University of Amsterdam
Amsterdam Business School
Bachelor in Economics and Finance
Bachelor Thesis
“The effect of cross-border mergers and acquisitions on the acquirer’s stock price. The case of emerging market firms.”
Hoogeveen, Annet January 20, 2016 10279318
STATEMENT OF ORIGINALITY
This document is written by Annet Hoogeveen 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.
ABSTRACT
While the number of cross-border mergers and acquisitions originating in emerging markets has been growing tremendously since the rapid globalization in the early 90s, our understanding of the value creating potential for the shareholders of the acquiring firm is limited. The aim of this thesis is to investigate the creation of shareholder value for the bidding firms via cross-border mergers and acquisitions originating in emerging markets. This study is performed with a short-window event study of 121 cross-border mergers and acquisitions by emerging markets firms during the period 2010-2015. The results of the event study show no statistical evidence to state that cross-border mergers and acquisitions by firms from emerging markets create shareholder value in the short-run.
TABLE OF CONTENTS
1. INTRODUCTION
1.1 M&A activity 1.2 M&A categories 1.3 Emerging markets
1.4 Cross-border mergers and acquisitions by firms from emerging markets 1.5 Research question and relevance
2. RELATED LITERATURE
2.1 Value generating motives for CBM&A 2.2 Value destruction for shareholders 2.3 Evidence from earlier research
2.4 The influence of firm and transaction characteristics
3. RESEARCH DESIGN
3.1 Data 3.2 Hypotheses 3.3 Methodology
4. RESULTS AND DISCUSSION
4.1 Results 4.2 Discussion of results 5. CONCLUSION 6. REFERENCES
1. INTRODUCTION 1.1 M&A activity
Companies basically have two ways to grow: organically or by merging with or acquiring other companies. It is a well-known fact that M&A come in waves. Martynova and Renneboog (2008) identify the following six waves since 1890: 1890-1903, 1910-1929, 1950-1975, 1981–1989, 1993–2001, and 2003–2007. Their study shows that the end of these waves usually coincides with a crisis or recession. Table 1 gives a summary of the completed waves.
In general one could argue that the waves become shorter over time and their frequency increases. The fifth and the sixth wave had a focus on cross-border transactions; this is a consequence of the globalization. The sixth wave ends in the subprime debt crisis. From 2008 to 2010, M&A activity sank to its lowest level since 2004. Since 2010 merger and acquisition activity has picked up again, according to the statistics of the Institute for Mergers, Acquisitions and Alliances (2015), as shown in Figure 1.
Although there were different crises over the past century, the number of merger and acquisitions worldwide has been growing tremendously over the last 30 years. As shown in Figure 1 the number of merger and acquisition transactions went from approximately 2.000 in 1985 to 40.000 in 2015. The expected value of the transactions for 2015 will be around US$ 4.000 billion (IMAA, 2015).
Figure 1. Number and value of announced transactions worldwide. Adapted from Institute for Mergers
Acquisitions and Alliances (2015). 1.2 M&A categories
M&A can be categorized in horizontal and non-horizontal. Horizontal refers to mergers and acquisitions in the same industry whereas non-horizontal transactions involve firms that do not operate in the same market.
In describing the characteristics of the mergers and acquisitions researchers have looked at the source of financing for mergers and acquisitions. The bidding company can offer cash or equity shares, or a combination of both, in order to acquire the target firm. In each wave it seems a certain financing source is predominantly present. For this reason the financing source has been taken into account for transactions investigated in this paper.
Relevant for this paper is the distinction between domestic and cross-border transactions. Cross-border transactions refer to transactions between firms in different countries. The various types of cross-border mergers and acquisitions are shown in Table 2, the focus of this paper is on the transactions of quadrant B. More particularly this paper concerns Cross-Border Mergers & Acquisitions (CBM&A) by firms from Emerging Economies (EE) in Developed Economies (DE).
Target
Acquirer
DE EE
DE A B
EE C D
1.3 Emerging markets
With the term emerging market this study refers to countries that do not meet the standards to be a developed market. The risk, but also the expected returns of investments in emerging markets is higher than the risk and expected returns in developed counties. China and India are considered to be the largest emerging markets. The BRIC countries are the four largest emerging markets. A wide range of definitions circulates for emerging markets. In this study the market classification framework of the MSCI (Morgan Stanley Capital International) is used. The MSCI makes a distinction between emerging and developed economies based on three criteria: Economic development, size and liquidity requirements and market accessibility. In section 3.1 of this paper, Table 3 shows the criteria that are quantified for emerging economies and developed economies. Given these criteria, Table 4 shows the lists of 23 emerging and 23 developed economies as classified by the MSCI.
