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Determining the Method of Payments of Mergers and

Acquisitions in Emerging Asia

Msc Business Economics, Finance track Master Thesis

Harsyah Nurman Djumiril 10257578

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This thesis is dedicated to my older brother, Harries Nurman Djumiril, who has

gone to a better place but will live on forever in my heart. This thesis is also

dedicated to my parents, Helwanurrachman Djumiril and Mirna Marathon Siregar

Djumiril, and my younger brother, Harsyaf Nurman Djumiril. I thank God for all

their support and love which has guided me throughout the process of writing this

thesis and gave me that extra push I needed to finish.

A heap of thanks also goes to my supervisor Jeroen Ligterink, who has been very

helpful and supportive during the whole writing process.

Harsyah Nurman Djumiril

Amsterdam, August 2014

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Abstract

This paper attempts to determine the factors that affect method of payments in mergers and acquisitions using the dataset of 9 of the most developing countries in emerging Asia with a time frame of 2007-2013, which consists of 1696 domestic and cross-border transactions. The results suggest that control, financial leverage, firm size, asymmetric information in relative deals, and cross-border target firms contribute to more use of stock in a mergers and acquisitions transaction.

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Table of Contents

I. Introduction 5

II. Literature Review 9

III. Hypotheses 12

IV. Data and Descriptive Statistics 16

V. Methodology 20

VI. Empirical Results 22

VII. Conclusion 26

VIII. Reference List 28

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I. Introduction

Mergers and acquisitions have recently been quite a hot topic in the financial world. This is especially happening in emerging markets such as Asia. While western markets such as Europe and the United States still follow a predictable pattern, which is big fish eats little fish1, this was not the case in Asia. In February 2000, an Indian company named Tata Tea bought Tetley Tea, a company three times their own size (Chakravarty & Chua, 2012). Billion dollar deals have either been completed or are in the process of being completed in the following years. Evidence has also shown, after the 1997-1998 Asian financial crisis, there was also a rise in mergers and acquisition activity from these developing countries to their neighbor countries and sometimes even to countries in different continents (Brooks & Jongwanich, 2011). Although the topic of mergers and acquisitions has been researched thoroughly, there exists minim literature on mergers and acquisitions in emerging Asia. As to my knowledge, Asian cases have been of little concern. There are many things from mergers and acquisitions transaction process that is not fully understandable, one of them being the choice of payment method. The choice of payment method alone has significant impact on other things such as ownership structure, financial leverage, and financing decisions made in the future.

The aim of this paper is to examine the method of payments in mergers and acquisitions deals of firms in Asia by taking a closer look at the determinants that affect these deals and see if the way they affect the transactions differ from that of a developed economy. Since most research is on mergers and acquisitions transactions in the US and Europe, researching in Asia would be useful to evaluate the importance of financing decisions on a wider scale. This would be interesting because Asia in itself is an emerging market whose importance will grow in the near future. Given the example mentioned previously, it seems that Asian markets might rewrite the rules of mergers and acquisitions. It is also hoped that the results could show how firms in emerging economies such as Asia decide method payments in mergers and acquisitions deals in today’s economy. Given that Asia is a relatively large region, the focus of this paper will be based on Brooks and Jongwanich’s research (2011) on the areas that are considered to have

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This means that larger companies tend to acquire smaller companies which is the trend for developed economies. See Chakravarty’s “Asian M&A: Riding the Wave” (2012) for deeper explanation on US and European M&A trends.

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emerging economies and large financial development which are the People’s Republic of China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, and Thailand. With this research, it is hoped that it can show how certain factors differently affect mergers and acquisitions transactions in different economies.

The method of payment has important implications for both sides involved since it affects the post-ownership structure, risk profile, and allocation of gains from the transaction (Huang et all, 2014). In a developing economy, the average firm would usually also be in the growth stage. Firms that are expanding and growing would be able to do so by acquiring other firms in the process. The method of acquiring will tell a story as to what the acquiring company is trying to achieve. A company acquiring with cash could mean a few things. It could be trying to eliminate the competition, fighting for market shares, or even just increasing asset value. They would be acquiring with cash because to do otherwise would not eliminate the other companies completely. They can make sure that they have full control of what to do with the acquired company. A company acquiring with stock could be trying to diversify risk or trying to expand.2 It also provides an inside look on how the management of the firm values their own shares. This leads to the main research question in this paper which is “How do the factors that could determine the method of payment in mergers and acquisitions in emerging Asia differ from developed economies?”. The goal is to find out how factors that could affect the method of payment in mergers and acquisitions differ and the reason firms choose one method over the other.

