Lara Louwerse - 5984149 University of Amsterdam
Faculty of Economics & Business: Finance & Organization Finance group
Bachelor Thesis Dr. J.E. Ligterink
30 June, 2015
Will cross-border merger and acquisition deals create more
value for acquirers shareholders, when the target firm is in an
2
Abstract
This paper studies the impact of cross-border merger and acquisition (M&A) on an acquirers returns with targets from developed or emerging countries. It includes a literature review that covers the main motives behind M&A. Also, the rationales behind cross-border M&A are discussed. Furthermore, an empirical analysis of cross-border M&A in emerging and developed markets is presented. An event study is used to answer the hypothesis. Using a sample of US firms involving 227 cross-border M&A deals that took place between 2002 and 2015. Evidence from literature suggests that acquiring in emerging markets will realize higher returns compared to those firms in developed markets. Returns will be measured by the change in stock prices due to new M&A information coming to the market. The empirical research is based on the method of Brown & Warners (1985), which measured the returns following the market model. Empirical evidence found that involving cross-border M&A creates significant positive returns for shareholders of 1.49%. Also, acquiring in emerging and developed countries results both in positive significant returns for shareholders. But unlike literature expectations, acquiring in developed countries results in higher absolute returns of 1.53%, in comparison with emerging markets of 1.29%. Therefore, involving cross-border M&A in developed countries creates more value for acquirer shareholders.
3
Table of content
1. Introduction ... 4
2. Literature Survey ... 6
2.1 Motives behind M&A ... 6
2.1 Motives behind cross-border M&A ... 7
2.2 Emerging and developed markets ... 9
2.3 Previous studies ... 10 2 Hypothesis... 11 3 Data ... 12 3.1 Sample Selection ... 12 3.2 Sample Statistics ... 14 4 Research methodology ... 17
4.1 Event study method ... 17
4.2 Determinants & control variable ... 19
4.3 OLS-regression ... 21
5 Empirical results & discussion ... 23
5.1 CARs Analysis ... 23
5.2 OLS regression ... 24
6 Conclusion & further findings ... 28
References ... 30
1. Introduction
A well-known motive for M&A is synergy. In corporate finance this is often described as: 1+1=3 (Marks & Mirvis, 2010). This equation means that the combination of two firms together via a merger or acquisition results in higher value than when the firms act on their own. Even though M&A have the same goal, they differ in strategy. Mergers occur when two firms decide to form a new company. Acquisition occurs when one firm buys another firm and take over all or part of the control (Berk & Demarzo, 2011).
After the second World War, economic and financial liberalization commenced in developed countries and spread in 1970 to developing countries. Liberalization of countries results in more openness towards the rest of the word with respect to trading. Liberalization leads to worldwide growth strategies due to lower trade costs. Nowadays, all developed countries have liberalized, but emerging countries still struggle with entry barriers (World Bank, 2005). Breinlich (2008) studied the impact of the free trade agreement between Canada and the US in 1989. He found a significant positive increase in cross-border M&A after liberalization. Because of the growth in open economies, foreign direct investment (FDI) has evolved in several ways. Although Greenfield is still a dominant way to invest abroad, cross-border M&A has grown faster in the past few years (Shimizu et al, 2004). According to the UNCTAD world investment report (2014) a rise in the numbers of cross-border M&A has taken place in the last decades (3460 in 1990 to 8624 in 2013). Because global investing through cross-border M&A has gained in popularity, developed and emerging targets have become an important issue.
M&A occurs in waves. Waves, are periods with a considerable increase in M&A deals followed by periods with less M&A deals. These waves are mostly triggered by economical, regulatory and technological changes in the world (Martynova & Renneboog, 2008). In global perspective, six M&A’s have taken place, each with their own characteristics. The fifth M&A wave (1992-2002) was characterized by a remarkable increase in cross-border M&A. The growth of international investing was caused by free trade agreements in the 1990s, such as the European Union (E.U) in 1990, North American Free Trade Agreement (NAFTA) in 1992 and the Common Market of the South in 1991 (Mercosur). Currently, there are speculations of the arising of a new M&A wave. This so called seventh M&A wave would be stimulated by the recovering economic conditions after the global financial crisis in 2007 to 2009. In the new M&A wave, emerging countries will play a more
important role as acquirer, but developed countries still dominate this position. International investing in 2013 covers up to 22.6% by emerging countries, whereas developed countries cover 73%
(UNCTAD, 2014). The arising of the following M&A wave puts pressure on investing in emerging and developed countries.
5 Previous studies have shown a broad range of findings about the effects of M&A deals on
shareholders’ value. Current literature especially shows positive returns for target shareholders. Results for acquiring shareholders are still unclear, both negative and positive announcement effects have been found. Investing in emerging or developed markets leads to differences in cultural, political, legal, economical and governmental factors. Therefore this thesis focuses on whether exploiting imperfect factor and product markets is an important issue for cross-border M&A. In line with previous results by Meyer (2006), the main reasons for developed countries involving M&A in emerging countries is their high economic growth and the corresponding expectations of rapidly increasing demand for consumer products and services.
This thesis will discuss issues, which have received little attention in literature. Therefore, this paper contributes to the existing findings of M&A in three ways. First, it discusses the announcement effects of cross-border M&A for the acquirer’s shareholder. Erel et al (2012) also noticed that there is a lot of literature that only focuses on domestic deals, while a large proportion of worldwide M&A activities involves firms in foreign countries. Second, because liberalization is a more recent process, research to emerging markets is new. Thirdly this thesis is closely related to the research of Chari et al (2010), but covers a more recent time period. This more recent period also includes the global financial crisis of 2007 to 2009, whereas most studies did research before this financial crisis like Martynova & Renneboog (2008). The considerations discussed above and additions to new research lead to this central question for this thesis: “Will cross-border M&A deals create more value for acquirers shareholders, when the target firm is in an emerging or developed country?”.
In order to answer this question, this thesis will do an empirical analysis of the announcement effect for US acquirers involving cross-border M&A deals with targets from emerging and developed countries. Based on literature, the effects will be measured by the abnormal returns, which is measured by the market model. Besides the effect of M&A’s in emerging or developed countries, other effects on shareholders return will be tested. Most of these control variables are M&A
characteristics or firm specific characteristics, such as method of payment, industry relatedness, deal value, firm size and return on assets. Gross domestic product (GDP) growth is a more specific factor that is related to emerging and developed markets. The period chosen for this thesis is between 2002 and 2015. This period includes some important events, like the sixth M&A wave of 2003-2007 and the global financial crisis of 2007-2009.
The main question of this thesis is based on literature and empirical research. This thesis proceeds as follows. Chapter two consist of the literature survey. Chapter 3 provides the hypothesis. Chapter 4 contains an empirical analysis of the announcement effect in Stata. Chapter 5 shows the empirical results and discussion. Chapter 6 closes this thesis with a summary and conclusion about the findings.
6
2. Literature Survey
This part presents the theoretical framework and previous empirical findings about M&A. The general motivations behind M&A as well as more specific motivations behind cross-border M&A will be discussed. Thereafter motivation between emerging and developed countries will be argued. Lastly, the empirical findings about previous studies of abnormal returns will be discussed.
2.1 Motives behind M&A
Extensive research is done that provides the reasons why firms are involving in M&A deals. There are two kinds of motives. Motives that contribute to shareholders value and motives that increase
managerial value, but not in shareholders’ value. Motives behind shareholders’ value are synergies, market power and valuation theory. Motives behind managerial value are hubris, principal-agency and free cash flow theory (Demarzo & Berk, 2011).
