T HE C ASE OF S OUTH A FRICA A CQUISITIONS BY E MERGING M ARKET F IRMS ; C ULTURAL INFLUENCES ON C ROSS -B ORDER HE E CONOMIC , O RGANIZATIONAL AND T

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T

HE

E

CONOMIC

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O

RGANIZATIONAL AND

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ULTURAL INFLUENCES ON

C

ROSS

-B

ORDER

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CQUISITIONS BY

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MERGING

M

ARKET

F

IRMS

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T

HE

C

ASE OF

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OUTH

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FRICA

University of Groningen, Faculty of Economics and Business, MSc IB&M Supervisor: Igor Kalinic

Second supervisor: Henk Ritsema 22-02-2013

A

BSTRACT

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The influence of Culture on Cross-Border Acquisitions by Emerging Market Firms; the case of South Africa 1

Content

Keywords ... 1 1. Introduction ... 2 2. Literature Review ... 3

2.1 Economic dimension - Developed and undeveloped markets ... 4

2.2 Economic dimension - Global competiveness ... 6

2.3 Organizational dimension - Size ... 6

2.4 Organizational dimension - Industry... 7

2.5 Cultural dimension - Cultural Distance ... 7

2.6 Cultural dimension - Normative distance and Christianity ... 10

3. Conceptual model ... 11

4. Methodology ... 12

5 Results ... 14

5.1 Economic dimension - Hypothesis 1a/1b/1c ... 14

5.2 Economic dimension - Hypothesis 2 ... 18

5.3 Organizational dimension - Hypothesis 3 ... 18

5.4 Organizational dimension - Hypothesis 4 ... 22

5.5 Cultural dimension - Hypothesis 5 ... 24

5.6 Cultural dimension - Hypothesis 6a/6b ... 30

5.7 Conceptual model ... 30 6. Discussion ... 34 7. Limitations ... 38 8. Appendix ... 39 8.1 Literature overview ... 39 8.2 Excluded cases ... 42 9. References ... 43

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EYWORDS

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The influence of Culture on Cross-Border Acquisitions by Emerging Market Firms; the case of South Africa

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1. I

NTRODUCTION

Sarik Tara, chairman of Enka Holding, Turkey’s biggest construction company, has learnt to search for contracts in difficult places. ‘‘I am stamped ‘Made in Turkey’, not ‘Made in Germany’,’’ says Mr. Tara. ‘‘I have to try harder. No one is going to ask me to build anything in the Champs Elysees. I have to go to difficult countries where it is easier for me to win contracts.’’ The collapse of communism opened a new chapter for Enka. Its first job was the restoration of the Petrovsky Passage, a shopping arcade in Moscow, in 1988. Through Mosenka, the company’s Russian arm, Enka has become the biggest private real-estate owner in Moscow, and one of the city’s leading developers. It has also completed more than 60 projects within the Russian Federation. (Munir, 2002: 2)

This story illustrates the perception of emerging market firms like Turkish firms and the difficulties that they encounter. Emerging market firms tend to have resources that are less sophisticated (Bartlett and Ghoshal 2000) and less cutting-edge (Lall 1983) (Wells 1983). Such countries also suffer difficulties as a result of operating in a home country characterized by a less developed institutional environment (Cuervo-Cazurra et al. 2008). Acquisitions performed by emerging market firms are characterized by the high failure rates and the existence of negative value creation of acquisitions (Doukas and Travlos 1988) (John et al. 2010) (Wells 1983). This thesis focusses on finding the factors causing such negative value creation. South Africa has recently gained the status of an emerging market, therefore the sample in this thesis consists out of South African firms (IMF 2012).

Acquisitions performed by emerging market based firms have been studied before. Emerging market based firms are believed to be successful when they expand their business into similar or less developed target countries (Wells 1983) (Cuervo-Cazurra et al. 2008). The research on this subject agrees on one main motive for entering into alliances with developed market firms; learning from partner’s expertise and experience (Adarkar 1997) (Chang et al. 2009). Furthermore, high cultural differences are thought to have a negative effect on acquisition performance (Chatterjee et al. 1992). These three statements are the main outcomes of the research that has been conducted in this field. Acquisitions targeted at both developed and undeveloped markets can offer opportunities for emerging market firms, the factors influencing this success are often only mentioned in suggestions for further research. Culture is however one factor that is believed to have a negative effect on acquisitions regardless of the acquirer being from an emerged of emerging market.

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market firms. Some expectations can be deducted out of research that has been done on emerged market firms that could apply in this case. For example, a culture-related concept that has been widely recognized as an important determinant of cross-border acquisition performance is fit or compatibility (Chatterjee et al. 1992) (Weber 1996) (Morosini et al. 1998) (Stahl and Voigt 2004).

The reason that these factors are important to study lays in the high failure rates and the existence of negative value creation of acquisitions (Doukas and Travlos 1988) (John et al. 2010) (Wells 1983). A reason for current lack of research on this subject might also be a shortage of information on firms from emerging markets. Information on South African firms and the Johannesburg Stock Exchange is however completely available and this is a good foundation for research.

This thesis contributes to this field of study by examining the effects of three dimensions on value creation of acquisitions performed by South African firms. These three dimensions are economic, organizational and cultural. A total of seven factors divided along these dimensions will be tested on their effects on value creation. Previous researchers already studied the effects of cultural distance on acquisitions performed by developed market firms, however this thesis transfers the scope to emerging market based firms and adds even more factors to the equation. Testing the effects of these extra factors, together with cultural distance, on value creation adds to a more specific understanding as to what makes or breaks these acquisitions.