When making a bid for a target firm, the managers of the acquirer firm faces the decision of bidding with cash or stock or even a mixture of both. These different choices have different effects. Different firms in different industries have different types of financing3. For example, a firm with high research and development would most likely be financed by equity since the return is less certain. Meanwhile, when a firm has limited cash and liquid assets and chooses to finance a bid with cash, it would usually lead to another financing decision, which is whether to choose debt or equity financing. This in itself raises the issue of a tradeoff between corporate control concerns when issuing equity and the financial distress costs of issuing debt. Thus, the financing decision is strongly influenced by debt capacity and manager’s desire to maintain

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Hitt et al (2004) explains in depth the motivations behind mergers and acquisitions

3 See Ross (1977) for a detailed explanation behind determination of financial structure

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existing corporate governance structure4. Other factors that may influence the financing decision may include overvaluation issues and country risk. Overvaluation issues might arise because of the competition between firms to acquire the target firm. However, due to the fact that the region is a developing economy, there is less competition and the problem of overvaluation might not rise that much. As for country risk, since the countries in the region are neighboring countries, they are more aware of the financial and political condition of the other countries in question, and therefore would know the risks. When the risks are higher, they would prefer to acquire with cash but when the risks are low, a mixed payment using both cash and stock could help boost the economy of the region as a whole.5

The target firm also faces a tradeoff between accepting cash or stock payments. For example, when the target firm has a low tax basis in their stock then by accepting stock they can defer their tax liabilities. However, they can also choose a cash payment to avoid the risk of becoming a minority shareholder in a somewhat concentrated ownership firm, thereby avoiding any associated moral hazard problems. Faccio and Masulis (2005) have tried to examine this tradeoff but due to data limitations it cannot be easily measured. Due to these data limitations, this factor will not be taken into account in this research.

Returning to the acquiring firms’ financing choice, the matter of corporate control plays a huge role in affecting the decision. If one of the targets of the acquiring firm is to maintain corporate control, then there are incentives to prefer cash financing rather than stock financing since stock issuance will dilute the voting power of a dominant shareholder. This incentive is strongest when the ownership of a target firm is highly concentrated which is the case most of the time and the acquiring firm’s major shareholder has a voting power between 20 to 60% (Faccio & Masulis, 2005). This is the range where the major shareholder is more vulnerable to the loss of control if the firm decides to finance with stock issuance. When the ownership of a target firm is more diffused, the incentive diminishes since control in not threatened. This is based on the models by Harris and Raviv (1988) and Stulz (1988) where managers with high control are more reluctant to diluting their voting power due to stock issuance.

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Brooks and Jongwanich (2011) explain this in depth

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Huang, Officer and Powell (2014) research the difference between cross-border transactions and domestic transactions.

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Logically, larger firms are usually more diversified and therefore are expected to have lower probabilities of bankruptcy. This means that at a given leverage ratio they have greater debt capacity. Risks such as bankruptcy would affect an acquiring firm’s chances of getting financing from lenders. Thus, larger more diversified firms have more favorability in issuing debt since they have less risk and thus, would prefer to use cash since the funds needed are available to the company.

At the end of this research it is hoped that the factors that affect a mergers and acquisitions transaction can be determined and can explain the difference in trends of mergers and acquisitions between developed economies such as the US and Europe and emerging economies such as Asia. An empirical analysis of the factors that affect the transactions of mergers and acquisitions in an emerging economy will be done using a tobit regression in which the aforementioned factors will be tested against the percentage of cash used in the transaction. This research will hopefully serve as a guideline for determining the method of payments in mergers and acquisitions in emerging economies.

This thesis will be structured as follows. After the introduction which is the first chapter, the second chapter will be the literature review on mergers and acquisitions. The third chapter will then be about the hypotheses, followed by the fourth chapter which contains the data and descriptive statistics. The fifth chapter will contain the empirical results and finally, the sixth and seventh chapter will include the conclusion and final suggestions respectively.

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II. Literature Review

According to classic corporate finance theory, a method of financing or payment should not affect any investment, including mergers and acquisitions (Modigliani and Miller, 1958). This statement holds in a perfect world with no asymmetric information. Unfortunately, that is not a world that we live in. Agency costs, asymmetric information, taxes, and bankruptcy costs cause the differences that may arise in financing. Before discussing empirical results, it is good to first discuss the theoretical insights behind the choosing of a method of payment.

Firms can choose to finance in two ways, internally and externally. As mentioned in the previous paragraph, theoretically it would not matter in a perfect world. However, since we live in the real world with imperfections, this is not clear. Thus, firms would prefer internal financing since it will not create new debt and the full return would go to the firm. Unfortunately, internal financing is not always available. When this is the case, firms are met with another intersection. External financing includes both debt and equity. In corporate finance, this is decided based on the information available to the firm. The Pecking Order Theory (Myers, 1984) is the order on which the firm will choose to finance a project or transaction based on the available information to the firm. In this order, debt is preferred over equity since issuing debt signals more confidence that the investment is profitable. If equity were issued, this would signal lack of confidence because a high return isn’t expected. However, this theory does not apply to all industries. For example, high-tech industries would prefer equity due to the high cost of issuing debt since their assets are intangible. In short, the Pecking Order Theory would be internal financing followed by debt financing and equity financing6.