Two types of synergies are operating synergies and financial synergies (Devos et al, 2009). Two ways of achieving these synergies are cost reduction and revenue-enhancement. Operating synergy arise through economies of scale and scope. Economies of scale applies due to operating at a larger scale, producing high volume goods over the same fixed costs. In this way spreading costs results in cost reduction. Economies of scope results in savings because firms combine marketing and distribution channels for related products. Other operating synergies are expertise and knowledge (Demarzo & Berk, 2011). In financial perspective, synergies arise through tax advantages and diversification. Firms pay taxes over earned profits, but nothing over its losses. Therefore, a profitable firm takes over a less profitable firm, compensating gains and losses and so paying less taxes (Trautwein, 1990). Diversification cost savings and benefits appear in three ways: risk reduction, increased leverage capacity and improved liquidity. Larger firms benefit from M&A because of industry-specific risk is diversified, so reducing risk. Though, Goel, Nanda & Narayanan (2004) argued that it is more profitable for individual investors to buy shares in different firms, so diversifying their own portfolio’s. Besides this, diversification results in lower bankruptcy risk, therefore firms could lend more from banks. Increase in debt capacity, again, results in tax savings (Devos et al, 2009).
Besides synergies motivations, other motives such as market power and the valuation theory increase shareholders’ value (Trautwein, 1990). A monopoly strategy occurs when companies take over competitors in the same industry. This strategy may result in price increase and increase in market power. During the last two decades antitrust laws were raised against these monopoly positions (Demarzo & Berk, 2011). The valuation theory suggests that asymmetric information arises between the market and managers. Because managers are better informed about the target firm or may find an undervalued target before found by other managers. In this way gains made through private
7 On the other side managerial motives destroys value for shareholders. Roll (1986) suggest that the Hubris theory is an advanced explanation of corporate takeovers. Excessive overconfidence of managers can explain why bids are made even when a valuation above the current market value represents a positive valuation error. Overconfident managers simply pay a too high premium for the target firm. This subconscious behaviour is not meant to destroy shareholders value, contrary to the principal-agency theory. The principal-agency theory is all about conflict of interest. Seth et al (2000) argued that managerial reasons behind M&A deals are personal gains, maximizing their own utility and empire building. The manager is selfish and not acting in the interest of shareholders. Jensen (1988) found two reason behind this agency problem. Managers often own a small fraction of stocks in the firm and so not bear the full consequences. Besides this, rewards often depends on the firm size, making empire building important.
A value decreasing motive described by Jensen (1988) called the cash-flow hypothesis. The free-cash-flow hypothesis states that, if there are no investment possibilities that results in increasing firm value firms, the excess in cash must pay out to shareholders. But managers like to keep the power and control over the excess cash and spending it on unprofitable investing projects, such as insolvent acquisitions. Trautwein (1990) argued that the real motivation behind M&A are difficult to discover because the expected value decreasing motives, not always result in negative returns.
2.1 Motives behind cross-border M&A
The motives behind M&A are also valid for cross-border M&A, but investing abroad have other specific motives in comparison to domestic takeovers. Motives behind cross-border M&A arise from strategic, economic, political and cultural perspectives. These motives also results in challenges of cross-border M&A, described as “liability of foreignness”.
Strategically seen the most important and well discussed motive of cross-border M&A is access to new markets (Shimizu et al, 2004; Data & Puia, 1995). Investing in new markets is desirable for firms to develop their products or services. There are several international investing ways to move in new markets. Shimizu et al (2004) suggest that cross-border M&A is a prevalent strategy, because it is a very fast and a direct way to obtain more control over their targets assets. Entering new markets results in more market share and therefore more market power. Goergen & Renneboog (2004) suggest that globalization of a firm is generally found in the opportunity to exploit market imperfections in the cross-border M&A of its intangible assets. A firm takes advantages of specific intangible assets such as patents, superior knowledge, management skills, personnel, brand and research and development capabilities in target firms.
8 Economic motivations found by Erel et al (2012) and Hopkins (2008) who discuss market
development as important rationale for cross-border M&A. Market development is described as the economic growth opportunities in a country. Acquirer firms are mostly related to low growing markets, while targets are related to fast growing markets. Therefore, acquiring firms seeking for fast growing markets which provide more opportunities. Goergen & Renneboog (2004) suggest that firms entering new markets can capture rents that are not competitively priced due to imperfect international product and factor markets. Differences in tax systems between countries is such an advantage. High taxes result in demotivation of cross-border M&A. Erel et al (2012) suggest that acquirers have often higher corporate income taxes then target countries. Also the differences in exchange rates between countries is such an advantage. Changes in exchange rate results in a profit when the domestic
currency becomes more expensive in comparison to the targets currency. Erel et al (2012) suggest that imperfect integration of capital markets results in acquiring low priced targets by higher valued bidders due to changes in the exchange rate. Froot & Stein (1991) also argued that due to differences in exchange rates, international investing is more attractive in countries with a weak exchange rate and higher valued currency.
Martynova & Renneboog (2008) discuss corporate governance as an important issue of political differences between countries. Corporate governance is a system with rules and principles in which the firm will be controlled. This system ensures a better relationship between the shareholders and managers and therefore provides more transparency and investor protection. Takeovers will lead to implementing the corporate governance structure of the acquirer into the target company. This results in more wealth for both bidder and target firm. Also Volpin & Rossi (2004) shows a negative
correlation between different corporate governance systems and wealth creation. They suggest that targets have often poorer corporate governance systems, so less protection for investors. Consequently acquirers have better protection systems for investors. Literature found that more distance in corporate governance systems results in higher value for the bidder firm (Erel et al, 2012 and Chari et al, 2010). Erel et al (2012) and Datta & Puia (1995) extensively discussed the cultural differences associated with cross-border M&A. Cultural differences found in the differences in languages, religions, and norms and values. If cultural differences are too extreme, the probability of M&A activities decrease. Shimizu et al (2004) suggest that cultural factors have a big impact on the M&A integration process costs. He found that an important factor of cross-border M&A failure is caused by the failure in the M&A integration processes. Geographic distance is also an challenge for cross-border M&A. Erel et al (2012) argued that the number of M&A deals have a negative relationship with geographic distance. A greater geographic distance could result in higher transaction cost and rules crossing different national boundaries.
9 Zaheer (1995) subdivided the cultural and geographic challenges under the concept of liability of foreignness. The concepts simply refers to the costs of doing business abroad arising from the unusual environment. Other liability of foreignness problems stem from economic and political disadvantages, such as institutional forces. Other challenges arises when involving cross-border M&A is asymmetric information. Some target countries have insufficient or incorrect information about firms. The information problem causes the problem for acquirers to accurate estimate the value of target firms. So takeovers result in bidders who overvalued the target firm (Hopkins, 2008).
2.2 Emerging and developed markets
There is no clear definition for emerging and developed markets. Often emerging markets are defined as low, lower-middle or upper-middle-income, fast growing countries and a market governance with a free-market system. On the other side, developed countries, are defined as high income and low growing markets (World Bank and MSCI, 2015). Investing in emerging or developed markets leads to differences in economic, cultural, political and governmental perspective.
