Is stock liquidity transferred and upgraded in acquisitions? Evidence from liquidity synergies in US freeze-outs

This paper investigates the value successful bidders generate from acquiring less liquid targets. This synergy is traced with both theoretical and empirical evidence from the squeeze-out stage of going private transactions, when bidders hold sizeable toeholds in target shares. By transferring their superior liquidity, acquirers can add value to the valuation of their toeholds in fully acquired target assets. We use a sample of US delisted targets from globally listed acquirers over 25 years, and, in line with our theoretical analysis, a nonlinear relation is evidenced between the expected added value from liquidity transfer and illiquidity differences. The adjustment of target market prices for the attached option to participate in the bid in a new stochastic volatility framework reveals that the bulk of deal-generated wealth depends on the offered option. Although the market penalizes the mean acquirer with negative abnormal returns, those with higher liquidity differences from their targets are suffering less because of their greater potential of liquidity transfer synergy. The analysis of the probability that the offered option gets in the money reveals that liquidity transfer acts as a catalyst for successfully concluding the deal and underlies underbidding.