An event study about the effect developed and emerging
markets have with cross border mergers and acquisitions on
the shareholder value
Amsterdam Business School
Name May Lai Tan
Student number 10754466
Program Economics & Business Specialization Finance & Organization Number of ECTS 12
Supervisor Dr. I.J.Naaborg Target completion 31 / 01 / 2018
Abstract
This paper investigates if cross border mergers and acquisitions create more shareholder value if developed countries invest in emerging countries than emerging countries investing in developed countries. The paper consists of an event study of 573 cross border deals in 47 countries during 2008-2017. The main findings of this research are that developed market firms show positive cumulative abnormal returns when acquiring in emerging markets and that these returns are significantly higher than emerging market firms acquiring in developed markets. This is in line with previous research of Jory et al. (2011) who suggest the acquired targets perform better in poor governed locations when already merged with the developed firm. This research is also in line with Aybar et al. (2009) who evaluated emerging market multinationals and found no evidence of shareholder value creation. Furthermore, the empirical results support evidence of a negative effect deal value has on shareholder value and the positive effect of firm size on shareholder value. This might implicate that asset exploitations strategies are more valuable for shareholders than asset-seeking strategies in cross border mergers and acquisitions.
Table of Contents
1. Introduction ... 2
2. Literature review ... 3
22.1 General determinants of mergers and acquisitions in literature……….4
2.2 Emerging and developed countries……….5
2.3 Shareholder value and motives behind CBMA………...5
2.4 Summary and hypotheses………...9
3. Methodology and Data ... 9
3.1 Methodology: Event Study ... 9
3.2. Data ... 12
3.3. Descriptive statistics ... 14
4. Analysis ... 16
4.1. Empirical Results ... 17
5. Conclusion and discussion ... 20
6. References……….22
Statement of originality
This document is written by Student May Lai Tan, who declares 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. The Faculty of Economics and Business is responsible solely for the super vison of completion of the work, not for the contents.
1. Introduction
Mergers and acquisitions(M&A) are globally common forms of investment, amounting to on average over 1 trillion USD worth of transactions per year (Berk et al., 2000). In the past four years worldwide M&A activity has exceeded 3 trillion USD which points to a possible new wave of unprecedented deal making (Massoudi et al., 2017). The fact that the takeover market is highly active stems from the economic climate of today. Due to globalisation, financial and product markets have become more integrated with each other. It has become easier for companies, that want to expand their market share to do this through foreign direct investment in the form of acquisitions.
Cross border mergers and acquisitions are most commonly seen as a developed market firm taking over an emerging market firm (UNCTAD, 2014). For example, the merger of Indian steel company Tata Steel in 2017, with Germany’s steel giant Thyssenkrupp which made them Europe’s number two producer in steel (McGee et al., (2017). The reports of the United Nations in 2014 show that of all the international investments 22.6 percent are made by emerging market countries relative to 73 percent by developed market countries. These numbers indicate that foreign direct investments are highly biased towards developed countries acquiring assets overseas. And indeed, with institutions worldwide opening up their policies and supporting investments from outside, considering the falling growth rates in the West, the climate for takeovers in emerging markets is highly attractive. However, for the multinationals in the emerging markets, the conditions to investment and expand abroad are also supported.
One could argue that the percentage of international investments made by developed and emerging countries has a direct relation to the perceived expectations of shareholder gain of the takeover. And therefore, that the shareholder gains a developed acquirer creates by taking over an emerging target are on average higher than if an emerging acquirer takes over a developed target and thus the former occurs more frequently.
In current literature, most of the case studies about cross border mergers and acquisitions are about one type of market; either developed or emerging. In developed market literature, the research is mainly about U.S acquirers which is a poor representation of all 23 developed economies listed by the MSCI (MSCI website). In studies of Francis et al. (2008) and Doukas et al. (1988) there is evidence for the presence of gains for U.S acquirers’ shareholders by cause of the takeover. In regard to literature about emerging markets, the evidence for shareholder gain is inconclusive.
no shareholder gain. In contrast to Sathyajit et al. (2009) who find positive cumulative abnormal returns when evaluating Indian firms. Even though the goal of a merger or acquisitions would always be to exploit the value the acquirer could not create on its own, the strategy to achieve this value depends on the motives of the takeover. The given motives for these takeovers are different which makes one argue that these cross-border deals create value in distinct ways and that the shareholder gain co-depends on it. In this light, the difference of shareholder value could be the reason for developed markets playing a more present role in the overall CBMA activity.
The aim of this paper is to evaluate to what extent shareholder gains of emerging acquirer and developed acquirers differ when acquirers takeover firms situated in different advancement levels of economic, political, social and legal environment. As follows, this paper provides a possible explanation for the large difference in amount of CBMA initiated by developed markets compared to emerging markets, by evaluating whether its origin comes from higher shareholder gains in cross border mergers and acquisitions deals for developed acquirers relative to emerging acquirers. Furthermore, this thesis wants to contribute to the literature by including all developed countries in the event study in the interest of a representative result of the effect on shareholder gain. This leads to the main research question: Is shareholder value higher if a developed market firm takes over an emerging market firm, than if it was to be reversed?
