Master Thesis
“The stock price reaction to acquisition announcements in a bank-based
economy: The analysis of economic factors and market specifications”
Author: Wojciech Poplawski Student Number: 1577980 Coordinator: Halit Gonenc
Abstract
_____________________________________________________________________________________
I examine 200 acquisitions undergone by German publicly traded companies during a period between December 31, 2006 and January 1, 2010. The methodology involves an event study using adjusted market model for German public domestic acquirers, and a cross-sectional least square regression analysis that verifies the impact of acquisition determinants. The results of this study show that the stock prices of German acquirers react positively to the acquisition announcements. Furthermore, managerial hubris is associated with negative abnormal regression returns. On the contrary, bank presence and neutral attitude in acquisition presents positive returns for the acquirer company. Finally, no evidence is found for companies’ size and deal value to affect the acquisition announcement returns.
Table of Content
1. Introduction...1
2. Literature Review...4
2.1 Corporate Governance System...5
2.2 Determinants………..6 2.3 Theories………..7 2.3.1 Agency Theory...8 2.3.2 Misvaluation...9 2.3.3 Economic Disturbance...10 2.3.4 Signaling Hypothesis...11 2.3.5 Managerial hypothesis...12 2.4 Description of Germany...13
2.5 Acquisition Studies on Germany...15
2.6 Measurement Indicators...17 2.6.1 Bank Presence...18 2.6.2 Managerial Hubris...20 2.6.3 Payment Methods...21 2.6.4 Source of Financing...22 2.6.5 Market Capitalization...23 2.6.6 Market-to-Book...25 3. Hypothesis...25
4. Data, Sample Statistics and Methodology...26
4.1 Data………..27
4.2 Sample Statistics………..28
4.3 Methodology………30
5. Results and Discussion...32
5.1 Univariate Analysis of Determinant………33
5.1.1 Method of Payment……….34
5.1.2 Industry Adhesion………...35
5.1.3 Deal Attitude………...………35
5.1.4 Bank Shareholding………..36
5.1.5 Managerial Hubris………...37
5.1.6 Returns by Method of Payment and Managerial Hubris………38
5.2 Cross-Sectional Regression...39
6. Conclusion...42
7. Limitations...44
1
1. IntroductionBanks are believed to have a significant influence over companies’ corporate activities in Germany. This involves a higher incidence of debt financing in German firms, and is one of the causes of the underdevelopment of stock markets. The widespread concern over volatility in German securities markets has stimulated research into the process by which information is impounded in stock prices. In particular, the returns from acquisition announcements have been a topic that caught a lot of attention. The finance literature describes the various stock price reactions to the acquisition announcements as a global phenomenon. Furthermore, despite the undisputed evidence that such significant effect exists, still there is an ongoing debate about the level of target and bidder’s returns. While some studies document that shareholders’ of acquiring firms benefit from acquisitions (Schipper and Thompson, 1983, Dennis and McConnell, 1986, and Asquith, Bruner, and Mullins, 1983), others conclude that acquisition activities result in a decrease in shareholders’ wealth (Bradeley and Kim, 1988, Roll, 1986). In general, most studies report positive combined abnormal returns for target and bidder firm, although for shareholders of target firm the findings consistently suggest significant and positive returns around acquisition announcements, opposite being true for the acquiring company. Furthermore, the findings of some studies seem to suggest that shareholders of target firms in tender offers receive about twice the returns of target-firm shareholders in merger and acquisition offers (Jensen and Ruback, 1983). Additionally, many recent studies report zero or negative abnormal returns to acquirer shareholders (DeLong, 2001, Houston et al., 2001, Campa and Hernando, 2004, Goergen and Renneboog, 2004). However, there are also studies that report positive abnormal returns for acquirer firms around announcements, such as Maquieria et al. (1998) for US stock-for-stock acquisitions, or Kohers and Kohers (2000) for the high-tech industry. In the majority of these studies, even in the case of positive returns, the magnitude is usually much lower for bidding company than the magnitude for target firms.
The primary intention of this paper is to investigate: ‘if companies’ structure and market
specifications have an influence over the acquisition activity in Germany, and whether the acquisitions inflict a market reaction at the publication day of the announcement?’ The focus will be on the stock
2
acquisition has shifted and during most of the last decade, foreign firms acted predominately as acquirers of US firms (Vasconcellos and Kish, 1998). Studies done on acquisition activity between the US and Great Britain (Vasconcellos et al., 1990) and between US and Japan (Kish and Vasconcellos, 1993) explore macroeconomic variables that contribute to this phenomenon. However, the extensive work of research including U.S. market leaves a scope for research in other countries. Therefore, an interesting approach would be to analyze the issue of stock price reaction to the acquisition announcement on the German market, and weather any differences exist between market-based economy and bank-based economy with respect to stock market reaction to announcements of acquisitions? For instance, Jenkins and Ljungqvist (2001) describe German market as a very complex with low level of transparency of shares stakes and weak regulation of parties acting in concern. Germany in contrast to US American market based economy is a bank based economy, which among many distinguished characteristics is typified by involvement of large banks in the companies’ financial life. Carney (1997) while comparing U.S and German markets, described them as entirely contradictory corporate governance systems. German system in that respect experienced large banks’ having a great deal of success in blocking the growth of strong financial markets. On the other hand, political constraints on large banks in the US American financial markets allowed the development of strong and efficient market. The opposite can be found in Germany where banks were politically and economically favoured. The separation of banks and stock markets in the US American economy cannot be observed on German market and will definitively have an impact on the results obtained.
3
assumes that companies are induced to take more considerate decisions as well as to strive for more strategic diversifications to overcome unfavorable circumstances.
Furthermore, using the sample of 200 acquisitions announcements over a period of 4 years between December 31, 2006 and January 1, 2010, I try to provide evidence that investors react positively to the news about acquisitions in Germany. The results for public domestic takeovers show that overall cumulative abnormal returns from the announcement are insignificant, however positive. Furthermore, the above mentioned factors give also insignificant results, with two exemptions, although the outcomes vary in the level and direction. Finally, it can be stated that acquisition industry affiliation as well as deal attitude have an influence over the announcement returns. These findings are in line with results obtained by authors such as Boehmer (2000) Dyck and Zingales (2004) Grundfest (1990) who report similar findings over different study periods.
4
the well known agency theory will also be used to explain the conflict between shareholders and management that under some circumstances lead to the merger and acquisition decisions. Thirdly, the misvaluation hypothesis, which will be further discussed more in depth, states that the merger and acquisitions are pursued in the periods of significant stock price divergence from the book equity value. Therefore, overvalued firms tend to bid for undervalued targets and in consequence management of company being targeted agrees for unfavorable offers due to pressure of corporate failure (Shleifer and Vishny, 2003). Finally, the economic disturbance and signaling theory should be of assistance. These two theories, in general, concentrate on the specific factors that influence the environment of the company and hence result in merger and acquisition decisions.
The rest of the paper will be organized as follows. The next section will provide a literature review of the broad evidence on the impact of mergers and acquisitions on shareholder wealth. Section three describes the hypothesis. While section four gives an overview of data and methodology that will be used in the analysis. Section five concentrates on the results from the analysis employed. Section six gives the conclusion and seven presents the limitations of the paper.
