The Effect of Mergers and Acquisitions on the
Performance of Dutch Housing Corporations
Master Thesis
Marjolein Horsten BSc. 6149871
Supervisor: dr. Martijn Dröes
Business Economics – Finance and Real Estate Finance
University of Amsterdam 2014
Abstract
In this thesis the effect of mergers and acquisitions on the performance of Dutch housing corporations is investigated. Due to a global merger wave and local regulatory changes, there has been a large merger wave between Dutch housing corporations that started in the 1990s. Previous research showed that mergers have had no effect on cost savings of corporations (Berge et al., 2013). This thesis takes an alternative perspective by focusing on the performance of corporations. Performance is measured by a corporation’s output (its rental income) versus input (the value of its housing portfolio). While from theory an effect of mergers and acquisitions on the performance of Dutch housing corporations is expected, this thesis shows there is no conclusive evidence of this effect. Perhaps this is because the business strategy of mergers and acquisitions is more suitable for private firms than for public firms. While maybe the incentive behind the mergers was to increase performance (due to the regulatory changes), the effect is not apparent and Dutch housing corporations should search for other ways to improve their performance.
Table of Contents
1. Introduction ... 3
2. Literature review ... 6
2.1. Drivers for mergers and acquisitions ... 6
2.1.1. External factors ... 6
2.1.2. Internal factors ... 8
2.2. Merger waves ... 12
2.2.1. How and why do merger waves occur? ... 12
2.2.2. Conglomerate merger wave of the 1960s ... 13
2.2.3. Refocusing wave of the 1980s ... 13
2.2.4. Global wave of the 1990s ... 14
2.3. The merger wave in the market for Dutch housing corporations ... 14
2.3.1. Brief history of the market for Dutch housing corporations ... 15
2.3.2. The merger wave ... 15
3. Data and Methodology ... 18
3.1. Data and descriptive statistics ... 18
3.1.1. Data ... 18
3.1.2. Descriptive statistics ... 19
3.2. Methodology ... 21
3.2.1. Classic difference-‐in-‐differences ... 21
3.2.2. Difference-‐in-‐differences with control variables ... 22
3.2.3. Difference-‐in-‐differences with fixed effects ... 22
4. Results ... 23
4.1. Classic difference-‐in-‐differences ... 23
4.2. Difference-‐in-‐differences with control variables ... 24
4.3. Difference-‐in-‐differences with fixed effects ... 25
4.4. Robustness checks and other results ... 26
4.4.1. First differences ... 26
4.4.2. Quantile regression approach ... 28
5. Conclusion and discussion ... 32
References ... 34
Appendix ... 36
1. Introduction
Mergers and acquisitions are a big part of financial and economic activity these days. They regularly make national headlines especially given the astronomical amounts that are paid to acquire another firm. A well-‐known example is the takeover of Whatsapp by Facebook for the phenomenal amount of 19 billion dollars. There are many reasons for firms to engage in a merger or an acquisition, for example empire building or prestige (Trautwein, 1990 and Malmendier and Tate, 2007). But there are also more profound reasons for mergers or acquisitions, for example strategic or financial reasons. Strategic reasons can be combining two entities from the same industry to gain a bigger market share, which is also known as horizontal mergers, but can also be vertical mergers in which a different part of the production process is incorporated by a merger or acquisition (Trautwein, 1990 and Betton et al., 2008). Financial reasons can play a role when one firm is financially distressed, or when two firms can work more efficiently together (Trautwein, 1990 and Andrade et al., 2001).
Internationally there has been a huge merger wave in the 1990s, when merger and acquisition activity (M&A activity) clustered. The wave of the 1990s was based on the need of firms to go global and to restructure their operational activities to more focused businesses rather than diversified businesses (Holstrom and Kaplan, 2001). This merger wave is also present in the market for Dutch housing corporations. Where in 1997 there were 764 housing corporations, in 2010 there were only 400 housing corporations left (Berge et al., 2013). That means that 48% of corporations merged with another corporation, making this merger wave a huge local wave in such a small country as the Netherlands.