A recent research done by Huang, Officer, and Powell (2014) discusses the choice of method of payments in both cross-border and domestic mergers and acquisitions. They differentiate between cross-border and domestic and see the trends between 1990 and 2010 in 46 countries. According to them, the method of payment has important implications for both the acquiring firm and the target firm. In both cross-border and domestic deals, cash payments are preferred. However, they found that cross-border deals settled with 100% cash is higher than

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Myers (1984) explains the capital structure problem and the pecking order theory more thoroughly in “The Capital Structure Puzzle”

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domestic deals settled with 100% cash. They take into account country-level governance factors that would impact the method of payment choice. Put specifically, stock payments are more likely when there is stronger governance, shareholder protection, or transparency for the acquirer. Taking into account the region in this research is an emerging region, the factors mentioned above are still not clear. The development of stock markets and regional shareholder laws are not as well-developed as in that of developed economies. Governance is also usually not as stable as those in a developed economy. This gives good reason to believe that stock payment is highly unlikely in a developing economy. Finally, Huang, Officer, and Powell conclude that cash payments are preferred in cross-border deals rather than domestic deals, but the differences have begun to narrow. This would also make sense since in cross-border situations there is higher information asymmetry compared to domestic situations.7

Faccio and Masulis (2005) have done a similar research determining the method of payment of European firms in 1997-2000. According to their results, the deal and target characteristics affect the method of payment chosen by bidders. Their method of research will be the main method in which this research will be conducted. The main difference is in the time frame and the region being researched. It may seem insignificant to research with just a different time frame and region, but due to the different approaches done by Asian companies to undertake mergers and acquisitions, the story will be very different compared to American and European consolidations. Martynova and Renneboog (2006) conduct a similar research which shows an overview of the European takeover market. Their results show that there is strong evidence that the means of payment largely impacts the share prices of both bidder and target, which supports the theory that method of payments play an important role in mergers and acquisitions. Golubov, Petmezas and Travlos (2013) study whether the source of financing affects the value of an acquisition. Their research showed that stock-purchased acquisitions are not value destructive, and the method of payment has no further explanatory power in cross-section returns. This would mean the method of payment does not really matter in the US markets but it’s not certain if the same results would apply in the emerging Asian markets. Meanwhile, Hattari and Rajan (2009) examines the cross-border mergers and acquisitions activities in a large panel including many developing Asian economies. They explore issues that

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Exchange rate risk also plays a role, but is not considered in this research since all transactions are measured in the same currency

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include the importance of financial drivers and financial risks in particular. They use data from 2000-2007 to investigate these issues. The difference between their research and this paper is that they try to find out the main drivers behind mergers and acquisitions while the focus of this paper is to find out what determines the method of payment in mergers and acquisitions. Brooks and Jongwanich (2011) examine the relationship between the mergers and acquisitions and the financial development in Asia using the top 9 developing countries. Their results show the importance of the equity financed mergers and acquisitions since it is related to the financial development of the bond market. Martin (1996) also has done a research on the factors that determine the method of payments by examining the motives underlying the payment in corporate acquisitions. He finds that the higher an acquirer firm’s growth opportunity the more likely that firm will choose stock financing. However, when an acquirer firm has higher cash availability they would more likely use cash.

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III. Hypotheses

The hypotheses formed in this paper are the results of mimicking Faccio and Masulis (2005) and Huang, Officer, and Powell (2014) because the goals that are achieved in these papers are similar to what this research is trying to achieve. The difference is Faccio and Masulis focus on European mergers and acquisitions which is considered to be a developed economy while this research is focused on emerging Asia, which is considered to be a developing economy. Huang, Officer, and Powell also differ from this research because their focus is on the difference between cross-border and domestic mergers and acquisitions while this research puts both cross-border and domestic mergers and acquisitions in the same region and analyzes how the type of deal affects the percentage of cash used in a transaction. And they do not limit their region while this research limits the sample to 9 emerging countries which are considered to be a developing economy region. The method of payment in mergers and acquisitions is classified into cash and stock. Cash payments include cash, non-contingent liabilities, and newly issued notes while stock payments include shares with full and inferior voting rights. In short, these hypotheses are adjusted to the fact that the region is an emerging economy.

An acquiring firm’s financing choices is influenced by the target firm as well. When a target firm does not like what is being offered by the acquiring firm, either the deal is aborted or the acquiring firm can do what is known as a hostile takeover where it will have its own terms.8 The acquiring firm may have a strong preference on one financial structure over the other. The factors that affect this strong preference is what will be investigated since it will determine a deal’s financial feasibility and attractiveness to both acquiring and target firms.

