Toehold acquisitions, bidder’s acquisition performance, and the cross-border effect

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MSc International Financial Management Faculty of Economics and Business

University of Groningen

MSc Business and Economics Department of Business Studies Uppsala University

Toehold

acquisitions, bidder’s acquisition performance,

and the cross-border effect

Abstract

This study examines the effect of using toeholds in domestic and cross-border acquisition processes on the bidder’s acquisition performance. The sample constitutes 1,701 acquisitions of European listed firms over the period 2003-2016. Results reveal significant evidence of an adverse effect of toeholds on the bidder’s acquisition performance. However, in cross-border acquisitions, the use of toeholds results on average in significantly higher abnormal returns. Finally, the use of toeholds is found to be more efficient in target countries with a civil-law system compared to countries with a common-law system. Overall, these findings increase our understanding of management actions about the application of toeholds as an acquisition strategy.

JEL Classifications: G14, G32, G34

Keywords: toehold bidding, international acquisitions, acquisition performance, cross-border

effect, common- and civil-law countries

Author: Wouter Wilmink

Student number: s2336162 (UoG) and 940226-T052 (UU)

Supervisor: Dr. Adri de Ridder

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1. Introduction

The number of mergers and acquisitions (M&A) increased rapidly over the last few decades, from over 27,000 announced deals in 2002 to more than 46,000 in 2016. Worldwide, M&A activities totalled approximately four trillion US dollars in 2016, which is equal to about 5% of the Global Gross Domestic Product (GDP) (JP Morgan, 2017). Although a majority of the acquisitions are domestic, Thomson Reuters (2012;2016) reports that the share of cross-border acquisitions in the total acquisition volume has grown from 29% in 2002 to 38% in 2016, with a peak of 45% in 2007, the year before the global financial crisis.

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4 smaller GlycoVaxyn with the development of a very promising vaccine. In 2015, GSK decided to acquire all remaining shares in GlycoVaxyn as they found that the technologies used by GlycoVaxyn appeared to be useful for GSK in the development of a much wider range of vaccinations. So by obtaining a toehold in an earlier stage, GSK purchased itself an option on all remaining shares of the target company in case it was found to be value enhancing for GSK. On the contrary, using toeholds are also found to contravene potential acquisition processes. For example, in December 2016, an offering by the Belgium media company Mediahuis on all outstanding shares of the Dutch media company Telegraaf Media Groep (TMG) was leaked. At that moment, Mediahuis already had 41% of the outstanding shares. After the offer became public, Mediahuis was able to increase its position to 55% of the outstanding shares. However, Talpa, which is another Dutch media company and already owning a toehold of 18.4% in TMG at that moment, also involved itself into the acquisition. Talpa argued that the acquisition of TMG by a foreign company would not be beneficial for the Dutch media and also started to buy more shares. Interesting is that Talpa offered an 8.3% premium over the tender price of Mediahuis, but was not allowed to the negotiation table by the board of TMG. Currently, the acquisition is still uncompleted as Talpa went to the court for being denied at the negotiation table. Interesting in this example is that if more firms obtain a toehold in a company, it potentially could result in ineffective bidding processes and higher premiums. Based on these two examples, it is seen that toeholds could be interesting and beneficial for firms, but it could also lead to substantial abruptions in the acquisition process and fights between the companies’ different stakeholders.

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5 the use of toehold bidding has steadily declined during the last couple of decades and that its effect on the acquirer returns seems insignificant, while Dai et al. (2016) find positive effects of toeholds on the announcement returns. While existing results on the effect of toeholds on bidder’s acquisition performance focus solely on domestic acquisitions mainly in the US market, the effect of using toeholds in cross-border acquisitions has received little attention in the literature. This study tries to fill that gap in the literature by examining the effect of toeholds on the acquirers’ performance in cross-border acquisitions compared to domestic acquisitions. As the share of cross-border acquisitions in the total number of worldwide acquisitions is increasing, it is interesting to investigate the effect of toehold bidding on bidder’s acquisition performance in an international context. Cross-border acquisitions differ from domestic acquisitions, as they provide additional opportunities such as the availability of new markets and scarce resources, achieving economies of scale and scope and diversification advantages (Rugman, 1976; Cooke, 1988; Doukas and Travlos, 1988). On the contrary, cross-border acquisitions also create new challenges for companies such as a lack of experience in the market, new market regulations, exchange rates risk and cultural differences (Cooke, 1988; Froot and Stein, 1991; Aybar and Ficici, 2009). Overall, the net effect of cross-border acquisitions on acquisition performance seems to be ambiguous and poses an interesting topic for research.

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6 Using stock return data on acquirers based in the European Union (EU) in the period of 2003 till 2016, this study seeks to identify the effect of toeholds on bidder’s acquisition performance in both domestic and cross-border acquisitions. The study aims to do so by performing an event study on the differences in returns of stock data at the announcement date. Short-term event studies, which measures the abnormal returns surrounding the announcement period, are found to be a common way to measure acquisition performance (Li et al., 2016). The EU is chosen as the area of research in our sample, as Bessler et al. (2015) report that bidders from the US rely less on toehold strategies and because toeholds are more common in European civil and common law countries. The results reveal strong empirical evidence about a negative relationship between toeholds and the bidder’s acquisition performance. However, in cross-border acquisitions, the use of toeholds result in a significantly higher acquisition performance. Finally, the use of toeholds is found to be more effective in target countries with a civil-law system compared to countries with a common-law system.

The remainder of this thesis is structured as follows. Section 2 presents a review of existing literature on the use of toeholds, its relation to firm performance and the use of toehold in a cross-border setting. Additionally, this section discusses the hypotheses. Section 3 describes the data and methodology used. Section 4 presents the descriptive statistics and discusses the results of the event study analysis and regression results. Finally, section 5 provides a conclusion on this study.

2. Literature review and hypotheses

This section provides an overview of the relevant literature related to the effect of toehold acquisitions on the bidder’s performance, and develops the hypotheses. The section starts off with an elaborate review on the advantages and drawbacks of using toeholds in an acquisition process, followed by an overview of the empirical findings on using toehold biddings. After that, the effect of the opportunities and challenges faced by cross-border acquisitions are explained, followed by an elaboration on the role of toeholds in cross-border acquisitions compared to domestic acquisitions. Finally, a discussion on the role of toeholds in both common- and civil-law target countries is presented.