2. Literature Review
5
Furthermore, acquisitions in general refer to two distinct forms of corporate strategy, one being corporate financing, and second one being management strategic investments overlook. In that sense, acquisitions adduce to organizational takeovers and buyouts in which one firm is acquiring assets of another firm, make it public, privet or subsidiaries of other company (DePamphilis, 2009). However, since in the finance literature the distinction is relatively blurred between mergers and acquisitions, I will follow majority of authors in this paper and refer to merger and acquisitions as simply acquisitions as the same form of corporate takeover decision. The buy or sell decisions most often are affected by frictions such as transaction costs, information asymmetries, and agency conflicts that prevent efficient transfer of control between companies. Each of this aspect will be discussed further in detail.
2.1 Corporate Governance System
6
level, UK and Germany have had procedures in place to evaluate proposed acquisitions for many years (from 1965 and 1973, respectively). In December 1989, member states of European Union finally agreed on common rules to regulate major European acquisitions (Brady and Feinberg, 2000).
2.2 Determinants
7
for firm and deal characteristics. Large firms are also more likely to complete an offer. Thirdly, the method of payment also matters in the acquisitions deals. Loughran and Vijh (1997) conclude that combinations resulting from cash offers earn excess returns that are significantly larger than those associated with stock offers. The explanation for cash offers being associated with greater post acquisition returns can be the post combination of operating results. Such cash offers may demonstrate greater improvement in companies’ operability than what is observed for combination associated with stock offers (Linn and Switzer, 2001). Lastly, takeovers allow management to follow a strategy of external growth. There are numbers of fundamental advantages of takeovers that appear more appropriate than internal development, which takes time to strengthen market position and opens up new markets by internal efforts. First, acquisitions give an advantage of time. Takeovers open up new lines of business quickly. The fast pace of technological change puts a pressure for more desirable and less time consuming updates of production technology. Economic opportunities diminish, the longer entry into a market lasts and the more competitors are already entrenched. Acquisitions allow quick participation in new technological markets to realize potential profits (Buhner, 1991). Second, the acquisition of an incumbent competitor brings cost-savings, especially when intangible assets such as patent, goodwill, brand identities or special know-how can be acquired (Salter and Weinhold, 1979). Nevertheless, all the circumstances that lead to corporate acquisitions are broadly discussed further in the literature.
2.3 Theories
The occurrence of an acquisition is a significant event in corporate life. Since the ownership and control of assets are being transferred. The underlying motivations of such managerial actions are interesting to study. Certainly, the interest in the acquisition must be caused by a change in the environment of the acquirer and possibly also in the target’s environment to lead to the transaction. Otherwise the acquisition would have occurred previously (Beckenstein, 1979).
8
acquisitions. Roll (1986) hypothesizes that manager sometimes overpay for the acquisitions because they may suffer from hubris. Travlos (1987) states that firms that experience poor returns on acquisition deals usually pay with equity, and Myers and Majluf (1984) show that firms that issue equity signal that the market overvalues their assets in place (the equity signaling hypothesis). A related hypothesis, can be found in McCardle and viswanathan (1994) and Jovanovinc and Braguinsky (2002), these authors suggest that firms make acquisitions due to exhausted internal growth opportunities (the growth opportunities signaling hypothesis). Jensen (1986) proposed another explanation for takeovers and argues that empire-building management prefers acquisitions rather than increase in dividend payout to shareholders (the free cash flow hypothesis). Furthermore, Dong et al. (2002) argue that worse announcement returns are experienced by firms with higher valuation, perhaps because they are undertaking efforts to acquire less overvalued assets with more overvalued equity. Consequently, highly valued acquirers send information to the market that these high valuations are not warranted by fundamentals (the misvaluation hypothesis). Finally, Mitchell et al. (2004) show that there is a price pressure effect on the stock price of the bidder for equity based acquisitions. The possible explanations for that phenomenon are activities of arbitrageurs (the arbitrageurs’ hypothesis), who establish long positions in target stock and short positions in bidder stock.
With respect to German economy, some of these theories impose considerable restrictions. This is because banks in Germany are assumed to play an important role in both financing and control of German corporations. Banks are at the same time major shareholders and debt-holders in German firms (Jenkinson and Ljungqvist, 2001). Furthermore, the regulatory environment in Germany also differs from the U.S. standards. Therefore, each theory analyzed below has to be adjusted for the specificity of the German market and dual position of banks in the corporate governance system present in Germany.
2.3.1 Agency Theory
9
may indeed diminish shareholders’ wealth (Sudarsanam and Salami, 1996). Therefore, the alignment usually is assured by appropriate contracting and compensation of the agents (Eisenhardt, 1989).
The ownership structure of a company may often be an important agency control device. For instance Sudarsanam et al. (1996) developed a series of hypotheses that discuss the impact of ownership structure on the level of gains from mergers and acquisitions for the bidder and target shareholders. The authors imply that the ownership structure and agency conflict are function of managerial and shareholders’ interest alignment, and on the other hand managerial entrenchment. Thus represent the return from the acquisition and the division of this return between bidder and target. Furthermore, the important aspect of the acquisition process is the managerial shareholding. The stake that is owned by the management of the company can lead to either alignment or entrenchment, and may influence both the probability of a takeover and the wealth gains received by the shareholders (Sundarsanam et al., 1996). Authors such as Mikkelson and Partch (1989) and Song and Walkling (1993) present evidence that lower managerial ownership of targets increases the probability of a bid, whereas at the same time, lowers the probability of a success of the acquisition. As well, Stulz, Walkling and Song (1990) found out that management shareholding has a positive impact on target shareholder wealth gains. Lewellen, Loderer and Rosenfeld (1985) report a similar result for bidders. These studies suggest that managerial shareholding is a valuable aspect in the relationship between the principals and agents, and represents the alignment with the shareholders interest rather than entrenchment from shareholders.
2.3.2 Misvaluation
10
Furthermore, the misvaluation hypothesis of takeovers holds that market inefficiency has important effects on takeover activity. These effects stem from the efforts of bidders to profit by buying undervalued targets for cash at a price below fundamental value, or by buying targets with use of equity, even in the situation where bidder is overvalued, however to a lesser extent than overvaluation of the target. As argued by Shleifer and Vishny (2003), target overvaluation encourages target management to voluntarily accept expropriation offers in order to cash out. The measurement of the misvaluation with respect to the bidder and target, significantly impacts on the expropriation of the opportunities and managerial incentives, and therefore on transaction characteristics including the means of payment (stock versus cash), the form of the offer (merger versus tender offer), bid premium, hostility of the target to the offer, success of the bid, and event-period returns.The misvaluation hypothesis also implies that bidders will tend to be overvalued relative to targets (Shleifer and Vishny, 2003).
Verter (2002) presents systematic evidence of higher levels of acquisition activity in higher-valuation markets. Furthermore, in his original study, Nelson (1959) pointed out that acquisitions are highly concentrated in time. Also, that they cluster during periods of high stock market valuation, and that generally the means of payment is stock. Andrade et al. (2001) confirms these results, and additionally shows that the preponderance of stock acquisitions is greater in high-valuation markets. Thus, acquisitions were the mean of payment was stock represented 45.6% of total acquisition during the 1980s, versus 70.9% in the 1990s.