1. Less Competition in Corporate Control

Acquiring firms whose goal is also to retain the corporate control of the firm would be more reluctant to use stock financing (Amihud, Lev, and Travlos, 1990). Based on this, firms with dominant shareholders are associated with more use of cash since it will not threaten the controlling shareholder’s position. But due to the fact that the region is an emerging market, there would be less competition compared to that of a developed market. To measure this effect,

8 Based on Faccio and Masulis’ results

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the voting stake held by the largest controlling shareholder will be used as the variable CONTROL. For example, when a family owns 50% of firm X which owns 30% of firm Y, then that family controls 30% of firm Y through the weakest link in the chain of control. If that same family also owns 50% of firm Z that owns 20% of firm Y, then the family owns 50% of firm Y which is the sum of the two weakest links in the chain of control (Faccio and Masulis, 2005). Since there is less competition for control in an emerging economy, acquiring companies wouldn’t need to use cash to keep control and wouldn’t mind to use stock payments in their transactions. The first hypothesis would be:

H1 = Acquiring firms would not need to bid using 100% cash due to less competition for control and would therefore be more open to using a payment mixed with cash and stock payments.

2. Financial Leverage and Debt Capacity

An acquiring firm’s financial condition is important since in an emerging economy the average firm would be in a maturing stage, which is a volatile stage. To measure a firm’s financial condition, the variable FINANCIAL LEVERAGE is used. A way for firms to raise cash is by issuing new debt, which means firms that are highly levered would be more constrained and would rather use stock financing. An acquiring firm’s leverage is measured by the sum of the value of existing debt before the deal plus the value of the deal divided by the sum of the value of the assets before the deal plus the value of the deal. This will capture the post-deal leverage of the acquiring firm. Since firms with higher financial leverage are more constrained, they would prefer stock financing. The second hypothesis would be:

H2 = Acquiring firms with higher financial constraint would prefer to add stock payments in the deals to lessen the burden of debt.

The size of the acquiring firm would also influence the financing decision. A larger firm is usually more diversified and therefore are have lower bankruptcy costs. They usually also have better access to debt markets, which would mean issuing debt would not be a problem at all for them. This means that cash financing would probably be more appropriate for larger firms. Cash financing also allows the acquiring firm to avoid the costs of obtaining shareholder approval and stock authorizations and high regulatory stock offer costs. This is true for a 13

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developed economy. But in an emerging economy, there would be no large outlying firm and the target firms aren’t really small in comparison either. The size of the acquiring firm is measured by the log form of their assets pre-merger which will be labeled TOTAL ASSETS. To deal with the fact that this is an emerging economy, the size of the firm doesn’t necessarily mean more use of cash financing since the fluctuation of size is not that large. The third hypothesis would be: H3 = Larger acquiring firms do not automatically mean more use of cash in transactions since

the difference in size is not large, and would rather use a mixture of cash and stock to expand the firm better.

3. Relative Deal Size and Asymmetric Information

When asymmetric information is high about the target firms, acquiring firms have more incentive to finance using stock (Hansen, 1987). When the assets of the target firm rise in value relative to that of the acquiring firm, the asymmetry is also more likely to rise. As the equity capitalization of the acquiring firm rises, concerns about financing constraint falls since there is a relatively smaller impact on overall financial condition. To proxy this effect, REL SIZE is used which is the ratio of the deal size divided by the sum of the deal size plus the acquiring firm’s market capitalization at the year-end prior to the bid. The fourth hypothesis would be:

H4 = Target firms with high asymmetric information in the relative deal size would prefer stock financing.

4. Unlisted Targets and Subsidiary Targets

The indicator variable UNLISTED TARGET is used to control for the listing status of the target firms. The value will be one when the firm is not listed anywhere and zero if the firm is listed on any stock exchange. When an unlisted target is involved, the liquidity of said firm is also important. These target firms would prefer cash given the nature of their portfolio holdings which is illiquid and concentrated. Especially given that this is an emerging market. Unlisted firms in emerging markets are smaller on average. The fifth hypothesis would be:

H5 = Firms acquiring unlisted targets would use more cash financing in the transaction.

As for corporations that are selling subsidiaries, these are usually motivated by financial distress concerns or desire for restructuring which would also require cash payments or the

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acquiring firm would like to expand their business and acquiring he subsidiary of a rival firm would lead to more market gains. But since rival firms would not want to let go of the subsidiary firms so easily, the value of these deals are usually overpriced. To take this into account, the variable SUBSIDIARY is used whose value will equal one when the target is a subsidiary of another firm and zero if otherwise. To avoid overpricing, the acquiring firm would most likely use a mixture of both cash and stock payments. The sixth hypothesis would be:

H6 = Firms acquiring subsidiary targets would lean more towards using a mixture payment of cash and stock in the transaction.

5. Cross-Industry Deals

When the target firm is unaware of the industry in which the acquiring firm is coming from, they are more reluctant to accept stock payment since they are uncertain of future cash flows and earnings. On the other hand, if it were an intra-industry merger, the target firm is more likely to accept a continuing equity position since they are well aware of future prospects and industry risks. Therefore, a dummy variable INTRA_INDUSTRY is used which will equal to one if both acquiring and target firms are in the same industry and zero if otherwise. The primary SIC codes of these firms will be matched to see if they coincide. The seventh hypothesis would be:

H7 = Firms acquiring targets in different industries would prefer cash financing.