1.4 Cross-border mergers and acquisitions by firms from emerging markets
Since the rapid globalization in the early 1990s, cross-border mergers and acquisitions became important to stay competitive, especially for firms in developing economies (Chen and Findlay, 2003). According to the statistics on UNCTAD (2015), CBM&A have increased since the early 90s from 3442 worldwide deals to 9696 in 2014. In 1990 only 169 of these deals included emerging markets, in 2014 this number increased to approximately 1700 deals.
Traditionally developed countries invested in emerging countries bringing technology, capital and access to international markets. Nowadays emerging market investors acquire assets and resources in developed countries. The key motivation for overseas acquisitions is to gain tangible and intangible resources that are both difficult to trade through market transactions and are difficult to develop themselves. Since emerging markets lack sufficient assets and resources, CBM&A are an effective way to acquire these assets and resources (Boateng, Wang and Yang, 2008). As shown in Figure 2 this growth in CBM&A by firms from emerging markets is quite substantial.
Figure 2. Increasing cross-border M&A deals originating in emerging markets.
1.5 Research question and relevance
Since that the number of cross-border transactions by firms from emerging markets in developed markets has been growing extensively, a substantial economic impact is expected. This expected economic impact, as well as the fact that only a limited number of studies pay attention to this subject, makes a paper on EMF cross-border transactions relevant.
The research question for this paper can be formulated as follows:
Can firms from emerging markets create shareholder value by Cross-Border Mergers & Acquisitions (CBM&A) in developed markets?
In this paper the short-run abnormal returns for shareholders of the acquiring firm are investigated around the period of the announcement. This study is performed with a short-window event study. This is a commonly used analysis to measure the effect of an event on stock prices. Also the influence of the method of payment, type of bid, size of the acquiring firm and industries of the firms on the abnormal returns is tested. To measure this influence a regression is performed. The data consists of 121 cross-border mergers and acquisitions announcements from 23 different emerging countries. The announcement dates cover the period 2010-2015 and are obtained from the database Thomson One Banker. The daily stock price returns of the acquiring firm and of the MSCI emerging markets index are used to compute the abnormal returns. This paper finds no evidence that the abnormal returns around the announcement dates are significantly different from zero. The results do not show that the method of payment, type of bid nor the size of the acquiring firm have statistically effect on the
abnormal returns. Evidence is found to state that abnormal returns are lower when bidder and target firm operate in the same industry.
The remaining part of the paper is outlined as follows. Section 2 presents the relevant theories and motives behind cross-border mergers and acquisitions. Section 3 describes the hypotheses, data set and the research method. In section 4, the results are discussed and presented. Section 6 concludes.
2. RELATED LITERATURE 2.1 Value generating motives of CBM&A
The dominant theory of internationalizations is the OLI (Ownership, Location and Internationalization advantage) paradigm of Dunning (1993). Three main motives for CBM&A are suggested in this theory: efficiency seeking, resource seeking and foreign market seeking. Since the booming trend of cross-border mergers and acquisitions by firms from emerging markets researchers are interested in their underlying motives. They agree that the theory of Dunning cannot totally explain the rise in cross-border acquisitions by firms from emerging economies.
In contrast to developed countries, studies on emerging-economies suggest that CBM&A are driven by asset seeking rather than asset exploiting motives (Gubbi et al, 2010). According to the resource-based view literature, capabilities and resources are crucial factors in a firm’s competitive advantage (Barney, 1991). This resources-based view suggests that the key motivation for overseas acquisitions is to gain tangible and intangible resources that are both difficult to trade through market transactions and are difficult to develop themselves. These assets include technological know-how, marketing skills, natural resources, product differentiation, patent-protected technologies, managerial know-how and economies of scale. Since emerging markets lack such strategic resources, cross-border M&As can be used as an effective way to improve their competitive advantage and performance. Some studies suggest that firms which aim at acquiring new assets and new capabilities tend to create even more M&A value than firms exploiting their existing capabilities (Boateng, Wang and Yang, 2008). Numerous studies support this resource-seeking motive. For example, in their study of Asian firms, Makino et al. (2002) found that Asian firms’ main reason to make acquisitions abroad is to acquire assets and resources.
than developing new local distribution. Especially for emerging markets a CBM&A can provide a way to catch up rapidly (Chen and Findlay, 2003).