To answer this question, this research conducts an event study and so, measures the returns to shareholders for CBMA deals of 23 developed countries and 24 emerging countries during time period 2008-2017. With the cumulative abnormal returns, one can evaluate whether the deals create shareholder value. A multivariate analysis will be presented in order to answer the research question and several control variables will be analysed to control for alternate explanations.
Chapter 2 contains an overview of the literature available about CBMA and the hypothesis. In chapter 3, the methodology and the data used in this research will be presented. This chapter will also contain the descriptive statistics. Chapter 4 presents the results of the event study and of the multivariate analysis. Finally, chapter 5 contains the conclusion and discussion.
2. Literature review
The idea of internationalization is connected to the believe that firms can extract above normal returns from CBMA investments by internalising host country imperfections when their firm specific assets cannot find comparable value elsewhere. In order to create a clear foundation on what factor mergers and acquisitions depend on this section begins with the general determinants of M&A in literature. Afterwards, an overview of the definition and criteria of emerging and
developed markets is given. Finally, an elaboration is made about whether CBMA actually creates value for the shareholder and what the motivations are to engage in one.
2.1 General determinants of mergers and acquisitions in literature
This section contains an overview of the general aspects that can influence the shareholders response to a takeover. This will give more theoretical framework on the control variables in the multivariate analysis.
Firstly, the method of payment can have effects on corporate control, tax, risk bearing and cash flow for the buying and selling firms and stakeholders (Faccio et al., 2005) and there influence the CAR. For instance, shareholders might prefer cash financing over stock when preserving control is an important factor for the targets stakeholders (Faccio et al.,2005).
Secondly, the deal value may also influence the shareholder value of the firm because according to Sudarsanam et al. (1996) low deal values are associated with smaller targets which makes the integration process easier. Thirdly, firm size is added as a control variable because in the research of Moeller et al. (2004) announcement return for acquiring firm shareholder is about two percentage points higher for small acquirers. An explanation might be that large firms offer a higher acquisition premium than small firms and enter the acquisition with negative dollar synergy gains. Also, Oh et al. (2014) suggest that the number of employees matters during the merging process and explaining that the larger the number of employees the harder it will be to manage the transition.
Variables to control for the economic environment are also analysed such as the financial crisis and the GDP growth rate. According to previous research, the economic environment has a significant effect on the cross-border mergers and acquisitions activity (Cai et al., 2011). Beltratti et al. (2013) claims overall economic uncertainty may have caused investors to be more cautious in their response to an announcement of a potential deal, and therefore dragging the process of completion or postpone repricing stocks. Sehleanu (2015) provides evidence for a positive influence of GDP on the number of cross-border mergers and acquisitions inflows. Whereas for acquirers the GDP growth has a negative impact on the outflow from the home country (Uddin et al., 2010). This is coherent with the reasoning that developed markets often seek economic growth through mergers and acquisitions when the mother firm has experienced low growth rates for some years.
(2008) who provide evidence for the shareholder value destruction on conglomerate deals. Acquisition relatedness may create market power for the acquirer by enhancing firm value through economies of scale and increasing the absolute size and breadth of the firm (Singh et al., 1987).
2.2 Emerging and developed countries
The investment industry distinguishes developed and emerging markets in the degree of economic development and risk factors. An emerging economy is still undergoing industrialization and is becoming increasingly advanced. Such countries are growing in their role and position in politics and economics. Therefore, they grow faster than developed economies and their capital markets typically entail greater risk (Bodie et al., 2014). In regard to cross border mergers and acquisitions factors firms look at possible targets from an investment point of view. As a consequence, the developed and emerging markets are defined on the criteria from the MSCI ACWI Index.
The institution uses the following criteria to classify the developed and emerging countries: economic development, size, liquidity and market accessibility. For emerging markets, there are no requirements regarding the sustainability of the economic development. In regard to size, there is a minimum number of companies that should satisfy a certain company and security size measured by their full market capitalization and the latter by float market capitalization. The liquidity is measured by the annualized traded value ratio(ATVR) and is calculated as the median value of all the shares traded per month of the security relative to the market capitalization. Market accessibility is measured by the openness to foreign ownership, ease of capital in-and outflows, efficiency of operational framework and stability of the institutional framework. These factors need to be present in some modesty while for developed market it is expected that the presence of these factors is very high.
2.3 Shareholder value and motives behind CBMA
2.3.1 Emerging markets
A large part of the foreign direct investments by emerging markets in developing economies are in the form of an acquisition (Ramamurti et al., 2009). When initiating in cross border mergers and acquisitions, emerging market firms seem to invest overseas at a relatively earlier stage compared to developed market firms that follow a more incremental process of internationalisation (UNCTAD, 2006).