The aim of this thesis is to measure the effect of mergers and acquisitions on the performance of Dutch housing corporations. The hypothesis that is examined in this thesis (given the international focus on performance gains after a merger):
“Performance is significantly higher for a corporation post-‐merger compared to corporations that have never undergone a merger or acquisition.”
Data on the performance of housing corporations from the Centraal Fonds Huisvesting (CFV) are used to examine this question. This is a panel dataset that contains data for the years 2008 – 2012. A difference-‐in-‐differences methodology is utilized. Performance is measured by returns, or simply output versus input of the corporation. In the case of Dutch housing corporations the output is defined as rental income, input is defined as
the intrinsic value of the assets in their portfolio. Three models are estimated; a classical difference-‐in-‐differences model with only time fixed effects, one with time fixed effects and control variables and a difference-‐in-‐differences model with time fixed effects and corporation fixed effects. Lastly, a quantile regression approach is used, to see whether the effect is different for groups with either a lower or higher performance level.
This thesis contributes to the existing literature in two ways. First of all, the existing literature only discusses theories behind mergers and acquisitions between private firms. Dutch housing corporations however are public firms, or more precisely non-‐profit corporations with a social purpose. Private and public firms have different purposes, for example making profit or not. The business strategy to merge or acquire another firm is often used in private firms, but it is interesting to see whether or not it is also beneficial to use this strategy to achieve performance gains between public firms. The second contribution of this thesis is that this research focuses on the effect of mergers and acquisitions between Dutch housing corporations on the performance of the corporations, while in previous (Dutch) research the focus was only on cost savings. Berge et al. (2013) however found that corporations that merged actually had higher costs in the end. So maybe there is a beneficial effect on performance that made all the corporations want to merge despite the negative effects on costs. Moreover, performance is a generally used alternative measure to costs. Costs or cost savings are absolute, one-‐sided measures since income generated by making these costs is not included.
The results in this thesis show that there is an ambiguous relationship between mergers and the performance of Dutch housing corporations. The classic difference-‐in-‐ differences model and the model including control variables suggest a lower performance level for merged firms (-‐2% and -‐3% respectively). All three difference-‐in-‐ differences estimates (classic model, classic with control variables and the model with fixed effects) show a decrease in performance after a merger (-‐3%, -‐0,8% and -‐0,5% respectively). However all these results are mainly not statistically significant. Another approach for the fixed effects model (taking the first differences) gives an increase in performance after a merger (1,3%), which is interesting, however not significant. However, a quantile regression approach might give more insight. This approach shows that the performance of the median group and the higher (75th) percentile suffers a
decrease in performance after a merger of -‐0,7% for both groups. The corporations with lower returns in the 25th percentile however do benefit from a merger with a 0,3%
increase in performance. This could be explained by the fact that corporations with a lower performance level are more likely to merge with a corporation that has a higher
performance level, and the lower performing corporations might benefit from merging with a corporation with higher returns. When a corporation has a high performance level chances are large that it merges with a corporation with a lower performance level. This causes the performance of the combined entity to be lower than the performance of the best performing corporation. It is important to note that only the quantile analysis for the median group and the 25th percentile is statistically significant. So the overall
conclusion is that on average there is no effect but the effect of mergers on the returns of housing corporations is positive for corporations with initially a lower level of returns and negative for corporations with a median level of returns. For corporations with a high level of returns there is no effect.
The remainder of this thesis is structured as follows. The second chapter contains a literature review. First the drivers and implications of mergers and acquisitions are discussed. After that the concept of a merger wave is put forward. Finally, the particular case of the Dutch market for housing corporations is discussed. A brief overview of the history of this market is given and the merger wave of the last decade is reviewed. In the third chapter the dataset used for this thesis is explained and descriptive statistics are given. After this, the methodology is explained. In the fourth chapter the results of the thesis are reviewed. The fifth chapter contains a conclusion and a discussion.
2. Literature review
There are many reasons for firms to decide to merge with another firm, to acquire another firm or to be acquired by another firm. Most current literature only focuses on mergers and acquisitions between private firms. In the following sections first the drivers for private firms are discussed. In the second section merger waves are discussed, what they exactly are and why they occur. In the last section the specific case of the merger wave in the public market for Dutch housing corporations is discussed, the reasons for the merger wave and the implications of the merger wave.