2. L

ITERATURE

R

EVIEW

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immediate effects at or around the day of the acquisition. These reasons justify the use of firm’s stock prices to calculate value creation in this thesis.

Previous studies have generally found that international acquisitions lead to positive abnormal returns for shareholders. However, these results have been somewhat mixed, and found to be dependent on specific internal and external conditions, such as prior acquisition experience of the bidding firm, cultural distance or the location of the target firm (Doukas and Travlos 1988). Therefore, the research aim is to investigate which factors influence the value creation in international acquisitions by emerging market firms. This is done by looking at acquisitions by South African firms.

Furthermore, the effect of certain differences between South African and their target companies will be examined in this context. The cultural distance, competitive distance, normative distance, level of economic development, size of South African firms, religion and the relatedness between industries of the acquirer and target company will be used to further clarify the value that is created or destroyed through these acquisitions.

Whilst the existence of high cultural distance is known to have detrimental effects on value creation in acquisitions made by firms from Western, developed countries (Doukas and Travlos 1988), findings of such effects in acquisitions made by companies from less developed countries are generally lacking in modern literature. Findings of the effects of competitive and normative distance on value creation are totally lacking in existing literature.

The examined factors that influence value creation are divided in three dimensions; an economic, organizational and cultural dimension. This division is made in order to better understand the results that are presented in the final chapters of this thesis. These dimensions also structure the literature presented in this chapter.

2.1 E

CONOMIC DIMENSION

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D

EVELOPED AND UNDEVELOPED MARKETS

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internationally for the first time, and especially when they expand into new industries and geographic markets. In terms of the specific context of cross-border acquisitions by emerging market based firms, Gubbi et al. (2009) and Bhagat et al. (2011) state that these acquisitions create value. Furthermore, Gubbi et al. (2009) underline that such international expansion gives access to critical resources and capabilities that can in turn help emerging market firms to overcome issues like the “latecomer disadvantage”. When firms combine these capabilities with their own unique competencies, they increase their ability to compete with developed market firms on price advantages due to low production and labour costs.

Therefore the expectation is that South African firms, that is firms based in emerging markets, do create value through expansion into developed markets. This expectation is based on the assumption that emerging market firms that expand into developed markets can learn from their partners experience, technology and expertise. However, this advantage might only be apparent when the expansion is into new industries and markets.

In addition to this apparent advantage of expansion into more developed markets, emerging market based firms have also been found successful when they expand their business into similar or less developed target countries (Wells 1983) (Cuervo-Cazurra et al. 2008). In these cases, competitive advantages originate from sources like low input costs, management and marketing skills adapted to local third world conditions, an inexpensive labor pool, and advantages associated with conglomerate ownership (Lall 1983) (Wells 1983). According to Cuervo-Cazurra et al. (2008), combining these factors with their own knowledge and capabilities will help to outpace rivals from similar home markets.

Summarizing the above, there are reasons to predict positive value creation in acquisitions by emerging market firms. The potential for success comes from a “best of both worlds” approach; a unique set of competencies and knowledge that is acquired through acquisitions in both more and less developed target countries.

Hypothesis 1a, 1b and 1c are therefore formulated as follows:

Hypothesis 1a: Cross-border acquisitions performed by emerging market firms create value. Hypothesis 1b: Cross-border acquisitions performed by emerging market firms into developed markets create value.

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2.2 E

CONOMIC DIMENSION

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LOBAL COMPETIVENESS

The World Economic Forum or WEF is an organization that publishes a global competitiveness ranking each year. The Global Competitiveness index (GCI) assesses how productively a country uses its available resources (WEF 2012). Their results are based on over 170 items, divided into eight pillars. Criticism exists on this index, for example Lall (2001) states that it is merely focussed on differences between countries and no conclusions should be drawn from the index concerning a single country. Furthermore, she states that it is focussed on the micro level of the economy and not the macro level. Fortunately these limitations do not impede the usefulness in this research, as it is focussed on the differences between countries and on micro level economics. This index will be used to calculate the relative differences of target countries with South Africa in order to compute a variable that is called competitive distance.

If a country has a high competitive distance, this means that learning objectives might be available for South African firms. Thus, high competitive distance is believed to lead to value creation.

Hypothesis 2 is therefore formulated as follows;

Hypothesis 2: High competitive distance leads to higher abnormal returns than low competitive distance.

2.3 O

RGANIZATIONAL DIMENSION

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IZE

According to Adarkar (1997), the biggest threat and reason for value destruction is power imbalance. He also states global expansion and survival as some of the biggest drivers for cross border acquisitions made by emerging market firms. This already suggests that size could be a double-edged sword.

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These power imbalances (Adarkar 1997) generally occur long after alliance formation and since this thesis primarily focusses on short term effects, they are believed to be outside the scope of this thesis. This implies that small firms are not hindered by power imbalances and are therefore able to create relatively more value than large firms.

Hypothesis 3 is therefore formulated as follows;

Hypothesis 3: Small emerging markets firms create more value than larger emerging market firms in cross-border acquisitions.

2.4 O

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I

NDUSTRY

As mentioned earlier on in this thesis, Doukas and Travlos (1988), stated that international expansion creates value, be it only for firms expanding internationally for the first time, and especially when they expand into new industry and geographic markets. Finding out if the expansion into another industry is new for the acquiring firm is not possible to measure in this thesis. However, information about the acquirer’s main industry and the target firms main industry is available and this seems like a suitable substitute.

