Purchasing reserves and commodity market timing as takeover motives in the oil and gas industry

a r t i c l e i n f o JEL classifications: G34 L71 M20 Keywords: Takeovers Mergers & acquisitions Oil and gas industry Oil reserves Energy Can broad factors such as natural resources endowment and global commodity markets influence corporate takeovers? This paper theorizes that managers are motivated in mergers and acquisitions to purchase energy reserves and to time the commodity market in the oil and gas industry. We find supportive evidence that shows that energy reserves and prices cause and affect takeover activity, value, and performance. Acquirers are motivated to purchase reserves, while targets are motivated to sell based on market timing. Acquirers have negative takeover performance from lower risk. Our conclusions are robust to the traditional explanations: equity valuation, synergy, free cash flow, equity and debt market conditions, and economic cycles. Can broad factors such as natural resources endowment and global commodity markets influence corporate decision making? Our contribution to the extensive mergers and acquisitions (M&A) literature concerns novel motivations for takeovers that offer explanations from broader economic and environmental factors rather than simply traditional firm and managerial ones. We find evidence supporting our theoretical notion that these factors, such as energy reserves and commodity prices, do influence takeovers. In other words, managers can be motivated to purchase energy reserves and to time prices in the commodity markets when making takeovers in the energy industry. Because these motives better fit the reality of takeovers in the natural resources and extraction industries than existing theories, this study thus serves the interests of researchers that are exploring how the natural environment and global pricing markets influence corporate decision making. Canada is among the only 10 countries in the world that produces significant amount of oil (equal or greater than 3% global share). 1 It is presently ranked number 6th in terms of global production share. Total oil production is increasing as oil sands production grows. Canada with its oils sands has the world's second largest oil reserves after Saudi Arabia. Therefore, this study of Canadian oil and gas firms is a representative and valid study on the phenomena of energy takeovers. Over the past decade, the oil and gas (O&G) industry in Canada has taken center stage economically. At the G8 meeting in 2006, Prime Minister Steven Harper declared, " Canada is now an energy superpower. " At the same time, the global economic stage is increasingly recognizing …