An Auction-Based Perspective on Takeovers of Real Estate Investment Trusts

A large fraction of takeover deals among US equity real estate investment trusts (EREITs) are settled via auction procedures with a substantial number of bidders involved. The valuation of targets in mergers has been examined by the general finance literature and has also been investigated on the basis of stock price movements and publicly observable target characteristics for samples of real estate investment trusts throughout the last decade. However, conventional estimation techniques widely neglect the competitive process which is taking place in advance of the deal. Thus, the existing evidence is mainly based on final outcomes and the obtained results suffer from endogeneity through the neglected impact of the underlying sales-mechanism. The present study estimates the valuation determinants in acquisitions of REITs using an empirical auction model. The hand-collected dataset comprises REIT takeover auctions of the 2000-2017 period. The approach allows to incorporate Information of the entire bidding process and provides a distinct perspective on the public and private bidders involved. We find valuation patterns for bidders in auctions of REITs to be much more homogenous, compared to those of bidders for targets of other industries. We do not find a significant divergence of public and private bidders, as opposed to the evidence for non-REIT corporates. Inference on the determinants of target valuation suggests a significant valuation impact of typical firm-level financial variables and of the macroeconomic environment. The findings are robust to alternative premium measures and further testing. A comparison of the auction-based approach and conventional estimation procedures is provided.