2.3.3 Economic Disturbance
11
share prices rise in general, takeovers will be executed if the buyer has information about the target that leads him to a more optimistic view about the company and its shareholders. When share prices fall and the shareholders have pessimistic expectations, they may want to sell their firm under its current market prices and offer an attractive takeover target. In both cases, takeover will take places because of different expectations. Shareholders are more pessimistic, buyers more optimistic (Weston 1953, Nelson 1959).
In general, there are two reasons that may lead buyers and sellers of firms to expect an increase in wealth as the result of acquisition. First, the market value of assets of the combined firms may rise because of merger. Second, the valuations of buyers and sellers may differ; with the result that each expects to gain by the transactions though neither foresees a rise in value from common ownership (Shleifer and Vishny, 2003). Discrepancies in valuation for income-producing assets arise from differences in expectation about future income streams and the risks associated with expected income. For instance, when such discrepancies are characterized by a higher value being placed on the assets of a firm by non-owners than by owners, acquisitions become possible (Gort, 1969).
2.3.4 Signaling hypothesis
As mentioned in the introduction to literature review section, acquisitions are characterized by factors coming from external or internal environment of the firm, and which send a signal to the market that firms are accessible potential targets. First, acquisitions take time to complete. Therefore, the acquisition activity registered in a particular year may be the consequences of environmental conditions that existed in a previous year. Second, if the environment present favorable conditions there might be a set of interested competing bidders that aim at buying same potential company. Therefore, extend of actual acquisition activity is likely to be less than proportional to the strength of external influences. Third, offsetting the second consideration to some extend are the external factors that lead to the acquisitions, and might be multiplicative in nature rather than additive (Beckenstein, 1979).
12
acquisition, and which incorporated all other available external or internal information. Finally, the method of payment often considered as having the largest influence on the outcome of the acquisition offers, have a huge signaling effect when the announcement of the bid occurs. Empirical evidence offered by Travlos (1987), Wansley, Lane and Yang (1987), and Asquith, Bruner and Mullins (1983) indicate that higher abnormal returns to bidding firms are higher with cash transaction rather than with stock offers.
2.3.5 Managerial hypothesis
Another type of internal evaluation theory is the managerial theory. The separation of ownership from control discussed for instance by Berle and Means (1932), and Shleifer and Vishny (1997) allows the management of an enterprise to diverge from goals of the owners. This collides with the shareholders welfare maximization theory discussed before in a way that the incentives between principal and agent are not align properly and management seeks its private gains instead of maximizing the returns of the shareholders. This divergence of interests leads to takeovers initiated by the management that are often at the expense of shareholders wealth (Lubatkin, 1983). Factors motivating the management are desire for power and prestige as well as the pecuniary gains from corporate growth (Marris 1966, Baumol 1967, Mueller 1969). Takeovers allow rapid growth and consequently some authors see a direct connection between the takeovers activity and desire for power and prestige (Mueller, 1977). Jarrel and Poulsen (1989) stated that managers favor shareholders value-destroying acquisitions to increase firm size, as a larger company reduces the possibility for shareholders to monitor the management effectively, and give a prestige for being able to run a larger firm. Shleifer and Vishny (1988) argued that acquisitions are driven by ‘empire building’ motives as managers enjoy running a larger company. The free cash flow theory developed by Jensen (1986) also bears on the agency conflict. The managers endeavor not to distribute dividends to the shareholders but to leave free cash flow in the firm and thus to consolidate their own influence instead. Furthermore, a large available free cash flow in the company imposes a danger for shareholders that it will be used to undertake failing takeovers. According to Jensen (1986), the diversification role of takeovers generally falls into this category. As well,
13
lower than that in a young, profit-oriented firm. As the cost of capital rises, the cost of internal growth through expansion becomes less attractive and the acquisition of existing facilities becomes desirable. Due to lower discount rate employed by the mature, growth-oriented firm, an acquisition of the younger, profit-oriented firm can be lucrative to both parties (Beckenstein, 1979).
2.4 Description of Germany
14
German firms take several different legal forms. Two types of firms can issue shares that are legal evidence of ownership: the Aktiengesellschaft (AG – a stock corporation) and the Kommanditgesellschaft auf Aktien (KGaA – a partnership partly limited shares). The former corresponds to a public limited company, while the latter has elements of both a public limited company and a partnership. Both AG and KGaA are required to have a supervisory board, consisting of both shareholder and worker representatives. The supervisory board has the legal right to appoint and dismiss the management board, which is responsible for the firm’s operation (Edawrds and Nibler, 2000). Only AGs and KGaAs can be listed on a stock market, but many AGs and KGaAs are unlisted. The German equivalent of a private company, the Gesellschaft mit beschrankter Haflung (GmbH – a limited liability company), cannot issue shares that are legal evidence of ownership.
Another important issue concerning the development of German capital market where the barriers to entry, first created in 1884 when German law restricted corporations’ access to the stock exchanges. This was accomplished by increasing the minimum size of a public offering and the length of time a company had to be in existence before it could list its shares on an exchange (Carney, 1997). These restrictions on listing ensured that debt would become a dominant source of financing in Germany by forcing smaller companies to deal with the banks. As a result, up to few years ago, German stock markets were still considered to remain relatively small and illiquid compared to American markets. In year 2000 only about 2,800 German corporations were stock corporations (AG’s), while the vast majority, approximately 220,000, was limited liability companies without tradable shares (GmbHs). As well, German accounting systems appear to provide far less transparency than the U.S. system. Therefore, the comparison between firms, on the German domestic market and across the borders, is very difficult if not impossible due to a vast variety of accounting standards available to German firms. On the other hand, some authors provide evidence that German financial statements offer the same quality disclosures as the U.S., however, these studies deal only with the transactional efficiency of the German market, and do not test the allocative efficiency. In particular, they examine only whether market prices adjust quickly to new accounting information, leaving aside the important results of price reaction when the financial statements are restated under another accounting system (Carney, 1997).
15
Germany was expected to stimulate the market for large share blocks. Nonetheless, since the corporate governance systems in Germany and the U.S. differ immensely, many argue that high ownership concentration, complex ownership structures, a two-tiered board structure, and the power of banks created an environment in which the acquisitions of German firms is very difficult (Shleifer and Vishny, 1997). Furthermore, this ‘hostile’ environment furnished an opportunity for large German banks to provide substitute markets, and play a monitoring role in the German corporations. These corporations were forced to borrow from banks to a far greater extent than their American counterparts. This led to, higher than in the U.S. debt-equity ratios, and excessive rates for borrowing that restricted the growth of German industries.
2.5 Acquisition Studies on Germany
firm-16
level data, for the years 1986 to 1995. His study sample consists of firms with headquarters located in Germany. The findings of Koke indicate that survival, acquisition, and failure of German firms depend significantly on the performance and the leverage level. Further, indicating that public as well as private German corporations are more likely to be acquired when their performance is relatively poor or leverage level is high. This is consistent with other studies (Altman, 1968; Powell, 1997; Denis and Sarin, 1999; Maksimovic and Phillips, 2001).