Some researchers suggest international risk diversification as a motive for cross-border acquisitions. Through geographical market diversification both operational and financial risk can be reduced. If economic activities in different countries are not perfectly correlated, cross-border acquisitions should improve risk-return opportunities (Boateng, Wang and Yang, 2008).
The Martynova and Renneboog’s (2008) bootstrapping hypothesis can also improve the performance of the firm after the transaction. The bootstrapping hypothesis can arise when a bidder firm with weaker governance standards acquires a target with better governance standards. If the richer governance regime of the target will be imposed on the acquirer, bidders voluntarily bootstrap to the higher governance level of the target firm. This improvement is expected to generate value for shareholders; this indicates higher abnormal return. Since developed markets often have higher governance standards than emerging markets, this can be particularly interesting for emerging markets.
2.2 Value destruction for shareholders
The economic motives described above show the factors of cross-border acquisitions and mergers that may generate shareholder value for the firms from the emerging market. But not all researchers agree on this point. Some researchers suggest that CBM&A by firms from emerging markets lead to value destruction for shareholders. The earlier mentioned study from Berkovitch and Narayanan (1993) mentions two other managerial theories: the agency and hubris theory. The agency theory suggests that mergers and acquisitions are primarily motivated by the self-interest of the management of the acquiring firm. This implies that managers maximize their own utility at the expense of the acquirer shareholders. Which results in higher acquirer management’s welfare at the expense of acquirer shareholders. Therefore, acquisitions will lead to negative shareholder value. The other theory includes the hubris hypothesis. This motive suggests that acquisitions are motivated by manager’s mistakes and that no synergies occur.
Investors are also sceptical of cross-border mergers and acquisitions when the government is the majority owner. As such, a principal- principal conflict can arise. In these cross-border transactions it may be the case that they are not in the best interest of the minority shareholders. A study of Chinese listed firms engaging cross-border mergers and acquisitions shows that less government ownership results in higher abnormal returns for the acquiring firm (Chen and Young, 2010).
Recent studies show that one of the main prior economic motives, fast entry to foreign markets, is influenced by cultural distance between the target and bidder countries. A study of Nicholson and Salaber (2013) showed that cultural closeness is essential in the process of internationalization; returns achieved from fast entry into a target’s country can be negatively affected by cultural differences. These cultural differences can be relatively large between developed and emerging countries.
Also doubts exist about the intentions of emerging markets to invest in developed markets. Some research found that the intention to invest overseas is above all supported by gaining access to the knowledge and capabilities of the target firm. This suggests performance of the firm after the acquisitions or merger is not of their interest. This argument is supported by a paper of Schuller and Tuner (2005) where is shown that the target firms frequently were in financial difficulty. The financial state does not imply, however, that they lacked valuable knowledge and capabilities. Finally, researchers suggest that EMF’s lack inherent management capabilities and international competitiveness. They argue that this raises questions about the ability of the emerging market management to run post-acquisition firms (Knoerich, 2010).
2.3 Evidence from earlier research
Aybar and Ficci (2009) examine the value implications of cross-border acquisition of emerging-market firms. The sample data exists of 433 mergers and acquisitions announcements during the period 1994-2001 originating in countries across Latin America, Eastern Europe, Asia and Africa. In the sample only 39,49% of the target firms are located in developed economies, the remaining targets are located in emerging market economies. Using an event study the influence on shareholders’ value around these announcement dates are tested. They found, on average, that cross-border acquisitions by emerging market firms do not create value. Furthermore, in more than half of the transactions the transaction leads to value deduction. These results show that the expected benefits from cross-border expansion are offset by various costs associated with the transaction.