2.1. Drivers for mergers and acquisitions
Drivers for a firm to engage in a merger or acquisition can be split up into external and internal factors. External factors include economic circumstances in which it is beneficial to merge with or acquire another firm, stock market performance and industry-‐specific shocks. Internal factors include qualities of firms, but also strategic decisions such as financial reasons, empire building, horizontal mergers and vertical mergers. In the following section first the external factors are discussed and after that the internal factors are discussed.
2.1.1. External factors
The market for mergers and acquisitions is often referred to as the “market for corporate control” (Betton et al., 2008). This is another reason than just performance enhancement and cost savings to enter into a merger or acquisition. However, next to underlying strategic reasons for a merger or acquisition – which are discussed later on – there are also economic circumstances that lie on the basis of a decision to merge with or acquire another firm. No matter what strategy or control issues play a role in a takeover, a takeover can only be done when it is financially and economically feasible. Therefore the external factors that play a role in mergers and acquisitions are now discussed.
As is mentioned in the research by Betton et al. (2008), M&A activity tends to be greater in periods of general economic expansion than in periods when the economy is in a downturn. This can be logically explained by economic theory, since in times of economic expansion companies strive to achieve growth in revenues, size, etcetera. One natural growth strategy is expansion of a firm through a merger or acquisition. Therefore a firm is more likely to takeover or merge when economic times are prosperous. This is also discussed by J. Wang (2008). In his research growing M&A
activity in the nineties is researched. By studying the growing Chinese M&A activity, which only started to blossom as late as in the nineties, the following relationship was uncovered: “…economic growth, interest rates, money supply, exchange rates will affect the number of China’s corporate mergers and acquisitions, while the relationship between the M&A and the stock market and economic freedom are not significant.” (Wang, 2008).1
It is interesting to see whether in economically more free countries the stock market does have an impact on M&A activity. This would be economically logical, since many mergers or acquisitions are carried out through the acquisition of all the stock of another firm, a method largely seen in the merger wave of the nineties in the U.S. (Shleifer and Vishny, 2003). Especially when mergers or acquisitions are purely carried out through the acquisition of stock (rather than other financial means) a decision to engage in a merger or acquisition is influenced by the performance of the stock market and the performance of the particular bidder and target on the stock market. Shleifer and Vishny (2003) even argue that a decision to merge with, or takeover, a firm is based on (mis-‐)valuation of firms on the stock market. They argue that firms can manipulate their stock value by over valuating their equity and therefore making chances higher a firm becomes a bidder rather than a target. Firms that do not over value their equity or have a lower stock value in general, tend to become target in an acquisition rather than a bidder. No matter in what way the theory works out for each company, it can be concluded that the stock market can be a strong driver in the decision to engage in mergers or acquisitions (Shleifer and Vishny, 2003).
Next to general economic and stock market movements, mergers and acquisitions can also be driven by industry-‐specific shocks (Mitchel and Mulherin, 1996). These industry-‐specific shocks are often caused by legal or regulatory changes within an industry and can lead to changes in operational activities. These changes can lead to higher costs for example, causing firms to aim for scaling benefits by merging with or acquiring another firm. It could also be the case that there is deregulation, causing companies to be able to have a bigger market share (monopoly or oligopoly) or to incorporate other parts of the production process. Mergers and acquisitions lead to higher efficiency and performance in that case, and the mergers and acquisitions are then driven by deregulation (Mitchel and Mulherin, 1996).
2.1.2. Internal factors
Internal factors can be separated into different categories. First of all an internal factor can be the quality of firms engaging in a merger or acquisition: their quality of assets, quality of earnings, etcetera. Furthermore a firm can engage in mergers or acquisitions for strategic means. There are three different strategic decisions: financial drivers, signalling and growth strategies. In the following sections these several internal factors are discussed.