6. Cross-Border Deals

In a cross-border deal, there is the concern of home country bias in the investors’ portfolio decisions. This can reflect a foreign stock’s greater trading costs, lower liquidity, exposure to exchange risk and less timely, more limited access to firm information. But since the region being examined is a region consisting of neighboring countries, stock financing would not be a problem since each country is more aware of the financial and political condition of the neighboring country. Another indicator variable CROSS BORDER is used which will equal one if the acquiring firm and target firm come from different countries and zero if otherwise. The eighth hypothesis would be:

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H8 = Neighboring firms would use a mixture of cash and stock payment if the target firm is in a country with a stable condition.

IV. Data and Descriptive Statistics

The sample will include all acquisitions announced and completed between 2007 and 2013 by acquiring firms from the following nine countries: the People’s Republic of China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, and Thailand. The announcement and completion of these deals are obtained from Thomson One, “Worldwide

Mergers & Acquisitions Database”.

Since this paper will focus only on Asia, the mergers investigated will be cross-bordered between countries but still within Asia. The mergers and acquisitions observed are those that have been completed only to ensure that the results will show the factors that are taken into consideration will produce a successful merger. After the screening, we are left with 1696 observations.

The following tables show the distribution of mergers and acquisitions with the average control rights in each country and the method of payment used in each country.

Table 1

Country Distribution and Average Control Rights of M&A Transactions Country Acquirors Targets Average Control Rights

N % N % % China 512 30.19 569 33.55 82.45 Hong Kong 148 8.73 137 8.08 90.69 India 52 3.07 48 2.83 79.27 Indonesia 40 2.36 61 3.60 85.73 Malaysia 342 20.17 319 18.81 87.92 Philippines 24 1.42 27 1.59 84.02 Singapore 178 10.50 154 9.08 88.36 South Korea 372 21.93 353 20.81 82.39 16

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Thailand 28 1.65 28 1.65 79.76

Total 1696 100 1696 100 Average 84.51

Table II

Method of Payment Choice

N Cash % Mixed % Stock %

China 512 414 80.86 98 19.14 0 0.00 Hong Kong 148 71 47.97 77 52.03 0 0.00 India 52 48 92.31 4 7.69 0 0.00 Indonesia 40 38 95.00 2 5.00 0 0.00 Malaysia 342 298 87.13 44 12.87 0 0.00 Philippines 24 24 100.00 0 0.00 0 0.00 Singapore 178 135 75.84 43 24.16 0 0.00 South Korea 372 357 95.97 15 4.03 0 0.00 Thailand 28 27 96.43 1 3.57 0 0.00 Total 1696 1412 83.25 284 16.75 0 0.00 Listed Target 136 121 88.97 15 11.03 0 0.00 Unlisted Target 1560 1291 82.76 269 17.24 0 0.00 Subsidiary 505 451 89.31 54 10.69 0 0.00

According to Table I, the country with the majority of acquirers is China (30.19%) followed by South Korea (21.93%) and Malaysia (20.17%). Meanwhile, Philippines and Thailand have the least number of acquirers (both below 2%). As for the targets, it seems that the same countries are the majorities with China (33.55%), South Korea (20.81%), and Malaysia (18.81%). Based on these numbers, it seems that the countries that are active in acquiring are also the countries active in being targeted. This makes the variable CROSS BORDER more important. Of the 1696 transactions in the sample, 236 of them are transactions done by different countries. As for the control rights, the country with the largest average level of dominant

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shareholder voting control is Hong Kong (around 90.69%) while India’s average control rights after mergers are the lowest (around 79.27%). Still, the overall control rights in every country is very high (on average about 84.51%). This is a substantially high number which means most of the mergers and acquisitions that occur in this region involve nearly full control of the target firm.

Table II shows the method of payment used in the transactions. In short, the sample contains 83.25% pure cash transactions, 16.75% mixed (cash and stock) transactions, and 0% stock transactions. What is interesting here is that in the sample, none of these mergers and acquisitions transactions use stock only without any percentage of cash. Considering the fact that the region being investigated is considered a region with an emerging economy, this would make sense since transactions with cash are more certain and less risky. Other reasons are that the stock exchanges in each country are not as advanced as those in developed economies thus the firms would still want to use cash in order to acquire the target firms without the fuss of going through regulations on stock acquisitions.

The following tables contain the summary and the correlation of the variables.

Table 3

Summary Statistics of Variables

Variable Mean Std. Dev. Min Max

CU 89.470850 25.933020 0.17 100 CON 84.83560 19.651030 50 170 FL 0.126995 0.180826 0.0000154 0.9974 logTA 2.311847 0.899353 -2.30103 6.1614 RS 0.390448 0.126304 0.0003769 0.9278

The dummy variables are not included in the table since their values are either “0” or “1”.