Access to a partners knowledge and expertise is one of the main agreed upon goals of international expansion by emerging market firms. Especially when expanding into new industries this would of course be a very important goal. Therefore value is expected to be created when the acquirer’s and target’s main industries differ.

Hypothesis 4: Cross-border acquisitions into unrelated industries generate more value than those targeted at related industries.

2.5 C

ULTURAL DIMENSION

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ULTURAL

D

ISTANCE

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firms have significantly different organizational cultures. Moreover, Buono and Bowditch (1989) mention that post-acquisition discomfort and hostility can arise from large differences in organizational cultures. They furthermore argue that existing firm members are often so strongly dependent on their own culture that an attempt to merge this culture with a different organizational culture can create significant problems. It can even lead to a point that this resulting cultural clash can kill the entire performance of the alliance. Chatterjee et al. (1992) state that high cultural distance between target and acquiring firm leads to negative value creation. This effect is mainly due to culture clashes because of previously learned management attitudes and behavior. Some of this research is primarily focused on local acquisitions, but it still supports the assumption that a misfit between two organizational cultures and management styles negatively impacts value creation. Compared to such local acquisitions, cultural distance is often found to be even more important in international alliance performance (Kogut and Singh 1988) (Davis et al. 1991) (Madura et al. 1991).

In terms of specific reasons why cultural distance can threaten the performance of international acquisitions, Datta and Puia (1995) provide helpful arguments. For one reason, it could cause significant management resistance from the target firm, thereby increasing alliance costs. Moreover, cultural distance in international acquisitions increases difficulties in post-acquisition integration. In particular, this concerns the transfer of specific competencies between alliance partners. Many distinctive capabilities can be considered culture specific, hence somewhat intangible and difficult to transfer. For example, concerning the scope for transfer of managerial skills, Das (2010) showed how the Indian view of good management practices is strongly rooted in ancient Indian epics such as the Mahabharata and the Ramayana. Finally, the greater the cultural distance, the less likely it is that the acquiring firm possesses the necessary knowledge about the local conditions of the host country. A lack of such knowledge increases costs related to monitoring foreign operations, negatively affecting value creation (Doukas and Travlos 1988).

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example, an acquisition involving firms from the U.S. and Japan, two countries with very different national cultures, would likely involve two very different organizational cultures as well. Differences in organizational cultures can thus often be attributed to differences in their respective national cultures.

Thus far, the arguments presented have been based entirely on findings from acquisitions by developed market firms. In fact, it could be that cultural fit has a somewhat different impact when the acquiring firm is based in a less developed market. Multinationals from such markets may differ in several respects from those from developed markets. One of such differences may relate to acquisition motivation or objectives. Following the arguments of Gubbi et al. (2009) and Bhagat et al. (2011) that emerging market firms create value through international acquisitions primarily by gaining valuable tacit or intangible knowhow, resources, and/or capabilities, one could argue that acquiring firms based in emerging markets often have acquisition motives related to organizational learning. Following this, emerging market firms may actually benefit from cultural distance if for example the two organizational cultures are complementary. On the other hand, cultural distance has been argued to increase social conflict, by causing “us versus them” thinking, posing a possible obstacle to organizational learning (Vaara et al. 2010). Cultural distance could thus have an even stronger negative effect on performance for these acquisitions. Furthermore, not all acquisitions by emerging market firms will have learning objectives; some may have more straightforward motivations, for example general growth or expansion of market share. A second difference could be that firms from emerging markets may not always have as much cross-border acquisition experience as firms from developed markets, thus having less experience integrating different organizational cultures. The level of post-acquisition integration has frequently been found an important moderator of cultural distance (Slangen 2006) (Björkman et al. 2007), meaning that a lack of such integration capacity could be detrimental to successful post-acquisition integration, and ultimately performance.

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distance; Hofstede values and the Globe project. In this way, results can be compared and a possible suggestion can be made as to which measure best captures the Ubuntu principles. To summarize, cultural distance has generally been found to negatively influence value creation in international acquisitions. Overall, it is proposed that cultural distance is likely to have a significant negative effect on value creation for bidding firms' shareholders.

Hypothesis 5: High cultural distance leads to lower abnormal returns than low cultural distance in cross-border acquisitions performed by emerging market firms.

2.6 C

ULTURAL DIMENSION

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N

ORMATIVE DISTANCE AND

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HRISTIANITY

The Global Competitiveness report (WEF 2012) can be used to compute a competitive distance index, however some of its items can be used to calculate so called normative distance. Normative distance relates to the differences in the values and norms that govern people’s behaviour (Xu and Beamish 2004). This might prove to be an interesting addition to the cultural distance dimension that was explained in the previous chapter. Xu and Beamish (2004) tested several items on their predicting power on normative distance. They came up with seven dimensions that best explain the normative dimension. These seven dimensions are; Production process sophistication, Customer orientation, Staff Training, Willingness to delegate authority, Pay and productivity, Reliance on professional management and Efficacy of corporate boards. As normative distance is a difference between norms and values that govern human behaviour it is believed to have a similar negative impact on value creation as cultural distance.

Christianity is the last factor that will be discussed. This factor belongs to the cultural dimension. There is no real literature on the effects of this factor and therefore predictions about this variable are hard to make. This variable might shed some light on the influence of the Ubuntu culture on South African management practices. As this Ubuntu culture has typical Christian foundations (Battle 1997), it can be expected that when a target firm resides in a generally Christian country, grounds for possible conflicts will be lower than when this country holds a general religion that is different from Christianity.

