WEALTH EFFECTS OF MERGERS AND ACQUISITIONS ON REIT ENTITIES: A STUDY OF US EQUITY REITS

Abstract

Merger and acquisition (M&A) are features of corporate finance and modern economics. Albeit investigations surrounding the impact of M&A announcements on the performance of the REIT acquirers have been a well-trodden path in the domain of real estate finance literature, the study of wealth effects – particularly so in the investigation of firm value and financial performance of enlarged REITs post-M&A are relatively less explored.

This study examines the wealth effects of M&A activities undertaken by listed U.S. real estate investment trust (REIT) entities using a corporate finance-based approach. 33 completed M&A transactions between two US-listed REITs are taken over the period of 2000 through 2013, after the REIT Modernization Act of 1999 which led to the evolution of the US REIT industry – the largest and most mature REIT sector in the world.

First, a preliminary univariate analysis using paired t-test methodology on financial ratios is carried out to detect any significant performance differences between the pre- and post- merger years over the short to long term. Results suggest mixed performance across growth, profitability and leverage metrics across different timeframes. Subsequently, panel regression analysis is carried out as a secondary investigation into the effects of M&A on firm value through the measurement of Tobin’s Q.

Empirical results show mixed impacts of M&A across various financial dimensions as affirmed by the past literatures. Notably, this study observes the effect of M&A to be strongest in the long run and increasingly more predictors are significant in predicting the changes on firm value. Lastly, a deeper investigation is carried out according to the type asset classification held by the REIT. Interestingly, non-commercial REITs are found to have a larger impact on the overall Tobin’s Q model.