17
product extension, for the whole investigation period show losses of 1.97 per cent, however, horizontal takeovers with product extension achieve better results than the other categories. Vertical takeovers show, with a few exceptions, steadily falling cumulative abnormal returns. The highest loss appears in the fifteenth month after the takeover with cumulative abnormal returns reaching - 11.90 per cent. The evaluation of conglomerate takeovers by the stock market is in general very negative. The cumulative abnormal returns show a sharp decline for firms diversifying into new products and markets. This trend is, moreover, only interrupted by a few months with positive returns. For the whole investigation period, cumulative abnormal returns for this category amount to -37.31 per cent.
2.6 Measurement indicators
18
credit financing from banks. Regardless of the source of financing, the market capitalization measure will also play an important role. Croci and Petmezas (2009) to verify the impact on the abnormal returns by target shareholders used this measure of the stock market development, and created their own indicator such as: turnover over market capitalization. Finally, the misvaluation that leads to mergers and acquisitions will also be considered in this analysis. Therefore, market-to-book ratio, which is a measure specific for misvaluation should be valuable for the analysis. Used in the previous literature e.g. by Rhodes-Kropf and Vishwanathan (2004) the market-to-book value indicated whether firm is over or under valued, and thus imply the reason and the direction of the bidding offer.
2.4.1 Bank presence
19
announcements. One possible way to verify the bank influence is to check whether the bank is a major shareholder in the company that is bidding for a takeover.
One view of the German system is that German banks are large, active, informed investors that improve the performance of firms to the extent that they hold equity and have voting power from casting the votes of small investors in proxy. Banks are seen as long-term investors who oversee firms’ investments and organize internal capital markets, rather than acting as myopic investors (Porter, 1992, Grundfest, 1990). Gorton and Schmid (2000) adhere to this view by stating the relationship with banks mitigates the costs of external financing and induces the active management monitoring. Grundfest (1990) furthermore asserts that large banks in Germany exercise substantial influence over the operation of many companies and are able to effect management and strategic changes when circumstances warrant.
20
level. This level of shareholding should allow verifying the incidence of banks monitoring power on the returns from the acquisition announcement.
2.4.2 Managerial hubris
Recently acknowledged in the literature, a reason for undertaking the mergers and acquisitions is the over-optimism and desire for growth of managers, also called managerial hubris. Following Malmendier and Tate (2008), hubris is a cognitive bias in the CEO's decision making process. Furthermore, personal characteristics of CEOs are known to influence the managing style of firms (Bertrand and Schoar, 2003) and this is particularly true for large investment decisions such as mergers and acquisitions (Park, 2003, Harding and Rovit, 2004, Sitkin and Pablo, 2004). Hubris thus can affect the CEO's initial perception, which are the perceived synergies at the first deal attempt, and his learning process, which enables the CEO to recognize the effects of past market reactions. This allows the CEOs to hold an unrealistic belief that they are able manage the assets of a target firm more efficiently than the target firm's current management (Aktas et al., 2009). As hubris infected CEOs over-value the target, it is important to stress that they usually over-pay for the target. One should therefore observe either an initial negative CAR or a surprisingly low initial CAR with respect to the true potential synergies. Furthermore, with resulting learning, the same CEOs should progressively, improve their valuation abilities, bid more cautiously, and reduce any value destruction, since from deal to deal, investor reactions generate signals, offering to the CEO the opportunity to correct his initial bias. Therefore, if the CEO still remains on his position as a manager after completing his first acquisition, and the learning process occurred, he will use the learned knowledge to bid for targets more aptly, despite the initial hubris (Aktas et al., 2009).
21
Hence, measuring for managerial hubris on one hand can confirm or deny Roll’s (1986) initial assumptions, and on the other hand verify the positive abnormal returns for consecutive takeovers. Therefore, a measure with respect to managerial opts for power and prestige will be constructed. The measure will verify if serial acquirers included in the study sample experience significantly lower returns from acquisitions than returns of single buyers. The aim will be on identifying companies involved in multiple acquisitions during the study period and the abnormal returns from each consecutive acquisition.
2.4.3 Payments methods
The extensive literature suggests two practical explanations for the payments methods used in the acquisition offers. These include: signaling hypothesis discussed previously; and environmental and tax factors. A common aspect among these two explanations is the fact that payment methods matters and have a significant influence on the abnormal stock returns of both bidders and targets (Yang, Qu, and Gon Kim, 2009). In the 1960s, common stock or equivalents were dominant in the financing of acquisitions. While in the mid-1970s, cash replaced equity as major payment method (Yang, Qu, and Gon Kim, 2009). In 2005, 60% of global merger and acquisition activities were entirely financed by cash, as compared to 28% in the period from 1998 to 2000 (Barshay and Falk, 2006). The combination of cash and stock remains a common form of payment method nowadays.
22
flows, and therefore limits its possibility of debt financing by encouraging financing the valuable investment opportunities with equity.
Second determinants can be described as environmental factors, and the tax effects of acquisition payment methods. Martin (1996) for instance suggests that the method of payment in corporate acquisitions is influenced by the characteristics of the industries and sectors, and market environment of both the bidder and the target. Furthermore, an equity payment is less likely to be offered in cross-border takeovers. Typically, the target may refuse the bid if the bidder’s shares are not traded on the target’s stock exchange. This is due to the information asymmetry, low transparency, and different accounting standards that impose restriction to obtain the information about the bidding firm’s quality (French and Poterba, 1991, Coval and Moskowitz, 1999). Also, the regulation in the target's country may impose restrictions on foreign equity investments (Faccio and Masulis, 2005). With respect to the tax effects, shareholders of the target companies demand higher premium for cash offers due to capital gains tax (Linn and Switzer, 2001). In an equity acquisition, there are no immediate capital gains, which would lead to capital gains tax liability for shareholders of the target company. Whereas in the cash acquisition, investors’ gains must be realized for tax purposes, thus resulting in a tax liability at the capital gains tax rate (Franks et al., 1988).
Generally, the evidence provided by Travlos (1987), Wansley et al. (1987), Asquith et al. (1983) Conn and Nielsen (1977), Bradley (1980), Franks et al. (1988) suggests that overvalued acquirers have an incentive to offer stock and undervalued acquirers pay with cash. Furthermore authors also show that higher abnormal returns can be observed for the bidders using cash payment than for the bidders offering stock.