Economically, market development is an important difference between the economies. Literature suggest that fast growing markets are related to emerging markets and therefore often targets. Hoskisson et al (2000) discuss that the fast growing strategy of emerging economies is caused by liberalization. Consequently, slow growing markets are related to developed markets and therefore often acquirers. The fast growing economies of emerging countries are attractive for foreign investors, because of their high trading opportunities. Meyer (2006) also argued that emerging markets are attractive to business, because they offer sheer number of people, even if they are on low incomes, and large markets for consumer goods with high growth potential.
Other economic factors that influence the decision between emerging and developed markets are operational capabilities and natural sources for multinationals worldwide. Operational capabilities for emerging markets are high production and low labour costs and still desirable quality products. Firms from developed countries have invested manufacturing facilities in emerging markets. These markets are home to low wage and high quality for labour and assembly operations. Some markets have large reserves of natural resources and raw materials (Cavusgil et al, 2014).
As pointed out before in the valuation and institutional theory, investors are seeking for countries with weak exchange rates, high valued currency and less regulated corporate governance systems.
Investors who invest in emerging markets could expect the previous kind of markets and therefore results in higher profits. Khanna & Krishna (1997) suggests that emerging markets suffer from weak institutions. They found that large and diversified firms which are integrated in these markets take advantage of it by imitation the functions of several institutions. But the institutional theory also pointed out that because of the differences in authorities, they hinder the efficiency of the markets and
10 therefore increase risks and uncertainty. Also the valuation theory faces challenges in emerging markets. Iinformation found in small, illiquid, and informational obscure markets is much less likely to make public information about prices and market expectations than is the information found in large, liquid, and transparent ones (Meyer, 2006).
So besides these opportunities in emerging markets, they face risks and challenges in a high volatile environment caused by frequent changes in institution, industry structure, macro-economy. Economic development is possibly high, but emerging markets have volatile business cycles and experience economic crisis more frequently than developed economies. Research shows that this is connected with cyclical fluctuations in access to international credit. Emerging markets face highly volatile and contrary cyclical interest rates (Arellano, 2008). High volatility is a benefit for firms who can change their strategy immediately to the fast changing circumstances. Therefore, developed countries, like the US, have to develop different strategies and economic models to function in the less wealthy
customers regions and the mass market (Meyer, 2006). Also emerging markets face unpredictable stock prices, causing higher risks. The higher risk is caused by ineffective monitoring, incomplete contracting, political risk, lacking protection and enforcement of the minority stakeholders (Renneboog & Martynova, 2008; Chari et al, 2004).
2.3 Previous studies
In principle, cross-border M&A offers a wide range of advantages, and therefore create value for both acquirer and target shareholders. This thesis only focus on the shareholder value of the acquirer firm. Research is done to the value creation or destruction of cross-border M&A, but there is still no clear conclusion, considering the variation in conclusions. This part introduce a small summary of previous findings of both domestic and international takeovers. After that empirical findings about takeovers in emerging and developed countries are shown. Table 1 in the appendix shows a total overview of the previous empirical findings.
Moeller & Schlingemann (2005) did research on the effect of cross-border and domestic M&A for Canadian acquirers during the period 1984 to 1998. Results are positive for both targets. But insignificant positive results of 0.31% are found for cross-border M&A, but significant positive results of 1.17% are found for domestic takeovers. This was tested on a 3 days event window. Also Conn et al (2003) found evidence for higher returns for shareholders involving domestic deals. They researched a sample of 4344 deals during 1985 to 1995. They found for both targets positive
significant results. For cross-border M&A 0.38% and 1.05% for domestic M&A. They argued that the difficulties came from cultural barriers, and therefore have negative results on value creation.
11 corporations between 1990 and 2001. They found no differences between national and cross border M&A. Goergen & Renneboog (2004) on the other hand, found significant positive returns (2.38%) for public bidders taking over firms in other countries and insignificant negative returns for domestic takeovers (-0.45%). Results found for an event window of 2 days [-1,0].
Chari et al (2010) research the biggest developed countries from 1986 to 2006, acquiring in developed and emerging countries. He found a significant increase in shareholders return (1.16% on average) when acquirers takeover firms in emerging countries. Acquiring in developed counties leads to no significant results. Two causes for the positive findings are the improvement of the corporate governance structure in the target firm and the weak institutional differences. Also Burns &
Liebenberg (2011) found, in a sample of 2125 US firms, a significant positive result of acquiring in emerging countries (0.57%), while in developed markets a positive insignificant result is found . They argued that in developed markets factors such as efficiency, growth opportunity and leverage, play an important role on shareholders return. For emerging markets factors such as economic development and shareholders protection plays an important role.
2 Hypothesis
This paper studies the effect of cross-border M&A on acquirer shareholders with targets from
emerging and developed countries. Evidence, found in theory and literature, is still inconclusive about value creation of shareholders involving cross-border M&A and certainly for targets from emerging and developed markets.
On the one hand, developed acquirers like US firms are faces less challenges when involving cross-border M&A in develop countries. From strategic point of view, developed countries have more clear rules about entering a country. Economically, exchange rates are less volatile then in emerging markets and so less risk of currency depreciation. Developed countries also have more stable and less changeable political and government institutions. And at last, cultural barriers are smaller in
developed countries and therefore promote the integration process of M&A in firms.
On the other hand, involving in emerging countries offers bigger growth opportunities, a strategy that results in higher returns for the US acquirer shareholders. The implementation of the more developed corporate governance structure also result in wealth creation. Emerging markets faces a more
imperfect international product and factor market. Therefore, takeovers in emerging markets has a big advantage over developed markets.
Therefore, expectations for this thesis are:
Hypotheses 1: Cross-border M&A announcement result in positive wealth effect of acquirer shareholders of US firms
12 Hypotheses 2: Acquirers taking over firms from emerging markets will realize higher abnormal returns compared to those firms in developed markets
3 Data
3.1
Sample Selection
This empirical research making use of US acquirers and emerging and developed targets during the period 2002 to 2015. The definition of emerging and developed countries are based on the
information of the institute Morgan Stanley Capital International (MSCI). MSCI is a worldwide publicly traded company that for more than 40 years helped institutional investors to provide
research-driven insights and tools (MSCI, 2015). Therefore, MSCI is an worldwide accepted resource. MSCI based the classification in developed and emerging countries on the following criteria:
economic development, size and liquidity as well as market accessibility. Table 2A shows 23 emerging countries, table 2B shows 24 developed countries.
