Does cross-border M&A have different announcement
effects on the Chinese acquirers in comparison to domestic
M&A?
Author:
Yunxi Fan
Student number:
10879234
Thesis supervisor: Dr. Jan Lemmen
Finish date:
June 2018
UNIVERSITY OF AMSTERDAM
AMSTERDAM BUSINESS SCHOOL
BSc Economics & Business
Statement of Originality
This document is written by Student Yunxi Fan who
declares to take full responsibility for the contents of this
document.
I declare that the text and the work presented in this
document are original and that no sources other than
those mentioned in the text and its references have
been used in creating it.
The Faculty of Economics and Business is responsible
solely for the supervision of completion of the work, not
for the contents.
PREFACE AND ACKNOWLEDGEMENTS
This paper contributes to the Chinese stock market researches by investigating the short-term announcement effect induced by a cross-border merger or acquisition. Special thanks goes to my supervisor Dr. Jan Lemmen for the help in this paper.
Fraud and plagiarism are defined as any act or omission on the part of the student which makes
an accurate assessment of his/her knowledge, insight and skills partially or wholly impossible.
The ‘Regulations governing Fraud and Plagiarism for UvA Students’ gives definitions of fraud
and plagiarism and sets out the rules and customs with which students are expected to comply
during examinations or when working on an assignment, paper or essay.
ABSTRACT
In total 162 Chinese listed acquirers are examined with their share price movement around the
announcement date of mergers or acquisitions. With this sample, 45 are the cross-border M&As made by the Chinese listed acquirers. The daily average abnormal return at the announcement day of both types of M&As are found to be positive but not significant. The overseas M&As also experience a slightly larger cumulative effect within a seven-day period around the announcement than the domestic M&As. Relative size of target to acquirer and leverage level of the acquirer are positively but insignificantly related to the cumulative abnormal return over the period one day before and after the announcement (CARs [-1, +1]). Variable CrossBorder is found to be positive but not significant in the regression of CARs [-1, +1]. Payment by cash is welcomed while hostile takeovers is negatively related to the CARs [-1, +1]. Some Western targets show resistance to the M&A offers from Chinese firms but such hostile takeovers are still favoured by investors.
Keywords: Cross-border, Merger and Acquisition, Announcement effect, Event study, Chinese acquirer.
JEL Classification:
G14, G34.TABLE OF CONTENTS
PREFACE AND ACKNOWLEDGEMENTS ... iii
ABSTRACT ... iv
TABLE OF CONTENTS ... v
LIST OF TABLES ... vi
LIST OF FIGURES ... vii
CHAPTER 1 Introduction ... 8
CHAPTER 2 Literature Review ... 12
CHAPTER 3 Methodology and Hypotheses ... 14
3.1 Event Study ... 14
3.2 Regression Framework ... 15
3.3 Hypotheses ... 17
CHAPTER 4 Data Description ... 18
CHAPTER 5 Empirical Results and Analysis ... 20
5.1 Descriptive Statistics ... 20
5.2 Regression Analysis ... 23
CHAPTER 6 Conclusion ... 28
REFERENCES ... 29
LIST OF TABLES
Table 1 Descriptive Statistics (Cross-Border Daily) 21
Table 2 Descriptive Statistics (Domestic Daily) 21
Table 3 Descriptive Statistics (CARs) 22
Table 4 Descriptive Statistics (CAARs) 23
Table 5 Regression results of CAR (-1, +1) 25
Table 6 Regression results of CAR (-1, +1) for domestic and cross-border M&As 26
LIST OF FIGURES
Figure 1 Investment Promotion Agencies’ selection of most promising home economies for 2017-2019 9 Figure 2 Countries of the Target firms and corresponding Number of deals 19 Figure 3 Domestic and Cross-border CARs 22
CHAPTER 1 Introduction
In 2013, an initiative named One Belt One Road was introduced by the Chinese Government aiming at jointly building the Silk Road Economic Belt and the 21st Century Maritime Silk Road. After the “Go Global” strategy announced in 2001, One Belt One Road is another remarkable policy encouraging the outward Foreign Direct Investment (FDI) in China (WIR, 2014).
Stretching from China to Europe, more than 60 countries and economic groups are located along the major Belt and Road. With a combined FDI stock of over 3 trillion dollars, many countries participate in the initiative and have obtained a significant amount of FDI inflows from China. In the World Investment Report 2017 issued by United Nations, the amount of Chinese outward FDI sharply rose by 44% to 183 billion dollars. China was also commended as the most promising source of FDI by the UNCTAD’s survey of Multinational Enterprises (MNEs) and Investment Promotion Agencies (IPAs) exceeding the United States, Germany and the United Kingdom (Figure 1) (WIR,2017)
Figure 1: Investment Promotion Agencies’ selection of most
promising home economies for 2017-2019.
Thanks to the increasing amount of such open policies, China has become the second largest investing country in the world in 2016 (WIR, 2017). And the Chinese MNEs start to seek for opportunities to expand their businesses and gain revenue streams in foreign currencies. Within several channels of investing, Mergers and Acquisitions (M&As) provide the best possible use of the corporate asset by reallocating available resources (Rossi and Volpin, 2004). The United Nations Conference on Trade and Development (UNCTAD) (2000) also states that cross-border mergers and acquisitions is one of the fastest methods for companies to achieve international expansion.