2.4.4 Source of Financing
23
target assets is uncertain, there is higher likelihood that the bidder will protect himself from being unable to realized the expected gains, and offer equity to the target to spread the risk among these two parties. Empirical evidence confirms the negative market reaction to mergers and acquisitions paid with equity (Moeller et al., 2004; Andrade et al., 2001; Martynova and Renneboog, 2009). In contrast to equity financing, the announcement of debt financing is expected to trigger a positive market reaction. This is due to the fact that debt financing sends a signal that the company is not overvalued, and management has good perspectives for future cash flows. Furthermore, as debt capital is typically raised in Europe via borrowing from a bank, the bank's decision to provide funding may convey a positive signal about the project's profitability to the market (Martynova and Renneboog, 2009). According to Leland and Pyle (1997) and Diamond (1984) banks are typically regarded as financial intermediaries with superior information and evaluation capabilities, therefore they are able to identify projects with positive prospects. As well, documented by Lummer and McConnell (1989) and Billett et al. (1995) that market reacts positively to the announcements of bank loans is consistent with the prediction offered by Bharadwaj and Shivdasani (2003) that mergers and acquisition financed by debt will results in positive abnormal returns. Finally, Bolton and Freixas (2000) formulate an alternative theory, in which they suggest that if the assumptions of capital market equilibrium stand, financially stable firms prefer equity issue to avoid costs associated with bank loans. On the other hand, risky firms prefer bank loans to equity financing. This is due to maintaining close relationship with the banks, which assures bank’s assistance in the times of financial distress. Hence, such a relationship with banks provides risky firms with easy access to the cheap capital.
2.4.5 Market Capitalization
24
25
2.4.6 Market-to-BookThe last measure is the market-to-book value, which measures the market value of the equity to the book value of the equity. Therefore, it can be used to check for the misvaluation of the company’s stock by the market. As previously explained, the misvaluation of the shares is one of the main causes of acquisitions. Rhodes-Kropf and Vishwanathan (2004) and Shleifer and Vishny (2003) studied the misvaluation of the stock with respect to the takeover activities, and found a significant correlation. Authors found that the valuation difference is roughly 20% between the bidders and the targets in the log market-to-book ratio. The differences can be observed in cash targets, which tend to be undervalued, while stock targets are slightly overvalued. Rhodes-Kropf and Vishwanathan (2004) state that misvaluation explains about 15% of acquisition activity at the sector level. On one hand, misvaluation is important for understanding patterns of acquisition activity at the industry level. One the other hand, the neoclassical theory suggests that industry shocks also play an important role. Roughly 40% of the total dollar volume of acquisition activity occurs during takeover waves, which are the consequences of the industry shocks (Rhodes-Kropf and Vishwanathan, 2004). Therefore, the neoclassical explanations are important for understanding acquisition activity at the sector level, misvaluation is critical for understanding the direction and causes of acquisitions.
3. Hypotheses
To guide this research on the effects of the announcements of acquisitions on German market and to determine firm-specific and market-specific determinants of acquisitions I formulate a set of hypotheses building on the theoretical and empirical literature. The first set consists of one hypothesis that concentrates on abnormal returns from takeover announcements.
H1: Announcements of acquisition do lead to an abnormal market reaction at the publication day of the
announcement.
26
negative returns. Found in more recent studies by DeLong (2001), Houston et al. (2001), Campa and Hernando (2004),and Goergen and Renneboog (2004) who also report zero or negative abnormal returns to acquirer shareholders. Hence, I expect that announcement of acquisitions induce a significant reaction on the stock market, and will allow verifying the magnitude of the possible returns (Hypothesis 1).
The second set consists of hypotheses that concentrate on factors determining mergers and acquisitions from the firm-specific perspective. These factors encompass merger and acquisition activity, and bank presence.
H2: Number of acquisition bids has a significant negative impact on the abnormal returns from
acquisitions announcements
H3: Positive abnormal returns in acquisitions bids are observed for firm with bank as a major shareholder
The relevance of the number of acquisitions in Hypothesis 2 follows from the recent empirical studies, which show that the cumulative abnormal returns (CARs) of serial acquirers are declining from deal to deal at the firm level (Fuller et al., 2002, Conn et al., 2004, Croci, 2005, Ahern, 2008, Ismail, 2008). These authors present a downward trend in CAR as an evidence of growing managerial hubris across the deal sequence. The regression analysis will check whether the companies included in the study and actively participating in multiple acquisitions over the study period experience a declining trend in CARs. Consequently declining abnormal returns would imply that management of the acquiring company is driven by the desire of power and status. Secondly, the previously discussed literature also suggests that companies that have shareholding blocks in the hands of banks are less prone to undertake value destroying activities. Furthermore, such companies do not engage in mergers that are not optimal, and in which synergies are not being realized. Therefore, the supervisory role of banks is assumed to have positive influence on the outcome of mergers and acquisitions. Hence, firms with banks as a major shareholder should have a significant positive reaction to the announcement of merger and acquisition (Hypothesis 3).
4. Data, Sample Statistics and Methodology
27
find the abnormal returns attributable to the event under study by adjusting for the return that stems from the price fluctuation of the market as a whole. Second of all, regression analysis is based on statistical modeling and analyzing relationship between variables. In that respect the determinants described in previous sections are used.
4.1 Data
Abnormal returns associated with acquisition announcements are investigated. The potential market reactions inflicted by acquisitions are analyzed by assessing these abnormal returns before, after and at the announcement day. The abnormal return is the realized ex post return of the stock over the event window minus the normal return of the stock over the event window. The normal return is defined as the expected return without the event taking place, and is estimated by using the adjusted market model. The selected sample consists of acquisitions of publicly traded domestic targets acquired by German public companies, announced between January 1, 2010 and December 31, 2006. To catch the impact of bank ownership on the acquisition announcement the sample concentrates purely on domestic public companies. The effects of bank shareholding in German companies that are involved in domestic acquisitions can be fully analyzed due to environmental similarity in which both acquirers and targets operate. Different governance system in the over the border deals could restrict German banks from exercising their voting power and thus the banks’ relevance in acquisitions would be diminished extensively. Furthermore, other governance system involves different level of corporate information disclosure and usage of alternative accounting standards. As a result cross-border acquisition would limit the extent to which banks can gather the information on the target and prepare their position on the matter of purchase (Hernando et al., 2009). Additionally, the deals that involve cross-border targets are associated with other stock markets and therefore can cause distortion in the measures that will be used in the following analysis. For instance, in most of the cross-border mergers and acquisitions the mean of payment is usually cash. Therefore, the analysis of methods of payment in the merger and acquisition deals would become meaningless as a consequence of lack of stock transaction in cross-border acquisitions. Finally, separate stock markets would entail unique market specifications and possible differences in stock price reaction to the announcement of acquisition.
28
€1 million, public German firms are subject of the acquisition, and the target and acquirer is a public firm listed on the German Stock Exchange (XETRA) or Frankfurt Stock Exchange (FWB). I exclude the acquisitions for which the acquisitions value was not reported. The final sample consists of 106 acquiring firms and 156 target firms. This sample represents 200 acquisition announcements over the 4 years period. The stock data for acquiring firms was available for whole sample of 106 companies. Furthermore, for each deal included in the sample I also collected the following data:
- Information regarding market capitalization of acquirers, which will be used as a proxy for a company size.
- Information regarding deal value.
- Information regarding shareholders of acquiring firms. Specifically if company directly or indirectly is controlled by bank. Data shows all major shareholders of a company and their level of ownership. As indicated in the literature section, the 5% level is a significant level that allows banks to have an influence over the company’s agenda, and therefore was selected as a cut of point for a measure of bank presence.
- Information regarding market-to-book ratio gathered on the basis of the year of the takeover announcement.
- Information regarding the number of acquisitions that company was engaged over the study period. It will be used as a proxy for a measure of managerial hubris.