When looking at cross border mergers and acquisitions done by emerging market firms there are several positive and negative results regarding the profitability including different explanations from the results. The growing trend of Indian multinationals investing in foreign companies has shown to have a high success rate in terms of shareholder gain. In an event study about cross-border acquisitions by Indian firms during 2000-2007, there is supporting evidence that CBMA creates shareholder value (Sathyajit et al., 2009). In which the main independent variables are the quality of resources available in the host economy and the level of institutional development. An important motivation given by the researchers to engage in taking over developed market firms, is that Indian firms seek to gain advantages like the access to strategic resources that they are forced to look for beyond their national borders because their host market owns underdeveloped factor markets for managerial capabilities, finance and technology. In 2003, cross border deals consist of already 75% of all the mergers and acquisitions in India. This shows that Indian firms prefer internationalizing over indigenous host country competitors. Sathyajit et al. (2009) also find that the level of economic and institutional advancement of host country where the acquisition is made is positively correlated with the market expectation of the takeover performance. A similar event study by Wu et al. (2016) using 180 M&A cases of listed Chinese firms between 2002-2012, affirm the evidence of cross border mergers and acquisitions creating shareholder value showing for all event windows a significant positive cumulative abnormal return. Wu et al. give the same asset seeking motive for acquiring targets in developed markets. Furthermore, the targets the Chinese firms acquire are mostly either in deficit or on the verge of bankruptcy, which suggests these firms only have valuable intangible assets e.g. technology and natural resources.
Other motives behind CBMA are that market development and power are important objectives for the acquirer, for which CBMA is an effective tool (Boateng et al., 2008). This is suggested by an event study about Chinese corporations acquiring developed targets between 1998-2011(Du et al., 2015). This study also provides evidence for positive abnormal returns when Chinese acquirers engage in CBMA activities with targets in a developed formal institutional environment. Furthermore Du et al. (2015) add extra motives behind CBMA by pointing out that market development and power are also common drivers for emerging countries entering into CBMA, explaining that for emerging market firms, the fasted way to access new markets to expand their product and consumer markets internationally is through CBMA. Government and societal influences are stronger in emerging market economies compared to developed countries (Hoskisson et al., 2000).
However, there are also several studies that express their concerns about the value creation of such deals. On one side, the acquisitions are seen as a way to enter into the home economies of the emerging multinationals and a new source of capital for the targets. However, these acquisitions are also seen as competition for which the target should protect itself from (Knoerich, 2010). In early stages of international growth emerging market firms need to possess firm specific advantages in order create synergies. De Beule and Sels (2016) point out that emerging market firms seem to suffer from the lack of technology, management and brand advantages developed market firms do possess. Resources that have traditionally not been considered to be the source of extraordinary rents as is the case for technology which is argued to underpin non-location bound firm specific advantages. According to Rugman (2008), factors such as cheap labour and natural resources are not firm specific and therefore less valuable for the developed target. Besides possibly lacking the ability to absorb, the emerging acquirers can also face more challenges due to the fact that managers lack the institutional resources and experience to operate in more advanced countries (De Beule et al., 2016).
Aybar et al. (2009) evaluate 433 CBMA deals by emerging market multinationals between 1991 and 2004 with an event study and find cross border expansions do not create value. For more than half of the transactions their research points to value destruction. A similar study by Aybar et al. (2015) takes 824 cross border deals during 2000-2010 and finds similar results. Despite that investors react positively immediately after the announcement; the cumulative abnormal returns are negative beyond 4 days after announcement. Additionally, a study of Chinese firms (2000-2008) also provides evidence for the destruction of shareholder value which tends to be the case for Chinese acquiring firms with majority government ownership (Chen et al., 2010).
2.3.2 Developed markets
This section presents different motives behind the takeover compared to emerging countries by developed market firms.
Developed markets often seek to takeover emerging market firms because of the market entry hypothesis (Zhu et al.,2011). The hypothesis claims that developed market firms seek to gain access to emerging markets with acquisitions. The other option, Greenfield investments, is more complicated to embark in because of the differences in political and legal systems. Zhu et al. (2011) evaluate pre- and post-acquisition operating performance, long term stock performance, target industry characteristics, and ownership structure of deals in 20 emerging markets in the period 1990-2007. In their results, they find that the acquirers mostly take over large successful firms and
no significant positive cumulative abnormal returns. This can be interpreted as such that taking over large successful firms doesn’t cause the stock performance to change.
Francis et al. (2008) mention that cross border acquisitions have become an increasingly important source of investment and restructuring. After the Sarbanes and Oxley act, the US has declined a lot of cross listings of foreign firms which forms an advantage of US corporations over foreign firms seeking access to the US capital markets. In the early 1990s many emerging markets liberalized their financial markets however these firms can still face a higher cost of capital then firms from developed markets. Their results show that an important source of value creation is the access to cheaper external capital by the merged firm giving foreign firms more opportunities to undertake positive NPV projects which they would otherwise have to forego due to financial constraints. Their claims were supported by results of positive cumulated abnormal returns for US corporations engaging in cross border M&As during 1996-2003. This is consistent with the findings of Doukas et al. (1988) who find higher abnormal returns when firms expand into new industry and geographic markets especially when the firm is less developed than the U.S. economy.