However, cross-border M&As are more complicated in comparison to domestic M&As. Numerous factors need to be considered in order to achieve balance between countries. For example, the culture
distance can be an intractable obstacle during the process of cross-border M&As and the performance afterwards. Weber and Camerer (2003) suggest that a consistent lower performance occurs for both employees from target firms and acquirer firms due to the culture differences. But there are also
evidences showing that the cross-border M&As can create synergy value and diversify the production of firms. Morck and Yeung (1992) report positive performance in their research of the overseas acquisitions, which indicates that cross-border M&As can lead to financial benefits for bidding firms. The Chinese culture is largely different from the western countries especially in terms of the path toward the agreement in a certain deal (Rui and Yip, 2008). Therefore, the announcement effect could show dramatically differences on the Chinese bidding firms in the domestic M&A cases and overseas M&As. Beside the culture factor, China as an emerging market has limited international expanding experience. And Western countries might resist M&As from China due to the lower operating standard and the different accounting standard of Chinese firms, which results in an increase of hostile takeovers in the M&As of Chinese firms acquiring Western targets. Firms without prior experience will largely behave differently from the firms from developed markets, which could harm both acquirer and target firm in a certain cross-border M&A case (Yang and Hyland, 2012). Some Chinese large listed firms such as Alibaba, Tencent and Industrial and Commercial Bank of China have gained the world’s attention with some noticeable and high-profile overseas mergers and acquisitions. Unlike the United States and the European countries with prolonged history of the M&As and a significant amount of studies examining various M&As performance operated in both regions, there seems few articles that focus on the M&A deals made by Chinese acquiring firms.
This paper will make contribution to the existing literature by investigating whether the announcement effects on the Chinese bidding firms are different between the domestic M&As and cross-border M&As. An event study methodology will be applied in this paper to examine the differential impact on the stock prices of the acquiring firms. There are two hypotheses with regard to the research question. One expects positive abnormal return in the cross-border M&As and the other predicts a larger reaction of market toward cross-border M&As in comparison to domestic M&As.
In the results, the daily average abnormal return at the announcement day of both types of M&A are reported to be positive but not significant. The stock market shows slightly larger reactions toward cross-border M&As than domestic M&As. Leverage ratios of bidding firms are found to be positively and significantly associated with the announcement-induced cumulative abnormal returns. Some Western targets show resistance toward the M&A offers from Chinese acquirers but such M&As are still
welcomed by investors witness the positive but statistically insignificant coefficient. Overall, cross-border M&As made by Chinese listed firms are favourable by the investors and have no significantly differential announcement effects on acquiring firms compared with domestic M&As.
The paper is constructed as follows: Chapter 2 reviews the existing relevant literatures. Chapter 3 provides a discussion of the methodology and the hypotheses about differential announcement effects of cross-border and domestic M&As. The data sources are described in Chapter 4, followed by the empirical results in Chapter 5. Chapter 6 concludes with a summary of the main findings and the suggestions and limitations of this research.
CHAPTER 2 Literature Review
From the very beginning of the last century to the present, numerous papers have been written about examining the short term and long-term performance of the M&A activities. In this chapter, previous literature is divided into three categories relevant to the topic of this paper.
Announcement effects of M&As
There is extensive research about the announcement effects of M&As. However, the empirical results of this literature are still mixed and inconsistent with each other to some extent.
Jensen and Ruback (1983) document that shareholders of target firm experience significant positive returns while those of acquiring firms do not. Byrd and Hickman (1992) report negative bidding-firm shareholder returns generated from the short-term announcement effect. Furthermore, most of the studies suggest the share price movement around the announcement date is not significant for the bidding firm. Bruner (2002) reviews 44 studies, of which 24 report positive returns and 20 show negative returns for the bidding firms. He finally concludes that the stock market shows little reaction to the announcement of M&A cases because overall the abnormal returns to the bidding firms are not significantly different from zero. Langetieg (1978) measures stockholder gains from mergers by applying a three-factor performance index. He also finds evidence of insignificant excess returns after the merger and negative abnormal returns for bidding firms around the announcement date.
Cross-Border M&As
Globalization and the development of technology propelled cross-border M&As to a vital positon among several options for firms to implement firm-level economic integration across countries (WIR, 2017). However, unlike M&As that happened within one country, more complicated situations can occur in the process of overseas M&As. Doukas and Travlos (1988) suggest that larger abnormal returns are present when firms diversify in terms of industry and geographic market. They also point out that if the bidding firm is not initially operating in the target firm’s country, abnormal returns around the announcement date are significantly positive whereas firms without the internationally expanding experience have
insignificantly positive abnormal returns. Rossi and Volpin (2004) investigate the determinants of the cross-country M&As and concluded that GDP growth, accounting standards, common law and
shareholder protection system positively influence the volume of cross-border M&As. In consistency with this point of view, the statistics reported by the Ministry of Commerce of the people’s Republic of China (MOFCOM) (2013) also demonstrate that the improved merger control system in China largely
contributes to the increase of cross-border M&As of Chinese listed firms. In addition, cultural factors play an important role in the performance of cross-border M&As as well. Weber and Camerer (2003) apply
performance of both firms due to the difference in culture. Ahern, Daminelli and Fracassi (2015) also note that organizations with less cultural distance obtain higher combined returns from the announcement of overseas mergers.
