Market valuation and announcement effects in cross-border acquisitions
Abstract
Academic year 2014/2015
This research investigates whether cross-border deals undertaken in low-valuation markets are fundamentally different from deals undertaken in high-valuation markets. The sample contains 266 acquisitions announced between January 1, 2001 and December 31, 2014 of which 102 take place in low-, 112 in neutral-, and 52 in high-valuation markets. Using both univariate and multivariate models with a three-day CAR as the dependent variable, this study shows that there is a significant relation between the state of the market and firm-specific announcement returns. Contrary to findings from Bouwman et al. (2009), I find evidence that acquirers announcing a takeover during a low-valuation market have significantly higher announcement returns than acquirers who announce a takeover during a low-valuation market. In addition, I find that cross-border acquisitions are of higher quality than domestic acquisitions during high-market valuations. Furthermore, I show that focused acquisitions are positively related to the three-day CAR across all states of the market. Msc Business Economics, Finance track
Master Thesis
Student: Hesse van der Werk Field: Corporate Finance Supervisor: Dr. J.E. Ligterink August, 2015
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Statement of originality
This document is written by Hesse van der Werk who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Table of contents
I. Introduction ...4
II. Literature review ...6
a. Historical overview of merger waves ...6
b. M&A motives and related theories ...7
i. Synergy ...7
ii. Agency ...8
iii. Hubris ...8
iv. Market timing ...9
c. Cross-border M&A ...9
d. Market valuations ...10
e. Market reactions to M&A announcements ...11
i. Market reactions to M&A announcements in cross-border takeovers ...12
ii. Market reactions to M&A announcements in different market valuations ...12
III. Hypotheses ...13
IV. Data and descriptive statistics ...13
a. Sample selection ...13
b. Classification of the market into different valuation states ...14
c. Descriptive statistics ...16
V. Empirical method ...18
a. Announcement returns ...18
b. Multivariate regression framework ...20
c. Control variables ...21
i. Method of payment ...21
ii. Tender Offers ...22
iii. Diversifying and focused M&A ...23
iv. Private and public targets ...23
VI. Results ...24
a. Univariate results ...24
b. Multivariate results ...26
c. Possible explanations ... 30
VII. Conclusion ...31
VIII. List of references ... 35 Appendix
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I. Introduction
In corporate finance literature, it is common knowledge that mergers and acquisitions (M&As) tend to come in waves. Theory from Jovanovic and Rousseau (2001) show that periods with high merger activity go together with high-market valuations. In addition, Rhodes-Kropf and Viswanathan (2004) show that firm- and market-wide misvaluations can result in merger waves but also impact the quality of the deal. Bouwman et al. (2009) study the short- and long-term relationship between market valuations and deal quality by dividing the market into different states of valuation based on its Price-/Earnings (P/E) ratio.
Thus far, no study has focused on studying the effect of market-valuations on firm
performance for a European market. Related literature focuses primarily on takeovers involving US bidders (Georgen and Renneboog, 2004; Bouwman et al., 2009). Furthermore, no division has been made between cross-border and domestic acquisitions. The objective of this study is to research if managers are able to time the market when they make merger decisions and thus create additional wealth. More specifically, this study aims to shed light on this topic through an empirical examination where we specifically answer the following question: Are deals undertaken in low-valuation markets fundamentally different from deals undertaken in high-valuation markets?
As expected, the results show that market valuations are related to short-term stock
performance. Given these results, acquirers may want to pay extra attention on macro-valuations when announcing a takeover. Because previous research is confined to only the US, I believe that a study focused on European firms contributes to corporate finance literature. The European market is characterized by weaker investor protection and less developed capital markets (LaPorta et al. 1998), and by more concentrated ownership structure (Faccio and Lang, 2002). Through the integration of Europe and the introduction of the EURO as the single currency, cross-border deals gained their prominence in Europe (Coeurdacier et al., 2009). Thus, it is interesting to evaluate if the following patterns hold in a new institutional, legal and regulatory setting.
This study primarily builds further on research from Bouwman et al. (2009). They find that acquisitions that are announced when the market is booming are fundamentally different from those that are announced during market troughs. They find that US bidders have higher short-term returns at announcements compared to bidders in low-valuation markets. Bouwman et al. (2009) do also
partition their US sample by the method of payment. Consistent with other literature, they find that cash offers are preferred above stock offers. No theoretical foundations support these results nor do Bouwman et al. (2009) come up with possible explanations which seem to justify their findings. Using Buy and Hold Abnormal Returns (BHARs), Bouwman et al. 2009 find that the short-run price effects are reversed. Their results are consistent with the managerial herding theory, which suggests that underperformance of acquisitions undertaken when markets are booming is caused by firms that buy later in the merger wave.
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This study uses a sample of 266 acquisitions announced between January 1, 2001 and December 31, 2014. As first presented by Bouwman et al. (2009), the market index is divided into low-neutral-high valuation states by its P/E ratio. Of all the acquisitions, 102 take place in low-, 112 in neutral-, and 52 in high-valuation markets. Furthermore, this thesis deploys an event study for the analysis of abnormal returns around the event of an announcement. A three-day event window will be used. Secondly, two multivariate models are used to test how firm-specific characteristics relate to different valuations of the market. The models differ in the way the market valuations are being reported. The first model includes the market valuation dummies as the independent variables and the CAR as the dependent variable. Where Bouwman et al. (2009) include high- and neutral-market valuation dummies, this study includes high- and low-valuation market dummies. This is done as to test the difference in high-market and low-market coefficients from takeovers in a neutral-valuation market. The model controls for cross-border acquisitions, method of payment, tender offers, nature of the firm, relative deal size and if the deal was focused or diversifying. The second multivariate model differs in the way the market is being partitioned into different valuations. This time, the market valuation is reported through a continuous variable which is called the ‘DetrendedPEratio’. By using two different ways in which the market is being divided, this study tests if the results are robust to different standards.
The main findings of this study show that acquirers buying during high-valuation markets underperform those buying during low-valuation markets. This implies that the market favors acquisitions undertaken in low-valuation markets above those undertaken in high-valuation markets. Across all deals in the sample, this study does not find significant announcements effects to cross-border acquisitions. However, the results show significant evidence that cross-cross-border acquirers during high-valuation markets underperform their counterparts during low-valuation markets. Furthermore, domestic deals during high-valuation markets seem to have highest negative returns, and
underperform acquirers involving cross-border acquisitions. Furthermore, I show that focused acquisitions are positively related to the three-day CAR. Initially, no significant results are found for the method of payment. Although, in the second regression including the interaction variables, this study finds that cash seems to have a significant negative effect on the three-day CAR. This finding is ambiguous to empirical literature.