Furthermore, developed market firms can also exploit their country specific market advantages in order to create synergies. Developed countries have more advanced institutional and corporate governance practices, as well as legal and accounting standards. These advantages are easy to implement because the developed acquirers know how to identify the weak spots in those areas and improve them by copying their own methods on the target. For example,
emerging market firms might lack good contracting institutions which creates difficulties ex-post hiring to enforce the agreements. In an event study containing of UK-listed acquirers in the period 1989-2008, the cross-sectional analysis shows the targets perform better in poorly governed locations (Jory et al., 2011). This suggests that the acquirer can exploit those imperfections to their advantage successfully.
Additionally, in developed countries many companies have advanced technologies and other assets. As discussed earlier in Chapter 2, the reason for emerging market firms to acquire foreign more developed firms is to exploit their knowledge and technologies. This simultaneously also goes for the emerging target. If developed market firms possess advanced technologies the emerging market firms in the same industry don’t use, they can implement those technologies in the company they takeover in the emerging country in other to boost the targets competitive advantage in the foreign market.
2.4 Summary and hypotheses
All previous literature mentioned above miss the effect of market classification in CBMA. Nevertheless, considering all the literature that is discussed the effect of market classification could be present and it could have different influential factors. In short, the literature suggests on average positive cumulative returns for both type of markets. However, the motives and possible areas where synergies can be created from the CBMA are different. In emerging markets, firms acquire developed market firms to gain advantages that they are forced to look for beyond their national borders because their host market owns underdeveloped factor markets for managerial capabilities, finance and technology. Other motives behind CBMA is to achieve market development and more power for the acquirer, for which CBMA is an effective tool (Boateng et al., 2008). On the other hand, literature also point out a lack of firm specific advantages to create a synergy and the ability to absorb with the target. Developed markets often seek to exploit their knowledge, advanced systems and technology affiliated with developed economies. In other words, emerging market mainly seek assets while the developed market seeks to exploit their assets with takeovers. Influential factors on the shareholder value are specific deal characteristics like the firm and deal size. Also, the economic environment of the deal is found to be an important factor. The research of developed firms investing in emerging targets shows positive shareholder value creation. While the same is found in the literature for emerging markets, on average the literature is still inconclusive about the shareholder value creation. This suggests the following hypotheses. Hypothesis 1: Cross border mergers and acquisitions with a developing acquirer and an emerging target have a positive cumulative abnormal performance around the announcement date.
Hypothesis 2: Cross border mergers and acquisitions with an emerging acquirer and a developing target have a positive cumulative abnormal performance around the announcement date.
Hypothesis 3: The positive cumulative performance of developing acquirers over emerging targets is higher relative to the positive cumulative performance of emerging acquirers over developed targets.
3. Methodology and Data
3.1 Methodology: Event Study
This empirical research is based on the effect market classification of the acquirer can have on a cross-border M&A, making a distinction between developed and emerging countries. The research is conducted using the event study methodology, where the effect of the market classification will be isolated with a CAR analysis based on the paper by Fama, Fisher, Jensen and Roll (FFJR, 1969)
that pioneered the event study methodology. Firstly, the CAR analysis will be conducted testing the first hypothesis. Secondly, a multivariate analysis will be carried out to examine the effect of the M&A characteristics on the CAR.
An event study is a widely used statistical method in empirical financial research to measure the impact of an event on the value of a firm. This is done by investigating the reaction of the stock market around the event date. The reliability of the method depends on the assumption that, given market rationality, the effect of a certain event will be immediately reflected in the price of the asset under analysis, causing its impact on shareholder value to be observed throughout a short period of time centred around the date of its disclosure (Feldmann et al., 2013). An event study can be structured in five parts (Bowman, 1983). Firstly, the identification of the event of interest takes place. In this study, the event of interest is the announcement date of the deal. The announcement date is the date in which the parties of the merger or acquisition have signed an agreement, specifying the material terms of the transaction and outlining how the merger or acquisition will proceed. In light of the assumption of market rationality, the announcement date, being the first moment the information becomes public, ignoring previous rumours, is the moment on which the stock market will react and effects should be seen.
The second phase is modelling the security price reaction by creating a benchmark model. In this research, the normal stock behaviour is formed using the market model. In which the abnormal returns are defined as the residuals of the market model. The expected return formula is:
!(#$,&) = *$ + ,$× #.,& + /$,&
Therefore, the residual is derived as follows:
/$,& = 0#$,& = *1+ ,1 × #.,&
Where
• #$,& is the return of the stock of firm i on day t • #.,& is the return of the reference market m on day t
• /$,& is the error term with expectation zero, finite variance and assumed uncorrelated to the market return and firm return, not auto correlated, and homoscedastic.
In which we estimate alpha and beta with an OLS regression taking an estimation window of 504 days to 20 days prior to the event date. The parameters are estimated using a different market proxy for each deal according to the country. For example, American acquirers’ normal returns are estimated using the S&P 500 index and Brazilian acquirers’ normal returns with the Bovespa Index. Afterwards the abnormal return is calculated deducting the estimated normal return separately for each day in the event window including the event date.