Bhagat et al (2011) studies the abnormal returns acquired by cross-border acquisitions from emerging markets. In this study a dataset of 698 cross-border acquisitions made by EMF’s during the period 1991 through 2008 is collected. An event study is used to test the announcement effect of the cross-border acquisitions. The outcomes show a positive market response on the announcement day, additionally they indicate acquirer returns are positively correlated with better governance standards in de target country. In this paper no distinction is made between the locations of target firm.
evidence and interview data, the study finds explanations for these transactions. The results show that managers found a strategic arrangement, which allow both parties to fulfil their goals. These goals for acquiring firm are among other things internationalization, market entry, technological know-how and efficient allocation. Gubbi et al (2010) focus on international acquisitions by firms from emerging markets. They argue that cross-border mergers and acquisitions enable internationalization of tangible and intangible resources that are normally difficult to trade through market transactions. This internationalization will lead to value creation for emerging economy-firms. Besides, they show that this value generation is higher when the target firm is located in a developed economy. To investigate this, over a sample data of 425 cross-border acquisitions by Indian firms during 2000-2007, an event study is performed. This study found positive abnormal returns for shareholder of the acquiring firm. Furthermore, the level of advancement of the host country where the acquisition is made seems positively correlated with the value generation for stockholders of the acquiring firm.
2.4 The influence of firm and transaction characteristics
Several studies show that the method of payment, type of bid, size of the acquiring firm and the industries where the firms are operating in influence the abnormal returns in mergers and acquisitions.
In general, most studies indicate higher expected return when CBM&A are entirely cash financed. Georgen and Renneboog (2004) find strong evidence that the means of payment has a large impact on the abnormal return. They found all-cash offers trigger an abnormal return of almost 10% upon announcement. Whereas all-equity bids or offers combining cash and equity only generate a return of 6%. Also Agrawal et al. (1992) find higher abnormal returns when takeovers are entirely cash financed. The usual argument that cash bids do better is because the market takes this as a positive signal of bidder expectations. Contradictory, Travlos (1987) shows no relationship between abnormal returns and the method of payment.
Georgen and Renneboog (2004) also mention the type of bid (friendly or hostile) as important for abnormal returns. They find, on average, hostile mergers and acquisitions generate lower abnormal returns than friendly mergers and acquisitions. The market seems to expect that a hostile takeover suggest a higher bid premium is paid. Results show that a higher bid premium will lead to underperforming of the acquiring firm.
According to a study of Moeller et al. (2004) the size of the firm matters for the return. They show that the return around the announcement for the acquiring-firm shareholders is roughly 2% higher for small acquirers independent of the form of
managers of large bidding firms may think in their self-interest. This is motivated by the agency theory that suggests that managers maximize their own utility at the expense of the acquirer shareholders (Berkovitch and Narayanan, 1993). Also larger firms enter acquisitions more often with negative synergy gains.
When a company invests in a related industry higher abnormal returns are expected. It is often more difficult to realize synergies when the target is from a different industry. Georgen and Renneboog (2004) show the average market return of acquirers in non-related industries is almost 1% lower than acquisitions within non-related industries. However, following the diversification theorem investing in a different industry should lead to improved risk-return circumstances.
In this study the influence of these four characteristics (method of payment, type of bid, size of the acquiring firm and the industries the firms are operating in) on the abnormal return is tested specifically for the case of CBM&A by firms from emerging markets.
3. RESEARCH DESIGN 3.1 Data
The database Thomson One Banker is used to find the announcement dates of cross-border mergers and acquisition. During the subprime debt crisis, starting in 2007, M&A activity sank to its lowest level in the period 2008-2010. After this period we see an annual increase in deal activity (IMAA, 2015). Based on the fact of growing activity in M&A deals as well as the fact that this is the most recent available data, the announcement dates of cross-border acquisitions during the period 2010-2015 is observed.
We eliminate all transactions that does not meet the following criteria: - Acquirer nation is from developing countries
- Target nation is from developed countries
- Acquirer companies are listed on local stock exchanges - Percentage of shares owned after transaction 100%
- Transaction closed between 1 January 2010 and 1 January 2015. This means that if the announcement takes place in the period 2010-2015 but the deal is not closed before 1 January 2015, this transaction is not taken into account.
A wide range of definitions circulates for emerging and developed markets. In this paper the classification as defined by the MSCI (Morgan Stanley Capital International) is used. The criteria for emerging and developed markets according to the MSCI are shown in Table 3. Based on these criteria the classification of emerging countries and developed countries is shown in Table 4.