2.1 Toehold bidding and bidder’s acquisition performance

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7 unprecedented levels in recent years, an interesting topic in the field of M&A is the impact of acquisitions on acquirers’ performances, as most studies report negative returns (Agrawal et al., 1992; King et al., 2004). Because of this contradicting finding, many scholars tried to identify which conditions could have a moderating impact on bidder’s acquisition performance. Haleblian et al. (2009) categorize the moderating conditions into four distinct groups: deal characteristics, managerial effects, firm characteristics, and environmental factors. Regarding the first group, deal characteristics, the authors give a comprehensive overview of how factors such as the type of payment and deal type affect the acquisition performance relationship. However, regarding the deal type, the authors neglect an important but minor part of research focused on the bidder’s bidding strategy. Bessler et al. (2015) identify three different takeover bidding strategies: pre-emptive bidding, negotiating a termination fee and toehold bidding. In the case of pre-emptive bidding, the bidder uses a strategy in which they set the initial offer high enough that competition is unlikely to enter the bidding contest. Negotiating a termination fee is a commitment in which they specify a compensation in case the proposed deal fails. The termination fee between the bidder and the target protects the parties economically and legally in case of deal failure. The last bidding strategy concerns the use of a toehold, which focuses on the bidder’s ownership of a limited number of shares in advance to the announcement of acquiring a controlling part in the target (Strickland et al., 2010). The use of toehold bidding is an interesting field of research as a substantial part of the scholars theoretically agree on its claimed advantages, but in reality, they are rarely used, and the effect of toeholds on bidder’s returns appear to be insignificant (Betton et al., 2009). Toeholds have the potential to positively affect an acquisition, as they can lower the costs and risks of an acquisition. On the contrary, toeholds can negatively affect an acquisition process in certain situations. For example, a possible adverse effect of toehold bidding is that it is often used in hostile takeover processes or it could turn target management hostile and resist the potential acquisition. Hence it is important to understand the possible advantages and drawbacks of toeholds, and it is crucial to understand when it is appropriate and when to avoid toehold bidding in a transaction process. Advantages of toehold bidding

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8 can mitigate the free-rider problem. As discussed by Jensen (1986), in certain situations corporations are poorly managed as managers are entrenching themselves or pursuing an “empire building” strategy. These situations often result in higher renumeration for management but are value destroying for shareholders. Poorly managed companies often form the ideal target for “well managed” firms as value can be created due to the low target value and by simply replacing management and following a different strategy. However, in cases where the target company consists of several minority shareholders, the potential acquirer might face a problem. Minority shareholders might believe that by not selling their shares, they do not affect the likelihood of the transaction to succeed and they might hold on to their shares as they believe new and better management will increase the price and premium on their shares even further. In case when more than 50% of the shares are owned by minority owners and they all act this way, the bidder needs to offer such substantial premiums resulting in minimized potential profits (Strickland et al., 2010). This is called the free-rider problem, and it reduces the probability of an acquisition to succeed significantly. Using toeholds in acquisitions where a majority of the target shares are in the hands of minority shareholders will mitigate the free-rider problem as acquirers can offer substantial higher premiums on the shares. Acquirers can do this as the toehold allows them to accrue some profits from the higher paid premiums on their shares as well. As long as the benefits of the toehold exceed the additional costs of increasing the premium offered to the minority holders, the free-rider problem will be mitigated (Shleifer and Vishny, 1986).

Secondly, during an acquisition process, acquirers often face valuation uncertainties, especially when the acquirer also face competition, it will result in higher acquisition premiums. As a result, the winning bidder often pays exceptional high premiums for the target shares resulting in negative acquisition performances of the acquirer, also known as the “Winner’s Curse” (Thaler, 1988). In the case of a toehold position, the acquirer often obtains inside information from the target and is, therefore, able to reduce valuation uncertainty (Bulow et al., 1999). This results in a lower probability of paying an exceptional high premium on the shares. Moreover, when in a possession of a toehold, the acquirer can overpay as much as its competitor and still profit more from the potential acquisition as part of overpayment returns to the acquirer through its toehold (Strickland et al., 2010).

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9 chances to get a majority for its competitor without a toehold as the supply of available shares is lowered by the toehold. Lastly, even when a toehold owner loses a competitive sales process, the toehold owner is still able to benefit from its toehold position as it can sell its toehold with a substantially higher premium to its competitor (Singh, 1998).

Drawbacks of toehold bidding

Opposed to all above-mentioned advantages of toeholds, toeholds can also destroy value for potential acquirers when not appropriately used in an acquisition. First of all, toeholds can destroy value for a potential acquirer in a failed acquisition process. As argued above, when a toehold owner loses a competitive acquisition process it can sell its toehold with a substantial premium to its rival. However, in case target management stop the takeover process, and nobody win the acquisition process, the market observe the potential target as an unfeasible candidate for a takeover in the short-run. As a result, the shareholders of the target company will not see any takeover premiums soon, and this may work contradictive on the share price, with a significant possibility of lowering its share price below its pre-bid price (Goldman and Qian, 2005). Bidders having a toehold in such circumstances might forfeit their benefits as their toehold position will be less valuable compared to the pre-bid price.

Secondly, most of the time an acquisition process starts with a friendly approach by the bidder, and the process only turns hostile in case the potential target rejects the friendly approach. Having a toehold before starting the acquisition negotiations, might make it seem for target management that the potential acquirer is not negotiating in a friendly manner and this increases the chance that the takeover turns hostile. In such situations, target management might become non-cooperative and try to avoid the takeover. Strickland et al. (2010), states that the percentage of an acquisition to succeed reduces from 80 to 48 percent in the case of non-cooperating target management. Moreover, Betton et al. (2009) find that this argument is one of the main reasons why the toeholds are nowadays only present in about 10% of the acquisitions, down from over 60% of the acquisitions in the early 1980s.

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10 toeholds in their sample are purchased shortly before making a tender offer. Hence, these observations confirm the importance of the appropriate application of toehold bidding.

Empirical findings on toeholds

Previous studies tells us that obtaining a toehold before making a tender offer will be beneficial for bidders (Bris, 2002; Georganas and Nagel, 2011). Toeholds acquired prior to the acquisition process are found to improve the detection of potential synergies for the post-acquisition situation (Povel and Sertsios, 2014), to discourage competitors in competitive acquisition processes (Bessler and Schneck, 2015; Ravid and Spiegel, 1999), to increase the probability of an acquisition to succeed (Bessler et al., 2015), and to reduce valuation uncertainty in later stages due to a better understanding of the target (Betton and Veeren, 2011). On the contrary, Betton et al. (2009) find that acquiring a toehold will increase the probability that target management declines the acquisition negotiations which results in rejection costs, such as termination fees, for the acquirer. Ravid and Spiegel (1999) argue that toeholds should not be used in the absence of competitors as the costs will outweigh the benefits in such cases. Moreover, it is in the interest of the board of directors of the target to “level the playing field” in case only one of the potential acquirers is in possession of a toehold (Bulow et al., 1999). The potential benefits to the toehold holder might come at significant costs for the target. Therefore, the target might decide to sell a toehold to a rival bidder or to change the rules of the auction. If such events happen, it could work contra-productive for the bidder initially having a toehold.

Another widely researched topic regarding toeholds is the effect of the size of the toehold. Bulow et al. (1999) document that even a small difference in toeholds will result in a greater probability of winning the takeover process, while Georganas and Nagel (2011) find that small toeholds show no effect. Concerning the use of significant large toeholds, large toehold positions can be effective in an acquisition process, but the cost to acquire them often outweighs the strategic benefits (Georganas and Nagel, 2011). Moreover, larger toeholds are not found to be effective at discouraging competition (Ravid and Spiegel, 1999).

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11 important study by Betton et al. (2009) is one of the papers that empirically researched the effect of toeholds on acquirer announcement returns. However, they find insignificant effects on the use of toeholds. These findings are somewhat puzzling, as literature often agrees on benefits of toeholds. On the contrary, Dai et al. (2016) suggest that toeholds do increase returns for acquirers when used in executing complicated acquisitions. They explain that learning-by-doing is a key factor in using toeholds, so acquirers use their previous experience to perceive in which circumstances a toehold would be most appropriate.