Chinese firm performance and Chinese M&As policies
There has been a number of studies evaluating the M&A activities. Nevertheless, most of the articles are dedicated to the western countries markets and few studies focus on the cross-border M&As performance of Chinese firms. Some studies illustrate the attitude of shareholders toward the political motivations behind the cross-border M&As in China. According to Sun et al. (2002), the government still plays a role even in share issuing privatization firms by holding the control of subsidization. Cross-border M&As driven by the political purpose are not favourable by the shareholders because it can be contradictory to the value maximization goal of individual shareholder. They also indicated that the stock market of China has a short history and still is in the beginning stage. However, the role of the Chinese government in the cross-border M&As is viewed to be conducive by Chen and Young (2009). They give evidence that shareholders hold favourable and positive attitude toward the cross-border M&As made by Chinese firms. And one of the reasons behind this shareholders’ confidence is the Chinese government open policies supporting foreign investment.
CHAPTER 3 Methodology and Hypotheses
3.1 Event StudyEvent study methodology is a competent technique to investigate the causal relationship between the share price movement and the M&A events announced. (Duso, Gugler and Yurtoglu, 2010).
Step 1 Select the benchmark return model.
Normal returns are estimated by using the Mean Adjusted model in this paper. As a benchmark, normal returns indicate the share price movement if the merger or acquisition has not happened.
The normal returns are defined as:
!"
#$ =!" $%$&!
"#Where T=T2-T1+1 is the length of the normal return estimation period. In this paper, the average return over two-month period that ends one month before the announcement date is used as the benchmark normal return. If we define the event date as t" , the estimation period is therefore from trading day t" -90
to trading day t" -30.
Step 2 Calculate the abnormal returns.
Abnormal return reflects the stock market’s reaction to the announcement of an event and it is calculated as follows:
!"
#$ = !"# -!"#$Where !"# is the actual daily return of each firm. By subtracting the normal return from the daily return,
the abnormal return!"#$% can be obtained.
The average abnormal return of each trading day across the 162 M&A announcement cases is calculated by aggregating all abnormal returns at t divided by N (the number of cases):
In order to examine the cumulative effect of announcement, cumulative abnormal returns (CARs) are produced. CARs can be calculated with the formula below:
CAR
$ =!"#$%$ +…+!"#$% = $%$&!"
#$Where t1 and t2 represent the event windows of each CAR. In terms of determining the event window, McWilliams and Siegel(1997) document that the length of event period should be short enough to evade the confounding factors. Since the central question of this paper is about the short-term announcement effect, the corresponding event periods should not be long as well. Therefore, I test three event windows which are three {-1,+1}, five {-2,+2} and seven {-3,+3} days around the announcement date respectively.
Moreover, the cumulative average abnormal returns (CAARs) are useful to examine the cumulative effect of the M&As announcement, which can be computed by adding up all the average abnormal returns.
CAAR
$ = $%$&!!"
#$3.2 Regression framework
To explore additional insights of the differential announcement effects, the following regression is constructed
!"#$%(−1, +1) = !" +!" *RelativeSize +!" * DebtToEquity+!"*PaymentMethod + ! " *CrossBorder
+!" *Hostile + !
Where:
RelativeSize: Deal value/total asset of the acquiring firm
DebtToEquity: Pre-event debt-to-equity ratio of the acquiring firm PaymentMethod: the method of payment (dummy variable)
CrossBorder: M&As across countries (dummy variable)
Hostile: type of M&As, attitude of the target firm (dummy variable)
In this regression model, RelativeSize and DebtToEquity are included as control variables. CrossBorder, PaymentMethod and Hostile are dummy variables (CrossBorder=1 if overseas M&As, CrossBorder =0 otherwise; PaymentMethod=1 if M&As entirely paid in cash, PaymentMethod=0 otherwise; Hostile=1 if hostile takeover, Hostile=0 otherwise).
In order to investigate the resistance of Western countries toward the M&A offer from Chinese acquirers, the following regression is constructed for the cross-border M&As:
!"#$%(−1, +1) = !" +!" *RelativeSize +!" * DebtToEquity+!" *PaymentMethod + !" *
WesternCountries*Hostile +!" *Hostile + !
Where variable WesternCountries*Hostile is added as a dummy variable (WesternCountries*Hostile=1 if the target is a Western country and the takeover is hostile, WesternCountries*Hostile=0 otherwise). In my sample, Western countries include the Netherlands, Switzerland, Australia, France, Germany, the United Kingdom, the United States and Luxembourg.
There are a number of previous studies supporting the selection of the control variables described above. A review study on Canadian M&As carried out by Eckbo and Thorburn (2000) report that the relative size of target firm compared to bidding firm is correlated to the gain of the bidder. Agrawal, Jaffe and Mandelker (1992) also emphasize the informational effect of relative size on the bidder’s return. There is enough reason to involve this factor in the regression. However, the sample of this paper contains mostly private target firms and the information about financial statistics of private firms is hard to access. Therefore, the deal value divided by the bidding firm’s total assets is adopted as a proxy of the relative size.