2.1.2.1. Quality of firms
An internal factor that plays a role in the decision whether or not to engage in mergers or acquisitions is of course the quality of the parties engaging in the agreement. Worthington (2004) investigates mergers and acquisitions in Australian cooperative deposit-‐taking institutions and several internal factors are discovered as important determinants for M&A activity. These factors include asset size and quality, management ability, earnings and liquidity. The influence of these factors is different for target firms than for bidding firms (Worthington, 2004). This can be explained by taking asset quality as an example: when a bidding firm takes over a target firm, the goal is to get the asset quality of the target firm at the same level as the asset quality of the bidding firm. All of this is economically reasonable, a firm would not want to takeover a sinking ship and the different measurements of quality (asset size, earnings, liquidity) have to be up to a certain standard before a firm would decide to takeover or merge with another firm.
2.1.2.2. Strategic decisions: Financial drivers
The internal factors discussed above are mostly assessed once the idea of a merger or acquisition is already in place and when choosing which firm to acquire or merge with. Internal factors that move a firm to engage in a merger or acquisition are more aimed at strategic goals. First, and foremost, a strategic reason to merge or acquire is a financial reason. A merger or acquisition can be seen as an investment decision, as argued by Andrade et al. (2001). When a firm acquires another firm, they hope to expect an abnormal return in order for the acquiring firm to have financial benefits through the acquisition or bluntly said so the acquirer can make a high profit. An abnormal return of zero reflects that the acquisition of the target brings no more than normal benefits, and this is what the typical firm does not want. However Andrade et al. (2001) find that mergers and acquisitions generate no higher return than any other investment decision (capital expenditures for example). This leads one to think whether there are other internal drivers for a firm to engage in mergers or acquisitions.
Abnormal return is not the only measurement for a successful merger or acquisition. One other financial benefit caused by mergers can be saving costs. Costs can be saved through scaling benefits after a merger or acquisition. When two firms merge, certain synergies arise (Betton et al., 2008). Synergies are part of operational activities that both the target and bidder perform, for example an HR-‐department. When two firms become one it only needs one HR-‐department that probably doesn’t have to be as large as the HR-‐departments of the two separate firms combined. The operational activities can be combined and downsized, leading to lower costs for the combined firm. While cost savings are often seen as one driver for a merger or acquisition, Trautwein (1990) argues that cost savings are just part of the bigger picture relating to efficiency. In this light synergies can also be regarded as knowledge transfers (Trautwein, 1990). Efficiency is a big driver for firms to engage in mergers or acquisitions. According to the research of Jovanovic and Rousseau (2002) M&A activity responds 2,6 times more to efficiency than other direct investments. This indicates that firms engage in mergers or acquisitions to benefit from efficiency gains. Jovanovic and Rousseau (2002) even argue that while on internal investments money is never wasted, on mergers and acquisitions firms do sometimes waste money. While this contradicts the notion that efficiency can increase due to a merger or acquisition, it shows that a merger or acquisition is often driven by the need of firms to increase efficiency.
The ultimate aim for firms is that with increasing efficiency, corporate performance increases. In the research of Healy et al. (1992) it is tested whether or not this is actually the case. For the fifty largest mergers in the U.S. in the early 1980s performance is examined post-‐acquisition. Relative to industry peers, merged firms improve significantly in asset productivity, which in turn leads to higher operating cash flow returns. Performance especially improves when firms merge that have a lot of overlap in their activities, so when a merger generates a lot of synergies. Healy et al. (1992) furthermore prove that long-‐term capital expenditures and research and development investments do not suffer from a merger and they uncover a strong positive relationship between increasing operating cash flows after a merger and above average stock returns at the moment a merger is announced. This positive relationship indicates that when firms merge, there are positive expectations for the merging firms, leading to the revaluations of the equity value of the firms (Healy et al., 1992).