Table 2A Emerging Countries
Americas Europe, Middle-East & Africa Asia
Brazil Czech Republic China
Chile Egypt India
Colombia Greece Indonesia
Mexico Hungary Korea
Peru Poland Malaysia
Qatar Philippines
Russia Taiwan
South Africa Thailand
Turkey
United Arab Emirates
Table 2B Developed Countries
Americas Europe, Middle-East & Africa Pacific
Canada Austria Italia Australia
13
Denmark Norway Japan
Finland Portugal New Zealand
France Spain Singapore
Germany Sweden
Ireland Switzerland
Israel United Kingdom
The initial sample of cross-border M&A deals are collected from the database ZEPHYR. ZEPHYR is a comprehensive database of M&A transactions. This database contains detailed financial information of the companies involved in M&A deals. This information is gathered from the databases of business information Bureau van Dijk (ZEPHYR, 2015). Two samples are extracted from ZEPHYR, the first consists US bidders taking over firms in emerging countries and the second consists US bidders taking over firms in developed countries. Actually, the number of cross-border M&A of US acquirers was 197444, but 283 were left out when selecting the following criteria:
1. Acquirer is an US listed company
2. Target are emerging countries from table 2A and developed countries from table 2B 3. Deal type: acquisition and merger
4. Initial stake maximum 20%, final stake 100%
5. Major sectors include all, except insurance and banking sector
6. Deal value minimum 100 million USD for emerging countries, 100-2900 million USD for developed countries
7. Time period: 01-01-2002 to 31-05-2015 completed confirmed deals
US firms are listed to gather the available data from database Eventus (see chapter 4.1). The
developed target Canada is excluded from the list, because this country is next to the US and therefore adds noise to the sample. The extend of ownership of the target prior to the acquisition has a
maximum of 20% and final stake 100%, greater differences in control over the target result in a better effect in change in stock prices, and therefore returns (Chari et al, 2004). Banking and insurance sectors are excluded because of their differences in capital structure in comparison to the other sectors. Deal value will be minimal 100 million USD, since small deals are not of interest in responsiveness from capital markets (Lowinski, 2004). Much higher deal values were found in the sample of involving cross-border M&A in developed counties. For that reason the developed sample get a maximum deal value of 2900 million USD, which is the highest deal value found in emerging countries.
14 The two samples from ZEPHYR are subjected to other criteria. To prevent contamination of the research sample, for all firms only one M&A deal within one year is allowed in the sample. Less deals remained when adding Bvd ID numbers and Cusip codes. Bvd ID numbers are important for finding the control variable. Cusip codes are of interest because Eventus use these for collecting data for calculating the abnormal returns. After calculating the abnormal returns in Eventus a sample left of 41 deals in emerging countries and 186 deals in developed countries, resulting in a total of 227 cross-border M&A deals.
The control variable industry relatedness is based on comparing the industry sectors of the acquirer and the target. The sectors are defined in numbers, called sic-codes, which are also collected from ZEPHYR. Comparing the first three numbers of the sic-code will result in industry related or
unrelated M&A. ZEPHYR also contains the deal value. ZEPHYR did not disclose all information for the control variables. Additional information is gathered from Orbis. Orbis includes information about the method of payment, total assets and return on assets (ROA). The latter two variables are taken a year before the announcement date. Because Orbis only includes information from 2005 till the current date, other information is found in the annual reports of the firms. GDP growth of a target country is measured based on information on the World Bank. The percentage in growth is taken one year before the announcement date.
3.2 Sample Statistics
As already mentioned before developed countries are still the dominated acquirer in worldwide takeovers. The traditional trend of developed acquirers taking over firms in emerging countries is continued. So, there are high expectations of cross-border M&A in emerging countries, such as the BRICS (Brazil, Russia, India, China and South-Africa). Inflows to the BRICS has doubled since the financial crisis (UNCTAD, 2014). Table 3 is an overview of cross-border M&A deals per country. Results show that the BRICS countries are in the top 10 of emerging targets. Brazil is the leader with 26.83%, than India and China with 12.19% and Russia and South Africa with only 4.88%. This is a pretty high result of 60.97% of the total deals in emerging countries. An explanation behind the high percentage in the BRICS countries is because this are the world leaders in supplying goods, services and raw materials (Ranjan & Argawal, 2011).
Table 3
Number of cross-border M&A per country
Developed targets # % Emerging targets # %
United Kingdom 59 31.72 Brazil 11 26.83
Germany 24 12.9 Mexico 8 19.51
France 16 8.6 China 5 12.19
15
Israel 12 6.45 Korea 3 7.31
Australia 11 5.91 Russia 2 4.88
Italia 9 4.84 South Africa 2 4.88
Belgium 7 3.76 Colombia 2 4.88 Switzerland 7 3.76 Poland 1 2.44 Norway 6 3.23 Qatar 1 2.44 Denmark 5 2.69 Philippines 1 2.44 Sweden 4 2.15 Chile 0 0 Spain 3 1.61 Peru 0 0
Singapore 3 1.61 Czech Republic 0 0
Austria 2 1.08 Egypt 0 0
Japan 2 1.08 Greece 0 0
Finland 1 0.5 Hungary 0 0
Hong Kong 1 0.5 Turkey 0 0
Portugal 0 0 United Arab Emirates 0 0
New Zealand 0 0 Indonesia 0 0
Ireland 0 0 Malaysia 0 0
Taiwan 0 0
Thailand 0 0
TOTAL 186 100 41 100
Figure 1 shows the number of deals over the year 2002 to 2014. Two important events take place in this period. The sixth M&A wave from 2003 to 2007 and the global financial crisis from 2007 to 2009. Expectations of the sixth M&A wave are an increase in M&A, this trend is not seen in figure 1 for both markets. Only a small peak is shown for emerging targets in 2006. An explanation for this could be the high placed deal value, because most deals in emerging countries are from lower value. Aguiar & Ginopath (2005) suggest that a financial crisis result in an increase in M&A. They did research to deals in East Asian and found a 91% increase in M&A between 1996 and 1998. Figure 1 shows no clear relationship in these theoretical and empirical findings. 2007 shows a slight downturn in M&A in both emerging and developed countries. These results are confirmed with the findings of Ravinchandran (2009), who argued that the slowdown in M&A is caused by market uncertainty.
16
Figure 1
Relationship between emerging and developed target bids
Table 4 shows the summary statistics of the characteristics which are of interest for cross-border M&A deals. The sample shows that most cross-border M&A are paid with cash, followed by a combination of stock and cash and last through stocks. Chari et al (2004) found also that most deals are financed with cash, but thereafter stock instead or a combination. Observing deal value results in higher value for M&A in developed countries. Spread between median and average is also higher in developed countries, caused by more outliers in this sample. Firm size of the acquirer is defined as total assets a year before the M&A announcement (Campello & Almeida, 2007). Acquirer size is bigger in takeovers in developed countries then in emerging countries. Hence, the median of the assets is lower for developed countries, caused by more outliers in the sample. In the crisis period of 2007 to 2009 more deals are made by acquiring in emerging markets (21%) then in developed markets (16%). In the sixth M&A of 2003 to 2007 more deals are made by acquiring in emerging countries (21%) then in developed countries (16%). Outcomes of industry relatedness indicates that takeovers in developed countries are not specially divided in related or unrelated industries. While takeovers in emerging countries are mostly in related industries. Last, GDP growth is higher for emerging targets, these findings are in accordance with Erel et al (2012). Average ROA (net income/total assets) of the acquirer is higher for emerging countries, this makes sense, because also acquirers total assets of emerging countries are lower, but it may also cause by higher net income.
0 5 10 15 20 25 30 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 N u m b er o f d eals Year
17
Table 4
Summary statistics of cross-border M&A deals
Developed targets
Emerging targets Total sample
Number of deals 186 41 227
Method of payment (#)
Cash 145 28 173
Stock 10 5 15
Combined 31 8 39
Deal value (mil USD)
Average 407.73 317.66 388.07
Median 248.28 208.70 241.90
Firm Size (mil USD)
Average 38369.46 17987.10 5435
Median 3171.48 6794.00 8308
Crisis (2007-2009)
In crisis period 25 8 33
Out crisis period 161 33 194
Sixth M&A wave (2003-2007)
In M&A wave 65 19 84
Out M&A wave 121 22 143
Industry related Related 92 29 121 Unrelated 94 12 106 GDP growth % Average 1.26 5.06 1.95 ROA % Average 7.17 9.31 7.55
4 Research methodology
4.1 Event study method
This empirical research is based on the effect on US acquirers involving cross-border M&A in emerging or developed countries. This research includes a CARs analysis and a multivariate analysis.