As for the size effect, Moeller, Stulz and Schlingemann (2004) examine 12,023 acquisitions over the period 1980-2001 and conclude that the abnormal return of large acquiring firm is higher than that of small acquiring firm regardless of the method of payment and legal structure. In general, larger firms have more opportunities to obtain resources, which help them not only to finance their investment afterwards but also to operate in the new management to achieve a better performance. For example, a professional labour resource is one of the most vital elements in determining the successfulness of a M&A case, especially for the cross-border type (Aguilera and Dencker, 2007). The firm size and bidder’s return show even stronger correlations in the M&As made by firms from emerging markets (Rossi and Volpin, 2004). In this study, the firm size is measured by the total asset of the acquirer. Compared to the number of employees and equity, total asset is more capable to reflect the ability of a firm in a certain deal (Berger and Ofek, 1995).
The dummy variable Payment Method is added to see if the method of payment used to finance a takeover has impact on the bidder’s abnormal return. Many previous related articles give evidence of the existence of such influence. Kim and McConnell (1977) suggest that stock prices will fall if the takeover is paid by common stock due to a wealth transfer. Travlos (1987) finds that shareholders of bidding firms experience significant loss in pure stock exchange offers whereas cash offers lead to normal-level stock
In terms of the impacts caused by hostile takeovers, Baradwaj, Fraser and Furtado (1989) point out that bidders in hostile takeovers have insignificant negative abnormal return. Jarrell, Brickley and Netter
(1988) also find that the winning acquirers in a bidding competition experience negative abnormal returns. Finally, t-test is applied to test the significance of each coefficient in this regression and abnormal returns.
3.3 Hypotheses
This paper aims to shed light on the differential impacts of the announcement of domestic M&As and cross-border M&As on Chinese listed acquiring firms. By analysing the abnormal stock price movement around the announcement date, the difference between two types of takeovers can be observed. Zhu and Malhotra (2008) find positive announcement effect in the cross-border M&As by Indian firms. Wong and Cheung (2009) investigate the announcement effect of M&As in Asia. Most of the Asian countries reported to have positive abnormal returns in the M&A activities over the period from 2000 to 2007. What is more, Kang (1993) suggests that international integration benefits shareholders of the bidding firm by creating higher synergy value in terms of knowledge and market access. According to Young et al. (2014), firms in emerging markets have different strategies with firms of Western countries. Due to the weakness of national-level institutions of emerging markets, firms’ strategies made based on such institutional matrix might be not competitive in the global market in comparison to strategies of Western firms with well developed institutions. Lin et al. (2009) also give evidence that different institutional environments between acquirer and target can lead to the significant different M&A behaviours. Based on the previous results driven from studies with similar research questions, the hypotheses are constructed as follows:
H1: The daily abnormal returns of Chinese listed acquiring firms at the announcement day in cross-border M&As are positive.
AAR#(%&'(()*'&+,&
)> 0
H2: The cumulative abnormal returns within three days around the announcement date are differently associated with the cross-border M&As made by Chinese listed acquiring firm in comparison to domestic M&As.
!" ≠ 0
H3: The cumulative abnormal returns within three days around the announcement date is negatively related to the M&As with Western targets.
CHAPTER 4 Data description
Over the period from 2010 to 2018, the recovery of the world economy after the financial crisis also stimulates the volume of M&As worldwide, which includes China as well (WIR, 2017). The period selected also evades the endogenous financial crisis influence on the stability of stock price (Kaminsky and Schmukler, 1999).
By setting a minimum deal value threshold of 400 million dollars, 162 mergers and acquisitions made by Chinese listed firms from 2010 to 2018 are gathered. Among the completed 162 cases, 45 are cross-border M&As with target firms from 15 countries in various regions. As shown in Figure 1 below, France has the highest number of M&A deals with deal value over 400 million dollar made by Chinese acquirers during the examination period, followed by the United Kingdom and the United States with both 7 deals. Thanks to the positively developed relations between Thailand and China, there are 3 deals with target firm from Thailand under the sample selecting restriction requiring a considerable amount of deal value. The rest of the deals are evenly distributed in the European markets and Asian markets with only 1 or 2 deals. Detailed M&A deal information including announcement date, deal value, industry SIC code, total asset and debt to equity ratio of acquiring firm are collected from database Zephyr and Thomson one. DataStream provides stock prices of bidding firms over the corresponding examining periods.
There are only 21 hostile takeovers in the sample and 7 of them are cross-border M&As with targets from European countries and the United States. In terms of method of payment, information of 125 cases is gathered among which 51 are paid entirely by cash, 27 are paid by pure stock and the rest are financed with combination of stock and cash.
Figure 2: Countries of the Target firms and corresponding Number of
deals
CHAPTER 5 Empirical Results and Analysis
5.1 Descriptive statistics
By analysing the sample consisting of 162 M&A events made by Chinese listed firms, the obtained empirical results are shown below.
Out of the total 162 M&As cases, 81 deals experience positive average abnormal return at the
announcement day. This finding is in line with the result of Bruner’s review study in 2002. Eckbo and Thorburn (2000) also come to similar conclusion with only 47.9% of their sample reporting positive abnormal returns.
Table 1 and table 2 below provide statistical information of daily abnormal returns over a seven-day period around the announcement date. Based on the tables, we can see that both oversea and domestic M&As experience positive average abnormal returns at the announcement day, which are 0.41% and 0.16% respectively. But with the corresponding t-statistics, it is also clear that all the daily abnormal returns are the not significant at 95% confidence level.