The rest of the paper is outlined as follows. Section II reviews the relevant theories and motives behind the aforementioned research topic. Section III presents the main findings from existing literature and relevant hypotheses for the thesis. Section IV describes the data collection procedure and descriptive statistics. In section V the methodology used to compute the cumulative abnormal returns (CARs) and the multivariate model is discussed. Section VI presents the results of the analyses, robustness checks and a discussion. Section VII concludes the paper, discusses the potential limitations, and presents some directions for future research
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II. Literature review
The literature section helps in framing the hypothesis and provides an extensive introduction to existing literature on takeovers and firm- and market-wide valuations. This section starts with a historical overview of mergers and acquisitions. Second, main motives for takeovers and their related theories are introduced. Third, cross-border takeovers and their differences with domestic takeovers are discussed. Forth, this paper continues explaining existing empirical literature and theories on market valuations and their implications for deal quality. Furthermore, the empirical evidence on both domestic as cross-border acquisitions is discussed, as well as how this research relates and adds to existing literature.
a. Historical overview of merger waves
First, the historical development of takeover waves and their underlying motives are introduced in order to get a basic idea how the takeover market developed itself to current standards. In total, there are five main merger waves documented which were driven by both industrial-, economic- and regulatory shocks (Harford, 2005).
The first merger wave documented started in the late 1980s and was named the ‘Great Merger Wave’. This merger wave was driven by large developments in technology, economic expansion and other innovations on US soil. These factors together instigated a large number of horizontal takeovers which resulted in giant firms and monopolies with large market power. After this horizontal
consolidation, more than 1800 firms disappeared, and the economic landscape was dominated by only a few large firms. The first merger wave ended in 1904 due to a large crash of the capital market (Martynova and Renneboog, 2008).
The second merger wave occurred after World War I and was a reaction to the large monopolistic firms having large market power. A merger wave between small companies was initiated, which together formed better competition against the large firms created in the first merger wave. The economic landscape transformed into an oligopoly, with multiple large firms competing each other (Sudarsanam, 2010). This wave ended due to the stock market crash which took place in 1929 (Martynova and Renneboog, 2008).
The third merger wave took place in the 1960s, and was characterized by growth through diversification of operations. Due to stronger antitrust regulations which were focused on preventing horizontal and vertical mergers, firms began to diversify their operations into new unrelated markets. Whereas this wave took place in the US, the UK also experienced their first merger wave which was characterized by horizontal mergers. This UK merger wave was motivated by new regulations to create new large firms which could compete with other large international firms in the rest of the world (Sudarsanam, 2010).
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focused acquisitions and divestitures. Firms began to focus on their core business in order to exploit their competitive advantage. This was done through divestitures of non-core activities and acquisitions of companies which enhanced core operations. This wave was known for their hostile tender offers and and acquisitions of diversified firms. The wave ended with the stock market crash in 1987 (Martynova and Renneboog, 2008).
The fifth merger wave took place in the 1990s and was driven by economic globalization. Takeovers in this wave were primarily undertaken for the expansion of operations and to strengthen the competitive position on a global scale.
b. M&A motives and related theories
This section gives an overview on the motives behind takeovers. Where some takeovers are initiated for their operational or financial synergies, Martynova & Renneboog (2006) identify three more motives. First, managers involved in a takeover process might suffer from hubris, leading them to overestimate potential synergies and overpay during the takeover process. The other two motives involve agency problems, where deals are undertaken for the satisfaction of private benefits. Last, market timing theory is introduced, where takeovers take place during market booms when markets are overpriced.
i. Synergy
Common motives for a takeover are the operational and/or financial synergies to be realized from the deal. When a synergy exists, the combined value of the target and acquirer is greater than that of the separate entities. These synergies justify a premium paid by the bidder which can be up to 10-30% above the pre-announcement targets’ stock price. Synergies are either cost-reducing or revenue enhancing and focus on operational or financial improvements. Cost-reduction synergies are often easier to achieve, mostly through layoffs of overlapping employees and the elimination of redundant resources (Berk et al., 2008). Ravenscraft and Scherer (1987) and Haleblian et al. (2009) state that operating synergies arise through economies of scale and scope. This includes increased market power and efficiency through layoffs of overlapping resources / activities, vertical integration and a reduction in agency costs through common ownership. Other financial gains are attained through internalization of capital markets or tax optimization. Operating synergies are more common when the merging firms operate in the same sector or industry. Mainly because the reduction of production and distribution costs through economies of scale is most likely to occur when companies operate in the same way. Other operating synergies can arise through the acquisition of a specific knowledge, technology or patents. Financial synergies are somewhat harder to achieve and are most commonly realized through diversification of operations. According to Lewellen (1971), Higgins and Schall (1975), diversification of operations generally result in better cash flow certainty, lower default probabilities, better access to external funding and a better use of tax shields. Another motive which is often cited as a reason for a
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takeover is to improve managerial failure through better resource utilization (Asquith, 1983). Failing management within the target firm is replaced by new management which is brought in by the
acquiring firm through a hostile takeover. Until recently, this disciplinary market for corporate control existed mostly in the US (Morck et al., 1988). Hasbrouck (1985), Palepu (1986) and Mitchell and Lehn (1990) provide evidence that targets in a hostile takeover significantly underperform their peers involved in friendly takeovers.
ii. Agency
Managers may not always act in their shareholders’ best interests (Jensen, 1986). When there is an agency problem in the acquirers firm, takeovers are likely to be initiated for the managerial benefits at the cost of shareholders. Such takeovers are mainly the result of wrongly set compensation schemes which are tied to the amount of assets managers have under their control. Managers prefer size above profit, with a focus on attaining high growth rates on their assets under control (Morck et al. 1990). According to Martynova & Renneboog (2008), a wrong compensation scheme incentivizes managers to pursue asset growth and go for empire building. In a firm with agency problems,
managers are more likely to minimize risk and enhance the chances of corporate survival to safeguard their position. This is in line with the managers’ strategy to initiate takeovers for means of diversifying operations and create more stable sources of income to the firm (Amihud & lev, 1981). Shleifer and Vishny (1989) find that managers sometimes initiate takeovers to entrench themselves. They find that some takeovers were made to increase the firms’ dependence on the skillset of the manager as to secure their position.
iii. Hubris
Developed by Roll (1986), another relevant theory to this paper is the behavioral Hubris theory of mergers. This theory hypothesizes that managers who suffer from managerial hubris are overconfident and overoptimistic in their value-maximizing behavior and therefore pay too much for their targets. In addition, Hodgkinson and Partington (2008) report that overconfident managers overestimate the synergies of the deal and therefore overpay for their targets. Managers with Hubris genuinely believe that they are superior to other managers and therefore underestimate the chances of failure and other hazards in the decision process. Since there is no wealth created in the deal, these takeovers have no gains for both the acquirer and target. This over-investing is relevant in particular when external financing is easily accessible. Even when managers expect the announcement to have negative wealth effects, they are willing to make acquisitions because they are confident that these deals will create value in the long-run. This theory suggests that more mergers occur in high-valuated markets with better access to external financing and higher amounts of takeover opportunities.