In conclusion, previous literature has shown that toeholds potentially could provide synergies in acquisitions for the acquirer by reducing valuation uncertainties, mitigating the free-rider problem and deterring competition in the takeover process. On the contrary, when not applied appropriately, toeholds could also work contradictive for the acquirer. However, the literature suggests that the advantages of using toeholds outweigh its drawbacks. Therefore, the first hypothesis is formulated as follows:

Hypothesis 1: The bidder’s acquisition performance is positively correlated with the use of toehold bidding

2.2 Cross-border effect

Building on the literature described above, this paper will contribute to the literature by investigating whether the hypothesized positive effect of using toeholds on the bidder’s acquisition performance will be significantly different for cross-border acquisitions. So far, only a few studies show empirical results of the use of toeholds on the acquisition performance of the acquirer. However, all these studies focus on domestic M&A. By including cross-border acquisitions, this study allows us to better understand the interdependence between toehold bidding and the bidder’s acquisition performance. Moreover, it will also improve our understanding in which circumstances toeholds will be most effective to apply.

Acquisition performance in cross-border acquisitions

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12 strand of theoretical literature reports that cross-border acquisitions are more value creating compared to domestic acquisitions. Using M&A as an investment strategy to explore new markets and to expand their current sales market will help firms to overcome multiple entry barriers faced when using other methods of foreign direct investments (Root, 1987). These entry barriers include foreign countries regulations and the lack of relationships with suppliers and distributors (Hitt and Pisano, 2003). In this way, value is not only created through economies of scale and scope by the exploration of new markets (Doukas and Travlos, 1988), but also by reducing potential value decreasing entry barrier risks. To diversify themselves, firms can also create value by acquiring foreign companies. International diversification allows firms to spread their risks over multiple countries and markets and consequently reduce its dependency on the home market (Caves, 1982). Moreover, by undertaking cross-border acquisitions, the likelihood of the acquirer to gain new knowledge and capabilities from the foreign target will be increased (Barkema and Vermeulen, 1998). Overall, by looking outside the country borders, there are several advantages of cross-border acquisitions leading to a larger value creation compared to domestic acquisitions.

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13 effect on the bidder’s acquisition performance, as it enhances the valuation uncertainty (Aybar and Ficici, 2009), the quality level of accounting systems in the foreign country increases the potential for errors and the complexity of the valuation (Black et al., 2007) and managers need to be aware of the exchange rate risk in cross-border transactions (Froot and Stein, 1991). It seems straightforward that if a manager is aware of the exchange rate risk, it can give bidders a cost of capital advantage. However, prior research provides mixed evidence regarding the effect of exchange rates on the bidder’s acquisition return (Dewenter, 1995).

Overall, prior literature argues that cross-border acquisitions potentially affect the acquirer’s acquisition returns, however, findings are conflicting on whether they are value-creating (Danbolt and Maciver, 2012; Francis et al., 2008) or value-destroying (Moeller and Schlingemann, 2005; Eckbo and Thorburn, 2000) in comparison with domestic acquisitions. Based on the theories elaborated on above, the following hypothesis is formulated:

Hypothesis 2: Conducting a cross-border acquisitions leads to a different change in the bidder’s acquisitions performance compared to conducting a domestic acquisition Toeholds in cross-border acquisitions

Regarding the relationship between toehold bidding and the bidder’s acquisition performance, it can be argued that a cross-border effect is present. As discussed by Conn et al. (2005), the potential for valuation errors in a cross-border acquisition is much more severe compared to domestic acquisitions. Less developed markets, volatile exchange rates, differences in accounting practices and less knowledge about the foreign market all lead to difficulties in capturing synergies (Danbolt and Maciver, 2012). The use of toeholds in cross-border acquisitions might not necessarily be more effective at increasing the benefits of an acquisition, but potentially could reduce the additional risks and costs involved in a cross-border acquisition.

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14 in a joint-venture. The potential seller first stays partial owner of a company, which sends positive signals about the valuation of a company (Williamson, 1983), and in the meanwhile, the potential acquirer can identify whether both companies have a good strategic and cultural fit which is found to affect the bidders acquisition returns positively (Bauer & Matzler, 2013). Joint-ventures and toeholds are similar in the sense that buyers and seller both own shares and can exchange inside information (Mantecon, 2009), and differ in that toeholds are shares bought and sold on the open market while a joint-venture is a non-freely traded agreement on the shareholding between two or more parties. For these reasons, the above-mentioned advantages also hold for using toehold bidding in cross-border acquisitions.

Moreover, when entering foreign markets for the first time, acquirers are likely to face high levels of exogenous uncertainty, such as economic and political risk (Cuypers and Martin, 2006). Acquirers can reduce such risks by creating a real option for themselves that enables them to delay the decision, whether to expand and acquire the whole company or to exit the market at a later stage, through obtaining a toehold or starting up a joint venture now (Tong et al., 2008). To see how the exogenous uncertainty resolves in the first stages of expanding abroad, the use of toeholds over a joint-venture is preferred as the use of toeholds prevents, in case the foreign firm chooses to exit the market, that the foreign firm needs to negotiate a complicated exit arrangement with the joint-venture partner (Inkpen and Beamish, 1997). As the use of toeholds significantly reduce potential costs for the acquirer in cases where exogenous uncertainty is high, acquirer’s shareholders are assumed to positively react to the use of toeholds as the potential value creation is greater compared to cross-border acquisitions were no toeholds are used.

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15 found to significantly increase announcement returns in cross-border acquisitions (Hamberg et al., 2011).

On the contrary, toeholds often cause target management to turn hostile. Betton et al. (2009) find that in more than 50% of the hostile takeovers the potential acquirers are in possession of a toehold. In situations where target management turns hostile, the likelihood of an acquisition to succeed reduces significantly unless the potential acquirer is willing to pay substantial premiums which will result in fewer synergies and lower bidder’s acquisition returns. As hostile bids are found to be more frequent in cross-border acquisitions (Moeller and Schlingemann, 2005), the probability that the use of a toehold strategy will result in negative bidder’s acquisition returns is larger compared to domestic acquisitions. This finding is also supported by Bessler et al. (2015), who reveal that the use of toeholds in cross-border acquisitions significantly reduces the probability of bid success. However, Dai et al. (2016) report that nowadays acquirers take more into account the relevant circumstances when choosing to perform a toehold strategy. Therefore, toehold strategies tend to be more efficient, even in cross-border acquisitions.