Andrade, Mitchell and Stafford (2001) confirmed the fact that all the gains and losses from the announcement effects are statistically insignificant in their comparative study. Moreover, insignificant acquirer returns can also be found in the research of Doukas and Travlos (1988). In addition, it is also noticeable that the average abnormal return at t" of cross-border M&As ( 0.41%) is higher than that of
domestic M&As ( 0.16%). This result demonstrates the hypothesis that cross-border M&As experience larger average announcement-induced abnormal returns compared to domestic M&As. The positive and higher average abnormal return illustrates the favourable attitude of the shareholders with regard to a M&A deal across countries. Similar findings can be found from previous researches.
Besides, it can be seen that all the post-announcement daily abnormal returns in the domestic M&As turn out to be negative. And surprisingly it is not happening in the case of cross-border M&As. Although these daily abnormal returns after the announcement are not statistically significant at 95% confidence level, the obvious drop from the positive 0.16% at the announcement day to the negative -0.32% at the next day cannot be neglected. In fact, during the process of collecting the stock prices for the sample, I have noticed this phenomenon that the stock price of domestic M&As made by Chinese acquirer tend to decrease more or less at the next day after the announcement. The reason behind this phenomenon could vary largely. A good example to explain is the case of Youku acquiring Tudou in March 2012. Both of
increased sharply. Because Tudou is the biggest competitor of Youku and together they will become a giant online video site firm in China. Nevertheless, the stock of Youku started to decline in the following days after the announcement for the reason that the shareholders believed Youku was paying too much premium to Tudou. A high premium is frequently observed in the takeovers between Chinese firms. Rossi and Volpin (2004) suggest that the premium paid by the acquiring firm in emerging markets is greater, which can explain the high premium paid in China.
Table1: Descriptive Statistics (Cross-Border Daily)
N t
Sig. (2-
tailed) Mean Std. Deviation
t+3 38 1.123 0.269 0.52% 2.86% t+2 42 -0.205 0.839 -0.07% 2.06% t+1 44 0.399 0.692 0.26% 4.35% t0 45 0.784 0.437 0.41% 3.54% t-1 44 -0.180 0.858 -0.08% 3.07% t-2 42 1.528 0.134 0.66% 2.80% t-3 38 -0.804 0.426 -0.31% 2.33%
Table2: Descriptive Statistics (Domestic Daily)
N t
Sig. (2-
tailed) Mean Std. Deviation
t+3 89 -0.269 0.788 -0.08% 2.95% t+2 108 -0.694 0.489 -0.22% 3.35% t+1 116 -0.947 0.345 -0.32% 3.61% t0 117 0.552 0.582 0.16% 3.09% t-1 116 1.247 0.215 0.42% 3.69% t-2 108 0.316 0.753 0.08% 2.74% t-3 90 -1.083 0.282 -1.24% 10.86%
Table 3 contains empirical information of cumulative average abnormal returns in three event windows. Most of the cumulative average abnormal returns (CAARs) are positive. The CAARs in [-1, +1] event window for cross-border and domestic M&As are 0.59% and 0.22% respectively, which is consistent with findings of earlier studies.
For example, Morck and Yeung (1992) give the evidence of positive CARs over a short event period. However, both average CARs are not significant with small t- values, 0.32 for the domestic cases and 0.62 for the cross-border M&As. In addition, Figure 1 suggests that CAR of domestic M&As remain relatively stable in 3 days before and after the announcement while the CAR of cross-border M&As show
obvious more fluctuations. This finding also further indicates that the stock market is more sensitive upon a M&A case made by Chinese bidder with a foreign target compared to a domestic target. On average, acquiring firms’ stocks gain 2.4% in the three days around M&A announcement (i.e. CAR [-1, +1]), and 3.2% in the five days around the announcement (i.e. CAR [-2, +2]).
Table3: Descriptive Statistics (CARs)
N t Sig.(2- tailed) Mean Std. Deviation CAR(-3,+3)Domestic 89 -0.692 0.491 -1.14% 15.56% CAR(-2,+2)Domestic 108 0.060 0.953 0.05% 9.29% CAR(-1,+1)Domestic 115 0.321 0.749 0.22% 7.18% CAR(-1,+1)CB 45 0.618 0.540 0.59% 6.39% CAR(-2,+2)CB 42 0.773 0.444 0.90% 7.51% CAR(-3,+3)CB 38 0.854 0.399 1.20% 8.68%
Figure 3: Domestic and Cross-border CARs
Table4 exhibits the cumulative average abnormal returns (CAARs) of each event period. On average, bidding firms acquiring domestic targets have a cumulative gain of 0.09% in the three days before and after M&A announcement (CAAR [-1, +1]), only 0.03% in the five days around the announcement (CAAR [-2, +2]) and lose 0.17% in a seven-days period around the event (CAAR [-3, +3]). When it comes to the foreign targets, the Chinese bidding firms experience positive and stable CAARs in all three event windows, which are 0.20%, 0.24% and 0.20% respectively. The larger CAAR [-1, +1] in cross-border M&A cases preliminarily supports the second hypothesis. Even though the overseas M&As (0.41%) have larger abnormal return at the announcement day than the domestic M&As (0.16%), the stock prices in the overseas cases are surprisingly not largely fluctuant. Similar results with regard to positive CAARs are documented in a number of the previous M&A investigating studies. For instance, Eckbo (1983) reports a positive CAAR of 0.1% in his research of horizontal mergers.