Hubris is sometimes triggered through managerial herding, where firms (late-movers) are likely to mimic the actions of leading firms (first-movers). When a takeover is seen to be successful,
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this may encourage other companies to engage in similar takeovers which do not yield the same return as deals undertaken in an early stage (Martynova & Renneboog, 2008). McNamara et al. (2008) report that the market reacts positive to takeovers initiated early in a takeover wave, whereas later takeovers suffer from negative announcement returns.
iv. Market timing
As first documented by Myers and Majluf (1984), takeovers are sometimes undertaken when acquirers want to take advantage of an overvalued and financially booming market. Stock prices tend to be overvalued during a bull market. The degree of overvaluation differs amongst firms and depends on the strength of their inefficiencies (Shleifer & Vishny, 2003). When stocks tend to deviate from their true value, better informed acquirers may take advantage at the expense of less-informed targets (Martynova and Renneboog, 2008). Shleifer and Vishny (2003) report that the management of a target firm would be willing to accept such bids when they are focused on maximizing short-term benefits. In addition, Rhodes-Kropf and Viswanathan (2004) suggest that target management will accept such bids in the case it overvalues potential synergies as the consequence of an overpriced market.
c. Cross-border M&A
Cross-border acquisitions are often undertaken to cope with growing international competition in global markets. The expansion of domestic firms to foreign countries opens up possibilities to exploit tax advantages and to expand the firms’ reach to new markets. Since the 1980s, foreign direct
investments (FDIs) increased with 50% and made up around 83% of total FDI in 1999. After 2000, cross-border M&As fluctuated between 80-85% of global FDI according to research from UNCTAD (2008).
Cross-border M&As can be decomposed in several corporate actions such as Greenfield investments, joint-ventures and other strategic alliances. The considerable amount of growth of cross-border M&As can be accounted to several factors. One of them is the growth of the accessibility to capital used to finance such projects. The globalization and growth of financial markets has contributed to easier and cheaper access to funding.
There are several factors why the returns of a cross-border M&A could differ from that of a domestic M&A. Through diversification to new markets, a firm can diversify its risk and income. Other reasons include lower wages, production costs or better access to resources which may not be that accessible in the domestic market. Cross-border investments open up possibilities for firms to enjoy rents from market inefficiencies and other tax systems (Scholes and Wolfson, 1990). Moeller & Schlingemann (2005) add that foreign takeovers offer opportunities to get access to new investment opportunities. Froot and Stein (1991) state that imperfect capital markets also open up arbitrage possibilities as to profit from exchange rate movements. Markides and Ittner (1994) build upon research from Froot & Stein (1991), stating that exchange rate fluctuations have a significant
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relationship with Foreign Direct Investments (FDIs). They find evidence that when relative currency valuations are in favor of the acquirer, higher returns are obtained.
Cross-border deals are often more difficult to pursue due to several disadvantages. First, other regulations and corporate law can possibly form restrictions for the acquirer. The acquirer has to comply with foreign governments and institutions. Adaption or integration to these regulations can be a timely and costly process. In case the country where the target firm is placed is instable, the
acquiring firm has to take in account additional costs which may arise. It is harder to accurately value a foreign target as the distance plays a role and information may be scarce and expensive (Conn et al., (2005). This increases the chance that the bidder overpays for a foreign target and the deal destroys value for the acquirer.
Another important factor to the success of cross-border M&As is culture. Differences in culture between the acquirer and target firm could potentially lead to frictions in terms of communication and integration. Research from Chakrabarti et al. (2005), which studies the
relationship between cultural distance in cross-border M&As, finds negative abnormal returns for the bidder on the announcement day. However, this negative short-term effect is reversed on the long-term, where cultural distance seems to be a motivator for positive long-term performance. More specifically, they find that the long-term performance of cross-border deals grows when countries are more culturally disparate.
d. Market valuations
As the aforementioned literature explained, takeover activity tends to come in waves. Theory from Jovanovic and Rousseau (2001) show that periods with high merger activity go together with high-market valuations. In addition, Rhodes-Kropf and Viswanathan (2004) present a model which shows that firm- and market-wide misvaluations may result in merger waves. Shleifer and Vishny (2003) show that the state of the market may impact the decision to acquire, the method of payment and/or acquirers’ performance. Rhodes-Kropf and Viswanathan (2004) show that the state of the market has an impact on the quality of the deal.
Rhodes-Kropf and Viswanathan (2004) suggest that targets will only accept an offer during low-market valuations if the synergy outweighs the negative information embedded in the stock price. During high-market valuations, target firms filter out too little of the market-wide effects. This has the effect that bidding offers appear to be more attractive than they actually are. This means that the target firm will be more likely to accept the bidding offer. Consistent with this theory, the best deals should therefore be initiated during low-market valuations and deals which are of lower quality during high-market valuations. Goel and Thakor (2005) argue that mergers undertaken in bull high-markets have less synergies and will therefore be of lower quality than deals undertaken in bear markets.
Five years later, Goel and Thakor (2010) come up with a behavioral theory to explain the relation between takeover quality and merger activity. With the use of a model which is based on CEO
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envy, they suggest that late takeovers in a merger wave underperform those earlier in the merger wave. They explain that a merger wave starts with a shock, which is caused by the early movers. After this shock, the envy of the CEO makes them want larger takeovers with higher compensations and more prestige than their predecessors. This ultimately leads to value-destroying deals later on in a merger wave.
Consistent with the aforementioned theories, managerial herding (Bouwman et al., 2009) does also explain possible underperformance of high-market acquirers compared to low-market acquirers. Managerial herding suggests that at the moment that mergers or acquisition by early acquirers are shown to be successful, other firms want to make a similar move, thus leading to less returns as the ‘premium’ is already being picked-off by first-movers. According to this, acquisitions occurring late in a merger wave are more likely to be value destroying. Rhodes-Kropf and Wiswanathan (2004) support this argument by stating that merger waves end after the market learns from bad experiences of the previous acquirers.
e. Market reactions to M&A announcements
This section gives an overview of share price reactions to M&A announcements. First, share price reactions for all takeovers in general will be discussed. Tough this study is primarily interested in bidders’ returns to M&A announcements, target returns are also discussed. Subsection i makes the distinction between domestic and cross-border acquisitions and discusses implications for both bidder- as target firms involved in cross-border M&As.
The price effects of takeover announcements are estimated using daily stock prices. We therefore assume that stock prices incorporate the estimated value of the gains resulting from the deal. Martynova and Renneboog (2006) state that M&A’s are expected to increase the acquirers’ and targets’ combined value since target shareholders earn large positive announcement returns and acquirers’ shareholders do not win or lose on average.
Research from Schwert (1996) finds out that share price reactions commence already 42 days prior to the initial public announcement of the bid and not only on the announcement day itself. These price reactions are substantial, where the price run-up before the public announcement is sometimes greater than the actual announcement effect itself. According to Ascquith et al. (1983), Dennis and McConnell (1986), this price run-up prior to the actual public announcement can be up to 13%-22% for target firms in a period of 2 months leading to the event. This effect shows that there is an information asymmetry were the primary motivators for this price run-up include insider trading and information leakages to the public.