To summarize, the above-mentioned arguments assume that, if used appropriately, toeholds in cross-border acquisitions are likely to decrease the risks and costs associated with the challenges when performing a cross-border acquisition. Therefore, the following hypothesis is formulated:

Hypothesis 3: The cross-border effect has a significant positive impact on the relationship between toehold bidding and the bidder’s announcement returns

2.3 Target country’s legal origin

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16 bidder (Bris and Cabolis, 2008). In the case of legal systems with weak investor protection, potential foreign acquirers can circumvent the potential risks and costs associated with those weak legal systems by acquiring an inside ownership stake in the potential target. Insider ownership is found to be a firm-level corporate governance mechanism acting as a substitute for weak investor protection (John et al., 2010). Toeholds, a form of insider ownership before obtaining a controlling share, allow potential acquirers to reduce valuation uncertainty by better screening (Stähler, 2012), resulting in reduced earnings management which is associated with low levels of investor protection (Leuz et al., 2003). Kuipers et al. (2009) find that agency costs are more severe for countries with weak legal systems for investor protection and that toeholds can mitigate these agency costs. These findings are supported by La Porta et al. (1998), who report that insider ownership acts as a substitute for low country-levels of investor protection. Besides weaker investor protection, civil law countries are also characterized by more inadequate accounting standards compared to common law countries (La Porta et al., 1998). Lower accounting standards are characterized by more valuation errors and higher valuation uncertainty (Black et al., 2007), resulting in lower bidder’s acquisition returns in cross-border transactions (John et al., 2010). A toehold position in the potential target can act as a substituting mechanism for the lower accounting standards in civil law countries, as it reduces valuation uncertainty and allows the potential acquirer to get acquainted with the foreign country’s accounting standards. Consequently, this is likely to result in higher bidder acquisition returns. Thus, when the target country’s legal origin is characterized by a civil law system, toeholds may substitute for the lower investor protection mechanisms and lower accounting standards, resulting in higher acquisition returns to the potential bidder. Therefore, the following hypothesis is formulated:

Hypothesis 4: The effect of using toeholds on bidder’s acquisition performance in cross-border acquisitions is greater for target countries characterized by a civil-law system compared to target countries characterized by a common-law system.

3. Data and methodology

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3.1 Sample and data

In this study, acquisitions are examined over the sample period 2003 to 2016. The Zephyr database, created by Bureau van Dijk, and accessible through the library of the University of Groningen, is used to gather detailed information on the acquisitions. First, to be included an acquirer needs to be headquartered and listed in Europe, and the announced deal needs to be completed. Secondly, the sample includes only acquisitions of firms active in the non-financial sectors. Including financial firms would distort the sample and control variables due to their high leveraged capital structures and extreme firm sizes. Thirdly, the deal value of the acquisition needs to exceed 10 million euros, and the bidder needs to seek more than 50% ownership of the target. Finally, for determining an acquisition as a toehold acquisition, the acquirer needed to have a stake of at least 5% and less than 50% before the announcement date of acquiring a majority. Using the above-mentioned criteria, we obtained an initial sample consisting of 2,762 observations from the Zephyr database.

Most of the acquirers engaged in multiple acquisitions throughout the sample period. To prevent that acquisitions do not take place in the estimation window, acquisitions announced within 150 trading days of a previous acquisition by the same firm are removed from the sample. Stock returns 140 to 20 days before the announcement of an acquisition are used to calculate the slope and intercept with the country index in order to estimate the expected return and consequently also the abnormal return. In case another acquisition was announced within the estimation period, it would bias the results as the potential abnormal effect of acquisitions on stock returns is also incorporated in the market return.

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18 use of toeholds is decreasing is confirmed by examining the obtained sample. Appendix A reveals that the use of toeholds has dropped from well over 10% in the period before 2009 to below 10% in the period after 2009.

Table 1 Sample descriptive

This table presents the sample distribution. The vertical axis of the table presents the sample distribution based on the acquirer country, while the horizontal axis presents the sample distribution based on the year of the acquisition announcement. The final lines in the matrix presents the total number of announced deals attributable to either a particular acquirer country or announcement year. Year Acquirer Country 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Austria 2 1 3 5 2 1 3 1 2 2 2 24 Belgium 1 5 6 6 6 6 2 2 4 1 2 4 1 2 48 Denmark 1 1 1 1 1 2 3 2 5 17 Finland 1 2 7 10 5 4 2 7 3 4 5 4 3 57 France 6 14 24 16 33 15 17 19 15 13 12 11 10 15 220 Germany 5 9 12 11 15 10 8 11 9 6 5 14 7 6 128 Greece 1 3 2 1 4 3 4 2 1 21 Ireland 1 2 2 3 2 1 1 3 5 1 3 6 7 37 Italy 4 7 12 19 11 14 7 4 9 8 2 5 7 5 114 Luxembourg 2 1 2 1 2 2 1 11 Netherlands 1 4 8 9 6 5 3 6 8 6 1 8 5 3 73 Norway 1 1 2 Portugal 2 2 1 1 2 3 2 1 1 1 1 1 1 19 Spain 5 9 12 10 10 8 4 5 5 5 3 9 4 2 91 Sweden 1 4 7 4 2 3 5 6 5 4 5 5 9 60 Switzerland 1 1 1 3 UK 7 34 33 67 85 57 32 52 59 63 63 84 86 54 776 Total 34 96 127 165 191 133 86 118 123 122 103 150 140 113 1701 3.2 Variables Dependent variable

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19 𝐴𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝐴𝑅_𝑖𝑡 = 𝑅_𝑖𝑡− 𝐸(𝑅_𝑖𝑡|𝑋_𝑡). (1) In equation (1), ARit denotes the abnormal return of stock i at time t, Rit is the actual return of

stock i at time t, and E(Rit|Xt) denotes the expected return of stock i at time t. The conditioning

information for the expected return is resembled by Xt. As this thesis uses the market model, it

is assumed that for calculating the expected return there exists a stable and linear relationship between the return of the stock (Rit) and the return on the market (Rmt) (MacKinlay, 1997). The

return on the market is calculated for each acquirers’ country separately by using the market index of that country. Furthermore, the estimation period used in this study will consist out of 120 trading days in the event window (-140,-20), which should be sufficient according to the methodology of MacKinlay (1997). For each stock i, the market model is defined as:

𝑅_𝑖𝑡 = 𝛼_𝑖+ 𝛽_𝑖𝑅_𝑚𝑡+ 𝜀_𝑖𝑡. (2)

In equation (2), Rit and Rmt denote the returns for period t on stock i and on the country-related

market portfolio, respectively, and εit denotes the disturbance term for stock i in period t which

is expected to have a value of zero and a variance of 𝜎_𝜀2_𝑖_{. Furthermore, α}

i and βi denote the

market models’ parameters. As argued by MacKinlay (1997), the market model is preferred over the constant mean return model in calculating the normal returns, as it can better detect event effects by removing the part of the return that is correlated to the market return.

To draw inferences for the event period of interest, the abnormal returns need to be aggregated, both through time and across the different stocks to obtain the cumulative average abnormal return (CAAR). The abnormal returns for each stock will first be aggregated through time by calculating the CAR for the specific event windows of interest:

𝐶𝐴𝑅_𝑖(𝑡1, 𝑡2) = ∑ 𝐴𝑅𝑖𝑡 𝑡2

𝑡=𝑡1

(3) The event windows (t1,t2) of stock i used in this study are calculated over the period (-1,+1)

and (-2,+2), respectively. This study follows Gonenc et al. (2013) by using two event windows to test the results for their robustness. Secondly, we aggregate the obtained CARs across the different stock to calculate the overall mean for firms, the CAAR (Cumulative Average Abnormal Return), which is defined as:

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20 where CARi is the cumulative abnormal return for stock i over the event period (t1,t2), and N is

the total number of observation. The estimated variance for the CAAR is defined as follows:

𝑣𝑎𝑟(𝐶𝐴𝐴𝑅(𝑡1, 𝑡2)) = 1 𝑁2∑ 𝜎𝑖2(𝑡1, 𝑡2) 𝑁 𝑖=1 (5) The null hypothesis states that the abnormal returns are zero. The null hypothesis of abnormal returns equal to zero can then be tested utilizing the following expression:

𝜃₁ = 𝐶𝐴𝐴𝑅(𝑡1, 𝑡2) 𝑣𝑎𝑟(𝐶𝐴𝐴𝑅(𝑡1, 𝑡2))1/2

. (6)

In case the null hypothesis is rejected by the test statistics, inferences can be drawn from the obtained CARs in equation (3). The CARs are in that case utilized as a measure for the bidder’s acquisition performance in the cross-sectional analysis.