2#$,& = #$,&− *$ + ,1× #.,&
For further analysis, the abnormal returns must be aggregated over time. The dependent variable of research regression, cumulative abnormal return is calculated taking the sum of the abnormal returns of -2 up to +2 days of the event window. In this short event window, one can observe any possible immediate reactions. However, since an M&A deal is a longer process and effects can be dragged on over a longer period, an extra event window of -20 to +20 days is taken. This step can be described in formula in the following matter:
42# 56, 57 = ∑5 = 56572#$,&
The cross-border deals are then tested on significance with a mean t-test.
9 = 0 422#
: ≈ 0(0,1)
In addition, the multivariate analysis will be done to answer hypothesis 3 and to control for alternate explanations. With this analysis, this research follows the other studies in M&A by including for example
firm size (Uhlenbruck et al., 2006). The statistical relationship to be analysed is
42#$ = ,>+ ,6?@A2BCDEF@F + ,7GHI + ,J?K + ,LMN + ,O4FE:E: + ,PQRSD:5FT + ,U9?I + /$
Which contain the following variables:
The main interest variable, developed acquirer(DevAcquirer), is a dummy variable whether the acquirer is from a developed market then value 1 otherwise 0. Note that this automatically implicates the market classification of the target as well.
• The method of payment (MoP) • Deal value (DV)
• The global financial crisis during 2009: dummy variable, if deal took place in 2008-2009 then value 1 otherwise 0. (Crisis)
• Industry relatedness (Industry). This dummy variable shows whether the merger or acquisitions are operating in the relating industries then value 1, otherwise 0.
• Yearly GDP growth rate (GDP)
3.2. Data
In order to answer how the market classification can influence the effect on shareholder value for cross border M&A there needs to be a clear distinction in what an emerging and developed market is. Taking all the factors defining market classification into consideration, the chosen criteria for emerging and developed markets are taken from the MSCI ACWI Index as shown in table 1 and 2. The MSCI is an independent institution which provides research driven insights and tools for institutional investors and is widely used by the top 100 biggest investment managers (MSCI) and therefore considered a reliable source.
Table 1 Developed markets
Americas Europe & Middle East Pacific
Canada Austria Australia
United States Belgium Hong Kong
Denmark Japan
Finland New Zealand
France Singapore Germany Ireland Israel Italy Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom
Source: MSCI ASWI Index
Source: MSCI ASWI Index
The data is obtained from the database Zephyr. There are 2 samples drawn from the database. The first sample contains mergers and acquisitions with emerging acquirers and developed targets and consists of 1056 deals. The second sample contains mergers and acquisitions with developed acquirers and emerging targets, which consists of 2450 deals.
The samples are subject to the following criteria:
1. Only emerging countries and developing countries from the MSCI ACWI Index will be taken.
2. All deals contain acquirers who are listed on a stock exchange market. 3. The form of the deals are mergers and acquisitions.
4. All deals are taken from the time period: 2008 - until 27 November 2017.
The deals which show at least one missing value out of the control variables in the multivariate analysis are omitted in order to avoid big differences in the amount of observations. Ultimately, 244 observations for developing acquirers and 317 observations for emerging acquirers are left. In this research only the countries in the MSCI ACWI Index are evaluated to prevent confusion about the definition and characteristics of the included countries. It is essential that all deals are listed companies in order to obtain information about the stock prices and returns of the deals. In Zephyr, there has been made an exclusion of LBOs, recapitalizations, spin-offs, self-tender offers, exchange offers, repurchases, partial equity stake purchases, acquisitions of remaining interest, and privatizations. Leaving only the deal type mergers and acquisitions. Furthermore, the deals with incomplete stock returns for the estimation window are omitted. The time period in which the deals are taken consists of a small 10 years to avoid big differences in M&A trends. Cross border
Table 2 Emerging markets
Americas Europe, Middle East & Africa Asia
Brazil Czech Republic China
Chile Egypt India
Colombia Greece Indonesia
Mexico Hungary Korea
Peru Poland Malaysia
Qatar Pakistan
Russia Philippines
South Africa Taiwan
Turkey Thailand
mergers and acquisitions are relatively newer grounds, especially for emerging countries whose governments and industrialization have grown more open to foreign direct investments. Hence taking deals further back in time could entail having deals in the sample that occurred during different regulations and institutional factors for the same country. In the process of sorting the data no distinction in deal value is made explicitly to measure the effect in a later stage with the regression. Besides gathering the ISIN numbers of the parties of the deals, other variables were gathered simultaneously. The deal value, firm size of the acquirer (total assets last available year), announcement date and industry of both acquirer and target were all from Zephyr as well. The GDP Growth Rate is obtained from the public data of the IMF. Finally, the actual stock data of the companies and their market proxies are gathered from DataStream.
3.3. Descriptives
In this section, several features about the research data are given. Table 2 is an overview of the composition of the countries in the sample with developed acquirers and emerging targets. This sample shows a relative high percentage of British acquirers (22.1%) while the US only forms 4.1% of the whole sample. The emerging targets are mostly the BRICS (Brazil, Russia, India, China and South-Africa) countries which confirms the statistics of UNCTAD which wrote the inflows have doubled since the financial crisis (UNCTAD, 2014). Table 3 shows the composition of the sample with emerging acquirers and develop targets. The table reveals that around 60% of the cross-border deals are made by Asian acquirers to other more developed Asian targets like Hong Kong and Singapore. However, the United States of America is also a popular choice to acquire.