Overpaying on a takeover is a decisive way to impoverish shareholders of the acquiring firm. Acquirers’ firm shareholders gain an average return of 0.5% according to Martynova and Renneboog (2006). Andrade et al. (2001) and Moeller et al. (2005) report small negative or zero returns for
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acquirers’ shareholders. Previous literature thus points out that bidder shareholder returns are negative, zero or slightly positive around the day of the announcement.
i. Market reactions to M&A announcements in cross-border takeovers Through the integration of Europe and the introduction of the EURO as the single currency, border deals gained their prominence in Europe (Coeurdacier et al., 2009). Differences between cross-border and domestic deals are possibly accrued to due regulatory, cultural and-/or institutional differences across countries that affect the merger process.
According to research from Wansley et al. (1983), Dewenter (1995) and Danbolt (2004), foreign targets obtain higher abnormal returns than their domestic counterparts. Empirical research from Martynova and Renneboog (2006) on short-term wealth effects of domestic and cross-border mergers and acquisitions concludes that cross-border acquisitions do create value but most of the gains go to target shareholders. Target shareholder gains, as documented by different studies, range between 10-30% (Martynova and Renneboog, 2006).
In contrast, acquirers involved in cross-border acquisitions seem to experience a modest price reaction, both positive as negative or no change at all. Different studies report either no change or small gains or losses in the short term (Moeller and Schligermann, (2005). In addition, Andrade et al. (2001) find negative announcement abnormal returns for bidders. In contrast, Martynova and
Renneboog (2008) examine European M&As solely and report positive and significant gains for acquirers of 0.85% in cross-border deals.
The aforementioned overview suggests that empirical literature does not fully agree on the implications for bidding firms’ returns in cross-border takeovers. In general, this study therefore supposes that cross-border mergers have no significant share price reactions for bidding firms.
i. Market reactions to M&A announcements in different market valuations Bouwman et al. (2009) find that acquisitions that are announced when the market is booming are fundamentally different from those that are announced during market troughs. They find that US bidders have higher short-term returns at announcement compared to bidders in low-valuation markets. Acquirers bidding during high-valuation markets experienced insignificant abnormal returns of 0.04%, while neutral- and low-valuation market acquirers had significantly negative returns of 0.06% and -1.31% respectively .
Bouwman et al. (2009) do also partition their US sample by the method of payment.
Consistent with academic literature, they find that cash offers are preferred above stock offers. Stock offers suffer from negative announcement returns across all valuation states of the market. In addition, they find that mixed payment offers results in positive returns in high-valuation markets and negative returns in low-valuation markets. When Bouwman et al. (2009) control for the mode of acquisition, they find that tender offers experience positive returns of 1.46% during high-valuation markets. In
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contrast, Bouwman et al. (2009) find evidence that tender offers suffer from negative returns. during neutral- and low-valuation markets. No theoretical foundations support these results nor do Bouwman et al. (2009) come up with explanations which seem to justify their findings. Using Buy and Hold Abnormal Returns (BHARs), Bouwman et al. (2009) find that the short-run price effects are reversed. In line with the managerial herding theory, they now find that high-market buyers significantly underperform low-market buyers.
III. Hypotheses
Building on the theoretical framework, this section describes the hypotheses that are tested in this study. These hypotheses will help to find an answer on the central research question. The first hypothesis is as follows:
Hypothesis 1a: Acquirers do not enjoy short-term positive CARs in cross-border deals
Hypothesis 1b: Acquirers enjoy short-term positive CARs in cross-border deals
Summarizing the studies from Moeller & Schligermann (2005), Andrade et al. (2001) and Martynova & Renneboog (2008), no significant announcement returns are expected to be found for acquirers in cross-border deals.
Hypothesis 2a: Acquirers buying during high-valuation markets underperform those buying during low-valuation markets.
Hypothesis 2b: Acquirers buying during high-valuation markets do not underperform than those buying during low-valuation markets.
As previously explained, managerial herding explains how deals undertaken in early stages of economic cycles could differ in quality from those undertaken in a late stage. When the market is segmented into high-, neutral- and low-market valuations, the managerial herding theory is expected to explain how abnormal returns between early and late acquirers differ. Premiums are already picked off by first-movers, meaning that deals which take place in late-stages will in general be value-destroying. Thus, higher announcement returns for deals made during low-valuation markets are expected.
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IV. Data and descriptive statistics
This section describes the sample, explain our classification into high-, neutral- and low-valuation markets, and provide descriptive statistics.
A. Sample selection
The sample of Western-European acquirers which announced a domestic or cross-border takeover between January 1, 2001 and December 31, 2014 is selected from the Mergers and Acquisitions Database of the Securities Data (SDC)1. We select takeovers involving Western-European acquirers2 which were involved in a successful takeover within the selected time period. Data on deal
announcement dates and characteristics is collected from the Thomson One deals module. The aforementioned data has to meet the following conditions:
1. The initial public announcement takes place between the January 1, 2001 and December 31, 2014.
2. The acquirer is a Western-European listed firm
3. The target is not a subsidiary and located in the same or another country than that of the bidder. 4. The transaction value is at least €20 million3.
5. The sample only includes announcements of acquisitions where more than 50% of the target shares are owned after the transaction.
6. The closing share price of the acquirer for the month before the announcement is at least €3 (see Loughran and Vijh, 1997). This eliminates firms that are very small or in distress.
7. Daily acquirer return data is available for 280 days before and 1 day after the date of the initial public announcement4.
8. The method of payment is cash, equity or a mixture of both5.
B. Classification of the market into different valuation states
The aim of this research is to study whether deals announced in high-valuation markets are
fundamentally different from deals announced in low-valuation markets. Therefore, a market index is selected and being partitioned into different valuations. In addition, the market index should be related and representative to the sample used. As first presented by Bouwman et al. (2009), the market index
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The Thomson reuters SDC database changed its name to Thomson One
2
The Thomson One database defines which countries are Western-European.
3
This threshold is used because there are difficulties in capturing the effect in takeovers which are too small.
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The estimation window runs from -280 to -30 days before the initial public announcement. Furthermore, the announcement window requires data on 3 days surrounding the initial public announcement
5
As classified by the SDC, cash acquisitions include deals involving cash or debt. Stock deals involve payments made by common stock. Mixed payment acquisitions involve a mixture of both cash, debt and common stock.
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is divided into low-neutral-high valuation states by its P/E ratio. Bouwman et al. (2009) uses seven alternative definitions for market valuation purposes but concludes that these do not lead to other findings than the market P/E ratio. P/Es data is obtained from the Datastream database.
The EURO STOXX 50 makes up fifty of the largest and most liquid stocks in the Eurozone and therefore functions as the market index in this study. As the market has an upward trend over time, it first has to be detrended. This is done by subtracting the best straight-line fit from the market P/E ratio of the concerning month and the five years preceding this month. Not doing this would lead to wrong valuation estimates. After the best straight-line fit is subtracted, each month is being classified as above (below) average if the detrended market P/E of that month is above (below) the past five-year average. The top half of the above-average months are then called high-valuation markets and the bottom half of the below-average months are called low-valuation markets. The lower half of the above-average and the top half of the below-average months are classified as a neutral valuation market. Following this method, half of the months are neutral-valuation markets and the other half high-valuation and low-valuation markets (Bouman et al., 2009).