Independent variables

The main independent in this study is the use of toeholds in an acquisition process by the bidder. Consistent with previous literature, a dummy variable will be used to indicate whether a toehold is used in the transaction (Betton et al., 2008; Bessler et al., 2015; Dai et al., 2016). Additionally, the toehold dummy variable will be replaced by its real value as robustness check in this thesis. The dummy variable will obtain the value of 1 when a firm possesses a share equal to or larger than 5% and lower than 50% in the target company before the announcement date of acquiring a majority.

The second main independent variable used is a dummy variable indicating whether the acquisition has taken place in a cross-border setting. The cross-border dummy variable will take a value of 1 when the acquirer’s home country and the country of the target are not equivalent. In case the target is a separate business unit or subsidiary of a larger conglomerate, the location of the business unit or subsidiary itself has been taken as input for the target countries destination. Moreover, an interaction variable between the toehold and cross-border dummy variables is included to incorporate the effect of using toeholds in a cross-border acquisition.

Control variables

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21 acquisition performance in past literature. Firstly, a variable controlling for firm size is included by taking the natural logarithm of a firm’s total assets in the year before the date of the announcement. Previous literature found that acquirers’ firm size is negatively correlated with its acquisition performance as larger firms will face more severe agency problems (Moeller et al., 2004; Ismail, 2008). Besides that, Moeller et al. (2004) find that larger companies pay relatively higher acquisition premiums compared to smaller companies, which has a negative effect on the acquisition returns. Secondly, a control for the bidder’s performance is included as it is found that previous performance has a positive impact on the valuation of the firm (Yermack, 1996). Performance is measured by calculating the return on assets of the bidder, which is net profit over the total assets, in the year before the announcement date. Furthermore, leverage is included as a control variable as it is found to reduce the agency costs and, therefore, it has a positive impact on the acquirers’ returns (Moeller et al., 2004; Ismail, 2008). On the contrary, Lang et al. (1991) find a negative correlation between leverage and firm performance. Therefore, leverage is likely to affect the acquisition performance, although the exact relation remains ambiguous. Leverage is measured as the acquirers’ total book debt divided by its market value in the year before the announcement date. Tobin’s Q, measured by taking the market value of the firm and divides this by its total asset value in the year prior to the announcement date, is included as a control as previous literature find that firms with a higher Tobin’s Q are likely to have more valuable investment opportunities which result in positive abnormal returns (Lang et al., 1989; Moeller et al., 2004).

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22 In addition, several country-level control variables will be included to ensure that the regression outcome is not driven by differences in trade or GDP between countries, instead of determinants of toeholds. Firstly, a control variable measuring the openness of the target economy to the world economy in included in the regression. As suggested by Chakrabarti et al. (2009), the openness of the target country’s economy is positively related to the ease a potential target can be managed and the efficiency its profits can be employed, resulting in improved acquisition performance returns. Following Chakrabarti et al. (2009), the equation utilized to measure the openness of the target country’s economy to the world economy is as follows:

𝑂𝑇𝑙 =

𝐼𝑚𝑝𝑜𝑟𝑡_𝑙+ 𝐸𝑥𝑝𝑜𝑟𝑡_𝑙 𝐺𝐷𝑃𝑙

, (7)

where OTl is the openness measure for target country l to the world economy, and Importl and

Exportl represent the value of import and export of target country l 1 year before the

announcement of the acquisition, and GDPl is target country l’s gross domestic product 1 year

before the announcement of the acquisition. Secondly, a control variable measuring the economic disparity between the acquirer and target country is included in the regression as economic inequality between the countries potentially can affect the bidder’s acquisition performance (Chakrabarti et al., 2009). Following Chakrabarti et al. (2009), we measure economic disparity by the difference in GDP per capita, which is often associated with major socio-economic differences between countries. Economic disparity is calculated using the following formula:

𝐸𝐷_𝑘𝑙= 𝐺𝐷𝑃𝑘− 𝐺𝐷𝑃𝑙

𝐺𝐷𝑃_𝑘+ 𝐺𝐷𝑃_𝑙. (8)

In equation (8), EDkl measures the economic disparity between the bidders’ country k and the

target country l. Economic disparity is measured by using the GDP per capita in the year before the announcement date of both the bidders’ country k and the targets country l. An overview of all the variables included in the multivariate analysis can be found in Appendix B.

3.3 Regression analysis methodology

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23 independent variables for both its stand-alone impact and its moderating impact. The first model will solely examine the effect of using toeholds in an acquisition process on the CARs of the firm’s stock. The following regression model is utilized to test the first hypotheses, which state that toehold bidding positively affects the bidder’s acquisitions performance:

𝐶𝐴𝑅_𝑖 = 𝛼 + 𝛽₁𝑇𝑜𝑒ℎ𝑜𝑙𝑑_𝑖 + 𝛽₂𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒_𝑖+ 𝛽₃𝑅𝑂𝐴_𝑖 + 𝛽₄𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_𝑖+ 𝛽₅𝑇𝑜𝑏𝑖𝑛𝑄_𝑖 + 𝛽₆𝑅𝑒𝑙𝑆𝑖𝑧𝑒_𝑖+ 𝛽₇𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙_𝑖 + 𝛽₈𝐶𝑎𝑠ℎ_𝑖 + 𝛽9𝑂𝑇𝑙+ 𝛽10𝐸𝐷𝑘𝑙+ 𝛾𝑡+ 𝐹𝐸𝑡𝑐+ 𝜀𝑡,

(9)

where CARi is the cumulative abnormal return of acquirer firm i over the period (-1,+1) or

(-2,+2), Toeholdi is a dummy variable which takes the value 1 when the acquirer was in

possession of a toehold in the target company and 0 otherwise; Firmsizei is the natural

logarithm of acquirer firm i’s total assets; ROAi is the return on assets of acquirer firm i;

Leveragei is the total debt divided by market value of acquirer firm i; TobinQi is the value of

acquirer firm i’s market value divided by its book value of total assets; RelSizei is the relative

size measuring the value of the acquisition compared to the market value of acquirer firm i; Horizontali is a dummy variable which takes the value 1 when the acquirer has acquired a target

firm in the same industry measured by its NACE Rev. 2 code1 and 0 otherwise; Cashi is a

dummy variable which takes the value of 1 when the deal is solely financed with cash and 0 otherwise; OTl is the target country l’s economic openness compared to the world economy,

and EDkl is the economic disparity between acquirer country k and target country l. Note that

the variables Firmsizei, ROAi, Leveragei, TobinQi, OTl, and EDkl are all measured based upon

their respective values one year before the announcement of the acquisition. Moreover, year- (γt) and target country (FEtc) fixed effects are included in the regression. Year fixed effects are

included to control for time-related factors such as the impact of the financial crisis in the period from 2007 to 2009. Besides that, target country fixed effects are included to control for unobserved characteristics of the target countries. Additionally, cluster-adjusted standard errors will be used in the regression models of this thesis, to control for clustering within the acquirer countries. Using cluster-adjusted standard errors mitigates the problem of within-cluster correlation or heteroscedasticity of the acquirer countries.