2.1.2.3. Strategic decisions: Signalling
Concluding from the paragraph above, a merger or acquisition generates positive expectations for the merging firms. A merger or acquisition can be a signal to the
market, which can lead to firms deliberately entering into a merger or acquisition in order to signal that the firm is doing well. A merger or acquisition might not be beneficial for efficiency or corporate performance, but it can be undertaken to give off a signal to competitors, customers and other stakeholders. Firms seek a certain prestige; this tactic is called empire building. Trautwein (1990) discusses many arguments found that support the empire building theory. Although evidence is fairly limited, many arguments support this theory. For example: management control is found to be associated with the engagement of a firm in a conglomerate merger and management share ownership and the number of inside directors is found to be negatively associated with merger results (Trautwein, 1990). The first argument shows that the more control management has, the more a firm will engage in mergers or acquisitions, because it benefits the management and not necessarily the firm itself. The second argument shows that the bigger the size of the management, the worse the results are after a merger, implying that a bigger number of managers in a firm will cause a firm to engage in mergers that are not necessarily beneficial for the firm. Next to these arguments there are many more, therefore the empire building theory is seen as a relatively credible merger theory, given the many aspects and drivers it comprises (Trautwein, 1990). While the drivers behind empire building discussed above encompass deliberate strategies from management to signal positive expectations by engaging in mergers or acquisitions, empire building can also be driven by the actual belief of management that they are able to create an empire while this may not be the case. Malmendier and Tate (2007) discuss this form of empire building in their research. They research the relationship between mergers and acquisitions and CEO-‐overconfidence, which is measured by two proxies. These proxies are the personal over-‐investment of a CEO in it’s own company and the way the CEO is portrayed in the press. When a CEO is overconfident according to these proxies, he or she is 65% more likely to engage in a merger or acquisition. This effect is even larger when there is access to internal financing or when a merger is done to diversify operational activities (Malmendier and Tate, 2007). Overconfident CEO’s often overestimate their ability to generate good returns, causing them to overpay for target firms. While the results of Malmendier and Tate (2007) are mostly focussed on pure CEO-‐overconfidence, they also take into account risk tolerance, inside information and signalling as discussed in the previous paragraph. This shows the many interpretations behind the empire building theory.
2.1.2.4. Strategic decisions: Growth strategies
Growth strategies through mergers or acquisitions can be divided into two types of strategies: horizontal mergers or vertical mergers. A horizontal merger means that a firm merges with or acquires a firm that carries out the same operational activities, for example a producer for cars acquiring a firm that also produces cars. A vertical merger means that a firm merges with or acquires a firm that carries out a different part of the production process, for example a producer of cars that acquires a firm that produces the tires for the car.
Horizontal mergers can be explained by the monopoly theory (Trautwein, 1990). This theory explains how firms acquire similar firms, in order to gain a bigger market share and increase their market power. However, the monopoly theory goes one step further. It for example also explains how acquiring a successful firm within another industry can generate profits, which are in turn used to sustain the market power in the initial industry. This practise is called the cross-‐subsidization of products (Trautwein, 1990).
In this light, vertical mergers could also be explained by the monopoly theory. Vertical mergers are more related to the consolidation of firms of which the operational activity comprises a different part of the production process. This consolidation can lead to buying power with respect to suppliers, giving a firm a competitive advantage compared to firms that do not have the same bargaining power (Betton et al., 2008). Firms could of course also develop operational activities of the part of the production process that they do not execute, however in that case start-‐up costs are often too high as well as high barriers to entry in many industries, especially in industries that rely heavily on knowledge and expensive machinery. Therefore this growth strategy is often executed by acquiring a firm that already executes that part of the production process (Betton et al., 2008).
One critical note on the growth strategies discussed above that generate more market power, is that according to the research of Focarelli and Panetta (2003) the efficiency effect of a merger or acquisition in the long run dominates the market power effect. However, the market power gains after a merger or acquisition are in principle often a specific reason for a firm to engage in a merger or acquisition.
2.2. Merger waves
As discussed above, there are many reasons and drivers that lead a firm to engage in a merger or acquisition. Some of these drivers cause many firms to engage in a merger or acquisition around the same time, for example economic factors globally or industry-‐ specific shocks. Therefore M&A activity often happens in a certain pattern. Periods of high activity are followed by periods of low activity, and so on. When there is a period of high activity, this is called a merger wave. As defined by Betton et al. (2008) a merger wave is “…a clustering in time of successful takeover bids at the industry-‐ or economy-‐ wide level.” This phenomenon is discussed in the following sections. First, it is discussed how and why merger waves happen, after that the three most notable merger waves in the last century are discussed.