Figure 1 graphs the monthly adjusted, demeaned and detrended P/E ratios of the EURO STOXX 50. The EURO STOXX 50 P/E shows a slightly downward trend over time. The detrended P/E controls for this downward trend. Figure 2 shows the high-valuation, neutral-valuation and low-valuation months according to the EURO STOXX 50s detrended P/E.
Figure 1
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The monthly detrended P/E ratio as categorized into high- (3), neutral- (2) or low- (1) valuation markets
C. Descriptive statistics
The sample statistics are presented in both Table I and Table II and present the subsamples in terms of proportions, percentages and deal value. The sample contains 266 acquisitions of which 102 take place in low-, 112 in neutral-, and 52 in high-valuation markets. The division of the sample across different market valuations counter speaks the Hubris theory, which suggests that more mergers occur in high-valuated markets with more ease in external financing and higher amounts of takeover opportunities. Most deals (76.7%) are made with cash, this proportion shows no noteworthy deviations for method of payment during different market valuations. There is a high fraction of cross-border deals compared to domestic deals in the sample. This is due to the filter process of the data and also depends on the availability of daily return data. The domestic deals in the sample are included to test the difference between cross-border acquisitions as opposed to domestic acquisitions. Of the total sample, 53% consists out of deals involving public targets, whereas the other 47% are private targets. During low-valuation markets, the sample has 50% more public acquisitions than private acquisitions. During high-valuation markets, this proportion is reversed. Also noteworthy is the substantial majority in acquisitions involving tender offers during low-valuation markets compared to high-valuation
markets. This could be related to theory suggesting that there is more need to replace underperforming management when markets are low. Most deals are focus-oriented to capture potential synergy effects,
17
M&A deals between bidders and targets operating in the same industry account for the 59% of the sample, while the remainder is diversifying acquisitions.
Table I Descriptive statistics
This table shows the numeric and percentual composition of the sample. The summary statistics are based on our sample of 266 acquisitions. Acquisitions are included in this sample if the acquirer is a Western-European firm listed; sufficient Datastream and CRSP data are available; the target is not a subsidiary; the transaction value is $20 million or more; the acquirer obtains at least 50% of the shares of the target; the closing price of the acquirer for the month before the announcement is at least EUR 3; and the method of payment is cash, stock or a mixture of the two. Using monthly data from 2001 to 2014, each month from January 2001 to December 2014 is classified as a high- (low-) valuation market if the detrended market P/E of that month belongs to the top (bottom) half of all detrended P/Es above (below) the past five-year average. All other months are classified as neutral-valuation markets. As classified by the SDC, cash acquisitions include deals involving cash or debt. Stock deals involve payments made by common stock. Mixed payment acquisitions involve a mixture of both cash, debt and common stock.
Total acquisitions Low-market acquisitions Neutral-market acquisitions High-market acquisitions Total acquisitions 266 (100%) 102 (38.3%) 112 (42,1%) 52 (19,6%) Cash 204 (76.7%) 86 (42.2%) 82 (40.2%) 36 (17.6%) Stock 32 (12%) 8 (25%) 16 (50%) 8 (25%) Mixed 30 (11.3%) 8 (26.7%) 14 (46.6%) 8 (26.7%) Cross-border 210 (82.7%) 86 (39.1%) 92 (41.8%) 46 (20.9%) Domestic 46 (17.3%) 16 (34.8%) 20 (43.5%) 10 (21.7%) Target is Public 140 (52.6%) 60 (42.9%) 58 (41.4%) 22 (15.7%) Target is Private 126 (47.4%) 42 (33.3%) 54 (42.9%) 30 (23.8%) Deal is tender offer 66 (24.8%) 26 (39.4%) 32 (48.5%) 8 (12.1%) Deal is no tender offer 200 (75.2%) 76 (38%) 80 (40%) 44 (22%) Same industry deals 156 (58.6%) 54 (34.6%) 72 (46.2%) 30 (19.2%) Diversifying deals 110 (41.4%) 48 (43.6%) 40 (36.4%) 22 (20%)
Table II shows that the total deal value of the 266 acquisitions is EUR 456 billion and the average deal value is EUR 1.713 billion. Although there are more acquisitions undertaken during neutral-valuation markets, the average deal value for acquisitions in low markets is substantially higher due to several outliers with a deal value of EUR 25 billion or more. Thus, the total deal value of acquisitions undertaken in low-valuation markets is more than twice as much as for neutral- and high-valuation markets combined. As expected, deals involving public targets have a deal value which is more than six times than that of their private counterparts. The average value of diversifying bids (EUR 2.06 billion) is higher than that of intra-industry takeovers (EUR 1.44 billion). Moreover, is it noteworthy to mention that deals involving shares have a mean deal value of EUR 4.87 billion. This too is the result of some outliers in the sample with a deal value between EUR 10-30 billion.
18 Table II Descriptive statistics
This table shows the mean and total transaction value for the deals in the sample. The summary statistics are based on our sample of 266 acquisitions. Acquisitions are included in this sample if the acquirer is a Western-European firm listed; sufficient Datastream and CRSP data are available; the target is not a subsidiary; the transaction value is $20 million or more; the acquirer obtains at least 50% of the shares of the target; the closing price of the acquirer for the month before the announcement is at least EUR 3; and the method of payment is cash, stock or a mixture of the two. Using monthly data from 2001 to 2014, each month from January 2001 to December 2014 is classified as a high- (low-) valuation market if the detrended market P/E of that month belongs to the top (bottom) half of all detrended P/Es above (below) the past five-year average. All other months are classified as neutral-valuation markets. As classified by the SDC, cash acquisitions include deals involving cash or debt. Stock deals involve payments made by common stock. Mixed payment acquisitions involve a mixture of both cash, debt and common stock.
Number of acquisitions
Mean transaction value
Total deal value (€ million) % of total deal value % of total number of acquisitions All acquisitions 266 1713,1 455675,8 100% 100% High-market 52 1261,2 65582 14.4% 19.6% Neutral-market 112 811,9 90928,2 20% 42.1% Low-market 102 2933 299165,8 65.6% 38.3% Cross-border 222 1130,74 251024,8 55.1% 82.5% Domestic 46 4450,2 204709,2 44.9% 17.5% Target is Public 140 2849,8 398973,6 87.5% 51.6% Target is Private 128 443,33 56760,4 12.5% 48.4%
Deal is tender offer 66 1496,1 98742,6 21.7% 24.8%
Deal is no tender offer 202 1767,3 356991,4 78.3% 75.2%
Same industry deals 156 1443,8 225234 49.4% 58.6%
Diversifying deals 112 2058 230500 50.6% 42.4%
Cash 206 1258,1 25917,6 56.9% 76.4%
Mixture 30 1354,4 40631,2 8.9% 11.3%
Shares 32 4872,9 155933,4 34.2% 12.3%
V. Empirical method
This section covers the econometrical model and statistical tests used to test the hypotheses. The announcement returns will first be discussed, following the multivariate regression and the use of control variables.
a. Announcement returns
This thesis will deploy an event study for the analysis of abnormal returns around the event of an announcement. The event study methodology was first introduced by Brown and Wagner (1985) and makes it possible to capture the effect of the announcement and calculate its abnormal return. The assumption is that the market is competent in judging the quality of the takeover announcement, such that abnormal returns are solely caused by the corporate actions of the firm.