18 The first tests the two hypotheses and the second tests the effect of the M&A characteristics on shareholders return.
For this research an event study is used, an event study measures the impact of a specific event on the value of a firm. It investigates the response of the stock market to a public event (Eventus, 2015). In event studies the efficient market hypotheses is assumed. This means that the impact of an event will immediately be reflected in the stock prices (Fama, 1980). This event study measures the effect of cross-border M&A based on the absolute returns (ARs) of shareholders. The ARs shows the change in stock prices when there is a M&A announcement. The change in stock prices is caused by new information coming to the market. The sum of the abnormal returns before, at and after the
announcement will be the cumulative abnormal return (CAR). The CARs analysis uses the CARs in a student t-test to test if cross-border M&A has impact on the behaviour of returns of shareholders. Based on the student t-test it measures the overall effect of cross-border M&A on shareholders return, the effect of cross-border M&A in emerging countries and the effect of cross-border M&A in
developed countries. The multivariate analyse uses the CARs as dependent variable in the Ordinary Least Squares regression (OLS). To minimize the effect of outliers, all CARs and variables are winsorized at the upper and lower 1% levels1 (Shopov, 2012).
The database Eventus automatically calculate the ARs and CARs of the US acquirers based on stock prices. Eventus provides event studies using data from CRSP and other sources (Eventus, 2015). How Eventus working exactly will be explained in detail next.
The method used in Eventus is done in a lot of studies when measuring the value of shareholders (Brown & Warner’s, 1985; MacKinlay, 1997; Moeller et al, 2003). To measure the dependent variable, first the expected returns, then the AR’s, and finally the CARs are calculated. The expected return is considering that the event has not taken place. For the expected return the market model is used.The expected return formula is:
𝐸(𝑅)𝑖𝑡 = 𝛼𝑖+ 𝛽𝑖∗ 𝑅𝑚𝑘𝑡 + 𝜀𝑖𝑡
𝑅𝑖𝑡 = expected return of security i, on event date t
𝑅𝑚𝑘𝑡 = daily return of market, on event date t
𝛼𝑖 = intercept security i
𝛽𝑖 = parameter security i
19 𝜀𝑖𝑡 = residual
The parameters alpha and beta will be estimate by an estimation window of 250 days to 20 days before the announcement date.
The absolute returns will be measured by an event window; 1 day before and after the announcement date [-1,+1] and 20 days before and after the announcement date [-20,+20]. Different periods are used for the absolute returns because other studies shows that there are (significant) other results taking a longer or shorter event window. The reason is, that for a short event window of 3 days, only the announcement will have influence on the stock prices. But on the other side, M&A is a longer process then a couple of days, so superior insiders already have more information, and therefore stock prices already change.
𝐴𝑅 𝑖𝑡 = 𝑅𝑖𝑡 - 𝐸(𝑅)𝑖𝑡
𝐴𝑅 𝑖𝑡 = Absolute return of security i, on event date t
𝑅𝑖𝑡 = Actual ex-post return of security i, on event date t
𝐸(𝑅)𝑖𝑡= Expected return of security i, on event date t
For further inferences abnormal returns must be aggregated over time. Over times CARs from t1 to t2 are used:
𝐶𝐴𝑅 (𝑡1,𝑡2) = ∑ 𝐴𝑅𝑡2𝑡1 𝑖𝑡
Positive CARs creating value for shareholders, while negative CARs has a negative impact on shareholders’ value. Following the efficient market hypotheses the average CAR must be zero. The student t-test tests the two hypotheses of this thesis.
t𝐶𝐴𝑅 (𝑡1,𝑡2) =
𝐶𝐴𝑅 (𝑡1,𝑡2) 𝜎𝐶𝐴𝑅 (𝑡1,𝑡2)/√𝑁
The multivariate analysis will be based on an OLS regression, this uses the determinant and control variable. This will be discussed next.
4.2 Determinants & control variable
Literature described a lot of factors that have impact on the success or failure of cross-border M&A’s. The main focus of this thesis is the effect on shareholders return of takeovers in emerging or
20 creating process. The control variables are the method of payment, deal value, firm size, the global financial crisis, sixth M&A wave, industry relatedness, ROA of the acquirer and GDP growth. Method of payment: transactions could be financed through cash, stock or a mix of cash and stock. Payment of stocks often indicates that the firm is overvalued. This causes negative returns for
shareholders. While cash payments results in the opposite signal, so positive returns (Loughran & Vij, 1997). They found that stock financing results in negative returns of 25%, while cash financing results in positive returns on 62%. Volpin & Rossi (2004) find that cash is negatively correlated with the degree of shareholders protection in target countries. Their interpretation of this result is that stock payments are less popular in countries with lower shareholders protection because stocks entail a higher risk of expropriation. Emerging countries fail mostly in shareholders protections, so deals will mostly finance with cash.
Deal Size: Sudarsanam et al (1996) shows a significant positive results for acquiring shareholders if deal value is low. They explain that smaller deal sizes are related with smaller targets and therefore the integration process become more easy. The free-cash-flow theory is also related to deal value. Lang et al (1991) analysing the acquirers return and excess in cash. They found that acquirers with low investment opportunities and high excess in cash results in lower shareholders’ value. On the other side Chari et al (2004) found that deal size has a positive but insignificant effect on US acquirer returns involving cross-border M&A in emerging markets.
Firm size: Research shows a relation between acquirer firm size and absolute return. Moeller, Schlingemann & Stulz (2004) found evidence that takeovers of small firms results in higher absolute returns then larger firms. They argued that the negative relation between return and firm size is caused by management hubris, which plays a bigger role in larger firms. These findings are contrary to the findings Erel et al (2012) who found a positive relationship between firm size and shareholders return of 5.6%.
Financial Crisis: Research shows different ideas about the influence of the financial crisis (2007-2009) on absolute returns. As mentioned before positive and negative conclusions are made about this factor (Arguiar & Ginopath, 2005; Ravinchdran, 2009). Chari et al (2004) suggest that during
financial crises, the cost of capital is likely to increase even further in emerging markets, results in an increase in cross-border M&A, and possibly bigger gains from the acquisition for poor targets. They found insignificant results of -0.006%.
Sixth wave: The sixth M&A was during 2003 to 2007. The wave occurred just after the technology bubble burst. Economic drivers behind the wave was the abundant liquidity. The sixth wave ended in 2007 as a result of investors’ worries about the credit market. A characteristic of this wave was the less overvalued acquirer relative to the targets (Alexandridis et al, 2011). Alexandridis et al (2011)
21 found that takeovers during the sixth M&A wave destroys value for shareholders (-0.45%). They argued that the characterisation of excess in cash lead to the free-cash-flow problem.
Industry relatedness: Acquirer firms can choose M&A in related industries or unrelated industries. Morck, Shleifer & Vishny (1990) found significant negative returns for acquisitions of firms in diversified industries. An explanation for the negative return is the use of inefficient capital of
diversified firms. Dos Santos et al (2008) are consistent with this findings, they also find US acquirers involved in unrelated cross-border M&A experience a negative significant result of -24%. They suggest that unrelated diversification destroys shareholders value. Chari et al (2004) suggests that diversifying acquisitions do not appear to have significant impact on acquirers returns in emerging countries (0.11%).