Criteria Emerging market Developed market
Economic Development A.1 Sustainability of economic
development No requirement
Country GNI per capita 25% above the World Bank high income threshold for three consecutive years Size and Liquidity Requirements
B.1 -Number of companies meeting the following Standard Index Criteria -Company size -Security size -Security Liquidity 3 $ 1340mm $ 670mm 15% ATVR 5 $ 2679mm $ 1340mm 20% ATVR Market Accessibility Criteria
C.1 Openness to foreign ownership C.2 Ease of capital inflows/outflows C.2 Efficiency of operational
framework
C.3 Stability of the institutional framework
Significant Significant Good and tested Modest
Very high Very high Very high Very high
Table 3. MSCI Market Classification Criteria
Emerging Markets Developed Markets
Brazil Canada
Chile United States
Columbia Austria
Mexico Belgium
Peru Denmark
Czech Republic Finland
Egypt France
Table 4. MSCI Market Classification
3.2 Hypotheses
In order to answer my research question, the following hypotheses are tested:
𝐻!= Cross-border mergers and acquisitions by EMFs in developed economies create short run abnormal returns for shareholders of the acquiring firm around the period of the announcement of the acquisitions.
By acquiring new assets in developed economies and catch up rapidly through fast entry, the value generation for shareholders of emerging market firms is expected to be positive. Also the bootstrapping hypothesis of Martynova and Renneboog’s (2008) suggests positive value generation. The bootstrapping hypothesis can arise when a bidder firm with weaker governance standards acquires a target with better governance standards, bidders voluntarily bootstrap to the higher governance level of the target firm. Since developed markets often have higher governance standards than emerging markets, this can be particularly interesting for emerging markets.
𝐻!: β! > 0
The β! indicates the relation between the CAR and the variable cash, I expect the beta will be greater than 0. Different studies show that entirely cash paid mergers and acquisitions lead to higher returns (Georgen and Renneboog, 2004 ; Agrawal et al., 1992). The usual argument that cash bids do better is because the market takes this as a positive signal of bidder expectations. I think this will not differ from the results from CBM&A by firms from emerging markets. The positive beta shows this expected positive relationship.
𝐻 : β < 0
Qatar Italy
Russia Netherlands
South Africa Norway
Turkey Portugal
United Arab Emirates Spain
China Sweden
India Switzerland
Indonesia United Kingdom
Korea Australia
Malaysia Hong Kong
Philippines Japan
Taiwan New Zealand
this by higher premiums paid, since managers of large bidding firms more often think in their own interest. I expect this beta to be negative since higher premiums are paid on the expense of the shareholders.
𝐻!: β! > 0
The β! coefficient demonstrates the effect of the bidding and target firm operating both in the same industry. Since mergers and acquisitions between firms from related industries are able to create greater synergies, the coefficient is expected to be positive according to Georgen and Renneboog (2004). Since I expect synergies to be one of the most important value creating factors in CBM&A, the positive beta indicates this expectation.
𝐻!: β! < 0
The last beta indicates the relation between the CAR and the variable hostile takeover. This beta is expected to be negative, because hostile takeovers are assumed to be value destroying. Georgen and Renneboog (2004) suggest that this is because of the higher premium paid in hostile takeovers.
3.3 Methodology
In order to test the above described hypotheses, we use a short window event study methodology to compute daily abnormal returns around the announcement date of the acquisitions. The event study was introduced by Fama et al. (1969) to calculate the effect of an event or announcement on stock return. The basic idea is to test for abnormal return caused by the event or announcement. The time period, during which the abnormal returns are calculated, is called the event window. Fama et al. (1969) suggests that if the efficient market hypothesis holds, the effects of an event will immediately be reflected in the security prices. Therefore, to avoid dilution of the announcement effect, most event studies are based on an even window of three days around the announcement date. Since emerging markets are less efficient, due to imperfect regulatory environment, insider trading etc., in this study two different event windows are used. The first event window starts 20 days prior to the announcement and ends 20 days after the announcement. The second event window starts 10 days prior to the announcement and ends 1 day after.
First, to determine abnormal returns, expected returns, when no event occurs, need to be estimated. These expected returns are estimated over a period prior to the event, say 120 to 50 trading days prior to the announcement (-120, -50). The event window and estimation period are kept separate to make sure biases from the market already knowing or speculating about an M&A don’t influence the expected returns.
A standard OLS-regression is used to estimate the alpha and beta for each firm over the estimation period. The market model is used for this regression:
𝑬(𝑹𝒊𝒕) = 𝛂𝒊+ 𝛃𝒊𝑹𝒎𝒕+ 𝜺𝒊𝒕 t=-120, …, -50
E(𝑅!")= expected return of emerging market firm’s stock i at time t. α!= intercept
β! = the slope of the emerging market firm’s stock i 𝑅!" = return on market index at time t
Then, the abnormal return can be determined over the two different event windows. These abnormal returns are calculated as follows:
𝐴𝑅!" = 𝑅!"− (α!!"#+ β ! !"#𝑅
!") t=-20, 20 & t=-10, 1
Next, the cumulative abnormal returns (CAR) for each firm are measured over the two different event windows.