- Information regarding the method of payment.
- Information regarding the companies’ industrial relatedness is gathered based on the 2-digit SIC code, representing companies adhesion.
The information regarding market capitalization, deal value, method of payment, number of acquisitions, companies’ industrial affiliation, and market-to-book value are gathered from Thomson One Banker Database. The information regarding bank shareholdings were obtained from Amadeus Database.
4.2 Sample Statistics
29
Table 1Sample Statistics
Public Domestic Deals
Number of Acquisitions 200
Number of Acquirers 106
Mean number of acquisitions 4
by each Acquirer
Mean Size of Acquirer 12,965
(€ Euro Millions)
Median Size of Acquirer 2,499
(€ Euro Millions)
Mean Market-to-Book Ratio 2.0
Mean Transaction Value 1,521
(€ Euro Millions)
Median Transaction Value 77
(€ Euro Millions)
Secondly, cash is the primary medium of payment in merger and acquisition deals in the sample, and accounts to 85 % of all deals. Stock, however, account only for 15% of the acquisitions, which is consistent with characteristics of German market (Koke, 2002). Furthermore, 54,5 % of companies in the sample have bank as a major shareholder, with at least 5% stake in the company. From 200 acquisitions included in the sample 66% are associated with acquirer being active in more than one acquisition offer. Thirdly, most of the acquisitions are regarded as friendly and amount to 44.5%. Hostile acquisitions, on the other hand, are very small proportion of the entire sample and account only for 2.5% of the acquisitions. Thus, friendly acquisitions dominate the sample. Fourth, acquisitions between firms in related industries (defined as the same 2-digit SIC code) occur in 69% of cases in the sample. Fifth, the highest acquisition activity in the sample period can be observed in year 2007 with 33% of the acquisitions and secondly in year 2008 where 30% of sample acquisitions occurred.
Table 1 (Continued)
30
All Stock 15 Acquisition Hubris Single Acquisitions 34 Multiple Acquisitions 66 Bank Ownership 54,5 Deal Attitude Friendly 44,5 Hostile 2,5 Neutral 13,5 Undisclosed 39,5 Related Acquisitions 69 Notes:This table reports summary statistics for a sample of domestic acquisitions made by German public firms between December 31, 2006 and January 1, 2010, where size and market-to-book ratios were available for the years in which the acquisition announcements took place. The data was extracted from the Thomson One Banker Database. The values used are expressed in 2010 euro’s values (millions). Related acquisitions are defined as those in which the acquirer and target share the same primary 2-digit SIC code.
4.3 Methodology
31
Finally, closing prices and market index prices are used to calculate companies and market returns. This allows the analysis of stock market reactions, and expresses the gains or losses of shareholders through abnormal returns (ARs), showing the takeover-induced deviation from the normal trend of returns (Fama, Fisher, Jensen and Roll, 1969):
The total gains or losses to the shareholders during the investigation period will be obtained by cumulating the abnormal returns (CARs) of the portfolio:
Second part of methodology will concentrate, on the other hand, on the multiple regression analysis. For the announcement period I will use standard ordinary least squares cross-sectional regression to measure the impact of payment method, acquirers’ size, deal value, market-to-book value, industry relatedness, managerial hubris, bank presence, and deal attitude:
CARj;T1,T2 = β0 + β 1PMj + β 2Sj + β 3DVj + β 4MTBVj + β 5MTBGj + β 6IRj + β 7MHj + β 8BPj + β 9 DA j + εj
Where:
CARj;T1,T2 = cumulative abnormal return for Firmj from t=T1 to t=T2.
PMj = a dummy variable for the payment method. PMj = 1 for cash offers, 0 for stock
offers.
Sj = natural logarithm of market capitalization of a Firmj from t=T1 to t=T2
DVj = natural logarithm of deal value of a Firmj from t=T1 to t=T2
MTBVj = a dummy variable for market-to-book ratio, value, MTBVj = 1 for companies in
lowest quintile, 0 if not
MTBGj = a dummy variable for market-to-book ratio, glamour, MTBGj = 1 for companies
in highest quintile, 0 if not
IRj = a dummy variable for industry relatedness. IRj = 1 for merging firms are in same
32
MHj= a dummy variable for management hubris. MHj= 1 for company engaged in
multiple acquisitions, 0 otherwise
BPj = a dummy variable for bank presence. BPj = 1 for bank 5% and more ownership, 0
otherwise
DA j= a dummy variable for deal attitude. DA j = 1 for friendly, 0 otherwise
β i (O,..,8) = model parameters.
εj = model error term.
The signs of the model parameters should be interpreted in the following way. A positive β 1, indicates
that cash bids earn higher abnormal stock returns than stock bids; a positive β 2 indicates that acquirers’
size has an influence on the acquisitions’ abnormal returns around the announcement; a positive β 3,
indicates that deal value has an influence on the acquisitions’ abnormal returns around the announcement; a positive β 4 indicates that companies in lowest market-to-book value have an influence on the
acquisitions’ abnormal returns around the announcement; a positive β 5 indicates that companies in
highest market-to-book value have an influence on the acquisitions’ abnormal returns around the announcement; a positive β 6, indicates that companies in the same industry earn higher abnormal stock
returns than companies in different industries; a positive β 7, indicates that number of acquisitions that one
company is involved in has an influence on the acquisitions’ abnormal return; a positive β 8 indicates that
bidders with banks as a major shareholder earn higher abnormal stock return than bidders without banks as a major shareholder; a positive β 9 indicates that friendly acquisitions earn higher abnormal stock return
than hostile acquisitions.
5. Results and Discussion
I begin the analysis by estimating acquirer announcement returns for the 5-day period around the announcement day. Table 2 reports the mean and median cumulative abnormal announcement returns (CARs) over the announcement period.
Table 2
Cumulative Abnormal Announcement Returns
Acquisitions Mean CAR t-stat Median CAR wilcox All 0,0030 (0,211) 0,0013 (0,308)
Notes:
33
The results show that merger and acquisitions announcement returns for publicly traded German companies engaged in the takeover activity between December 31, 2006 and January 1, 2010 are insignificant and positive with mean cumulative abnormal return of (0,0030) and median of (0,0013).
Table 3
Announcement Returns by Day
Day Mean CAR t-stat Median CAR wilcox -2 -0,0056 (-1,364) 0,0001 (0,545) -1 -0,0019 (-0,258) -0,0004 (0,814) 0 0,0019 (0,337) -0,0007 (0,801) +1 0,0006 (0,187) 0,0001 (0,553) +2 0,0081 (0,924) 0,0004 (0,485) Notes:
This table reports mean and median cumulative abnormal announcement returns by each day in the event window. The return for Day 0 (announcement day) is the abnormal return as defined in the text. Sample includes all merger announcements for the period 2006– 2009. t-statistic and wilcoxon signed rank appear in parentheses. a,b,c refers to 1%, 5% and 10% significance levels
On the other hand, Table 3 reports cumulative abnormal returns by each day in the 5-day event window. The acquisitions result on the announcement day, day 0, is positive (0,0019), nevertheless insignificant. This means that investors do seem to react positively to the announcement of merger and acquisitions of publicly traded domestic companies in Germany. However, due to insignificant results it is not possible to draw any conclusion. I cannot either accept or reject the hypothesis 1 that announcements of merger and acquisition do lead to an abnormal market reaction at the publication day of the announcement. Despite the significance level, the results are consistent with previous study by Buhner (1990) who reports positive returns for German domestic acquisitions of public targets around the announcement day. Furthermore, cumulative abnormal returns for two days prior to the announcement day show insignificant negative returns of (-0,0019) and (-0,0056) respectively. The first day after the announcement demonstrate a positive return of (0,0006), however, also insignificant. Finally, the last day of the event window shows insignificant and positive announcement return of (0,0081).