Table4: Descriptive Statistics (CAARs)
(-3, +3) Domestic (-2, +2) Domestic (-1, +1) Domestic (-1, +1) Cross-Border (-2, +2) Cross-Border (-3, +3) Cross-Border CAAR -0.17% 0.03% 0.09% 0.20% 0.24% 0.20%
5.2 Regression analysis
With SPSS, a regression on the cumulative abnormal return in event window [-1, +1] is processed with respect to the independent variables mentioned in the methodology section. And the results of regression are exhibited in table 5 below.
With a standardized coefficient of 0.0132, the variable relative size shows positive correlation with the average abnormal return at the announcement day. Asquith et al. (1983) run a regression of the merger-induced abnormal returns to bidders on the relative size of target to bidder. They find a statistically positive and significant coefficient in the result. However, the coefficient of relative size in my analysis is found to be insignificant at 95% confidence level. It is reasonable that the slight inconsistency appears because the relative size in this paper is measured by the deal value divided by the total asset of the bidder, which could be the cause of the different results in terms of the significance.
The coefficient of payment method is found to be 0.319 for all M&As in the sample, which is statistically significant at 95% confidence level. This finding is in consistent with the results of Wansley, Lane and Yang (1983). They conclude that the acquisitions entirely paid by cash earn shareholders on average 33.45% abnormal return during an 80-day period around the announcement day. They also mention that
the tax effect is the reason that makes cash payment favourable as the medium of exchange. In the Chinese-firm case, the stock exchange involves more complicated procedures and problems due to the less developed stock markets in China. With different standards of accounting, governance regimes and regulations, stock transfer could cost more than payment in cash. Also, as Travlos (1987) suggests, pure stock exchange declines shareholders’ value because it transfers wealth from shareholders to bondholders. In terms of the cross-border effects, there is empirical evidence that shows the cross-border variable is positively correlated with the average abnormal return induced by the M&As despite of the insignificant coefficient. This finding supports the first hypothesis that stock markets have positive reaction to a M&A event across countries. The favourable attitude of shareholders toward the overseas M&As by Chinese acquirers can be explained. As mentioned in the literature review part, the Chinese government open policies with regard to foreign investment and the development of technology that mitigates the previous investment cost (i.e. generated by the distance and telephone traffic) stimulate the outward expansion of Chinese firms (Chen and Young, 2009). All the beneficial improvements provide the shareholders confidence to continuously invest in the firm and react positively toward a M&A deal across countries. From table 5 we can also see that the standardized coefficient of debt to equity ratio is 0.181 and it’s statistically significant with a p-value of 0.024 at 95% confidence level. Hence it can be concluded that the abnormal return of Chinese bidder is positively correlated with the bidder’s debt to equity ratio. Similar analysis results toward the relationship between the leverage level and the return of the bidders can be found from the previous researches. In the study of Kang (1993), mergers and acquisitions of U.S firms by Japanese firms during the period from 1975 to 1988 are examined. After evaluating a sample of 119 Japanese bidders, he documents that the returns on Japanese bidders increase with the bidder’s leverage level. Harford (2005) also finds the a positive but insignificant coefficient of the variable Leverage (measured by debt to asset).
Since in total there are five dependent variables in my regression model, I also check the possible multicollinearity problem between these dependent variables. As we can see in table 5, the Variance Inflation Factors (VIFs) for all the dependent variables are reported to be slightly higher than one, which means that they are all in the range 1-10. According to Dielman (1991), VIF scores of larger than 1 and less than 10 indicate that there is no serious multicollinearity problem between dependent variables.
Table 5: Regression results of CAR (-1,+1) for all M&As
Model Standardized Coefficients t Collinearity Statistics Beta VIF Payment Method 0.319* 2.447 1.241 Hostile -0.028 -1.444 1.025 Cross Border 0.025 0.067 1.036Debt to Equity 0.181* 2.137 1.001
Relative Size 0.132 0.061 1.328
1.Dependent Variable: CAR(-1,+1) 2. * Statistical significance at the 5% level.
Furthermore, regressions are conducted for domestic M&As and cross-border M&As separately. Table 6 shows the statistics about relations between control variables and CARs [-1, +1] for both types of M&As. Most statistics are reported to be positive and insignificant at the 5% level, which is in line with the overall regression results in table5. As can be seen from table 6 below, hostile takeovers are not favoured by investors in both domestic and cross-border M&As with coefficients of -0.022 and -0.126 respectively. It is reasonable because hostile takeovers often occur together with high premium and contests between bidders. Such relationships are more common in the situations that acquirers from emerging markets aim at target firms with higher corporate governance regime (Yang et al., 2011).
In terms of method of payment and debt-to-equity, separate regressions on domestic and cross-border M&As give similar results with the overall regression. All of the four coefficients are positive and statistically insignificant.
However, it is noticeable that variable relative size is negatively related to CARs [-1, +1] in the separate regression for cross-border M&As. This is an interesting and explainable finding. Recall that the proxy of relative size is calculated with deal value divided by firm size (total assets of bidding firms). The firm sizes of bidders in the cross-border M&As tend to be larger in my sample in comparison to the firm sizes in domestic M&As and such tendency could be explained by the views of Doukas and Travlos (1988). They suggest that investors may perceive the announcement of cross-border acquisitions as the ability of the acquiring firm to expand internationally and such ability should be proven by the firm’s market value. The firm sizes in cross-border M&A sample are larger enough to imply a relatively smaller relative size despite of the variation of deal values. Therefore, smaller relative size is favourable by investors in the cross-border cases, which manifested as a negative coefficient of -0.131.