1_{The NACE Rev. 2 code is the industry standard classification system used in the European Union. The NACE}

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24 To test the second hypothesis, whether there is a significant difference between bidder’s acquisition performance in domestic and cross-border acquisitions, we replace the dummy variable for the toehold by a dummy variable for cross-border acquisitions in the regression:

𝐶𝐴𝑅_𝑖 = 𝛼 + 𝛽₁𝐶𝐵_𝑖 + 𝛽₂𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒_𝑖 + 𝛽₃𝑅𝑂𝐴_𝑖 + 𝛽₄𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_𝑖 +

𝛽₅𝑇𝑜𝑏𝑖𝑛𝑄_𝑖+ 𝛽₆𝑅𝑒𝑙𝑆𝑖𝑧𝑒_𝑖 + 𝛽₇𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙_𝑖+ 𝛽₈𝐶𝑎𝑠ℎ_𝑖+ 𝛽₉𝑂𝑇_𝑙+ 𝛽10𝐸𝐷𝑘𝑙+ 𝛾𝑡+ 𝐹𝐸𝑡𝑐+ 𝜀𝑡,

(10)

where CBi is the dummy variable taking the value of 1 if the acquisition is cross-border and 0

otherwise. In the third model, an interaction variable is included in the model to test the third hypothesis, stating that the cross-border effect is bigger in acquisitions characterized by a toehold position. The following regression model is used to test for hypothesis 3:

𝐶𝐴𝑅_𝑖 = 𝛼 + 𝛽₁𝑇𝑜𝑒ℎ𝑜𝑙𝑑_𝑖 + 𝛽₂𝐶𝐵_𝑖 + 𝛽₃𝑇𝑜𝑒ℎ𝑜𝑙𝑑_𝑖 ∗ 𝐶𝐵_𝑖 + 𝛽₄𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒_𝑖 + 𝛽₅𝑅𝑂𝐴_𝑖 + 𝛽₆𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒_𝑖+ 𝛽₇𝑇𝑜𝑏𝑖𝑛𝑄_𝑖 + 𝛽₈𝑅𝑒𝑙𝑆𝑖𝑧𝑒_𝑖+

𝛽9𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙𝑖 + 𝛽10𝐶𝑎𝑠ℎ𝑖 + 𝛽11𝑂𝑇𝑙+ 𝛽12𝐸𝐷𝑘𝑙+ 𝛾𝑡+ 𝐹𝐸𝑡𝑐+ 𝜀𝑡,

(11)

where Toeholdi*CBi is the added interaction variable which is expected to be positive according

to hypothesis 3. To test the fourth hypothesis, the models demonstrated in equations (9) - (11) are estimated by splitting the full sample into two subsamples based upon the legal law system of the target country. So, a subsample is created for acquisitions where the target country has a common-law system, and for a sample only consisting of acquisitions where the target country has a civil-law system. Finally, a regression analysis on the differences between the two sub-samples is performed in order to see whether the coefficients of the variables in the two sub-samples are significant different from each other.

4. Results and discussion

In this section, the descriptive statistics and correlation matrix will be examined and discussed, followed by the results of the multivariate regression analysis. Finally, additional regressions are examined and discussed to test the robustness of the results.

4.1 Descriptive statistics and correlations

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26 was found to be slightly higher with 1.6%2_{. Although the average deal was received positively}

by investors, the extreme maximum and minimum values for the CARs show that there is a dispersion within the observations included in the sample. In 10.9% of all acquisitions included in the sample, the acquirer had obtained a toehold before the start of the acquisition process as indicated by the mean of the Toehold dummy. Moreover, the cross-border dummy shows a mean value of 0.561, meaning that in 56.1% of the acquisitions announced by the acquirer, the target firm is from a different country. Firms included in the sample obtained on average a ROA of 7.5% in the year before the acquisition and had a market leverage ratio of 0.39. Moreover, the deal control variables show that the acquirers took over target firms which had a mean size of 21.7% of the acquirer’s market value, with a median of 5.8%. This major difference could be explained by the fact that some firms have acquired target companies which were three times as big as their market value as shown by the maximum value of 3.006 for the relative size variable. The Horizontal dummy variable takes a mean value of 0.323, meaning that in 32.3% the acquirer has taken over a firm within the same industry, and the Cash dummy observed that in 35.5% of the observations the transaction was solely financed with cash. Panel B in Table 2 provides the correlation matrix of the variables included in the multivariate regression. The high correlation variable of 0.885 between both dependent variables, CAR(-1,+1) and CAR(-2,+2), is in line with the expectation and should form no issue since these are used in separate regressions. Moreover, the correlation matrix and additional tests show no signs of multicollinearity issues among the sample.

4.2 Multivariate analysis

This section shows the results of the relationship between toeholds and the bidders acquisition performance. Table 3 presents results of the multivariate regression analysis related to hypothesis 1 through 3. Two time periods for the cumulative abnormal returns are used in the regression analysis to test the robustness of the results. Columns [1] – [4] show the regression analysis using time period (-1,+1), while columns [5] – [8] account for the same regression analysis, but with the (-2,+2) time-period for the dependent variable. Table 3, model [1], shows the regression analysis in which only the control variables are employed. As follows from the table, higher firm size, leverage, and Tobin’s Q significantly reduces the cumulative abnormal returns for firms. The finding on the relationship between firm size and the CAR is in line with Moeller et al. (2004) and Ismail (2008), while the finding on the leverage ratio is in line with

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27 Lang et al. (1991) who found a negative correlation between leverage and firm performance. On the contrary, the significant negative value of Tobin’s Q is contradicting the findings by Moeller et al. (2004). A possible explanation for this is that, since that firms with high

Table 3 Multivariate regression analysis on bidder’s announcement returns

This table shows the full-sample results of the OLS multivariate clustered regression analysis. The dependent variable is the Cumulative Abnormal Return over the event time-period (-1,+1) or (-2,+2). Toehold represents a dummy variable that takes the value of 1 when the bidder had obtained a minority share in the target before the announcement of acquiring a majority, and 0 otherwise. CB is a dummy variable that takes value 1 when target and acquirer countries are distinct, and 0 otherwise. Firmsize, ROA, Leverage, and TobinQ represent the firm characteristics control variable measuring the logarithm of the acquirer total assets, return on assets, total debt divided by market value and the sum of market value of total asset value, respectively, in the year prior to the announcement. RelSize, Horizontal, and Cash represent the deal control variables. RelSize measures the deal value relative to the market value of the bidder. Horizontal is a dummy variable taking value 1 when the acquisition takes place within the same industry, and 0 otherwise. Cash is a dummy variable taking value 1 when the acquisition is solely financed with cash, and 0 otherwise. OT measures the openness of the target country, while ED measures the economic disparity between the acquirer country and target country. Fixed-effects for target country and announcement year are used in all regressions. Robust clustered standard errors are presented in parentheses. *, **, *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.