Hypothesis 6a and 6b are therefore formulated as follows;

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Hypothesis 6b: Cross-border acquisitions targeted at Christian countries generate more value than those targeted at non-Christian countries.

3. C

ONCEPTUAL MODEL

This conceptual model is introduced to explain the different relations that are examined, in order to be better able to imagine the research conducted in this thesis. As can be seen in the model below, the seven factors that are examined on their influence on value creation are divided into three dimensions. An economic, an organizational and a cultural dimension. This division into dimensions is made in order to better understand the results and effects that will be presented in this thesis. As can be seen in the model, the arrows are pointing away from the dimensions and onto value creation. This aligns with the research in this thesis as it searches for the effects of these three dimensions on value creation. Whether these effects are positive or negative has yet to be tested.

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4. M

ETHODOLOGY

The value that is created by an alliance or acquisition is measured by calculating the abnormal returns for the event dates. The rationale behind choosing abnormal returns as a proxy for value creation comes from the concept of market efficiency. If we assume that the market is efficient, then it is justified that any change in value of a firm is directly reflected in stock prices. Therefore, comparing the estimated stock price on the date of an event with the actual stock price, will lead to either value creation, destruction or to no effect at all. The model that can estimate stock prices is the market model (Doukas and Travlos 1988). The main formula in this model is the following;

R

xt =

b

x +

a

x

R

mt +

e

x

R

xt is the expected rate return for stock x at time t and

R

mt is the market return at time

t.

a

x and the constant

b

x in this model are calculated by a regression analysis of historical

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The stock and market data that needs to be collected comes from Thomson’s DataStream. The sample consists out of 101 deals and was collected from the Zephyr database, accessed through the University of Groningen. The following search criteria are used; 1. Only completed deals, 2. Only mergers, acquisitions and joint ventures, 3. Acquiring firm is South African and publicly listed and 4. Deals are cross-border.

In order to draw conclusions from this sample, the statistical software SPSS is used. A student’s t-test is performed in order to see if the abnormal returns are significantly different from zero. This will either identify or deny the overall existence of abnormal returns. Furthermore independent samples T-tests are used in order to compare the means of two groups (e.g. high cultural distance and low cultural distance) in order to see if these are significantly different from each other. An alpha of 0,05 is taken as an acceptable significance level. Lastly, these T-tests also perform a Levene’s test for the assumption of equal variances. When this test fails to be significant, equal variances can be assumed. Normality is assumed for the whole sample. The conceptual model is tested using regression analyses (ANOVA).

Cultural distance is calculated with this formula;

Iij = index of the ith cultural dimension for jth country at time 't'

Iib 't' = index of the ith cultural dimension for the respective acquiring country at time Vi = variance of the index of the ith dimension.

CDj = cultural difference of the jth acquired firm country from South African company

Cultural distance is then calculated with both Hofstede values and Globe values which leaves us with two ranges of distances. For testing purposes, dummy variables are created with 0 being low cultural distance and 1 being high cultural distance, divided by their median.

Level of economic development is looked up on the IMF website, which has an extensive list of all countries that are classed as developed and undeveloped. These variables are identified as follows; 0 is undeveloped and 1 is developed.

Size is measured as the total net assets of the acquiring firm at the time of the deal. These variables were also transformed into dummy variables high (1) and low (0), divided by their median. Industrial relatedness is very simply depicted as a 0 for related and a 1 for unrelated.

The industries that are used are the acquirer’s and target’s main industries at the time of acquisition.

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5 R

ESULTS

The results of the conducted research is presented in this chapter and essential results are presented in tables. The variables in these tables are taken from spss output.

5.1 E

CONOMIC DIMENSION

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H

YPOTHESIS

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B

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The first hypothesis stated that cross border acquisitions by South African firms create positive abnormal returns. In table 1 it can however be seen that none of the proxies that measure abnormal returns generates significant abnormal returns. In other words, the abnormal returns generated by the acquisitions made in this sample do not generate returns that are significantly different from zero. Therefore we can reject hypothesis 1a, thus it cannot be proven that abnormal returns are created by South African firms.

Table 1. Hypothesis 1a test results – one sample t-test; Abnormal Returns compared with zero.

Event window N Mean Std. Deviation T-test Significance*

Event day 101 -0,5143 13,213 -0,391 0,697 Event day (%) 101 1,6499 14,535 1,141 0,257 Three days 101 -1,6188 39,732 -0,409 0,683 Three days (%) 101 4,2096 42,511 0,995 0,322 Five days 101 -2,6012 65,826 -0,397 0,692 Five days (%) 101 7,4943 70,735 1,065 0,290 Seven days 101 -3,4719 89,880 -0,388 0,699 Seven days (%) 101 11,3089 99,509 1,142 0,256 Nine days 101 -4,2184 111,495 -0,380 0,705 Nine days (%) 101 15,3795 128,358 1,204 0,231 *2-tailed

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none of the proxies shows significant abnormal returns to support hypothesis 1b. In other words, none of the acquisitions into developed markets created returns that were significantly different from zero. Therefore hypothesis 1b is rejected, with a small mention that this hypothesis could be accepted when a significance level of 0,10 sufficed.

Table 2. Hypothesis 1b test results – one sample t-test; Abnormal returns of acquisitions targeted at developed markets compared with zero.