Table 6: Regression results of CAR (-1, +1) for domestic and cross-
border M&As
All Domestic Cross-Border
Payment Method 0.319* (0.014) 0.211 (0.130) 0.034 (0.116) Hostile -0.028 (0.156) -0.022 (0.368) -0.126 (0.300) Cross Border 0.025 (0.831)
Debt To Equity
0.181* (0.0024) 0.052 (0.621) 0.176 (0.274) Relative Size 0.132 (0.862) 0.162 (0.315) -0.131 (-0.452) N 125 88 37 R square 2.6% 1.6% 4.3%
1. Dependent Variable: CAR (-1, +1). 2. * Statistical significance at the 5% level.
3. P-values are in the parentheses.
In order to observe the attitude of investors toward a cross-border M&A with resistance of a Western target, the variable WesternCountries*Hostile is adopted here. From table 7 we can see that the coefficient of such variable is positive but not significant at 95% confidence level. Contrary to my expectation that CARs [-1, +1] is negatively related to the hostile takeovers with Western targets, such resisted M&As are still favoured by investors. This result can be attributed to the scale-based benefits for the Chinese acquirers. The potential huge gains in terms of horizontal integration, technology
development and revenue streams gained from developed markets give investors confidence in M&As with Western targets. Confirmed by Xia et al. (2008), they emphasize the importance of the external resources for Chinese firms in their current and future developments.
Table 7: Regression results of CAR (-1, +1) for cross-border M&As
Cross-Border Payment Method 0.029 (0.242) Hostile -0.133 (0.086) Western Countries*Hostile 0.031 (0.201)
Debt To Equity
0.125 (0.324) Relative Size 0.092 (0.360) N 37 R square 1.8%
1. Dependent Variable: CAR (-1, +1). 2. P-values are in the parentheses.
CHAPTER 6 Conclusion
Following the government open policies (Go Global in 2001 and One Belt One Road in 2013) aiming at encouraging foreign investment, cross-border M&As by Chinese enterprises have become increasingly popular in the last decade. In this paper, the short-term announcement effect on Chinese bidding firms in domestic M&As and cross-border M&As are evaluated and discussed. The merger-induced abnormal returns are found to be positive but not significant regardless of the type of M&As. At the announcement day, stock markets show slightly larger reaction to the cross-border M&As made by Chinese acquirers in comparison to domestic M&A cases. The market also gives positive reaction to the cross-border M&A deals during the period of seven days around the announcement date. The regression results of the cumulative abnormal returns within a three-day event window also support the conclusion that M&As made by Chinese acquirers across countries are favourable and welcomed by the shareholders. Hostile takeovers between Chinese acquirers and Western targets are favoured by investors for the reason that the future benefits of such M&As outweigh the current cost (Yang and Hyland, 2012).
There are some limits in this paper. For example, only the short-term announcement period effect is examined. The long-term post-announcement performance is also valuable to measure. What is more, most of target firms in my sample are private, which limits the access to the financial statistics of these target firms. As a consequence, many possible influential factors from the target firms are ignored. In addition, the sample of hostile takeovers between Western countries and China is too small, which results in not fully persuasive outcomes. Further study can pay more attention on the detail of value creation channels and the role of human resources in cross-border M&A deals. Given big cultural distance, the method for companies to achieve optimal integration in their cross-border operations is important as well. Especially for M&As between Western and Chinese firms, the corporate culture is really different and it is difficult to find the perfect balance point. Last but not least, the Chinese stock market nowadays is a giant and rapidly developing market with both outward and inward investment flows increasing sharply. More and more foreign firms and individual investors start to join this promising market. Therefore, the reverse situation in which foreign firms acquire a Chinese target is also worth to be investigated.
REFERENCES
Agrawal, A., Jaffe, J. F. and Mandelker, G. N., 1992, The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly, Journal of Finance 47, 1605-1621.
Ahern, K. R., Daminelli, D. and Fracassi, C., 2015, Lost in translation? The effect of cultural values on mergers around the world, Journal of Financial Economics 117, 165-189.
Andrade, G., Mitchell, M. and Stafford, E.,2001, New Evidence and Perspectives on Mergers, Journal of Economic Perspectives 15, 103-120.
Asquith, P., Bruner R. F. and Mullins D., 1983, The gains to bidding firms from merger, Journal of Financial Economics 11, 121-139.
Auguilera, R. V. and Dencker J. C., 2004, The role of human resource management in cross-border mergers and acquisitions, International Journal of Human Resource Management 15, 1357-1372. Baradwaj,B. G., Fraser, D. R. and Furtado, E. P. H., 1990, Hostile bank takeover offers: Analysis and
implications, Journal of Banking and Finance 14, 1229-1242
Berger, P. G. and Ofek, E., 1995, Diversification's effect on firm value, Journal of Financial Economics 37, 39-65.
Bruner, R. F., 2002, Does M&A pay? A survey of evidence for the decision maker, Journal of Applied Finance12, 48–68.
Byrd, J. W. and Hickman, K. A., 1992, Do outside directors monitor managers? : Evidence from tender offer bids, Journal of Financial Economics 32, 195-221.
Chen, Y.Y. and Young, M. N., 2009, Cross-border mergers and acquisitions by Chinese listed companies: A principal–principal perspective, Asia Pacific Journal of Management 27, 523–539.