𝐶𝐴𝑅! = 𝚺.... 𝐴𝑅
! t=-20, 20 & t=-10, 1
Now, the cumulative abnormal returns (CAR) of each firm are added together and divided by the number of firms to calculate the cumulative average abnormal return (CAAR):
𝐶𝐴𝐴𝑅 =!!𝜮!!!! 𝐶𝐴𝑅
! t=-20, 20 & t=-10, 1
A t-test will determine whether the cumulative average abnormal return (CAAR) is significantly different from zero.
In order to test the effect of the method of payment, type of bid, industry of the firms and the size of the acquiring firm, a regression was conducted to test these effects on the cumulative abnormal returns:
𝐶𝐴𝑅!" = 𝛼! + 𝛽! ∗ 𝐶𝑎𝑠ℎ + 𝛽!∗ 𝐿𝑜𝑔 𝑆𝑖𝑧𝑒 + 𝛽! 𝑆𝑎𝑚𝑒_𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝛽!∗ 𝐻𝑜𝑠𝑡𝑖𝑙𝑒 + 𝜀!
𝐶𝐴𝑅!"= cumulative abnormal return for each firm α!= intercept
β! = the slope of the regression of firm i’s CAR against method of payment
Cash is a dummy variable for the method of payment. When the transaction is entirely paid with cash, the dummy variable is set to 1.
β! = the slope of the regression of firm i’s CAR against type of bid
Hostile is a dummy variable for the type of bid. When the takeover is hostile, the dummy variable is set to 1.
Finally a t-test is used to test if the coefficients are statistically different from zero.
4. RESULTS AND DISCUSSION 4.1 Results
The cumulative average abnormal returns (CAAR) of the two different event windows are presented in Table 1. The sample contains 121 cross-border mergers and acquisitions by emerging market firms, which are all completed.
As seen in table 3, the results show a negative CAAR of -0,4% when the time window is [-20,20] and a positive CAAR of 0,9% when the time window is [-10,1] when a cross-border merger or acquisitions is performed by a firm from emerging market. There is no evidence that the returns are significantly different from zero. This is in contrast with the expectations. The earlier mentioned positive wealth effects of acquiring firms from emerging markets via acquiring assets, fast entry, diversification and bootstrapping seem to be not large enough for emerging markets to create shareholder value. Even though the results are not significant it is visible that the CAAR becomes larger and positive when the event window declines.
Coefficient t-value
CAAR (-20,20) -0,004743 -0,28
CAAR (-10,1) 0,0094619 1,01
Table 3: The Cumulative Average Abnormal Returns of the two different event windows and their t-test statistics of the acquiring firm.
Since the existing literature suggests that factors such as the method of payment, size of the firm and the industry matters for the CAR, a multiple regression is performed to check if this holds for cross-border mergers by firms from emerging markets. In table 4 the results are represented.
CAR (-20,20) CAR (-10,1)
Coefficient t-value Coefficient t-value
α
0,0332866 0,50 0,0418568 1,15Cash 0,0225936 0,66 -0,0085518 -0,46
Table 4: Multiple linear regression: Dependent variable CAR regressed on dummy variables ‘Cash’, logarithm of size and dummy variable ‘Same industry’ and a constant in the two different event windows.
The coefficient of the dummy variable cash in event window [-20,20] is 0,0225936 which indicates that cash bids create a higher cumulative abnormal return of 2,26% compared to other methods of payment. This is in line with the findings of Georgen and Renneboog (2004) and Agrawal et al. (1992). They found higher abnormal returns when takeovers are all cash financed, because this was picked up as a positive signal by the market. Contradictory, the second event window [-10,1] shows a coefficient of the dummy variable of -0,00885518. This indicates a lower cumulative abnormal return of 0,89% if mergers and acquisitions are paid entirely cash. This is in contrast with the expectations based on studies of Georgen and Renneboog (2004) and Agrawal et al. (1992). Since the values are not statistically significant on the 5% and 10% significant level, there is no evidence that cash payments actually have a positive effect on the return.