5.1 Univariate Analysis of Determinants
34
purpose of this part is to investigate if the abnormal stock returns differ as a consequence of dividing the sample according to the factors that are known to influence acquisition outcomes. Furthermore, the mean and median cumulative abnormal return in each subsample will be check for being significantly different from zero. Additionally, the means and medians of two subsamples will be compared for being significantly different from each other. To compare the means and medians between the samples the Wilcoxon median test of equality and Anova F-test of mean will be applied.
5.1.1 Method of Payment
In Table 4 the results of the univariate analysis are reported for the abnormal returns to acquirers classified by the method of payment used in the merger and acquisitions offers.
Table 4
Announcement Period Returns by Method of Payment Payment
method
Number of
Acquisitions Mean t-stat Median wilcox
Mean test of equality Median test of equality Cash 169 0,0016 (0,096) 0,0006 (0,757) Stock 31 0,0106 (1,017) 0,0066 (1,009) 0,228 1,182 Notes:
Table 4 reports the mean and median cumulative abnormal share return (CAR) for acquirers over the announcement period, which is calculated from day -2 to day +2, where day 0 is the announcement day. The abnormal return is calculated relative to the DAX Index. Acquisitions are classified according to the payment method used, categorized as cash offers or stock offers. t-statistic and wilcoxon signed rank appear in parentheses. a,b,c refers to 1%, 5% and 10% significance levels
35
payment. With regard to the results obtain no conclusion can be stated and thus I cannot confirm any evidence to support the signaling hypothesis.
5.1.2 Industry Adhesion
Table 5 presents the results to acquirers classified by company adherence to particular industry. The categories, which are related and unrelated, refer to companies that belong to the same industry defined by the same 2-digit SIC code or are not industry related. The reported results show significant negative returns to acquirers from the same industry of (-0,0119). Opposite results are found for the companies from unrelated industries, which represent insignificant results with respect to cumulative abnormal returns of (0,0339). These finding can be explained one hand by economic downturn that stipulates companies to seek for more diversified investments in the times of financial crisis. As well, companies may fail to realize synergies coming from the acquisition. However to justify the above statement, the analysis of economic factors and to what extend companies are exposed to them would be required. This would entail a study of long-run returns from merger and acquisitions. Unfortunately, this goes beyond the scope of this study. Finally, the Wilcoxon median test of equality shows a significant result. Thus, the null hypothesis that the medians of two subsamples are equal can be rejected. The median cumulative abnormal returns are significantly different between companies in the same industry and companies performing acquisitions in unrelated industries.
Table 5
Announcement Period Returns by Industry Relatedness Industry
Adherence
Number of
Acquisitions Mean t-stat Median wilcox
Mean test of equality Median test of equality Related 135 -0,0119c (-1,791) -0,0026 (1,317) Unrelated 65 0,0339 (0,818) 0,0095 (1,490) 2,291 1,727c Notes:
Table 4 reports the mean and median cumulative abnormal share return (CAR) for acquirers over the announcement period, which is calculated from day -2 to day +2, where day 0 is the announcement day. The abnormal return is calculated relative to the DAX Index. Acquisitions are classified according to the industry relatedness, categorized as related and unrelated. t-statistic and wilcoxon signed rank appear in parentheses.
a,b,c
refers to 1%, 5% and 10% significance levels
5.1.3 Deal Attitude
(-36
0,0258). Typically, hostile deals are linked to variety of defense mechanism available to the target companies. Therefore, the announcement returns usually turn out to be negative as a result of the information content of the announcement. These may be the expected changes in the companies’ management and resources. As well as with overall restructuring, redeployment, and innovations that causes uncertainty of future returns among investors and shareholders. However, typically the returns for the hostile takeovers improve in the long run as the effects of the consolidation period fade away (Buhner, 1991). The only positive mean cumulative abnormal returns are reported for acquisition with friendly attitude, and they are (0,0239) and insignificant. Additionally, friendly attitude in acquisition deals involve certain level of trust in the synergies and future performance of new entity. For example, in study by Dyck and Zingales (2004) authors show that friendly acquisitions are pursued by the financially troubled targets, and result in significantly positive returns from the acquisitions. Finally, the only significant results are found for the deals in which the acquisition attitude was neutral for both parties involved. The univariate analysis shows significant negative mean announcement return for neutral deals of (-0,0334) and median of (-0,0096). In the analysis of mean and median equality between subsamples the results show insignificant results. Therefore, I cannot reject the null hypothesis that mean and median cumulative abnormal returns for the deal attitude are equal between the subsamples.
Table 6
Announcement Period Returns by Deal Attitude
Deal Attitude
Number of
Acquisitions Mean t-stat Median chisq
Mean test of equality Median test of equality Friendly 89 0,0239 (0,778) 0,0095 (0,978) Neutral 27 -0,0334b (-2,345) -0,0096 c (1,646) Hostile 5 -0,0258 (-0,921) -0,0054 (0,270) Undisclosed 79 -0,0063 (-0,749) 0,0006 (0,257) 0,701 0,827 Notes:
Table 4 reports the mean and median cumulative abnormal share return (CAR) for acquirers over the announcement period, which is calculated from day -2 to day +2, where day 0 is the announcement day. The abnormal return is calculated relative to the DAX Index. Acquisitions are classified according to the deal attitude, categorized as friendly, neutral, hostile, and undisclosed. t-statistics and chi-square appear in parentheses. a,b,c refers to 1%, 5% and 10% significance levels
5.1.4 Bank Shareholding
37
are able mitigate the costs of external financing and induce the active management monitoring that prevents companies for undertaking value destroying acquisitions (Gorton and Schmid, 2000). Table 7 reports the abnormal returns classified by bank ownership. The straightforward results show that acquisitions in which companies are characterized by 5 or more per cent ownership of banks and banking institutions result in insignificantly negative returns of (-0,0099).This seems in line with results reported by Boehmer (2000) who shows that merger and acquisitions tend to decrease bidder firms’ value when banks or financial institutions have partial control over the bidder. However, since the results are statistically insignificant any conclusions drawn on the results obtain from the univariate analysis would be merely rhetorical and based on the previous studies. Thus, the negative abnormal returns for companies with banks shareholding do not give basis for rejecting the assumption that banks do not mitigate the cost of external financing and are capable of organizing internal capital markets. As well, they allow postulating that banks active monitoring may be sufficient instrument in preventing the loss of shareholders wealth. Finally, the results for German companies that are characterized by lack of bank ownership present further insignificant, however, positive returns of (0,0181). This could be a signal that management in publicly traded German firms is fully competent to pursue acquisitions without external influence from banks and banking institutions. Although, it cannot be assumed that these companies are not influenced by some external parties, it simply implies that banks do not exert any influence over these companies’ strategic investment decisions. Lastly, the mean and median test of equality shows statistically insignificant results, and thus it cannot be concluded that the means and medians of the subsamples are either equal or significantly different.