ROA acquirer: Eisenberg (1998) suggests that the pre-bid performance or historical performance are important for future performance. ROA measures the efficiency in which the acquirer firm exploit its assets to generate profits. A high return on assets is related to the inefficient management hypothesis. Inefficient management hypothesis implies that the bidder takeover poorly firms and benefit from value-enhancing change (Manne, 1965). The hypothesis suggests that inefficiently managed firms whose managers fail to maximize shareholder wealth are more likely to do takeovers.
GDP growth: As already discussed in the literature, developed acquirers are searching for economies with favorable market conditions. Market growth is an important factor for target countries which must result in profitable operations of firms. Because high economic growth is related to emerging markets, these economies must have higher GDP then developed counties. Erel et al (2012) found 4.9% significant positive return for acquirer shareholders when GDP increases.
4.3 OLS-regression
The multivariate analyse is based on an OLS regression. An OLS regression shows the relationship between the multiple explanatory variable and the dependent variable. The linear regression find beta’s which show the change in dependent variable when the independent variable increase with one (Stock & Watson, 2012). For this empirical research the following OLS regression is used:
𝐶𝐴𝑅𝑖𝑡 = 𝛽0+ 𝛽1∗ 𝐸𝑚𝑒𝑟𝑔𝑖𝑛𝑔 + 𝛽2∗ 𝐶𝑎𝑠ℎ + 𝛽3∗ 𝑆𝑡𝑜𝑐𝑘 + 𝛽4∗ 𝐶𝑟𝑖𝑠𝑖𝑠 + 𝛽5 ∗ 𝑊𝑎𝑣𝑒 + 𝛽6∗
𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑅𝑒𝑙𝑎𝑡𝑒𝑑 + 𝛽7∗ 𝐺𝐷𝑃 + 𝛽8∗ 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐷𝑒𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 + 𝛽9∗ 𝑅𝑂𝐴 + 𝛽10∗ 𝐷𝑒𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 +
𝛽11∗ 𝐹𝑖𝑟𝑚 𝑆𝑖𝑧𝑒 + 𝜀𝑖
Whereas 𝛽0 is the intercept, this is necessary to form an OLS-regression. The intercept has no
economic sense in this case (Stock & Watson, 2012). Emerging is a dummy variable with value 1 if the US acquirer taking over firms in emerging countries. Cash is a dummy variable with value 1 if the
22 deal is financed with cash. Stock is a dummy variable with value 1 if the deal is financed with stocks. Crisis is a dummy variable with value 1 if the announcement is made during the crisis in 2007-2009. Wave is a dummy variable with value 1 if the announcement is made during in 2005-2007. Industry Related is a dummy variable with value 1 if the acquirer and the target firm are in the same industry. GDP is a variable which is measured by percentage growth rate. Relative Deal Value is a variable which is measured by deal value/total assets of the acquirer in percentage. ROA is a variable measured by net income/total assets in percentage. Deal Value is a variable which is measured as a natural logarithm of the deal value. Firm Size is a variable which is measured as a natural logarithm of acquirers assets.
The variable will be tested on multicollinearity. This measures the relationship between the variables. When the variable is perfectly correlated, the OLS regression will be violated. Hence, imperfect multicollinearity results in high correlation, did not cause problems in the OLS estimator (Stock & Watson, 2012). Table 5 in the appendix shows the correlation between the variables, tested on a 1% significance level. Field (2005) suggests correlation values above 0.8 are high and should omit from the regression model. Table 5 in the appendix shows no correlation above 0.8.
As expected, significant correlation found between relative deal value and deal value (0.2578) and relative deal value and firm size (-0.6820). This is because deal value and firm size are variables in the equation for relative deal value. Relative deal value is negative correlated with emerging countries (-0.2306). This result relates to the relative deal value equation. As described in table 4, acquirers are smaller in takeovers in emerging markets, therefore an increase in relative deal value. Positive significant correlation found between deal value and firm size (0.2882), this makes sense because larger firms can afford higher transaction deals. High significant correlation found between emerging targets and GDP growth (0.4670). As shown in literature emerging markets are related to high growth rates. A significant negative correlation found between GDP growth countries and the financial crisis (-0.2542). UNCTAD (2010) shows the downturn in GDP growth during the financial crisis of 2007-2009. GDP growth is positive correlated with the sixth M&A wave (0.3014), this makes sense because high growth rate countries attract more investors. Significant negative correlation found between cash and stock (-0.4345), this is reasonable because deals are financed with cash or stock or a mix. Last, a positive significant correlation found between the financial crisis and firm size (0.2365). Campello et al (2010) argued that larger firms have more opportunities to get other credit during the crisis, therefore small firms will be more affected by the financial crisis then smaller firms.
23
5 Empirical results & discussion
5.1 CARs Analysis
The CARs analysis is conclusive for the two hypotheses of this thesis. The student t-test in chapter 5.1 is used to calculate the effect of 227 cross-border M&A deals. Table 6 and 7 shows the descriptive statistics of the CARs for a 3 [-1,+1] and 41 [-20,+20] day window.
Table 6 shows a positive return for acquirer shareholders involving cross-border M&A on both event windows for the total sample. The 3 day window shows a positive return of 1.49%, this result is significant on a one percent level. The longer event window shows an slightly increase in returns of 0.29%, but not significant different from zero. An explanation for this, is that there was no
information leakage to the inside sophisticated investors. These findings are consistent with Goergen & Renneboog (2004) who found positive significant returns for cross-border M&A for European firms of 2.38%. These findings are also in accordance with Conn et al (2005) who found wealth creation for UK bidders of 1.05%. Based on these findings conclusions can be drawn for the first hypothesis. Cross-border M&A, made by US acquiring firms, increase acquirer shareholder value and therefore hypothesis one is accepted.
Table 6 Descriptive Statistics CARs Total Sample
Event Window Mean Std. Error T-test p-value CAR [-1,+1] 1.4911 4.4307 5.0706 0.0000***
CAR [-20,+20] 0.2867 11.5978 0.3724 0.7100
Note: t-statistics with robust standard errors, significance level ***p<0.01 **p<0.05 *p<0.10
Table 7 shows the results of the acquiring CARs in emerging and developed countries. In both countries the CARs are positive for both event windows. In emerging countries a positive return of 1.29% is found on a 3 day window, this result is significant on a one percent level. The longer event window shows a slight increase in returns of 1.03%, but not significant different from zero. It is reasonable to argue that returns increases when the announcement date approximate, because more information coming to the market. This result is in line with the findings of Chari et al (2010) who found positive significant returns for developed firms of 1.16%. These findings are also in accordance with Burns & Liebenberg (2011) who found significant wealth creation for US bidders of 0.57%. This is between the findings of table 6, this could make sense because they use a longer event window. Takeovers in developed countries results in a positive return of 1.53% on a 3 day window, this result is significant on a one percent level. The longer event window shows a slightly increase in returns of 0.21%, but not significant different from zero. These findings are in contrast with the findings of
24 Burns & Liebenberg (2011), who found insignificant positive returns for developed targets. This could be explained due to the longer even window of 11 days. Based on these findings conclusions can be drawn for the second hypothesis. Cross-border M&A in emerging and developed countries, made by US acquiring firms, increase shareholder value. But acquiring in developed countries result in a greater significant positive return and therefore hypothesis 2 is rejected. An possible explanation for this short term differences could be related to the valuation theory. Because less information is available in emerging markets to estimate the valuation on the short window, results could be more negative.