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Table 4

Correlations Between Variables CU CON FL logTA RS DU DS DI DCB CU 1.000 CON -0.148 1.000 FL -0.459 0.091 1.000 logTA 0.123 0.051 -0.455 1.000 RS -0.194 0.399 0.244 -0.119 1.000 DU -0.023 0.101 -0.003 -0.257 0.282 1.000 DS 0.101 0.155 -0.128 0.227 -0.349 -0.373 1.000 DI 0.041 0.052 -0.022 0.031 -0.010 0.018 0.019 1.000 DCB -0.107 0.060 0.115 -0.013 0.018 -0.057 0.047 0.058 1.000 19

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V. Methodology

Since the dependent variable is the proportion of cash used in the M&A transaction, by definition it must be in the interval [0, 100]. Because of this, a two-boundary Tobit estimator is used. This estimation uses the general form:

𝑦𝑦𝑖𝑖∗ = 𝑥𝑥𝑖𝑖′𝛽𝛽 + 𝑢𝑢𝑖𝑖

Where 𝑢𝑢𝑖𝑖 is an independently distributed error term assumed to be normal with zero mean and variance 𝜎𝜎2. Since the dependent variable has both left and right censoring:

𝑦𝑦𝑖𝑖 = �𝑦𝑦𝑖𝑖∗ (if 0 ≤ yi ≤ 100)

100 (if 100 ≤ yi) Where 0 and 100 are censoring points.

The parameters β, σ are estimated by maximizing the log likelihood function: 𝑙𝑙(𝛽𝛽, 𝜎𝜎) = � 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙((−𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎)) 𝑖𝑖 ∋𝑦𝑦𝑖𝑖=0 + � 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙((𝑦𝑦𝑖𝑖− 𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎) 𝑖𝑖∋0<𝑦𝑦𝑖𝑖<100 + � log (1 − 𝑙𝑙((100 − 𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎)) 𝑖𝑖∋𝑦𝑦𝑖𝑖=100

Where f and F are the density and cumulative distribution functions respectively. Denoting 𝜑𝜑[(−𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎], 𝜑𝜑[(100 − 𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎], Φ [(−𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎], 𝑎𝑎𝑎𝑎𝑎𝑎 Φ[(100 − 𝑥𝑥𝑖𝑖𝛽𝛽)/𝜎𝜎] by the respective

symbols 𝜑𝜑0, 𝜑𝜑100, Φ0, 𝑎𝑎𝑎𝑎𝑎𝑎 Φ100, the conditional prediction of yi given xi is:

𝐸𝐸(𝑦𝑦𝑖𝑖|0 ≤ 𝑦𝑦𝑖𝑖∗≤ 100) = 𝑥𝑥𝑖𝑖𝛽𝛽 + 𝜎𝜎(𝜑𝜑0− 𝜑𝜑100)/(Φ100− Φ0)

And the unconditional prediction of yi is:

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𝐸𝐸(𝑦𝑦𝑖𝑖) = 𝑥𝑥𝑖𝑖𝛽𝛽{Φ100− Φ0} + 𝜎𝜎{𝜑𝜑0− 𝜑𝜑100} + (1 − Φ100)100

Formally, the regression equation would be written down like this:

CUtj= α + β1CONtj+ β2FLtj+ β3log(TA)tj + β4RStj+ β5DUtj+ β6DStj+ β7DItj+ β8DCBtj

Where:

CU: proportion of cash used in transaction CON: control

FL: financial leverage

TA: total assets of acquiring firm RS: relative size of deal

DU: dummy unlisted target DS: dummy subsidiary target DI: dummy intra-industry target DCB: dummy cross-border target

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VI. Empirical Results

This section will discuss the empirical results of the regressions done. The table below shows the results of the Tobit regression.

Table 4

Tobit Regression Model 1

Variable β Std. Err. [95% Conf. Interval] P-value

CON -0.615 0.208 -1.023 -0.206 0.003 FL -2.098 0.176 -2.444 -1.752 0.000 logTA -9.072 4.088 -17.090 -1.053 0.027 RS -1.234 0.383 -1.986 -0.483 0.001 DU -1.231 13.901 -28.496 26.034 0.929 DS 12.007 8.327 -4.325 28.339 0.149 DI 7.738 7.267 -6.516 21.992 0.287 DCB -22.555 8.003 -38.252 -6.859 0.005 CONSTANT 118.9 25.815 284.760 386.027 0.000 PSEUDO R2 0.0741

From the table above, it is now possible to interpret the effects of each independent variable on the dependent variable. A tobit regression has no R-squared but instead has a Pseudo R-squared which is not the equivalent of an R-squared. What it does is show the proportion of the total variability unexplained by the model. When the value is subtracted from 1 the result is the proportion of the total variability explained by the model. The more variability explained, the better the model. In this case, the pseudo R-squared has a value of 0.0741. When this value is subtracted from 1, it results in 0.9259. This means that about 92.59 percent of the total variability is explained by the model.