Dielman, T. E., 1991, Applied Regression Analysis for Business and Economics. Boston: PWS-Kent Publishing Company.
Dodd, P. and Ruback, R., 1977, Tender offers and stockholder returns: An empirical analysis, Journal of Financial Economics 5, 351-373.
Doukas, J. and Travlos, N. G., 1988, The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions, Journal of Finance 43, 1161-1175.
Duso, T., Gugler, K. and Yurtoglu, B., 2010, Is the event study methodology useful for merger analysis? A comparison of stock market and accounting data, International Review of Law and Economics 30, 186-192.
Eckbo, B.E., 1983, Horizontal Mergers, Collusion, and Stockholder Wealth, Journal of Financial Economics 11, 241-274.
Fama, E. F. and French, K. R., 1992, The Cross-Section of Expected Stock Returns, Journal of Finance 47, 427-465.
Harford, J., 2005, What drives merger waves? Journal of Financial Economics 77, 529-560.
Jarrell, G. A., Brickley, J. A. and Netter, J. M., 1988, The Market for Corporate Control: The Empirical Evidence Since 1980, The Journal of Economic Perspectives 2, 49-68.
Jensen, M. and Ruback, R. S., 1983, The market for corporate control: The scientific evidence, Journal of Financial Economics 11, 5-50.
Kaminsky, G. and Schmukler, S. , 1999, What triggers market jitters? A chronicle of the Asian crisis, Policy Research Working Paper Series No. 2094, The World Bank.
Kang, J. K., 1993, The international market for corporate control: Mergers and acquisitions of US firms by Japanese firms. Journal of Financial Economics 34, 345–371.
Kim, E. H. and McConnell, J. J., 1977, Corporate Mergers and the Co-insurance of Corporate Debt, Journal of Finance 32, 349-365.
Langetieg, T. C., 1978, An application of a three-factor performance index to measure stockholder gains from merger, Journal of Financial Economics 6, 365-383.
Lin, Z., Peng, M. W., Yang, H. and Sun, S. L., 2009, How do networks and learning drive M&As? An institutional comparison of China and the United States. Strategic Management Journal 30, 1113–1132. Martynova, M. and Renneboog, L., 2008, A century of corporate takeovers: What have we learned and where do we stand? Journal of Banking & Finance 32, 2148-2177.
McWilliams, A. and Siegel, D., 1997, Event Studies in Management Research: Theoretical and Empirical Issues, The Academy of Management Journal 40, 626-657.
Morck, R. and Yeung, B., 1992, Internalization: An event study test, Journal of International Economics 33, 41–56.
Rossi, S. and Volpin, P. F., 2004, Cross-country determinants of mergers and acquisitions. Journal of Financial Economics 74, 277–304.
Rui, H. and Yip, G. S., 2008, Foreign acquisitions by Chinese firms: A strategic intent perspective, Journal of World Business 43, 213-226.
Simon, H. A. and Bonini, C. P., 1958, The Size Distribution of Business Firms, American Economic Review 48, 607-617.
Sun, Q., Tong, W. and Yu, Q., 2002, Determinants of foreign direct investment across China, Journal of International Money and Finance 21, 79-113.
Thorburn, K. S. and Eckbo, B. E., 2000, Gains to Bidder Firms Revisited: Domestic and Foreign Acquisitions in Canada, Working paper No.4, Amos Tuck School of Business.
Travlos, N. G., 1987, Corporate takeover bids, method of payment, and bidding firm’s stock returns. Journal of Finance 52, 943–963.
United Nations Conference on Trade and Development (UNCTAD), 2017, World investment report 2017: Investment and the Digital Economy.
Wansley, J. W., Lane, W. R. and Yang, H. C., 1983, Abnormal Returns to Acquired Firms by Type of Acquisition and Method of Payment, Financial Management 12, 16-22.
Weber, R. A. and Camerer, C. F., 2003, Cultural Conflict and Merger Failure: An Experimental Approach, Management Science 49, 400-415.
Wong, A. and Cheung, K.Y., 2009, The Effects of Merger and Acquisition Announcements on the Security Prices of Bidding Firms and Target Firms in Asia, International Journal of Economics and Finance 1, 274-283.
Xia, J., Tan, J. and Tan, D., 2008, Mimetic entry and bandwagon effect: The rise and decline of international equity venture in China. Strategic Management Journal 29, 195-217.
Yang, H., Lin, Z., and Peng, M. W., 2011, Behind acquisitions of alliance partners: Exploratory learning and network embeddedness, Academy of Management Journal 5, 1069–1080.
Yang, M. and Hyland, M. A., 2012, Similarity in cross-border mergers and acquisitions: Imitation, uncertainty and experience among Chinese firms, 1985–2006. Journal of International Management 18, 352–365.
Young, M. N., Tsai, T., Wang, X., Liu, S. and Ahlstrom, D., 2014, Strategy in emerging economies and the theory of the firm. Asia Pacific Journal of Management 31, 331–354.
Zhu, P. and Malhotra, S., 2008, Announcement Effect and Price Pressure: An Empirical Study of Cross-Border Acquisitions by Indian Firms, International Research Journal of Finance and Economics 13, 24-41.
APPENDIX
Appendix figure 1 Daily average abnormal return from t-3 to t+3.