2.2.1. How and why do merger waves occur?
As discussed in the previous section on drivers for mergers and acquisitions, M&A activity tends to increase when economic times are prosperous (Betton et al., 2008). Since economic patterns can mostly be identified as a flowing movement from good times to bad times, it can be expected that takeover activity moves in a similar pattern. Therefore, takeover activity clusters in economic prosperous times and this causes a so-‐ called “merger wave”. Regarding M&A activity in economic bad times, Beltratti and Paladino (2013) examine merger and acquisition activity between European banks in the years 2007 – 2010, during the emergence of the financial crisis. They indeed find that market reactions to mergers or acquisitions are lower, causing all the signalling and market power benefits to minimise, which leads to fewer mergers and acquisitions. If markets even respond, they also tend to respond slower to merger and acquisition news, due to uncertainty. This in turn leads to fewer mergers and acquisitions again. Also a high discrepancy in stronger and weaker firms causes only strong firms to take a chance on a merger or acquisition while many weaker firms would rather not (Beltratti and Paladino, 2013).
Merger waves can also occur within a certain industry, caused by industry-‐ specific shocks. These industry-‐specific shocks are often the result of changing legal or regulatory circumstances (Mitchel and Mulherin, 1996) or they are stock-‐market-‐driven (Shleifer and Vishny, 2003).
The best way to take a look at actual causes and implications of a merger wave is to analyse some of the most well-‐known merger waves from the past decades. This is done in the following sections.
2.2.2. Conglomerate merger wave of the 1960s
The merger wave in the 1960s was the largest since the turn of the century and is characterized by friendly takeovers, executed between firms that have a different operational focus (Shleifer and Vishny, 1991). Therefore, the merger wave of the 1960s is named the conglomerate wave, known for the unrelated diversification. Larger firms tended to acquire smaller firms that had a focus on a completely different line of business. In this area, the big corporations started to emerge with a large scope of different operational activities and not one dominant business. By 1969 the number of firms with a one-‐business-‐focus dropped from 22,8% in 1959 to 14,8% (Shleifer and Vishny, 1991).
A reason for the conglomerate wave is that branching out a line of business creates less risk through a lower cyclicality of earnings (Shleifer and Vishny, 1991). However, the most important reason was the instalment of regulatory changes in the 1960s – 1970s that made it illegal for firms within the same industry to merge, no matter how little consequences would be for competition. Therefore, firms started to branch out to other industries, forming big conglomerates with not just one main business focus. Benefits for this conglomerate wave deemed to be low, since in the 1970s a large portion of all mergers or acquisitions was reversed again through disinvestments (Shleifer and Vishny, 1991).
2.2.3. Refocusing wave of the 1980s
The big difference between the merger wave in the 1960s and 1980s is the fact that almost all mergers and acquisitions in the 1980s were characterized as hostile (Shleifer and Vishny, 1991). The merger wave of the 1980s was actually a reaction to the wave of the 1960s. As mentioned in the previous paragraph, the wave of 1960s was followed by disinvestments. These were still occurring in the merger wave of the 1980s. The disinvestments were often done through so-‐called carve-‐outs, where a part of the business was acquired or sold as a stand-‐alone firm (Shleifer and Vishny, 1991). Also leveraged buy-‐outs started to emerge; the case in which management of a firm acquires a firm with the use of large debt-‐instruments. These leveraged buy-‐outs were also often followed by large disinvestments. The trend was to merge or acquire within the same industry, and unlike in the 1960s stock prices would fall after a merger or acquisition took place aimed at unrelated diversification (Shleifer and Vishny, 1991).
From the merger wave of 1960s there is evidence that the merger wave was not a great success, since a large part of mergers and acquisitions was reversed. From the merger wave in the 1980s it is not clear whether it was a success or not. Some firms
performed better after the merger wave, some worse (Shleifer and Vishny, 1991). It is however apparent that the merger wave of the 1980s led to a wave of restructuring. When firms did not merge with another firm, acquired another firm, or received a takeover bid – which according to Mitchell and Mulherin (1996) was nearly half of all U.S. corporations in the 1980s – they would restructure anyway (Holstrom and Kaplan, 2001). Sometimes they did this in order to avoid the pressure of a hostile takeover and to prevent becoming a takeover-‐target. The new large use of debt during the merger wave of the 1980s caused debt levels to rise substantially to typically exceeding 80% of total capital value of a firm (Holstrom and Kaplan, 2001).