Now to explain the independent variables. The coefficient of the control variable is -0.615 which means that when the control acquired is increased by 1 percent, the cash used in the transaction is reduced by 0.615 percent. This variable is significant at the 5 percent level because its p-value is 0.003. This would be in line with the first hypothesis which means that firms prefer 22

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more use of mixed payments which would include both cash and stock when it comes to control. Apparently, control of a target company does not increase the use of cash in a merger and acquisition transaction. The fact that there is less competition in an emerging market would support this since firms would not need to outbid other firms and there is no one firm that owns a large share of the market. Another reason might be because the stocks used in the payment may not have voting rights which is the case for most of the companies with a mixture of stock payments based on the data. The target companies might also want a mixture of stock payment to assure participation in the growth of the future post-merger company. The second variable, financial leverage, shows a coefficient of -2.098, which means that when the financial leverage of a company increases by 1 percent, the amount of cash used in a transaction decreases by 2.097 percent. This variable is significant at the 5% level because its p-value is 0.000. This would be in line with the second hypothesis which means due to financial constraint, firms with larger financial leverage would prefer more mixed payments to reduce the costs of debt. The third variable, total assets, has a coefficient of -9.072, which means that when the total assets of the acquiring company increases by 1 percent, the amount of cash used in a transaction decreases by 9.072 percent. This variable is significant at the 5% level because its p-value is 0.027. This would also be in line with the third hypothesis which means that the larger the size of the firm does not necessarily mean the firm has better access to debt markets and the size difference between the acquiring firm and the target firm might not be significant enough for the acquiring firm to purchase using more cash. The next variable, relative deal size, has a coefficient of -1.234, which means that when the relative deal size increases by 1 percent, the amount of cash used decreases by 1.234. This variable is also significant at the 5% level because its p-value is 0.001. This would be in line with the fourth hypothesis which means that the larger the asymmetric information in the relative deal size, acquiring firms would prefer to use stock payments.

Now for the dummy variables. The first dummy variable which is for unlisted target firms, has a coefficient of -1.231, which means that when a target firm is unlisted, the amount of cash used in a transaction decreases by 1.231 percent. This dummy variable is insignificant at the 5% level because its p-value is 0.929. This variable is inconsistent with the fifth hypothesis, which means that acquiring firms that are targeting unlisted firms do not prefer cash in emerging markets. However, this variable is highly insignificant. The next dummy variable which is for 23

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subsidiary target firms, has a coefficient of 12.007, which means that when a target firm is a subsidiary of another firm, the amount of cash used in a transaction increases by 12.007 percent. This dummy variable is also insignificant at the 5% level because its p-value is 0.149. This variable is also not in line with the sixth hypothesis which means that acquiring firms that purchase subsidiary firms tend to use more cash. However, it should be noted that this variable is also insignificant. The third dummy variable which is for target firms in different industries has a coefficient of 7.738, which means that when a target firm is in a different industry than the acquiring firm, the cash used in a transaction increases by 7.738 percent. This dummy variable is insignificant at the 5% level because its p-value is 0.287. This variable is in line with the seventh hypothesis, which means that target firms in different industries would use more cash in the transaction. Finally, the last dummy variable, which is for target firms in different countries, has a coefficient of -22.555, which means that when a target firm in in a different country than the acquiring firm, the cash used in a transaction decreases by 22.555 percent. This variable is significant at the 5% level because its p-value is 0.005. This is consistent with the last hypothesis which means that since the region consists of mostly neighboring countries who are more familiar with the financial and political conditions of each other, target firms in other countries are acquired with a mixture of both cash and stock payments. By adding stocks into the mix, firms are able to expand abroad and help develop the emerging economy as well.

To sum up the results, the variables control, financial leverage, total assets, relative deal size, intra-industry dummy and cross-border dummy are in line with their respective hypotheses. However, the intra-industry dummy is insignificant. Meanwhile, the rest of the variables which are the unlisted dummy and the subsidiary dummy are not in line with their respective hypotheses. However, since they are both insignificant, no conclusion can be made about them.

For the next regression model, the insignificant variables will be dropped. Thus, the equation becomes this:

CUtj= α + β1CONtj+ β2FLtj+ β3log(TA)tj + β4RStj+ β8DCBtj

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The next table will show the results of the tobit regression with all the insignificant variables dropped.

Table 5

Tobit Regression Model 2

Variable β Std. Err. [95% Conf. Interval] P-value

CON -0.516 0.200 -0.908 -0.125 0.010 FL -2.105 0.174 -2.446 -1.765 0.000 logTA -7.915 3.905 -15.575 -0.256 0.043 RS -1.485 0.352 -2.176 -0.794 0.000 DCB -22.092 8.013 -37.809 -6.376 0.006 CONSTANT 339.012 22.380 295.117 382.906 0.000 PSEUDO R2 0.0733

As it can be seen from the table above, after the insignificant variables are dropped, the pseudo r-squared decreases from 0.0741 to 0.0733. This means that when the new value is subtracted from 1, it results in 0.9267 which means that about 92.67 percent of the total variability is explained by the model. This is a slight increase from the previous regression which was 92.59 percent.