A three-day event window will be used, with one day prior and one day following the event (t1,t2) = (-1,1). The event window surrounds the announcement day, which is designated as day zero.
19 event from movements by the benchmark.
The EURO STOXX 50 index functions as the benchmark portfolio in this study. This index represents 50 super sector leading companies in 12 European countries and is a good index for benchmark purposes. This benchmark return is calculated using the following model:
Where: - BRi,t is the benchmark return of firm i on day t
- αi is the constant term
- is the β coefficient times the market return on
day t
- is the error term
Using the announcement dates and the CRSP daily stock returns, an event study is performed to calculate the abnormal returns (Alpha) and the regression coefficients (Beta). The α and β are estimated using an OLS regression of the daily stock return of firm i on the daily market return within an estimation window of 280 days until 30 days before the announcement day. The abnormal returns are then estimated as follows:
Where: - ARit is the abnormal return of firm i on day t
- Rit is the daily stock return of firm i on day t
- αi is the estimated constant
- is the β coefficient times the market return on
day t
The ARit formula shows that the abnormal return is calculated by subtracting the benchmark
return on day (t) of the daily stock return of firm (i) on day (t). Next step is to calculate the three-day CAR by computing the reaction of the announcement on the day prior and after the event within the event window [-1,1]. This is done because there might be some information in the market prior to the official announcement and a large fraction of the effect occurs a day after the event or more. The abnormal returns over the event window are aggregated to obtain the CAR of each firm.
Where: - CARi is the cumulative abnormal return of
firm i one day prior to the announcement until one day
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After the CAR(-1,1) is calculated for all the subtracted takeover announcements of Western-European acquirers over the period 2001-2014, next step is to calculate the cumulative average abnormal return (CAAR). The average of the CARs among N events gives the Cumulative average abnormal returns.
Where: - CAAR is the cumulative average abnormal return
- N is the total number of announced M&As
- CARi is the cumulative abnormal return of firm i
A T-test is used to check whether the cumulative average abnormal return is statistically different from zero with the following formula:
Where: - CAARk is the cumulative average abnormal return of
sample k
- denotes the 0 hypothesis that the CAAR is zero
- Sk denotes the standard deviation of sample k
- n denotes the number of observations of sample k
After the market index is divided into high-, neutral-, and low-valuation states. The CAARs can be accumulated to test if there is a significant difference between acquirers involved in high-market acquisitions and low-market acquisitions.
b. Multivariate regression framework
Secondly, OLS is used to test the hypotheses and see if the results from the univariate analysis hold. Two different multivariate models are used on the same dependent variable. The models differ in the way the market valuations are being reported. The first model includes the market valuation dummies as the independent variables and the CAR as the dependent variable. Where Bouwman et al. (2009) include high- and neutral-market valuation dummies, this study includes high- and low-valuation market dummies. This is done as to test the difference in high-market and low-market coefficients from takeovers in a neutral-valuation market. The model controls for cross-border acquisitions, method of payment, tender offers, nature of the firm, relative deal size and if the deal was focused or diversifying.
21
The second multivariate model looks similar as the first one, but differs in the way the market is being divided into different valuation states. This time, the market valuation is reported through a continuous variable which is called the ‘DetrendedPEratio’. By using two different ways in which the market is being divided the results get more robust.
Where the CAR is the three-day Cumulative Abnormal Return. Dhighmarket equals one if the acquisition was announced in a high-valuation market and zero otherwise. Dlowmarket equals one if the acquisition was announced in a neutral market and zero otherwise. This means that if both the Dhighmarket and Dlowmarket are zero, the acquisition is announced in a neutral-valuation market. Dcash equals one if the acquisition was paid in cash and zero otherwise. Dmixedpayment equals one if the acquisition was paid in a combination of stock and cash and zero otherwise. Dtender equals one if the acquisition was a tender offer and zero otherwise. Dpublic equals one if the acquisitions involves a public target and zero otherwise. Logrelsize captures the relative size of the acquisition, as measured by the transaction value at the time of the acquisition divided by the acquirer’s market value of equity 30 days prior to the announcement date (Bouwman et al., 2009). This variable is included because previous research from Schlingemann and Stulz (2004) finds that the size of an acquisition relative to the acquirer impacts the acquirer’s abnormal return. Dindustry equals one if the acquirer and target operate in the same industry and zero otherwise. The first 3 digits from the SIC codes are used to check if they match.
c. Control variables
Extensive research has been done within the field of corporate finance literature, trying to explain the different deal characteristics which impact the abnormal return around a takeover announcement. Key factors include the method of payment, the (non-) public state of the target firm, the nature and size of the deal and the industry-relatedness. This subsection introduces the important control variables within the aforementioned multivariate regressions and explains their implications on the abnormal returns. The method of payment is covered first, after which tender offers are being discussed. Third, the implications for diversifying and focused acquisitions are introduced. Last, the effect on the abnormal return when the deal involves a public or private target is dealt with.
i. Method of payment
The method of payment in takeovers range from all cash to all equity payments or a mix of the aforementioned. The choice of the acquirer on how to finance the takeover can have major
22
decision management, cash flows, taxes and corporate control of the firm (Faccio and Masulis, 2005). In some cases, the method of payment may also indicate the quality of the deal. Each firm will have superior information regarding the true value of its own stock and can therefore better estimate if it is under- or overvalued. Fuller, Netter & Stegemoller (2002) argue that this level of information asymmetry has the net effect that the acquiring firm will be less or more eager to use stock as a method of payment, depending on its current valuation. When the acquiring firm’s stock is overvalued by the market, they would prefer to pay with stock rather than with cash. If the acquiring firm believes its stock is undervalued or if there is uncertainty about its true value, they might prefer to pay with cash instead. The same reasoning applies for the target firm, which prefers cash over stock when information asymmetry is high. Andrade et al. (2001) report that deals which are undertaken using cash as a method of payment generate higher returns for both bidders as targets. According to Jensen (1986), firms do frequently use cash for the use of managerial state building and states that cash as a method of payment provides benefits as opposed to using equity. This because the use of cash as a method of payment motivates managers to use corporate resources more efficiently
` Deals where equity (shares) is the method of payment are believed to be of less quality. The argument here is that managers of bidder firms will only use equity as a method of payment when they believe that the shares of their firm are overvalued. The method of paying a takeover with overpriced shares as a method of payment is also referred to as market timing. Managers try to time equity issues and takeovers when their own firm valuation or the stock market valuation is at the top of its cycle. In addition, Myers and Majluf (1984) propose the pecking order theory, stating that managers know more about the firm’s financial situation than outside investors. This information asymmetry implies that managers prefer the issuance of debt and cash because this signals confidence that the takeover will be profitable. According to this pecking order theory, a firm will only undertake a takeover when it believes that the stock is overvalued. A takeover announcement will thus result in a lack of confidence in the board and signals the overvaluation of the firm’ stock. The use of stock as a method of payment will therefore have a negative impact on the announcement return.