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Table 3. Hypothesis 1c test results – one sample t-test; Abnormal returns of acquisitions targeted at less developed markets compared with zero.

Event day 11 -2,3619 31,00759 -0,264 0,797 Event day (%) 11 -5,2039 14,05199 -1,283 0,226 Three days 11 -7,1093 93,72332 -0,263 0,798 Three days (%) 11 -15,265 41,929 -1,261 0,233 Five days 11 -11,328 155,2794 -0,253 0,805 Five days (%) 11 -24,9413 69,51849 -1,243 0,240 Seven days 11 -15,1713 209,3789 -0,251 0,806 Seven days (%) 11 -34,1042 95,24943 -1,24 0,241 Nine days 11 -17,8385 255,6613 -0,242 0,813 Nine days (%) 11 -42,4807 118,7835 -1,239 0,241 *2-tailed

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Table 4. Hypothesis 1b/1c test results - Independent Samples T-test; Abnormal returns of acquisitions targeted at less developed markets and targeted at developed markets compared.

Event Window N Mean Std. Deviation T-test Significance*

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5.2 E

CONOMIC DIMENSION

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H

YPOTHESIS

2

Hypothesis 2 examines the effect of competitive distance on value creation. As can be seen in the results in table 5 there are no significant findings on this matter. The highest significance level is 0,273, which is far from significant. Therefore hypothesis 2 will be rejected. However, the negative t-test results indicate that the groups that had lower measured distances have lower means than the higher groups. This somewhat aligns with the argument that South African firms go to these economies for learning purposes. Therefore, the groups with the highest learning potential, high distance groups, have higher abnormal returns means.

Overall, the economic dimension does not show significant findings. There are only some signs that acquisitions targeted at developed markets create slightly higher abnormal returns.

5.3 O

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YPOTHESIS

3

Hypothesis 3 states that small firms generate relatively more abnormal returns than larger firms. To test this hypothesis, first all abnormal returns of the relatively smaller firms in this sample were t-tested with zero of which the results can be seen in table 6. The largest event window PAR (t=9) almost offers significant results on the T-test. However, as no significance is found, it cannot be assumed that acquisitions from smaller companies generate abnormal returns significantly different from zero. Therefore hypothesis 3 has to be rejected.

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Table 5. Hypothesis 2 test results - Independent Samples T-test; Abnormal returns of low and high competitive distance groups compared.

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Table 6. Hypothesis 3 test results – one sample t-test; Abnormal returns of small firms compared with zero.

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Table 7. Hypothesis 3 test results - Independent Samples T-test; Abnormal returns of small and large firms compared.

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5.4 O

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H

YPOTHESIS

4

Hypothesis 4 suggests that acquisitions into unrelated industries create more value than acquisitions into related industries. Therefore, a t-test is conducted in which the means of all abnormal returns of acquisitions into unrelated industries were compared to zero. This generated the results in table 8. However, according to these results there is no reason to accept hypothesis 4. The means are not significantly different from zero.

Table 8. Hypothesis 4 test results – one sample t-test with zero; Abnormal returns of acquisitions targeted at unrelated industries compared with zero.

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Table 9. Hypothesis 4 test results - Independent Samples T-test; Abnormal returns of acquisitions targeted at related and unrelated industries compared.

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5.5 C

ULTURAL DIMENSION

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H

YPOTHESIS

5

Hypothesis 5 states that value creation will be higher when cultural distance is lower and vice versa. In order to test this, two cultural distance indexes are used. One is calculated with Hofstede values and the other one with Globe values. First, t-tests are conducted in order to see if the lower cultural distance acquisitions and higher cultural distance acquisitions show abnormal returns that are significantly different from zero. Table 10a and 10b show Hofstede’s CDI results of respectively low cultural distance and high cultural distance. Table 11a and 11b show Globe’s CDI results of respectively low cultural distance and high cultural distance. None of these 4 tables show a significant difference from zero in its abnormal returns. Therefore, it cannot be stated that abnormal returns are created when CDI is high or low, even when two different types of proxies for cultural distance are used. Furthermore, when low and high cultural distance groups according to Hofstede and Globe are compared in respectively table 12 and 13, still no significant differences between groups is found. Therefore, hypotheses 5 is rejected.

Table 10a. Hypothesis 5 test results – one sample t-test with zero; Abnormal returns of acquisitions with low cultural distance using Hofstede values compared with zero.

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Table 10b. Hypothesis 5 test results – one sample t-test with zero; Abnormal returns of acquisitions with high cultural distance using Hofstede values compared with zero.

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Table 11a. Hypothesis 5 test results – one sample t-test with zero; Abnormal returns of acquisitions with low cultural distance using Globe values compared with zero.

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Table 11b. Hypothesis 5 test results – one sample t-test with zero; Abnormal returns of acquisitions with high cultural distance using Globe values compared with zero.

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Table 12. Hypothesis 5 test results - Independent Samples T-test; Abnormal returns of acquisitions with low and high cultural distance using Hofstede values compared with each other.

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Table 13. Hypothesis 5 test results - Independent Samples T-test; Abnormal returns of acquisitions with low and high cultural distance using Globe values compared with each other.

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5.6 C

ULTURAL DIMENSION

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H

YPOTHESIS

6

A

/6

B

These last two hypotheses test the effects of respectively normative distance and Christianity on value creation.