Table 5 shows the descriptive statistics summarized of all the control variables used for the multivariable regression. The method of payment has the approximately the same spread for both samples. The firm size measured by the total assets in for emerging acquirers is much higher. Another remarkable observation is that the number of conglomerate deals for emerging acquirers are a little higher than the number of related deals, while for developed acquirer the conglomerate deals are only one third of the whole sample. In table 6, the descriptive statistics of the dependent variable, cumulative abnormal returns, are given
Table 3
Cross border deals per country (developed acquirer – emerging target) Developed acquirers number % Emerging Targets number %
Great Britain 54 22.13 Brazil 38 15.7
Australia 27 11.07 China 33 13.64
Japan 25 10.25 India 26 10.74
France 19 7.79 Russia 20 8.26
Sweden 19 7.79 South Africa 15 6.2
Italy 12 4.92 Chile 13 5.37
Netherlands 12 4.92 Mexico 12 4.96
Hong Kong 11 4.51 Czech Republic 11 4.55
Germany 10 4.1 Poland 9 3.72
United States of America 10 4.1 Indonesia 8 3.31
Spain 9 3.69 Malaysia 8 3.31 Canada 8 3.28 Colombia 7 2.89 Switzerland 8 3.28 Turkey 7 2.89 Norway 6 2.46 Greece 6 2.48 Finland 5 2.05 Philippines 6 2.48 Belgium 4 1.64 Peru 5 2.07 Ireland 4 1.64 Thailand 5 2.07
Austria 1 0.41 United Arab Emirates 4 1.65
Egypt 4 1.65
Taiwan 3 1.24
Hungary 2 0.83
Total 244 242
Table 4
Cross border deal per country (emerging acquirer – developed target) Emerging acquirers number % Developed Targets number %
Taiwan 98 30.91 Hong Kong 80 25.32
Malaysia 58 18.3 United States of America 61 19.3
China 54 17.03 Singapore 60 18.99
India 31 9.78 Great Britain 32 10.13
Poland 17 5.36 Germany 16 5.06
South Africa 16 5.05 Austria 13 4.11
Thailand 14 4.42 Netherlands 13 4.11 Indonesia 7 2.21 Canada 6 1.9 Philippines 5 1.58 Switzerland 6 1.9 Mexico 4 1.26 Spain 5 1.58 Turkey 4 1.26 France 4 1.27 Colombia 2 0.63 Italy 4 1.27 Hungary 2 0.63 Japan 4 1.27 Brazil 1 0.32 Sweden 4 1.27 Greece 1 0.32 Belgium 2 0.63 Peru 1 0.32 Finland 1 0.32 Qatar 1 0.32 Ireland 1 0.32 Russia 1 0.32 Israel 1 0.32 Norway 1 0.32 New Zealand 1 0.32 Portugal 1 0.32 Total 317 316
Table 5
Descriptive statistics of the CBMA deals
Developed acquirer Emerging acquirer Total
Number of deals 244 317 561 Method of payment Cash 138 247 385 Liabilities 32 24 56 Earn-out 29 12 41 Shares 28 21 49 Deferred payment 13 8 21 Other 3 1 4 Bonds 1 1 2 Converted debt 0 3 3 Deal value Mean 268429.3 140971.6 196407.7 Median 25387.72 14548.8 17728.18
Firm size (total assets in thousands EUR)
Mean 18,100 2,270,000 1,290,000
Median 1,069 324 420
Crisis
In crisis period (2008-2009) 46 39 85
Out of crisis period (2010-2017) 198 278 476
GDP growth rate (%) Mean 1.89 4.92 3.61 Median 1.9 5.0 3.1 Industry Related 154 155 309 Unrelated 86 159 245 Table 6
Descriptive statistics of the Cumulative abnormal returns for sample A and B Cumulative abnormal
returns event window (-2,+2) Developed acquirer Emerging acquirer Cumulative abnormal returns event window (20, +20) Developed acquirer Emerging acquirer Number of obv. 244 317 244 317 Mean 0.0158 0.0031 -0.0016 4.1836 Median 0.0057 0.00009 -0.0025 -0.0073 Std.deviation 0.0974 0.0741 0.1693 0.1849 Minimum -0.3389 -0.3301 -0.8058 -0.5761 Maximum 0.9084 0.3789 1.2289 1.0642
4. Analysis
4.1. Event study results
In this section, the results of the event study will be discussed. The results of table 7 show on average positive abnormal returns around the announcement date of the cross-border mergers and acquisitions. For the total sample and the sample with developed acquirers and emerging targets, the CAR [-2, +2] event window is significant at a 1% level. For emerging acquirers and developed targets, the average CAR is positive but doesn’t give a significant level. For the CAR [-20, +20] event window all averages are positive except for emerging acquirers. This event window shows no significant values indicating that there is no increase in shareholders’ value takes place in the long term for CBMA deals. These results show support for hypothesis 1 and inconclusive support for hypothesis 2. These findings are consistent with the research of Francis et al.(2008) and Surendranath et al. (2011) that CBMA by developed market firms have positive shareholder value creation. This is also in line with the findings of Doukas et al. (1988) who find higher abnormal returns in the event U.S acquirers take over a firm in a less developed economy. The insignificant CARS of the emerging acquirer provide no evidence to support hypothesis 2. This is in line with the results of Aybar et al.(2009) who also find no evidence for shareholder value creation. Despite that no evidence is provided for shareholder value creation, there is also no evidence to conclude shareholder value destruction as was suggested by Chen et al.(2010) and Aybar et al.(2015). In view of the CAR [-2, +2] for the total sample, being positive and significant suggests overall cross border mergers and acquisitions between developed and emerging markets create shareholder value. On the long event window, the insignificant values indicate no evidence for shareholder creation, though this may be due to no information leakages prior to the announcement date. The significant CAR [-2, +2] for developed acquirers and insignificant CAR for emerging acquirers could mean that the former has higher CARs then the latter and thus supporting hypothesis 3. However, in order to conclude this the factor developed and emerging acquirer needs to be tested on the whole sample with a regression. On the long event window, the insignificant values indicate no evidence for shareholder creation, though this may be due to no information leakages prior to the announcement date. The significant CAR [-2, +2] for developed acquirers and insignificant CAR for emerging acquirers could mean that the former has higher CARs then the latter and thus supporting hypothesis 3. However, in order to conclude this the factor developed and emerging acquirer needs to be tested on the whole sample with a regression.