Table 7
Announcement Period Returns by Bank Shareholding Bank
Presence
Number of
Acquisitions Mean t-stat Median wilcox
Mean test of equality Median test of equality Bank 108 -0,0099 (-0,618) 0,0008 (0,164) Non-Bank 92 0,0182 (0,742) 0,0021 (0,255) 0,970 0,050 Notes:
Table 4 reports the mean and median cumulative abnormal share return (CAR) for acquirers over the announcement period, which is calculated from day -2 to day +2, where day 0 is the announcement day. The abnormal return is calculated relative to the DAX Index. Acquisitions are classified according to the bank ownership, categorized as bank and non-bank. t-statistic and wilcoxon signed rank appear in parentheses. a,b,c refers to 1%, 5% and 10% significance levels
5.1.5 Managerial Hubris
38
power and run bigger corporation. This leads to series of acquisitions for companies with managers suffering from hubris. As theory states, companies that acquirer multiple targets in a short period of time will on average experience lower abnormal returns from each consecutive acquisition. In Table 8 the cumulative abnormal returns are presented. Out of 200 acquisitions included in the sample, 132 were acquisitions in which the single acquirer was active at least twice over the study period. The results, although insignificant, show that positive mean cumulative returns of (0,0072) are experienced by companies with high acquisition activity. This would mean that on the average companies suffering from managerial hubris would earn positive returns. In spite of statistical insignificance, it can be assumed that management of companies with series acquisitions is able to learn from each acquisition and fairly consider the consequences. Secondly, single acquirers in the study sample experience on average negative abnormal returns of (-0,0051). The result is also insignificant. Finally, the results of equality test of means and medians between subsamples show statistically insignificant outcome. This not allows concluding any importance of the findings. Perhaps further studies will show a significant results and will allow for conclusion to be drawn to justify the effect of managerial pursue of power and prestige in Germany.
Table 8
Announcement Period Returns by Multiple Acquirers Managerial
Hubris
Number of
Acquisitions Mean t-stat Median wilcox
Mean test of equality Median test of equality Multiple 68 0,0072 (0,345) -0,0007 (0,932) Single 132 -0,0051 (-0,466) 0,0071 (0,816) 0,167 1,206 Notes:
Table 4 reports the mean and median cumulative abnormal share return (CAR) for acquirers over the announcement period, which is calculated from day -2 to day +2, where day 0 is the announcement day. The abnormal return is calculated relative to the DAX Index. Acquisitions are classified according to the managerial hubris, categorized as multiple and single acquirers. t-statistic and wilcoxon signed rank appear in parentheses. a,b,c refers to 1%, 5% and 10% significance levels
5.1.6 Returns by Method of Payment and Managerial Hubris
39
investors to react negatively to the acquisition announcement. Secondly, bank presence would indicate that the acquisitions would be mostly financed by cash coming from credit financing rather than sell equity.
Table 9
Announcement Period Returns by Method of Payment, Managerial Hubris, and Bank Presence
Cash Stock Mean test of equality Median test of equality Mean test of equality Median test of equality Multiple -0,211 0,214 0,079 1,296 Single 0,246 1,070 0,885 0,324 Bank -0,470 0,269 0,672 0,992 Non-Bank -0,572 0,300 -0,177 0,894 Notes:
Table 4 reports the results of Mean and Median test of equality with t-statistic and wilcoxon signed rank results. a,b,c refers to 1%, 5% and 10%
significance levels
5.2 Cross-Sectional Regression
In the last part of the analysis I employ ordinary least-squares cross-sectional regression analysis to test for the effects of the various merger and acquisition determinants. I will draw upon some insights from the univariate analysis to further explore the properties and verify the combined effects of acquisition determinants on returns. The dependent variable in the regression analysis is the cumulative abnormal returns for the study period. Furthermore, there are 9 independent variables, which are expected to have an influence on the returns from merger and acquisitions. The data before regressing was winsorized on the 99th and 1st percentile to remove extreme cases that could bias the results. In Table10 the results of regressions for the sample of 200 German public domestic acquisitions are presented.
Table 10
Regression of Announcement Period Abnormal Returns
Variables Public Domestic Deals t-statistics
40
Number of Acquisitions 200
R Square 0,041
Notes:
Table 8 reports results from cross-sectional ordinary least squares regressions, where the dependent variable is the cumulative abnormal share return (CAR) for acquirers over the announcement period. Cash is a dummy variable which equals one if the method of payment is cash only offer, zero if stock only. Size is the companies’ market capitalization value. Deal Value is the transaction value. MTB Lowest Quintile is a dummy variable equal to one if the acquirer’s market-to-book ratio quintile is quintile one (lowest), zero otherwise. MTB Highest Quintile is a dummy variable equal to one if the acquirer’s market-to-book ratio quintile is quintile five (highest), zero otherwise. Related is a dummy variable, which equals one if the bidder and target share the same primary 2-digit SIC, zero otherwise. Hubris is a dummy variable equal to one if the target has engaged in multiple acquisition over the study period, zero otherwise. Bank Presence is a dummy variable that equals one if target has a bank shareholding equal or higher than 5%, zero otherwise. Friendly is a dummy variable equal to one if the acquisition is friendly, zero if hostile or neutral.Acquirer size is the market valuation in millions of the acquirer at the acquisition announcement. t-statistics appear in parentheses. a,b,c
refers to 1%, 5% and 10% significance levels
First of all, the findings with respect to the mean of payment are not consistent with outcomes from univariate analysis. The coefficient is negative (-0,0103) and therefore indicates that stock acquisitions earn on average higher abnormal returns than cash acquisitions. However the results are insignificant even at 10% significance level. Nonetheless, it is expected that the cash offers would be a common mean of payment in the bank base economy. The easy access to bank loans and long-term relationship with banks would normally induce an increase usage of cash in the merger and acquisitions offers. Therefore, German banks having a long history of increased market participation would serve as intermediary and financial advisor for merger active companies. Unfortunately, no final conclusions can be drawn for the results obtain with regard to the mean of payment due to insignificance of the results. Secondly, the abnormal regression returns with respect to the size of the company show negative result of (-0,0013). The result is statistically insignificant. Furthermore, by drawing on this outcome it can be assumed that size of the acquirer has no sound effect on the acquisition outcome. The negative coefficient indicates that the size of a company does not influence the acquisition announcement returns. Moeller et al. (2004) in his paper shows that companies’ size is an important determinant in the analysis of acquisition abnormal returns. Additionally, authors propose that large firms experience significant shareholder wealth losses when they announce acquisitions of public firms irrespective of how the acquisition is financed. In spite of that, the coefficient for the size determinant reported in this paper is very small and insignificant, thus it cannot be stated that the size effect prevails among German companies.