2.2.4. Global wave of the 1990s
The merger wave of the 1980s was quickly followed by a new wave in the 1990s with a different focus. M&A activity reached about the same level as during the merger wave of the 1980s, however there were less hostile takeovers and smaller use of debt. Due to the fact that restructuring only started in the merger wave of the 1980s, many mergers and acquisitions at that time were based upon forcing assets or firms out of the hands of unwilling or incapable management that was not able to efficiently make use of the various business focuses within one firm. However, in the 1990s restructuring was more shaped as a build-‐up to the exploiting of growth-‐opportunities in new technologies and markets (Holstrom and Kaplan, 2001).
The emergence of executive stock options and the growing importance of shareholders and board of directors made hostility decline, and the use of debt declined as well (Holstrom and Kaplan, 2001). Shareholder value became more important and there was a rise in incentive-‐based compensation. Corporate governance became more market-‐based and more transparent. Since this trend took place globally (especially in Western areas, such as the U.S. and Europe) this merger wave is also referred to as the global merger wave (Holstrom and Kaplan, 2001).
2.3. The merger wave in the market for Dutch housing corporations
This thesis discusses the effects of mergers and acquisitions on the performance of Dutch housing corporations. Since 1990 more and more corporations started to acquire or merge with other corporations. In this section first a brief history of this particular market is discussed in order to get a better understanding of this particular case. After that the merger wave is discussed; why it happened, how it happened and what the consequences were of the high M&A activity within that sector. Since this is a case where many mergers between public (non-‐profit) corporations instead of private
corporations arose, the drivers and consequences of the merger wave could be different from the literature discussed above.
2.3.1. Brief history of the market for Dutch housing corporations
The Dutch Housing market is unique, with at its highest point in the beginning of the 1990s a percentage of 41% of total Dutch housing stock being social housing, where in other Western European countries the percentage at that point in time was barely 20% (Boelhouwer, 2002). The reason for this is the emergence and transformation of the Netherlands as a welfare state, to which the maturing of the social rented sector is closely related (Boelhouwer, 2002).
Until the 1950s only about 12% of total Dutch housing stock was social housing (Boelhouwer, 2002). Even compared to other Western European countries that was low at that time. While after World War II the phenomenon of the welfare state started to emerge in European countries, the Netherlands was slower in its development of this phenomenon. However, the Netherlands more than made up for that, becoming a leading welfare state within a few decades. While around the 1970s most European countries reduced government interference and stimulated influences from the market, the Netherlands kept growing as a welfare state. The turning point for the Netherlands only came as late as in the beginning of the 1990s (Boelhouwer, 2002).
When this turning point came in the 1990s, this meant housing corporations were supposed to start working according to market influences. The level of performance of housing corporations at that time was deemed inadequate, leading to a memorandum that required housing corporations to perform better in future years. Furthermore, they were required to take their own responsibility when business was not going well (Boelhouwer, 2002).
This memorandum led to a movement where many corporations started to be active in mergers and acquisitions. The merger wave that came out of this movement is further discussed in the next paragraph.
2.3.2. The merger wave
As mentioned above, in the 1990s many Dutch housing corporations started to engage in mergers and acquisitions. This was due to the Besluit Beheer Sociale Huursector (Decree Management Social Rent Sector, BBSH), which came in effect in 1995. With this memorandum some financial ties between the government and housing corporations were cut (Hakfoort et al., 2002). Housing corporations shifted from being public corporations to being non-‐profit corporations with a social purpose, as defined in 2004 by the Dutch government. Because of this change, housing corporations became more
liable for their own results instead of responsibility being in the hands of the government. Performance had to increase and accountability for bad performance was shifted from the government to the housing corporations itself (Boelhouwer, 2002). Therefore, many corporations engaged in mergers as an attempt to lower costs. While in 1997 there was a number of 764 corporations, in 2010 there were only 400 housing corporations left (Berge et al., 2013).