For normative distance, the highest measured significance is at a 0,20 level which can be seen in table 14. The t-tests show overall negative signs, which indicates that lower normative distance leads to lower abnormal return means. This difference is, as mentioned before, not significant but shows that unlike previously assumed, high normative distance might offer better learning opportunities. However, due to the insignificance of these findings, hypothesis 6a is rejected.

The effects of Christianity on value creation seem more promising. Table 15 shows clear signs of significance. At a 0,05 confidence level it can be stated that alliances targeted at countries in which the majority of inhabitants hold a Christian belief, value creation is high and vice versa. This has a clear relation to South Africa’s own general belief which is also Christian.

5.7 C

ONCEPTUAL MODEL

After all these individual effects of the components of economic, organizational and cultural dimensions, the combined effect of these variables will be tested. For these tests, the three day event window with percentile abnormal returns and Globe cultural values are used, because these variables show more promising predictability in the previous paragraphs. A linear regression analysis was performed in SPSS to test the conceptual model of this thesis. Using the enter method, all variables were entered into the model first. As can be seen in table 16, the significance of the model is unacceptable and furthermore the R Square is very low. In other words, there is no combined effect of these variables found. Therefore the existence of this conceptual model cannot be assumed.

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Table 14. Hypothesis 6a test results - Independent Samples T-test; Abnormal returns of acquisitions with low and high normative distance compared with each other.

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Table 15. Hypothesis 6b test results - Independent Samples T-test; Abnormal returns of acquisitions targeted at Christian and non-Christian countries compared.

Event day 80 0,2993 13,68952 1,211 0,229 21 -3,6134 10,95055 Event day (%) 80 3,4018 14,24751 2,421 0,017** 21 -5,0241 13,97968 Three days 80 0,6763 41,35009 1,135 0,259 21 -10,362 32,21536 Three days (%) 80 9,0836 41,6337 2,297 0,024** 21 -14,3582 41,61893 Five days 80 1,2248 68,57735 1,142 0,256 21 -17,1766 52,98377 Five days (%) 80 15,8364 69,38461 2,366 0,020** 21 -24,2853 68,27873 Seven days 80 1,7592 93,58821 1,143 0,256 21 -23,3998 72,58319 Seven days (%) 80 23,081 98,03044 2,374 0,020** 21 -33,537 94,25938 Nine days 80 2,4413 115,68984 1,174 0,243 21 -29,5889 91,84375 Nine days (%) 80 30,6168 126,93122 2,382 0,019** 21 -42,6672 119,46187

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Table 16. Regression analysis, test results of whole model.

Model Summary PAR T=3

R Square Std. Error ANOVA F Sig.

0,084 42,20046 1,211 0,305 Beta t Sig. (Constant) -4,37 -0,206 0,837 DEV 0,028 0,211 0,833 GCI 0,18 1,072 0,286 COMP_SIZE 0,058 0,549 0,584 RELATED 0,064 0,616 0,539 CDI_GLO 0,013 0,109 0,914 NDI -0,111 -0,904 0,368 CHRISTIANITY -0,171 -1,563 0,122

Table 17. Regression analysis, stepwise method.

Model Summary PAR T=3

R Square Std. Error ANOVA F Sig.

0,051 41,63072 5,274 0,024*

Beta t Sig.

(Constant) 9,084 1,952 0,054

CHRISTIANITY -0,225 -2,297 0,024

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6. D

ISCUSSION

Unfortunately only one of the hypotheses in this thesis could be accepted, this however does not mean that no conclusions can be drawn out of the other tests. Some findings are actually close to significant which creates ground to further investigate these findings in future research. Furthermore, two cultural indexes were tested and their effectiveness in explaining cultural distance differ somewhat. Finally, while most research uses Cumulative Abnormal Returns, Percentile Abnormal Returns were also introduced in this research to normalize the results. PAR values seemed to explain abnormal returns better than CAR.

Regarding abnormal returns over the whole sample, no conclusions can be drawn. There does not seem to be a significant overall positive or negative direction, which is different than literature suggests (Doukas and Travlos 1988). This can however be caused by positive and negative effects which cancel each other out. Therefore, the individual factors that influence abnormal returns become even more interesting.

Acquisitions into developed countries seem to develop positive abnormal returns and moreover abnormal returns are almost significantly higher than acquisitions targeted on less developed countries. The mean of the sample containing developed target market firms is positive, whereas the sample containing less developed target market firms has a negative mean. These findings are in contrast to what one would expect, taken into account previous findings. Wells (1983) and Cuervo-Cazurra (2008) actually found that acquisitions targeted at less developed or similar markets should create value. This research is however based on BRIC countries (Brazil, Russia, India and China) which might indicate that research on BRIC firms is not applicable for newer emerging markets. Results regarding acquisitions targeted at developed markets are in line with the existing literature on this subject. Gubbi et al. (2009) and Bhagat et al. (2011) also state that their research indicates that the proposed learning opportunities that developed markets offer do indeed generate positive abnormal returns.

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does not accurately measure these learning opportunities or this factor does not influence value creation in alliances entered by firms from newer emerging markets.

Firm size also seems to have an effect on abnormal returns. Small South African firms have a positive abnormal returns mean, while large South African firms have a negative abnormal returns mean. The abnormal returns of small firms are also almost significantly different from zero, which nearly proves the existence of abnormal returns in this group. Furthermore abnormal returns from small acquiring firms are also close to being significantly higher than those of large acquiring firms. This is in line with what one would suspect, that smaller firms are either more efficient in these acquisitions or they might actually have more learning opportunities in respect to larger firms. These findings do however not support the argument that power imbalances might affect smaller firms in these acquisitions (Adarkar 1997). A logical explanation for this is that such power imbalances appear over time and are impossible to measure with abnormal returns because they can only explain short term phenomena.