In the event window [-20,20] the coefficient of the logarithm of the variable size shows a negative value of -0,0013228. In percentages this is a decline of 0,13% in cumulative abnormal return when the firm is 1% bigger. Since Moeller et al. (2004) also show a negative relation between size and the CAR. The results in event window [-10,1] confirm this relation. Since the results are not statistically significant at the 5% and 10% significance level, this shows no evidence that the size of the firm has influence on the performance of CBM&A.
The last dummy variable is the same industry. Both event windows [-20,20] and [10,1] show a negative relation between the same industry and the CAR. The CAR declines respectively with 6,25% and 3,75% when the target firm operates in the same industry. The obtained results are significant at the 90% confidence level, but not at the 95% level. This is unexpected; the expectation was that investing in a related industry results in higher abnormal return because of higher synergies. A possible reason for this decline could be the positive diversification effect when investing in a non-related industry.
Since all of the 121 transactions in the obtained data are friendly takeovers, we weren’t able to test the effect of the type of bid on the cumulative abnormal return.
4.2 Discussion
- The transactions are based on other reasons/motives than value creation
- The decision makers are wrong in their assumption that a transaction will lead to value creation.
Incorrect assumptions
The outcome of the research can be strongly influenced by certain assumptions, in this research predominantly the assumption of efficient markets. Furthermore, the choice of the event window has possibly a large impact on the outcome of the research.
The event study method assumes efficient markets. The efficient market hypothesis states that asset prices fully reflect all available information including future expectations. Market efficiency in its strongest variant claims that prices instantly reflect even hidden insider information, meaning that no one can achieve exceptional returns.
In case of absence of strong market efficiency, it would be possible to make extraordinary returns by fundamental analysis and/or insider information. It might be possible that emerging markets lack sufficient legislation and financial infrastructure to achieve strong market efficiency. Before announcement date investors are possibly able to benefit from insider knowledge. In that case the increase in stock price lies before the event window following less abnormal returns in the event window. This is the reason that two different event windows are used in this study, both larger than the [-1,1] window if abnormal returns for a strong efficient market are tested. It might be possible that even these event windows are too small to measure the abnormal returns. Remarkably the event window from 10 days before announcement up to 1 day after announcement shows a higher abnormal return than an event window 20 days before and 20 days after announcement date. Although the effects seen in this study are statistically insignificant, the difference between the two event windows is obvious. A further investigation using different event windows can deepen the knowledge of this phenomenon.
Last but no least the dataset used in this study could be flawed because of its limited size and/or the specific timeframe.
Other reasons than value creation
If other reasons than value creation are considered it is logical to look at the agency theory described in the paper of Berkovitch and Narayanan (1993). This agency theory suggests that mergers and acquisitions are primarily motivated by the self-interest of the management of the acquiring firm.
I can also think of another specific reason. It could be that if a merger of acquisition does not take place the value of a company diminishes. In this personal theory a merger or acquisitions preserves the value of the company that otherwise would diminish.
Decision makers are mistaken
The hubris theory from Berkovitch and Narayanan (1993) suggests that acquisitions are based on wrong perception of the management of acquirer. In other words: they just make a mistake.
My personal opinion is that in those cases there might be synergies, but the management is not able to capitalize these synergies. Actually CAR is not realized because of a mistake in judgment due to weak management. In emerging markets the level of management is less developed than in developed countries.
It takes however quite some time to realize synergies and therefore in order to measure synergy effects on transactions, a long event window after announcement date need to be studied. Such a study can conclude if synergies are not capitalized because of judgment errors or weak management.
5. CONCLUSION
The central question in this research was: Can firms from emerging markets create
shareholder value by cross-border mergers and acquisitions in developed markets?
To answer this question the shareholder’s abnormal returns created by CBM&A were analyzed during the period 2010-2015. Using 121 cross-border mergers and acquisitions from emerging economies to developed economies an event study was performed to calculate the cumulative abnormal returns over two different event windows. Also a regression analysis was performed to measure the effects of the method of payment, size of the acquiring firm and the industry on the cumulative abnormal return. The results of the event study show no statistical evidence to state that CBM&A by firms from emerging markets create shareholder value. Also the results of the multiple regressions are not statistically significant, which suggests that these factors do not have an impact on the cumulative abnormal return.
Further research is necessary in order to answer the question of the thesis in more detail. In such follow-up research a larger sample should be used. Besides, the cumulative abnormal returns should be tested in a wider range of event windows to be
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