Table 7 Descriptive Statistics CARs Emerging and Developed Target
Emerging Target Developed Target
Event Window Mean Std. Error T-test p-value Mean Std. Error T-test p-value
CAR [-1,+1] 1.2914 0.3470 3.7223 0.0006*** 1.5325 0.3514 4.3598 0.0000***
CAR [-20,+20] 1.0349 1.8308 0.5653 0.5751 0.2140 0.8790 0.2434 0.8079
Note: t-statistics with robust standard errors, significance level ***p<0.01 **p<0.05 *p<0.10
5.2 OLS regression
The multivariate analyse uses the CARs as dependent variable in the OLS regression. The returns are estimate using a 3 [-1,+1] and 41 [-20,+20] day window around the announcement date. The OLS combines the determinant emerging target with the control variable. The OLS regression first tests all the variables on the total sample and second tests the control variables on the emerging and developed sample.
Table 8 shows the results of the OLS regression of the CARs on the total sample. The determinant, emerging target and the control variable are added in the regression. Results show that for a 3 and 41 day event window the most variables are insignificant. This means that most variable does not explain the independent variable CAR. This is also seen in the low percentage of R-squared for a 3 and 41 day event window, respectively 13.37% and 6.87%.
Examining the determinant emerging target, in the short term window a positive insignificant result is found of 0.80%, so on a 3 day window it creates value for shareholder. On the other side, the long event window shows an insignificant negative return of -1.13%. These findings are not in line with the findings of Chari et al (2004) and Burns & Liebenberg (2011). An explanation for these contrary results are the influences of the other factors. For example the variable GDP growth of the target, which is highly correlated with the determinant emerging target.
25 Table 8 shows two control variables which are significant on a 3 day window. Wave is significant on a ten percent level. The coefficient wave is -0.87%, this means destroying value for shareholders in the sixth M&A wave. These findings are consistent with the finding of Alexandridis et al (2011), who found that takeovers during the sixth M&A wave destroys value for shareholders (-0.45%). They explain that the excess in cash in this sixth M&A wave, lead to the free-cash-flow problem. Relative deal value is significant on a one percent level. The coefficient relative deal value is 9.33, this means that an increase of 1% in relative deal value result returns of 9.33% for shareholders. The positive returns in related to the relative deal value equation. These findings are in consistent with the
combination of findings with Chari et al (2004) and Moeller, Schlingemann & Stulz (2004). Chari et al (2004) found that deal size has a positive but insignificant effect on US acquirer returns involving cross-border M&A in emerging markets. Moeller, Schlingemann & Stulz (2004) found evidence that takeovers of small firms results in higher absolute returns then larger firms. They explain that negative relation between return and firm size is caused by management hubris, which plays a bigger role in larger firms.
The longer event window shows 4 significant variables. Wave is significant on a ten percent level. The coefficient wave is -2.73 and therefore M&A destroys value for shareholders in the sixth M&A wave. Which is also found and explained for the shorter period. GDP growth of the target is
significant on a one percent level. CARs increase by 0.97% when GDP growth increases with 1%, so GDP creates wealth for shareholders. These findings are in line with Erel et al (2012) who found 4.9% significant positive return for acquirer shareholders when GDP increases. Relative deal value is significant on a ten percentage level and increases return with 16.22%. Lastly, firm size is positive significant related to CAR on a five percent level. If firm’s assets increase with 1 million then return for shareholders increase with 1.84%. These findings are consistent with Erel et al (2012) who found a positive relationship between firm size and shareholders return of 5.6%.
Table 8 Regression results CARs Total Sample
CAR [-1,+1] P-value CAR [-20,+20] P-Value Emerging 0.7956 (0.5969) 0.184 -1.1294 (2.0231) 0.567 Cash 1.5222 (1.3014) 0.243 1.5186 (3.6971) 0.682 stock -0.3610 (0.7525) 0.632 0.1582 (2.2137) 0.943 Crisis -0.9708 (0.8087) 0.231 -2.2836 0.349
26 (2.4327) Wave -0.8787 (0.4395) 0.069* -2.7335 (1.5352) 0.076* Industry related -0.3386 (0.4395) 0.442 -0.8814 (1.4313) 0.539 GDP 0.0851 (0.1319) 0.520 0.9560 (0.3659) 0.010***
Relative Deal Value 9.3271 (3.0161) 0.002*** 16.2218 (8.6808) 0.063* ROA -0.0157 (0.0345) 0.650 -0.1319 (0.1096) 0.230 Deal Value -0.5107 (0.4470) 0.255 -0.8351 (1.2866) 0.517 Firm Size 0.2213 (0.2613) 0.398 1.8366 (0.8826) 0.039** Constant 0.0820 (2.6188) 0.975 -14.8918 (7.6253) 0.052 R-squared 0.1337 0.0687 Number 227 227
Note: t-statistics with robust standard errors, significance level ***p<0.01 **p<0.05 *p<0.10
Table 9 and 10 shows the results of the OLS regression on the CARs on the samples emerging and developed targets. Table 9 shows one significant variable for the emerging sample on a 3 day window. Relative deal value is significant on a ten percent level. Relative deal value increases shareholders return with 10.45%. The longer event window shows, on a five percent level, that deal value has a significant negative impact on shareholders wealth (-6.05). Firm size has a significant positive return for shareholders of 4.77%, on a five percent level.
Table 10 shows that on the long and short term M&A in the sixth wave has negative impact on shareholder wealth on a five percent significance level (-1.23% and -3.69%). Relative deal value has, on a one percent level, a positive return of 9.25% on the short term. Lastly, GDP growth in developed targets has a positive return of 0.95% on a five percentage significance level.
Table 9
Regression results CARs Emerging Target
CAR [-1,+1] P-value CAR [-20,+20] P-Value
27 (1.2008) (4.9740) stock 0.1555 (0.9867) 0.876 1.7766 (3.7090) 0.635 Crisis -0.0329 (1.3552) 0.981 -1.7542 (4.5806) 0.704 Wave -0.1919 (0.5676) 0.738 1.3291 (2.7379) 0.631 Industry related 0.7123 (0.5354) 0.193 -2.4210 (2.7403) 0.384 GDP -0.0703 (0.1096) 0.526 0.5387 (0.4155) 0.205
Relative Deal Value 10.4488 (5.3993) 0.062* 47.8176 (28.8591) 0.108 ROA -0.0161 (0.0452) 0.723 -0.0828 (0.2118) 0.699 Deal Value -0.9595 (0.6635) 0.158 -6.5028 (2.7470) 0.025** Firm Size 0.1251 (0.3615) 0.732 4.7682 (2.2007) 0.038** Constant 3.7284 (3.0730) 0.234 -13.6516 (14.5389) 0.355 R-squared 0.2906 0.3577 Number 41 41
Note: t-statistics with robust standard errors, significance level ***p<0.01 **p<0.05 *p<0.10
Table 10
Regression results CARs Developed Target
CAR [-1,+1] P-value CAR [-20,+20] P-Value
Cash 1.7710 (1.8639) 0.343 0.6371 (4.6813) 0.892 stock -0.5479 (0.9425) 0.562 0.1217 (2.5589) 0.962 Crisis -1.3835 (0.9853) 0.162 -2.2904 (2.5589) 0.431 Wave -1.2349 (0.6161) 0.047** -3.6858 (1.7404) 0.036** Industry related -0.5302 0.326 -0.2316 0.885
28 (0.5379) (1.6038) GDP 0.2039 (0.1649) 0.218 0.9488 (0.0.4382) 0.032**
Relative Deal Value 9.2497 (3.3352) 0.006*** 10.5019 (9.2421) 0.257 ROA -0.0241 (0.0421) 0.567 -0.1461 (0.1299) 0.263 Deal Value -0.3641 (0.5359) 0.498 0.5104 (1.4138) 0.719 Firm Size 0.1795 (0.3241) 0.580 1.2071 (1.0097) 0.234 Constant -0.4215 (3.3680) 0.901 -15.6410 (8.9922) 0.084 R-squared 0.1457 0.0619 Number 186 186
Note: t-statistics with robust standard errors, significance level ***p<0.01 **p<0.05 *p<0.10
6 Conclusion & further findings
This thesis studies the impact of cross-border merger and acquisition (M&A) on an acquirers returns with targets from developed or emerging countries. It includes a literature review that covers the main motives behind M&A. There are two kinds of motives. Motives that contribute to shareholders value and motives that increase managerial value, but not in shareholders’ value. Motives behind
shareholders’ value are synergies, market power and valuation theory. Motives behind managerial value are hubris, principal-agency and free cash flow theory. Also, the rationales behind cross-border M&A are discussed. Motives behind cross-border M&A arise from strategic, economic, political and cultural perspectives. These motives also results in challenges of cross-border M&A, described as “liability of foreignness”. Furthermore, an empirical analysis of cross-border M&A in emerging and developed markets is presented. This analysis consist of an CARs analysis and a multivariate analysis. An event study is used to answer the hypothesis. Using a sample of US firms involving 227 cross-border M&A deals that took place between 2002 and 2015.