When it is hard to value a target, bidders may use stock as a method of payment as to cope with the contingency pricing effect. Thus, sharing the risk during an equity offering (Hansen, 1987). Martynova and Renneboog (2006) suggest that when there is a two-sided information asymmetry, a mix of cash and stock may be optimal in the takeover as a part of the risk will be absorbed by the bidder’s equity overvaluation.
ii. Tender offer
In a tender offer, the bidding firm bypasses the target’s management and directly posts its bid to all target shareholders in a public bid. The acquirer offers a premium above the current market price of the target company to induce the target’s shareholders to sell their shares. A common reason for a tender offer could be to replace underperforming management . Such hostile offers are often more
23
costly than friendly takeovers due to anti-takeover defenses by the target company, legal costs and other costs due to its timely nature (Schnitzer, 1996).
Tender offers have shown to generate higher abnormal target returns around the
announcement than friendly takeovers (Martynova and Renneboog, 2006). In contrast, Georgen and Renneboog (2004) find that hostile takeovers seem to underperform on bidders returns when
compared with friendly deals. Martynova and Renneboog (2006) did some extensive research towards the relation between market reactions and different types of takeovers. They split up the types of takeovers in three different groups, based on how the target perceived the nature of the bid. Where target shareholders gain strong positive announcement returns in general. hostile announcement bids gave highest returns of 15%. In return, friendly takeovers and tenders offers yielded 3% and 12% respectively.
iii. Diversifying and focused M&A
In addition to the expected operational or financial synergies, acquirers undertake M&As to diversify their operations. The necessity for firms to either diversify or focus their operations is an important motivator for the high volume of takeovers in Europe. The so called diversification premium is justified through efficient capital markets, the coinsurance effects, economies of scope and market power. Later academic literature from Banerjee and Dey (2011), Maksimovic and Philips (2007), stated a diversification discount due to principal-agent conflicts, over-investments, cross-subsidization problems and an inefficient allocation of resources. Thus, there is contradicting evidence on the size and direction of diversification on abnormal returns around different types of takeovers. Where Agrawal et al. (1992) find negative returns to diversifying takeovers, Akben-Selcuk and Kiymaz (2012) present that diversification yields higher abnormal returns than focused acquisitions. Focused takeovers often gain from the operational synergies involved because the acquirer firm focuses on the business where it excels in. A common disadvantage of focused takeovers is that the merged firm may be more sensitive to sector-specific risks. Martynova and Renneboog (2006) find that CAAR’s where significantly higher for focused than diversified takeovers.
iv. Private and public targets
Target firms can either be public, private, a joint-venture or government owned. The multi-variate model in this research controls for the public or private nature of the firm as the target’s status can have implications for acquirer returns. There are several arguments as to why the state of the target firm can impact acquirer returns. First, the bidding process on private firms can be kept quiet until the deal is completed. Public targets often involve public negotiations which may impact stock prices for both the bidder as target firm. This private nature of negotiations decreases the possibility that the reputation of the acquirer will be damaged due to negotiations being terminated. In case of public targets, acquirers are sometimes put under pressure to pursue a bad deal in order to save their face.
24
According to Conn et al. (2005) private bids should therefore result in higher acquirer returns. Second, there is often far less competition involved in the bidding process of private targets. Few competition and the illiquid nature of the private market decreases the chance that the acquirer will overpay for a target. According to Conn et al. (2005), this should lead to higher returns for acquiring firms.
VI. Results
This section presents both the univariate and multivariate results of the regressions used to test the various hypotheses. First, section A provides announcement effects to bidders using univariate statistics. Second, section B shows the multivariate regression, where the three-day CAR is regressed on the market valuation- and control variables.
a. Univariate results
As indicated in Table III Panel A, all acquisitions in the sample are found to have statistically insignificant positive returns of 0.05% for the bidder. Although insignificant, this is in line with previous findings6. The first column in Table III Panel A shows that this result is driven by significant negative announcement returns (-1.62%) in high-valuation markets and significant positive
announcement returns (1.01%) in low-valuation markets. In addition, the results show insignificant negative returns of -0.031% for neutral-market acquirers. Panel B shows the substantial and significant difference (2.64%) between the announcement returns for high- and low-market acquirers. This implies that the market favors acquisitions undertaken in low-valuation markets above those
undertaken in high-valuation markets. This is not consistent with previous research from Bouwman et al. (2006), who find the opposite7.
The second and third column in Panel A show the three-day CAR for both cross-border as domestic acquirers during different market valuations. In general, cross-border acquisitions generate insignificant positive returns of 0.28% as opposed to negative insignificant returns for domestic acquisitions. This is consistent with previous literature from Moeller and Schligermann (2005). Hypothesis I is accepted. Noteworthy is the substantial and significant difference in deal quality during high-market valuations. Domestic deals during high-valuation markets seem to generate highest negative returns, and perform 2.62% worse than deals involving cross-border acquirers. Though the difference in means is smaller for neutral-valuation markets, the same relation is found. As for both high- and neutral-market valuations, cross-border deals outperform their domestic counterparts. Column II of Panel A shows that cross-border acquirers during high-valuation markets underperform their counterparts during low-valuation markets. As Panel B reinforces, the differences
6
Martynova and Renneboog (2006) state that M&A’s are expected to increase the acquirers and target’s combined value since target shareholders earn large positive announcement returns and acquirer’s shareholders do not win nor lose on average.
7
Research from Bouwman et al. (2009) reports insignificant abnormal returns of -0.04% for high-market acquirers and significant negative returns of -0.06% and -1.31%, for neutral- and low-market acquirers respectively.
25
in means is 2.04% and statistically significant. Though hypothesis II cannot be accepted based on all deals in our sample, it can be when domestic deals are excluded. This result is consistent with the theory, suggesting that acquirers buying during low-valuation markets create significantly more shareholder wealth than those buying during high-valuation markets. This phenomenon is possibly explained through managerial herding, which states that early acquirers enjoy a first-mover advantage and therefore enjoy higher returns. As this ‘premium’ is picked-off by early acquirers, deals
undertaken in later stages will be value-destroying in general. Table III
Three-day Cumulative Abnormal Returns
This table contains three-day cumulative abnormal returns (CARs) for all acquisitions undertaken during high-, neutral- and low-valuation periods. Acquisitions are included in this sample if the acquirer is a Western-European firm listed; sufficient Datastream and CRSP data are available; the target is not a subsidiary; the transaction value is $20 million or more; the acquirer obtains at least 50% of the shares of the target; the closing price of the acquirer for the month before the announcement is at least EUR 3; and the method of payment is cash, stock or a mixture of the two. Using monthly data from 2001 to 2014, each month from January 2001 to December 2014 is classified as a high- (low-) valuation market if the detrended market P/E of that month belongs to the top (bottom) half of all detrended P/Es above (below) the past five-year average. All other months are classified as neutral-valuation markets. As classified by the SDC, cash acquisitions include deals involving cash or debt. Stock deals involve payments made by common stock. Mixed payment acquisitions involve a mixture of both cash, debt and common stock. T-statistics are provided in parenthesis. *, ** and *** indicate significance at the 1%, 5%, and 10% levels, respectively.