Table 7
Student t-tests of cumulative abnormal returns Table 7 Developed Acquirer
Event window Mean Std.dev T-value P-value
CAR [-2, +2] 0.0158 0.0974 2.5361 0.0055***
CAR [-20, +20] -0.0013 0.1693 -0.1412 0.5557
Emerging acquirer
Event window Mean Std.dev T-value P-value
CAR [-2, +2] 0.0031 0.0741 0.7524 0.2266
CAR [-20, +20] 0.0132 0.1849 1.2706 0.1020
Total sample
Event window Mean Std.dev T-value P-value
CAR [-2, +2] 0.0086 0.0852 2.405 0.0082***
CAR [-20, +20] 0.0068 0.1783 0.902 0.1841
4.2 Multivariate regression results
In this section, the results of the multivariate regression are discussed. The main interest of the regression is to evaluate whether the CBMA deals by developed acquirers show a higher CAR than CBMA deals by emerging acquirers. In table 6, the dummy variable expressing the market classification of the acquirer gives significant positive results for all regressions on the CAR [-2, +2] event window. Which means that given the acquirer is developed and target emerging, the CAR [-2, +2] increases with approximately 0.01 points. Despite the increase being rather small, these results show evidence for hypothesis 3.
The regression on the CAR [-20, +20] event window shows insignificant negative coefficients for the developed acquirer.
To explain the cross-sectional variation in the CARs, several possible influential factors are considered such as method of payment, firm size, deal size and GDP. The coefficient deal value is for all regressions significantly negative. Which means an increase in deal value leads to a decrease in the CARs for all event windows. This affirms Sudersanam et al. (1996) suggestion that low deal values are associated with an easier integration process.
Furthermore, the firm size coefficient is positively significant for the regressions on CAR [-2, +2] event window. This is in contra with the research by Moeller et al. (2004) who conclude that small acquirers have higher returns due to the fact that small firms offer a lower acquisition premium than large firms. These results suggest that shareholders prefer the acquirer to takeover emerging targets when their assets are worth more. Shareholders may think that the assets could be of significant use for the emerging target. This is in line with the research of Francis et al. (2008)
market firm either through their financial market or through the already available capital in possession of the developed firm.
The regression on bonds also show significant negative results for the short event window. However, there are only 2 deals who were financed with bonds so it is difficult to say whether this effect is not coincidence. The chance of error type 1 is high in this case. The observations for the different type of payments differed so in order to analyse whether the method of payment has an effect on the CARs, a joint hypothesis test is done. The F-test of model 1 and 2 gives an insignificant F value of 0.62, and for model 3 and 4 an insignificant F-value of 0.76. Which means the method of payment does not have an effect on the CAR for the short- and long-term event window. This is in contrast with the research of Faccio et al. (2005) who found a significant effect for the use of cash over stock.
