Abstract:
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
