetry influence UK investors' decision where to invest, how to pay for the target and whom and how to acquire in order to maximise the chances that the transaction will be successfully finalised.

Earnout as a method of payment in an M&A allows for a number of advantages over the traditional choices of exchange medium, such as cash and stock. This study seeks to validate some of the conclusions drawn by existing literature, in the South African context and add value by investigating two specific attributes, namely the size of the earnout as well as the period over which an earnout may be evaluated; and their impact on the acquirer stock return. The investigation is conducted based on the analysis of event period abnormal gains for the acquirer over the event periods of ±10 days; ±5 days and ±1 day around the announcement of the merger or acquisition.Over the period 2003 – 2009, the data lends significant support to the view that earnout ratio larger than 51% leads to higher abnormal gains than those less than 51% of the total transaction value. Copyright / Dissertation (MBA)--University of Pretoria, 2010. / Gordon Institute of Business Science (GIBS) / unrestricted

This paper-based dissertation discusses applications of asset pricing using the methodology of stochastic modelling for different questions in corporate finance and comprises three essays. The first essay reconsiders the pricing of a firm by more appropriately quantifying one component of the APV equation, i.e., the tax savings. This study proposes a state dependent taxation of a cancellation of indebtedness (COD), reflecting the diverse national tax systems more realistically and investigates whether this has an impact on the value of a leveraged firm. The second essay quantifies the performance measure of a leveraged buyout (LBO) and facilitates the optimization of this figure by searching for an optimal redemption policy within the firm’s financial structure. Further evidence is brought to the often-discussed consideration between the internal rate of return (IRR) and the net present value (NPV) as investment decision criteria. The third and last essay prices a common clause in mergers and acquisitions (M&A) transactions – the earnout - by revisiting a prominent assumption about the payoff modeling in standard corporate finance literature. While current literature on pricing contingent claims mainly relies on the standard Black-Scholes-Merton framework, this study investigates whether a more realistic modelling by introducing stochastic jumps into the EBIT of firm earnout clauses to be mispriced under standard models.

The growth of private equity, as well as consolidation trends across other industries, have produced a strong and vibrant mergers and acquisitions market. A challenge during these acquisitions is information asymmetry, which makes agreeing on the transaction price a challenge. An increasingly popular instrument to get around this problem is to use earnout contracts, which puts the difference between what the buyer is willing to pay and what the seller is willing to accept as contingent on future performance of the company. This thesis focuses on testing four different models for estimating the expected pay-out of earnout contracts. The investigated models were geometric Brownian motion, autoregressive integrated moving average, artificial neural network and a hybrid model to forecast the underlying metrics which were used with Monte Carlo methods to compute the expected pay-out of the earnout contract. Furthermore, a bankruptcy adjusted and a model using implied market volatility were evaluated. The results were that the hybrid model showed the most promising predictions when estimating the expected pay-out. The bankruptcy adjustment was not successful since the model failed to reach sufficient accuracy. Using implied market volatility showed inconclusive results. / Tillväxten för riskkapital-industrin och konsolideringstrender inom andra industrier har resulterat i en aktiv marknad för bolagsförvärv. En tydlig utmaning under ett förvärv är informationsasymmetri, vilket gör det svårt att komma överens om bolagets värdering. En alltmer vanlig metod för att lösa detta problem är att använda en tilläggsköpeskilling. Ett sådant kontrakt placerar skillnaden mellan vad köparen är villig att betala och vad säljaren är villig att acceptera som en option baserad på bolagets framtida prestation. Detta examensarbete fokuserade på att testa fyra olika modeller för att skatta den framtida utbetalningen från tilläggsköpeskillingar. De utvärderade modellerna var baserade på geometrisk brownsk rörelse, autoregressive integrated moving average, artificiellt neuralt nätverk och en hybridmodell vilka användes för att generera prediktioner för optionernas underliggande mått. Dessa användes sedan för att med hjälp av Monte Carlo simulering skatta den förväntade utbetalningen från tilläggsköpeskillingen. Utöver detta testades en modell med justering av konkursrisk samt en modell baserad på implicerad volatilitet från börsnoterade optioner. Resultaten visade att hybridmodellen gav bäst prediktioner av den förväntade utbetalningen. Den konkursjusterade modellen påvisade inga signifikanta resultat då den ej nådde tillräckligt hög prediktionsförmåga. Användningen av implicerad marknadsvolatilitet gav ingen tydlig och statistiskt signifikant förbättring.