Panel A
All
acquisitions High-market acquisitions Neutral-market acquisitions Low-market acquisitions N CAR S.E. N CAR S.E. N CAR S.E. N CAR S.E. All 266 0.05% 0.29% 52 -1.62%*** 0.54% 112 -0.031% 0.45% 102 1.01%** 0.48% (0.20) (-2.98) (-0.07) (2.11) Cross-border 220 0.28% 0.31% 42 -1.12%* 0.64% 92 0.33% 0.85% 86 0.92%** 0.46% (0.92) (-1.74) (0.64) (2.00) Domestic 46 -1.01% 0.79% 10 -3.74%*** 0.45% 20 -1.70%** 0.51% 16 1.51% 1.85% (-1.28) (-8.38) (-1.98) (0.81) Panel B
Differences between means
Diff. S.E. High-market acquisitions minus Low-market acquisitions 2.64%***
(3.63)
0.73% Cross-border acquisitions minus Domestic acquisitions 1.30%
(1.53)
0.85% High-market Cross-border acquisitions minus Low-market Cross-border acquisitions 2.04%***
(2.58)
0.79% High-market Domestic acquisitions minus Low-market Domestic acquisitions 5.25%***
(2.75)
1.91% High-market Cross-border acquisitions minus High-market Domestic acquisitions 2.62%***
(3.43)
0.78% Low-market Cross-border acquisitions minus Low-market Domestic acquisitions 0.59%
(0.31)
26 b. Multivariate results
The hypotheses and the results from the univariate analysis are tested using three separate regressions with the three-day CAR as the dependent variable. The first regression, which is shown in Table IV, contains three runs and uses the model described in the methodology section. The second regression, which can be seen in Table V, adds to the first one and includes interaction terms in order to see if there is an interaction between the independent variables. The third regression, which can also be seen in Table V, uses the detrended P/E ratio of the EURO STOXX 50 as a continuous independent variable. Including the P/E as a continuous variable in the regression shows if the market valuation dummies lead to robust findings
The multivariate results are consistent with the findings in the univariate analysis. Table IV (1) shows that if an acquisition is announced during a high- or low-valuation market, the CAR is
significant at a 5% and 10% level respectively. The coefficient of the high-valuation market dummy is negative and significant (1.59%). The coefficient of the low-valuation market dummy is positive and significant (1.04%). This shows that if an acquisition is announced in a high- (low-) valuation market, acquirer returns are 1.59% lower (1.04% higher) than if an acquisition is announced in a neutral-valuation market. Thus, as in the univariate analysis, acquirers seem to enjoy higher CARs if they time the acquisition during a low-valuation market.
Table IV (2) includes the cross-border dummy as an independent variable in the regression. The coefficient of the high-valuation market dummy holds, whereas the low-valuation market dummy coefficient does not. Also noteworthy is that the coefficient of the cross-border dummy is just outside the 10% significance level. Thus, this implies that acquisitions undertaken in high-valuation markets lead to negative acquirer returns.
Table IV (3) includes all the dummies as independent variables in the regression. The
coefficients of the high-valuation market dummy and the low-valuation market dummy hold. They are mostly consistent with the results from the univariate tests and the first run of this regression. All other dummy variables except the industry dummy do not hold. The coefficient of the industry dummy shows that if an acquisition is focused, it will yield an additional 1.58% in announcement returns above diversifying acquisitions. There is no diversification premium found, which is inconsistent to what is discussed earlier. Though, the results are consistent with those of Martynova and Renneboog (2006)8. So far, the first regression shows that acquirers who make acquisitions in low-valuation make better decisions than acquirers who make acquisitions in high-valuation markets.
8 Martynova and Renneboog (2006) find that CAAR’s where significantly higher for focused than diversified
27 Table IV:
Regression Analysis of Short-Run Returns
This table contains ordinary least squares regressions of the acquirer’s three-day CARs (calculated using the EURO STOXX 50 index). Dhighmarket equals one if the acquisition was announced in a high-valuation market and zero otherwise.
Dlowmarket equals one if the acquisition was announced in a neutral market and zero otherwise. Using monthly data from
2001 to 2014, each month from January 2001 to December 2014 is classified as a high- (low-) valuation market if the detrended market P/E of that month belongs to the top (bottom) half of all detrended P/Es above (below) the past five-year average. All other months are classified as neutral-valuation markets. This means that if both the Dhighmarket and
Dlowmarket are zero, the acquisition is announced in a neutral-valuation market. Dcash equals one if the acquisition was paid
in cash and zero otherwise. Dmixedpayment equals one if the acquisition was paid in a combination of stock and cash and zero otherwise. Dtender equals one if the acquisition was a tender offer and zero otherwise. Dpublic equals one if the acquisitions involves a public target and zero otherwise. Logrelsize captures the relative size of the acquisition, as measured by the transaction value at the time of the acquisition divided by the acquirer’s market value of equity 30 days prior to the announcement date (Bouwman et al., 2009). We include this variable because previous research from Schlingemann and Stulz (2004) finds that the size of an acquisition relative to the acquirer impacts the acquirer’s abnormal return. Dindustry equals one if the acquirer and target operate in the same industry and zero otherwise. We use the first 3 digits from the SIC codes to check if they match. Bold font indicates significance at least at the 10% level. *, ** and *** indicate significance at the 1%, 5%, and 10% levels, respectively.
Dependent variable = Three-day Cumulative Abnormal Return
(1) (2) (3) Constant -0.0003 (0.07) -0.0103 (-1.36) -0.0128 (-1.12) Dhighval -0.0159** (-2.05) -0.0157** (-2.03) -0.0158** (-2.03) Dlowval 0.0104* (1.64) 0.0102 (1.61) 0.0115* (1.78) Dcrossborder 0.0121 (1.62) 0.0086 (1.11) Dcash 0.0007 (0.07) Dmixed -0.0039 (-0.33) Dtender -0.0072 (-0.89) Dpublic -0.0032 (-0.45) LogRelSize -0.0069 (-0.55) Dindustry 0.0158*** (2.69) N 266 266 266 Adjusted R2 3.36% 3.95% 5.23% F-statistic 5.61 4.63 2.62
Table V consists out of 2 regressions and 4 runs in total. The first regression shows the results of the third run in Table IV including interaction variables. The second regression shows the results from the regression with the market valuations being a continuous P/E ratio. Both regressions are bundled into the same table as to make an easy comparison.
Table V (1) shows the regression shown in Table IV (3) with the cross-border interaction terms included. All coefficients except the low-valuation market dummy do not hold. This makes clear that there are no significant interaction effects which may contribute to explaining the three-day CAR. Table V (2) shows the regression shown in Table IV (3) with the market valuation interaction terms included. Including the market valuation interaction terms result in a drop of the constant term to a significant -2.88% and an increase in the low-valuation market dummy coefficient to 6.53%.