Industry seems to have no influence at all, which is certainly not in line with literature on such acquisitions. Doukas and Travlos (1988), argue that acquisitions into new industries generally result in positive abnormal returns. This thesis measures industrial relatedness by looking at the acquirer’s and target’s main industries. Therefore it might be that the acquirer’s and target’s main industry are not suitable substitutes to measure if the acquisition is into a new industry. Again, previous research is based on BRIC countries and therefore might not be representative for newer emerging markets.

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that complementary cultures could create value. It is however outside the scope of this research to assess whether organizational cultures are complementary for one another.

The global competitiveness report is also useful for calculating normative distance between two countries. This distance index measures differences in the values and norms that govern people’s behaviour. As this proxy is closely related to cultural distance, one would expect similar effects. Either learning opportunities may arise due to complementary cultures or integration costs and conflicts may arise. The first leading to positive abnormal returns and the latter leading to negative abnormal returns. There are more indications to suggest that low normative distance leads to low abnormal returns than the other way around. Only further research can however accurately test the influence of this proxy. It might well be that a normative distance proxy measures opportunities as Gubbi et al. (2009) and Bhagat et al. (2011) mention and a cultural distance proxy measures possible sources for conflict or integration costs. This is an interesting contradiction, which deservers closer attention in future research.

The most interesting finding has to be the influence of religion. This research proves that the South African firms in this sample have significantly higher abnormal returns when they target firms in countries in which the majority of the population holds the Christian belief than when they target firms which reside in countries that either do not hold the Christian belief or in which the majority does not hold the Christian belief. As this finding might seem logical as South Africa itself is a country in which the majority of inhabitants hold the Christian belief, it could also relate to the concept of Ubuntu. This uniquely South African management style has its roots in the Christian belief. Combining these facts it could thus well be that Christian countries are better compatible with the Ubuntu management style of South African firms, leading to less potential for integration costs and conflicts. It can be expected that this assumption also holds for emerging market firms with other religious backgrounds. For example, emerging market firms with Muslim backgrounds might create more value when they engage into acquisitions with firms from Muslim countries. Future research can either confirm or deny these expectations.

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there which affect value creation. Finding these factors is crucial in order to understand why these acquisitions often fail (John et al. 2010). This research therefore indicates that future research should focus on finding even more factors in order to complete the conceptual model as presented in chapter three.

Two cultural distance indices were tested in this thesis and only one seems to have effects on value creation that support statements made by previous researchers. This is true for the cultural index based on Globe’s dimensions. When the sample is closely examined it seems that the differences between these two cultural distance indices are not that spectacular. However, in almost all findings, the globe dimensions showed clearer results which also lead to more significance. As this research regards acquisitions made by South African firms, one could also argue that Globe dimensions better identify the Ubuntu national cultural that is seen in South Africa. It is therefore expected that Globe values are generally better compatible with emerging market cultures.

Finally, regarding the two proxies that are used for abnormal returns, it seems that PAR showed clearer results than CAR. This can be explained by the following example; take two companies that are listed, one with stocks that sell at €10,- a piece and the other with stocks that sell at €1000,- a piece. A positive abnormal return of €1 in both stocks leads to equal CAR returns, while PAR returns show an increase of 10% in the first stock and 0,1% in the second stock. This shows that CAR leads to problems when comparing these abnormal returns. A conclusion of this thesis is that PAR values should be used in future research, because it allows for a fairer way of comparing.

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therefore be a good basis for future research. Finally, expectations from previous research based on BRIC countries might not be that suitable for newer emerging market firms, as some of their predictions do not hold in this thesis.

7. L

IMITATIONS

One of the first limitations lies in the structure of this research. The market is assumed as (close to) perfect. While it is a generally accepted way of research in this field, one can of course assume that some noise will always be added to the abnormal returns found. It is impossible to exclude all this noise and state that abnormal returns are only caused by the acquisition itself. This thesis tries to control for this noise by setting the estimation window between 120 days before the acquisition until 30 days before the acquisition. By doing this, noise caused by speculations about the acquisition is mostly cancelled out. Moreover, the event period in which abnormal returns are measured is increased to a maximum of 7 days, which is three days before and three days after. This should cover inefficiencies and a possible lack of transparency of the market. Long-term effects are however outside the scope of this thesis.

Furthermore, organizational cultural distance is of course hard to measure. The proxies containing GLOBE and Hofstede values effectively measure national cultural distance. It is only a generally justified assumption that national culture reflects organisational culture. For this reason, an extra proxy for cultural distance, normative distance, is introduced. This relatively new factor probably adds new insights because it looks at culture from a different angle than traditional cultural dimensions.

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8. A

PPENDIX

8.1 L

ITERATURE OVERVIEW Abnormal returns related;

Author

and year

Title

Main Findings

Adarkar (1997) Emerging market alliances; must they be win-lose?

Motives for emerging market companies are; global expansion, access to knowledge/expertise and survival. Biggest threats are power imbalances and differences in capital between partners

Doukas and

Travlos (1988) The Effect of Corporate Multinationalism on Shareholders Wealth: Evidence from International Acquisitions

Cross-Border acquisitions create value, but only when new industries and markets are targeted

Chang, et al (2009)

Control of subsidiaries of MNCs from emerging economies in developed countries: The case of Taiwanese MNCs in the UK

Emerging market firms entering developed markets often want to learn and therefore adept to target market companies’ practices. This attitude is reversed when entering less developed markets as their practices are perceived as inferior.