Table 8
Multivariate OLS regression results
CAR5 (1) (2) CAR41 (3) (4) devacquirer 0.0148929** 0.0124793** -0.0098299 -0.0139438 (0.0078644) (0.0073451) (0.0158799) (0.015285) crisis 0.0054267 0.0052037 0.0030011 0.0036861 (0.0111886) (0.0114333) (0.0203777) (0.0206337)
dealvalue -6,36E-09** -6,48E-09* -1,44E-08** -1,42E-08**
(3,16E-09) (3,4E-09) (5,76E-09) (6,52E-09)
industryrelated 0.0012657 0.0002851 0.0138172 0.0114579
(0.0065669) (0.0065845) (0.0149523) (0.0147789)
Firm_size 3,93E-14*** 4,1E-14*** 2,44E-14 2,24E-14
(9,59E-15) (1,04E-14) (1,99E-14) (1,97E-14)
GDP 0.0008941 0.0009007 -0.0002381 -0.0004995 (0.0012726) (0.0012676) (0.0025854) (0.002591) Liabilities 0.0138275 -0.0191568 (0.0158944) (0.0363305) Shares 0.0063597 -0.0485525 (0.0147451) (0.0476248) Bonds -0.0581443** -0.2148472 (0.0277036) (0.1704026) Cash -0.0003079 -0.0398971 (0.0061852) (0.0283447) Converted debt -0.0324016 -0.1671347 (0.0242345) (0.1644885) Deferred payment -0.0006153 -0.0202281 (0.0205967) (0.0390418) earn out 0.0183111 -0.0224666 (0.0184607) (0.044386) _cons -0.002803 -0.0036833 0.0035469 0.0453034 (0.0084013) (0.0090649) (0.0162366) (0.0312906) N 573 573 573 573 R squared 0.0088 0.0165 0.0052 0.0146
Note: The dependent variable in the regression are the daily cumulative abnormal returns of the acquiring firm. The devacquirer is a dummy variable, defined as a deal with a developed acquirer and emerging target, and if zero an emerging acquirer and developed target. The symbol behind the value of the coefficient * indicates a significance of 10% level, ** indicates 5% level and *** 1% level, for a two-sided test except for the variable devacquirer which is tested on one side.
5. Conclusion and discussion
In this paper, the difference in effect on shareholder value of cross border mergers and acquisitions by developed acquirers and emerging acquirers when they take over a firm with a different market development is examined during 2008-2017. It therefore seeks to answer the following question: Is shareholder value higher if a developed market firm takes over an emerging market firm, than if it was to be reversed? The sample contains 573 deals from which 244 are deals by developed acquirers taking over emerging targets, and 317 are deals by emerging acquirers taking over developed targets. Developed and emerging countries are selected based on the MSCI ACWI Index which contains 23 developed countries and 24 emerging countries.
The results of the event study on CAARs, show on the short-term significant positive CAAR for developed acquirers taking over emerging targets. This supports hypothesis 1 that cross border mergers and acquisitions with a developing acquirer and an emerging target have a positive cumulative abnormal performance around the announcement date. For emerging acquirers, the CAARs on the short term are positive but insignificant. Thus, providing no evidence for hypothesis 2. The total sample shows significant positive CAARs for the short event window.
On the long term the CAAR for developed acquirers is insignificant and negative while for emerging acquirers the long term CAAR is insignificant and positive. These results provide no evidence for hypotheses 1 and 2. The total sample shows insignificant positive CAARs for the long event window.
To answer the main research question and hypothesis 3, a multivariate analysis is done on the market classification of the acquirer and in order to control for other possible explanations, multiple control variables are added. These results show a significant positive effect of market classification of the acquirer and target on the CAR. Henceforth, developed acquirers create more shareholder gain when taking over an emerging target than emerging acquirers taking over a developed target (hypothesis 3). Other possible explanations that could influence this result are the deal value and the firm size. The deal size has a small but significant and negative effect on the short-term CAR. The firm size has a small but significant and positive effect on the short-term
The results of this research are in line with Francis et al. (2008) who find positive shareholder returns for U.S. acquirers engaging in CBMA. This research is also complementary to the findings of Doukas et al. (1988), who provide evidence for a higher shareholder gain when targets are less developed on an economic level than the U.S. acquirer. Also, Jory et al. (2011) providing evidence for more shareholder creation for UK-acquirers when acquiring targets in poorly governed locations. This research implicates asset exploitation, which motivates developed market firms to acquire in emerging markets, creates more value for the shareholder than asset seeking motivations emerging acquirers often have when acquiring in developed markets. The higher cumulative abnormal returns might implicate shareholders are more optimistic about developed acquirers in emerging markets because shareholders understand the motive of asset exploitation better and foresee more achievable value post-merger. Due to the fact this research included 23 different developed countries the results for positive cumulative abnormal returns, may implicate that all developed markets, not just the U.S or UK., create higher shareholder value when acquiring firms located in a lower economic advanced country.
Although this research attempts to prove, in the most adequate manner, that developed acquirers taking over emerging target creates more shareholder gain than it if was to be reversed, there are still some limitations. In the research sample, the deals which were from the same acquirer were not identified as such it is technically possible that there are deals made by the same firm during the same month or week; event clustering. This means the variance of the AAR is underestimated which causes an upwards bias for the t-statistics and the null hypothesis too often rejected. A recommendation for future research is therefore to use the crude dependence adjustment method suggested by Brown and Warner (1980), to calculate the variance in an alternative way. Furthermore, the event study also has a strong assumption of efficient market hypothesis. If the assumption of efficient market hypothesis is relaxed it might be possible the market reacts slower than the short-term event window of 5 days used in this research.
For further research, to add cross border mergers and acquisitions between two developed markets and two emerging markets would give a more accurate comparison. This would result in better isolating the effect of acquiring a firm with different advancement levels of economic, political, social and legal environment.
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