Evidence from literature suggests that acquiring in emerging markets will realize higher returns compared to those firms in developed markets. Returns will be measured by the change in stock prices due to new M&A information coming to the market. The empirical research is based on the method of Brown & Warners (1985), which measured the returns following the market model.
29 The CARs analysis found that involving cross-border M&A creates significant positive returns for shareholders of 1.49%. Also, acquiring in emerging and developed countries results both in positive significant returns for shareholders. But unlike literature expectations, acquiring in developed
countries results in higher absolute returns of 1.53%, in comparison with emerging markets of 1.29%. Therefore, involving cross-border M&A in developed countries creates more value for acquirer shareholders.
The multivariate analysis is based on an OLS regression. In the OLS regression the determinant and control variable are tested. Evidence shows that the variable emerging market has a positive but insignificant result of 0.80% return for the acquirer shareholders. Control variable which has significant influence on the CARs are wave and relative deal value.
Limitations of this work is mainly the small sample. The small sample is a consequence of the limited in time for this thesis. Therefore more criteria are used for a more proportional sample. The sample consist of 227 cross-border M&A deals. Only 41 cross-border M&A are in emerging targets, while developed target markets consist of 186 deals. For this reason the results could be biased for the emerging targets. Besides this it is an idea to compare the control variable without GDP growth, deal value and firm size. Even the control variables must nog bias the OLS regression, results could be different.
Interesting for further research is examine emerging markets as acquirers, because emerging markets are growing and become more important in the next M&A wave.
30
References
Literature:
Aguiar, M. and Gita G. (2005), Fire-sale FDI and liquidity crises, The Review of Economics and Statistics
Alexandridis, G., Mavrovitis, C.F. and Travlos, N.G. (2012), How have M&As changed? Evidence from the sixth merger wave, The European Journal of Finance, vol. 18, Issue 8
Almeida, H. and Campello, M. (2007), Financial Constraints, Asset Tangibility, and Corporate Investment, The review of financial studies, (20)5
Arelloano, C. (2008), Default risk and income fluctuations in emerging economies, American Economic Review, vol. 98, No. 3
Berk, J. and Demarzo, P. (2011), Corporate finance, Boston: Pearson Education Limited Breinlich, H. (2008), Trade liberalization and industrial restructuring through mergers and acquisitions, Journal of Interantional Economics, vol. 76, issue 2
Brown, S.J. and Warner, J.B, (1985), Using daily stock returns: The case of event studies, Journal of Financial Economics, vol. 14, issue 1
Burns, N. and Liebenberg, I. (2011), U.S. takeovers in foreign markets: do they impact emerging and developed markets differently?, Journal of Corporate Finance, vol 17, issue 4
Cavusgil, S.T., Knight, G., Riesenberger, J.R. (2014), International business, Pearson Australia Group Chari, A., Ouimet, P.P and Tesar, L.L. (2010), The value of control in emerging markets, The review of financial studies, vol. 23, No. 4
Data, D.K. and Puia, G. (1995), Cross-Border Acquisitions: An Examination of the Influence of Relatedness and Cultural Fit on Shareholder Value Creation in U.S. Acquiring Firms, Management International Review, Vol. 35, No. 4
Devos, E., Kadapakkam, P. and Srinivasan, K. (2009), How Do Mergers Create Value? A
Comparison of Taxes, Market Power, and Efficiency Improvements, The review of financial stuies, vol. 22, No. 3
Dos Santos, M.B., Errunza, V.R. and Miller, D.P. (2008), Does corporate international diversification destroy value? Evidence from cross-bordermergers and acquisitions, Journal of Banking and Finance, vol. 32, issue 12
31 Eisenberg, T., Sundgren, S. and Wells, M.T. (1998), Larger board size and decreasing firm value in small firms, Journal of Financial Economics, vol. 48, issue 1
Erel, I., Liao, R.C. and Weisbach, M.S. (2012), Determinants of cross-border mergers and acquisitions, The Journal of Finance, vol. 67, issue 3
Fama, E.F (1980), Agency Problems and the theory of the Firm, Journal of Political Economy, vol. 88, No. 2
Field, A. (2005), Discovering Statistics Using SPSS
Froot, K. and Stein, J. (1991), Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach, Quarterly Journal of Economics, vol. CVI, No. 427
Goel, A.M, Nanda, V. and Narayanan, M.P (2004), Career concerns and resource allocation in conglomerates, The review of financial studies, vol. 17, No. 1
Goergen, M. and Renneboog, L. (2004), Shareholders Wealth Effects of European Domestic and Cross-border Takeover Bids, European Financial Management, vol. 10, issue 1
Hopkins, H.D. (2008), Cross-Border Mergers and Acquisitions: Do Strategy or Post-Merger Integration Matter?, International Management Review, vol. 4, No. 9
Hoskisson, E.R., Eden, L., Lau, C.M. and Wright, M. (2000), Strategy in Emerging Economies, Journal of Acadamic Management, vol. 43, No. 3
Jensen, M.C (1988), Takeovers: their causes and consequences, Journal of Economic Perspectives, vol. 2, No. 1
Khanna, T. and Krishna, P. (1997), Why focused strategies may be wrong for emerging markets, Havard Business Review, vol 75, issue 4
Loughran, T. and Vijh, A.M. (1997), Do Long-Term Shareholders Benefit From Corporate Acquisitions?, The Journal of Finance, Vol. 52, No. 5
Lowinski, F., Schiereck, D., Thomas, W. (2004), The Effect of Cross-Border Acquisitions on Shareholder Wealth — Evidence from Switzerland, Review of Quantitative Finance and Accounting, Vol. 22, Issue 4
MacKinlay, A.C. (1997), Event studies in economics and Finance, Journal of economic literature, vol. 35, No. 1