Chen and Chen (2002)

Asymmetric strategic alliances ; a network view

New market access and experience are especially important for emerging market firms.

Craig (1997) Managing the Transnational Value Chain; Strategies for Firms from Emerging Markets

Focussing on cost leadership and differentiation are inadequate strategies for emerging market firms to enter the world market. Three strategies with limited participation; low-cost commodity (toys), private label manufacturer (electronics) and component manufacturer (auto parts).

Disadvantage -> buyer can go elsewhere. Three strategies with complete participation; low-cost leader (pc’s), 1st_{generation manufacturer (heavy} duty tires) and specialized niche (medicine). Disadvantage -> high costs and constrained opportunities.

Dacin and Hitt

(1997) Selecting Partners for Successful International Alliances Examination of U.S. and Korean Firms

Differences in partner selection criteria; Emerging market firms focus on learning possibilities e.g. technical expertise that partner has. Developed market firms focus on partner’s financial and managerial capabilities, presumably for security reasons.

Dacin and Hitt

(2000) Partner Selection in emerging and developed market contexts:

resource-based and

Emerging market firms search for partners with; good financial assets, technical capabilities,

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40 organizational learning

perspectives willingness to leverage resources, unique competencies and local market knowledge. Dong and Glaister

(2006)

Motives and partner selection criteria in international strategic alliances: Perspectives of Chinese firms

Emerging market firms’ motives for entering alliances are; maintaining market position, global expansion and technology exchange. They perceive their developed market partners’ motives as emerging market entry and access to experience on how to operate in emerging markets.

John et al. (2010) Investor protection and cross-border acquisitions of private and public targets

Value creation for public firms diminishes when investor protection is high, where it rises for private firms and vice versa

Gubbi et al. (2009)

Do international

acquisitions by emerging market firms create shareholder value? The case of Indian firms

Emerging market firms create value through acquisitions, especially when the target market is highly developed

Bhagat et al.

(2011) Emerging country cross-border acquisitions: Characteristics,

acquirer returns and cross-sectional determinants

Emerging market firms create value, especially through bootstrapping (adjusting to governance norms of target firm)

Wells (1983) Third world

multinationals: The rise of foreign investment from developing countries

Acquisitions in other less developed markets create value because of low labor costs and already suitable management skills

Cuervo-Cazurra et al. (2008)

Transforming disadvantages into advantages: developing-country MNEs in the least developed countries

Rivals in less developed markets will be outpaced because of unique mix of own and target market knowledge/resources. So due to experience with own poor institutional market, emerging market companies do well in likely markets.

Lall (1983) The new multinationals: The spread of third world enterprises

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41 Dimensions related;

Author

and year

Title

Main Findings

Barkema (1997) What differences in cultural backgrounds of partners are detrimental for international joint ventures?

Differences in uncertainty avoidance and long-term orientation are most detrimental. Other

dimensions can be countered with explicit agreements. Chatterjee et al.

(1992) Cultural differences and shareholder value: Explaining the variability in the performance of related mergers

Strong inverse relationship between cultural differences and value creation

Weber (1996) Corporate cultural fit and performance in

mergers and acquisitions Inverse relationship between cultural distance and value creation, this can be

mitigated through synergy potential

Datta and Puia

(1995) Cross-Border Acquisitions: An Examination of the Influence of relatedness and Cultural Fit on Shareholder Value Creation in U.S. Acquiring Firms

Cross-border acquisitions in general do not create value, however cultural distance is strongly correlated with value destruction Sales and Mirvis

(1984) When cultures collide: Issues in acquisition High potential for administrative conflicts when cultural distance is present Buono and

Bowditch (1989)

The human side of mergers and acquisitions High potential for cultural clashes because of hostility between both company cultures

Kogut and Singh

(1988) The effect of national culture on the choice of entry mode Culture influences entry mode choice. Furthermore, sitting management might obstruct performance. Higher cultural distance promises a larger difference in organizational traits Davis et al. (1991) Continental mergers are different Integration costs in

cross-border acquisitions are high. Important that partner has required skills to create synergy.

Merchant and

Schendel (2000) How do International Joint Ventures create shareholder value Positive value creation is related to partner-venture business relatedness, greater equity ownership and large firm size.

Madura et al.

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42

Das (2010) The Difficulty of Being Good: On the Subtle Art

of Dharma When cultural distance is high, target market conditions are not known by acquiring firm which creates costs

Terpstra and David (1991)

The cultural environment of international business

National culture reflects organizational culture Schneider and

Meyer (1991) Interpreting and responding to strategic issues: The impact of national culture National culture reflects organizational culture Vaara et al.

(2010)

The Impact of Organizational and National Cultural Differences on Social Conflict and Knowledge Transfer in International Acquisitions

Cultural distance can lead to conflicts, especially when learning is important motive

8.2 E

XCLUDED CASES

Deal nr; Acquirer; Reason; Target country

367684 Kumba No stock data Australia

189069 Durban No stock data Australia

154062 Kumba No stock data China

42606 Business Bank Double entry (42359) Germany

134257 Investec Too old Great Britain

136383 Datatec Too old Great Britain

269538 Discovery No stock data Great Britain

582410 Discovery No stock data Great Britain

1000003262 Bidvest Double entry (1000003260) China

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