Dependent variable CAR(-1,+1) CAR(-2,+2) [1] [2] [3] [4] [5] [6] [7] [8] Constant 0.189** 0.189** 0.188** 0.189** _0.165* 0.165* 0.163* 0.165* (0.066) (0.067) (0.066) (0.067) _(0.088) (0.090) (0.088) (0.090) Toehold -0.007*** -0.015*** -0.007** -0.014** (0.002) (0.003) (0.003) (0.006) CB -0.005 -0.007 -0.005 -0.007 (0.004) (0.005) (0.005) (0.006) Toehold*CB 0.014* 0.012 (0.007) (0.007) Firmsize -0.003*** -0.003*** -0.003*** -0.003*** _-0.003*** -0.003*** -0.003*** -0.003*** (0.001) (0.001) (0.001) (0.001) _(0.001) (0.001) (0.001) (0.001) ROA 0.073** 0.074*** 0.074*** 0.074*** _0.072*** 0.073*** 0.073*** 0.074*** (0.025) (0.024) (0.025) (0.024) _(0.023) (0.022) (0.024) (0.022) Leverage -0.009*** -0.009*** -0.009*** -0.009*** _-0.011*** -0.010*** -0.011*** -0.011*** (0.002) (0.002) (0.002) (0.002) _(0.002) (0.002) (0.002) (0.002) TobinQ -0.007*** -0.007*** -0.007*** -0.007*** _-0.007** -0.007** -0.007** -0.007** (0.002) (0.002) (0.002) (0.002) _(0.003) (0.003) (0.003) (0.003) RelSize 0.009 0.009* 0.009 0.009 _0.011 0.011 0.010 0.011 (0.005) (0.004) (0.005) (0.005) _(0.007) (0.007) (0.007) (0.007) Horizontal 0.004** 0.004* 0.004** 0.004** _0.001 0.001 0.001 0.002 (0.002) (0.002) (0.002) (0.002) _(0.002) (0.002) (0.002) (0.002) Cash 0.009* 0.009* 0.009* 0.009* _0.011** 0.011** 0.011** 0.011** (0.004) (0.004) (0.004) (0.004) _(0.004) (0.004) (0.004) (0.004) OT -0.031* -0.030* -0.030* -0.029* _-0.025 -0.025 -0.023 -0.023 (0.015) (0.016) (0.015) (0.016) _(0.020) (0.020) (0.020) (0.020) ED 0.012 0.012 0.013 0.013 _0.011 0.012 0.013 0.013 (0.008) (0.008) (0.009) (0.009) _(0.011) (0.011) (0.012) (0.012)

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28 Tobin Q’s have a greater probability to be overvalued, there is an increased chance that the acquirer initiates stock-driven acquisitions. Stock-driven acquisitions with overvalued stock tend not to be value creating but are merely an empire-building motive for the acquirers’ managers and are likely to be seen as value destructive by shareholders (Shleifer and Vishny, 2003). The positive and significant coefficient for ROA is in line with Yermack (1996), who already argued that previous performance should have a positive effect on current firm performance. Moreover, targets acquired within the same industry or acquisitions solely paid with cash are found to significantly increase the abnormal returns. The former is in line with Denis et al. (2002), while the coefficient of cash is as expected and in line with Travlos (1987) and Ismail (2008). The openness of the target country is significant and negatively related to the CAR of the acquirer, which is contradicting the findings of Chakrabarti et al. (2009). A possible explanation might be that although it is harder to manage target firms in relatively closed countries, the potential to improve performance for such target firms might result in potentially higher synergies and value creation for the bidder. Relative deal size and economic disparity are found to be insignificant in predicting the CARs.

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29 the empirical findings of Moeller et al. (2004). Moreover, the low R-squared is a result of using both target country and effective year fixed effects in the regression analysis.

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30 toeholds will have a positive impact on the CARs. For the second hypothesis, stating that there is a significant difference between domestic and cross-border acquisition performance, no empirical evidence is found. For the third and most relevant hypothesis in this paper, significant and positive evidence is found stating that the cross-border effect has a positive impact on the relationship between the use of toeholds and the bidder’s acquisition performance. However, this significant coefficient becomes insignificant when we extend the CAR from a period of 3 to 5 days surrounding the announcement.

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31

Table 4 Multivariate analysis on bidder’s announcement returns – effect of legal law system

This table shows the full-sample results of the OLS multivariate clustered regression analysis. Columns [1]–[4] presents the results on deals where the target country has a civil-law system, whereas Columns [5]-[8] presents the results of the common-law target country subsample. The dependent variable is the Cumulative Abnormal Return over the event time-period (-1,+1). Toehold represents a dummy variable that takes the value of 1 when the bidder had obtained a minority share in the target before the announcement of acquiring a majority, and 0 otherwise. CB is a dummy variable that takes value 1 when target and acquirer countries are distinct, and 0 otherwise. Firmsize, ROA, Leverage, and TobinQ represent the firm characteristics control variable measuring the logarithm of the acquirer total assets, return on assets, total debt divided by market value and the sum of market value of total asset value, respectively, in the year prior to the announcement. RelSize, Horizontal, and Cash represent the deal control variables. RelSize measures the deal value relative to the market value of the bidder. Horizontal is a dummy variable taking value 1 when the acquisition takes place within the same industry, and 0 otherwise. Cash is a dummy variable taking value 1 when the acquisition is solely financed with cash, and 0 otherwise. OT measures the openness of the target country, while ED measures the economic disparity between the acquirer country and target country. Fixed-effects for target country and announcement year are used in all regressions. Robust clustered standard errors are presented in parentheses. *, **, *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.

Civil-law target countries Common-law target countries Dependent Variable _CAR(-1,+1) _CAR(-1,+1)

_[1] _[2] _[3] _[4] _[5] _[6] _[7] _[8] Constant 0.028 0.028 0.031* 0.034* 0.054 0.052 0.057* 0.057* (0.017) (0.016) (0.017) (0.017) (0.031) (0.031) (0.030) (0.029) Toehold -0.008*** -0.016*** -0.005 -0.010*** (0.002) (0.004) (0.005) (0.002) CB -0.003 -0.006 -0.006 -0.006 (0.004) (0.005) (0.004) (0.004) Toehold*CB 0.016* 0.008 (0.008) (0.009) Firmsize -0.003*** -0.003*** -0.003*** -0.003*** -0.002* -0.002* -0.002* -0.002* (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) ROA 0.011 0.013 0.011 0.015 0.126*** 0.126*** 0.127*** 0.126*** (0.024) (0.024) (0.025) (0.025) (0.021) (0.020) (0.020) (0.020) Leverage -0.008*** -0.008*** -0.008*** -0.008*** -0.011*** -0.011*** -0.011*** -0.011*** (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) TobinQ -0.003 -0.003* -0.003 -0.003* -0.010*** -0.010*** -0.010*** -0.010*** (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) RelSize 0.014*** 0.014*** 0.014*** 0.014*** 0.003 0.003 0.002 0.003 (0.004) (0.004) (0.004) (0.004) (0.006) (0.006) (0.006) (0.006) Horizontal 0.009** 0.010** 0.009** 0.010*** -0.002 -0.002 -0.002 -0.002 (0.003) (0.003) (0.003) (0.003) (0.002) (0.002) (0.002) (0.002) Cash 0.014*** 0.014*** 0.014*** 0.014*** 0.004 0.004 0.004 0.004 (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) OT -0.014 -0.013 -0.012 -0.012 -0.047*** -0.047*** -0.049*** -0.049*** (0.025) (0.025) (0.025) (0.025) (0.015) (0.015) (0.015) (0.014) ED 0.029** 0.028** 0.031** 0.029** 0.001 0.003 0.002 0.003 (0.012) (0.012) (0.012) (0.012) (0.020) (0.021) (0.021) (0.021) Target country FE Yes Yes Yes Yes Yes Yes Yes Yes Year FE Yes Yes Yes Yes Yes Yes Yes Yes Adj. R-squared 0.078 0.082 0.078 0.085 0.023 0.022 0.022 0.020 Observations 864 864 864 864 837 837 837 837

weak empirical support regarding the fourth hypothesis. The use of toeholds in cross-border acquisitions in which the target country is characterized by a civil-law system seems to have a greater impact on the bidder’s acquisition returns compared to the use of toeholds in common-law target countries as a higher estimated coefficient for the Toehold*CBi variable is observed.