Figure 1: Number of Dutch housing corporations over the years
Source: Berge et al., 2013
Looking back at previous sections where external and internal drivers for mergers and acquisitions are discussed, it is apparent there is a difference in drivers for mergers between private firms and this case, where public firms merge on a large scale. Economic prosperous times play a big role in private mergers and acquisitions, while this does not play a significant role here. Also more complex drivers such as empire building and diversification do not play a significant role. In this case the main driver behind the merger wave was a regulatory change. Because housing corporations started being held accountable for their own failures instead of the government bailing them out, corporations started striving for ways to cut costs and enhance performance (Boelhouwer, 2002). 0 100 200 300 400 500 600 700 800 900 1997 … 2008 2009 2010 2011 2012 2013 2014 Number of Housing Corporations
The main reason why corporations started merging was that the corporations believed this would generate cost savings (Berge et al., 2013). It was believed that costs could be cut through a merger because of scaling benefits that can be generated by a bigger, merged corporation. We would also expect to find this effect with regard to performance (i.e. the topic of this thesis). However Berge at al. (2013) show in their research that costs were not cut at all by all the high level of M&A activity. Perhaps there were other factors that were benefitted by engaging in mergers or acquisitions. Mainly one factor comes up in the previous sections that would be a plausible driver behind all the M&A activity, and that is performance. If costs were not saved and there is no increase in performance, the high number of mergers would not make sense from a typical performance/costs point of view.
3. Data and Methodology
3.1. Data and descriptive statistics
In this section the dataset is discussed. After this, some descriptive statistics of the most important variables are given.
3.1.1. Data
Data for this thesis have been gathered from the CFV. In their database financials for all housing corporations are recorded, for example net operating expenses and the number of allocations of tenants to houses made each year. Also, other market factors that are the same for each corporation are incorporated, for example growth in rental prices. For this thesis data from 2008 until 2012 are used. The dataset is transformed into a typical panel data structure so that the appropriate analyses can be executed. Dummy variables are created to make a distinction between the treatment group and the control group. The treatment group has undergone one or multiple mergers between 2008 and 2012. The control group has undergone no merger in this timespan. Another dummy variable is created to indicate in which year the corporation merged. For corporations that merged multiple times within the timespan, the year of the first merger is taken as the year from which on the corporation merged.2
When corporations merge, there is the problem in the database that prior to the merger there are two corporations and after the merger there is one. In this database, financials of corporations prior to a merger have already been taken together. This is why financials of the merged corporations prior and post-‐merger can be compared relatively easily.
Several steps have been taken to clean up the dataset. The dataset started out with 396 corporations. First of all, 13 corporations were omitted due to the fact that there was no merger information about these corporations. Second of all, 21 corporations were omitted when information on the years 2011 and 2012 was missing. Since the database only contains information from 2008 until 2012, missing data from two out of five years can have a big impact on the regression outcomes. Therefore, the entire corporation has been omitted if this was the case. This results in a final dataset that contains 362 corporations. What has been done to eliminate outliers will be explained in the next section.
2 In the dataset no distinction is made between mergers or acquisitions, all transactions are referred to as mergers.
3.1.2. Descriptive statistics
The most important factor of this research is the number of mergers that takes place between Dutch housing corporations within the time frame of the dataset. In Figure 2 an overview of the number of mergers is given.
Figure 2: Mergers between housing corporations
Source: CFV
The log of returns is the dependent variable in this research. In this thesis the aim is to assess the impact of mergers on the performance of housing corporations, and the variable returns is the measurement for performance. Returns in the dataset are the rental income as a percentage of the value of the assets of the corporation. This value is based on the Dutch WOZ-‐value (in Dutch Waardering Onroerende Zaken, or in English assessed value) of all the properties in the portfolio of the corporation. In Table 1 the descriptive statistics are given of returns as well as other factors.
0 5 10 15 20 25 30 2008 2009 2010 2011 2012 Number of mergers
Table 1: Descriptive statistics
Variable Mean Standard Deviation Minimum Maximum
Returns (performance measurement) 3,38 2,15 1,00 81,63
Market Factors -‐1.215,68 2.413,31 -‐20.155,01 9.267,49
Lag Net Operating Expenses 1.232,18 342,88 -‐1.595,47 5.415,34
Allocations 496,77 767,75 0,00 12.314,00
Net Cash Flow per Rental Unit 2.367,39 902,83 -‐5.820,65 7.129,55