As for the variables, they seem to give the similar effects as the previous regression only with slightly different coefficients. They all still seem to be in line with the hypotheses and are all significant.

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VII. Conclusion

The main objective of this research is to find out what factors determine the method of payments in mergers and acquisitions in emerging Asia. It is hoped that, since the mergers and acquisition pattern in emerging economies such as Asia differs from the mergers and acquisition pattern in developed economies such as the US and Europe, the factors that affect the method of payment can be researched in depth. This research does a tobit regression to achieve the objective.

As the results in the previous chapter suggests, most of the factors considered in this research are in line with the hypotheses for emerging markets. However, there are a few factors that are not in line with the hypotheses.

The factors investigated in this research that are in line with the hypotheses mentioned are control, financial leverage, total assets, relative deal size, intra-industry target firms and cross-border target firms. These factors follow the characteristics of an emerging market and affect the transactions differently than that of a developed economy. When it comes to control, because of less competition in emerging markets, this leads to more use of a mixed method of payment in mergers and acquisitions deals. And when firms are more financially constrained, they would also use more mixed method of payment to avoid stress costs of debt. The larger the size of the firm does not automatically mean that that firm will tap into debt markets to finance the transaction as well. And when there is larger asymmetric information in the larger relative deal size acquiring firms would prefer more use of stock financing since it will increase the acquiring firm’s equity capitalization and concerns on the financing constraint will fall since there is a smaller impact on overall condition. Intra-industry target firms would usually lead to more use of cash in the transaction, but due to insignificance this is not concluded for sure. Finally, since the region that is researched consists of neighboring countries that are more or less aware of each other’s financial and political stability, the mixed use of cash and stock would make sense because the addition of stock to the mix would help the growth and development of the region as a whole.

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The factors that are not in line with the hypotheses mentioned are unlisted target firms, and subsidiary firms. These factors do not follow the characteristics of an emerging market. However, both variables are insignificant and do not contribute to affecting the percentage of cash used in a mergers and acquisitions transaction.

To summarize, it seems some factors affect mergers and acquisitions transactions differently in an emerging economy compared to a developed one. Whether these factors will later have the same effect when the economy has matured is uncertain and a question for future researchers. What is certain is that control, financial leverage, total assets, asymmetric information in relative deal size, and cross-border target firms support more stock used in a transaction. That is what determines the method of payments in mergers and acquisitions in emerging Asia. Due to limitations such as time constraint and the possibility of other factors playing a role in mergers and acquisitions, this research may still have its flaws. Hopefully future researchers who are interested in this field of study might be able to expand and continue this research.

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VIII. Reference List

Alexandridis, G. and Mavrovitis, C.F. and Travlos, N. G. “How Have M&As Changed? Evidence from the Sixth Merger Wave” The Journal of Finance (2011), Elsevier

Alexandridis, G. and Petmezas, D. and Travlos, N. G. “Gains from Mergers and

Acquisitions Around the World: New Evidence” Financial Management Journal (2010), SSRN Brooks, D. H. and Jongwanich, J. “Cross-Border Mergers and Acquisitions and Financial Development: Evidence from Emerging Asia” ADB Economics Working Paper Series (2011), SSRN

Claessens, S. and Djankov, S. and Lang, L.H.P. “The Separation of Ownership and Control in East Asian Corporations” Journal of Financial Economics (2000), Elsevier

Faccio, M. and Masulis, R.W. “The Choice of Payment Method in European Mergers and Acquisitions.” The Journal of Finance (2005), Wiley Online Library

Hattari R. and Rajan R.S. “Cross-border Mergers and Acquisitions in Developing Asia: The Role of Financial Variables” HKIMR Working Paper No.36 (2009), SSRN

Heron, R. and Lie, E. “Operating Performance and the Method of Payment in Takeovers.” Journal of Financial and Qualitative Analysis (2002), Cambridge University Press

Hitt, M. A. et al. “Theoretical Foundations of Cross-border Mergers and Acquisitions: A Review of Current Research and Recommendations for the Future” Journal of International

Management 10 (2004), Elsevier

Hopkins, H.D. “Cross-border Mergers and Acquisitions: Global and Regional Perspectives” Journal of International Management (1999), Elsevier

Huang, P. and Officer, M.S., and Powell, R. “The Choice of Payment in Cross-Border and Domestic Mergers and Acquisitions” Journal of Finance (2014), SSRN

Martin, K.J. “The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership.” The Journal of Finance (1996), Wiley Online Library

Martynova M. and Renneboog, L. “Mergers and Acquisitions in Europe” Finance

Working Paper No. 114 (2006), SSRN

Myers, S.C. “The Capital Structure Puzzle” The Journal of Finance (1984), JSTOR

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Rossi S. and Volpin, P.F. “Cross-Country Determinants of Mergers and Acquisitions.”

Journal of Financial Economics (2004), Elsevier

Travlos, N.G. “Corporate Takeover Bids, Methods of Payment, and Bidding Firms’ Stock Returns.” The Journal of Finance (1987), Wiley Online Library

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