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32 with an average of 1.6%, which is found to be significant at a 10% level, while in common-law target countries the value is found to be insignificant and lower at a 0.8% increase. To test whether the reported coefficients on the variables in both sub-samples are significant

Table 5 - Difference analysis between civil-law - common-law regression

This table shows the results of the difference OLS regression analysis between the civil-law target country sample and the common-law target country sample. The dependent variable is the Cumulative Abnormal Return over the event time-period (-1,+1). Toehold represents a dummy variable that takes the value of 1 when the bidder had obtained a minority share in the target prior to the announcement of acquiring a majority, and 0 otherwise. CB is a dummy variable that takes value 1 when target and acquirer countries are distinct, and 0 otherwise. Firmsize, ROA, Leverage and TobinQ represent the firm characteristics control variable measuring the logarithm of the acquirer total assets, return on assets, total debt divided by market value and the sum of market value of total asset value, respectively, in the year prior to the announcement. RelSize, Horizontal, and Cash respresents the deal control variables. RelSize measures the deal value relative to the market value of the bidder. Horizontal is a dummy variable taking value 1 when the acquisition takes place within the same industry, and 0 otherwise. Cash is a dummy variable taking value 1 when the aquisition is solely financed with cash, and 0 otherwise. OT measures the openness of the target country, while ED measures the economic disparity between the acquirer country and target country. Robust standard errors are presented in parentheses. *, **, *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.

Full Sample Civil-law target countries Common-law target countries Civil-law and Common-law Dependent variable CAR(-1,+1) CAR(-1,+1) CAR(-1,+1) CAR(-1,+1)

[1] [2] [3] [4] Constant 0.189** 0.034* 0.057* 0.002* (0.067) (0.017) (0.029) (0.003) Toehold -0.015*** -0.016*** -0.010*** -0.018** (0.003) (0.004) (0.002) (0.007) CB -0.007 -0.006 -0.006 -0.006* (0.005) (0.005) (0.004) (0.004) Toehold*CB 0.014* 0.016* 0.008 0.017* (0.007) (0.008) (0.009) (0.009) Firmsize -0.003*** -0.003*** -0.002* -0.002** (0.001) (0.001) (0.001) (0.001) ROA 0.074*** 0.015 0.126*** 0.091*** (0.024) (0.025) (0.020) (0.032) Leverage -0.009*** -0.008*** -0.011*** -0.007** (0.002) (0.002) (0.002) (0.003) TobinQ -0.007*** -0.003* -0.010*** -0.004* (0.002) (0.002) (0.002) (0.002) RelSize 0.009 0.014*** 0.003 0.005 (0.005) (0.004) (0.006) (0.005) Horizontal 0.004** 0.010*** -0.002 0.004 (0.002) (0.003) (0.002) (0.003) Cash 0.009* 0.014*** 0.004 0.012*** (0.004) (0.004) (0.004) (0.004) OT -0.029* -0.012 -0.049*** -0.005 (0.016) (0.025) (0.014) (0.004) ED 0.013 0.029** 0.003 -0.004 (0.009) (0.012) (0.021) (0.007)

Target country FE Yes Yes Yes No Announcement year FE Yes Yes Yes No Adj. R-squared 0.040 0.085 0.020 0.044

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33 distinctive from each other, an additional regression analysis is done on a difference sample between the civil-law target countries and the common-law target countries. Table 5, column [4], shows the obtained results for the difference regression analysis. Weak empirical support is found considering the fourth hypothesis, as the positive coefficient for Toehold*CB is found to be significant at a 10% level, indicating that there is a significant difference between the coefficients reported in columns [2] and [3]. Moreover, the obtained results in column [4] also indicate that toeholds have an higher adverse effect on the CARs in the civil-law subsample compared to the common-law sub-sample as indicated by the negative and significant coefficient for Toeholds.

4.3 Robustness test

To verify the robustness of the reported results found in section 4.2, several additional tests and regressions are used. Firstly, in unreported results, an additional time-period for the event is utilized which analyses the effects of toeholds on the CARs in the 11 days surrounding the announcement date (-5,+5). The additional time-period has been added to verify whether the coefficient of Toehold*CB is robust when extending the time-period. Contradicting the robustness test used in section 4.2 (the “-2,+2” event period), which revealed that the interaction variable between toeholds and the cross-border effect had become insignificant in the extended period, the interaction variable becomes significant again at a 10% level when extending the period even further to 11 days (-5,+5). Furthermore, the robustness regression using the time-period of CAR(-5,+5) presents equivalent results as presented in Table 3. Hence, by extending the event period to either 5 days or 11 days, the estimated coefficients reveal that the empirical results of this study are robust.

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34 Thirdly, additional regressions were performed on a sample including only the 185 toehold acquisitions. These regressions use an alternative specification of the independent variable Toehold. Instead of using a dummy variable for toehold, the regressions demonstrate what the effect is of the size of the toehold on the CARs. The results of these regressions are presented in Appendix C, Tabel C2. The results show no significant findings on the effect of the toehold size on the CARs. All independent variables and most of the control variables appear to be insignificant. This finding is in line with Betton et al. (2009) and Dai et al. (2016) who report that the relationship between toehold size and bidder’s acquisition performance appears to be non-linear. Acquirers embody an optimal toehold threshold due to the presence of termination fees and exorbitant high acquisition premiums. Hence, using the toehold size as the independent variable will deviate significantly from the results where a toehold dummy is used due to the non-linear relationship between the size of the toehold and bidder’s acquisition performance.

5. Conclusion

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35 Prior literature extensively investigated the effect of toeholds on the bidder’s acquisition performance and the likelihood of a transaction to succeed, looking at determinants such as the size of a toehold, valuation uncertainty, the level of competition during a process, and the paid premiums in a transaction. However, research has neglected the effect of toeholds in cross-border acquisitions as it only has investigated the role of toeholds in domestic acquisitions. This is where this paper contributes to the existing literature. As the share of cross-border acquisitions in the total number of worldwide acquisitions is increasing, it is of great importance to understand what the impact is of the toehold strategy on the bidder’s acquisition performance in cross-border transactions. Moreover, this paper goes even further by examining the impact of toeholds for target countries with different legal law systems.

Results found in this paper could have several implications for management. Firstly, the results imply that using a toehold strategy is not beneficial under every circumstances. Managers should carefully assess when it is appropriate to use a toehold for each acquisition. Since evidence in this study suggests that toeholds are likely to be more effective in cross-border acquisitions, managers should consider using a toehold strategy more often for acquiring foreign targets. Finally, the toehold strategy is found to be not as effective in target countries with a common-law system compared to target countries with a civil-law system based upon the lower average effect on the abnormal returns. Therefore, managers should be aware that in cross-border acquisitions with a target from a common-law country, the toehold strategy might not give the desired result on the bidder’s firm value.

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