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Hui Chen
August 2007
UNIVERSITY OF GRONINGEN
Faculty of Management & Organization
MSc Program in Business Administration－Specialization Finance
Under the Supervision of
H.Gonenc
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Abstract Abstract Abstract AbstractThis study examines announcement period abnormal returns to acquirers of listed targets in 16 European countries (including U.K.) of a sample of 550 acquisitions occurring during 2000 to 2005. Acquirers using cash to acquire listed firms gain more than using non-cash financing. In domestic acquisitions, cash financing acquirers experience significantly positive announcement returns and the cash acquirers outperform non-cash acquirers. However, there is no evidence that cash acquirers outperform non-cash acquirers in related acquisitions. Moreover, there is no significant difference between cash and non-cash deals in cross-border and unrelated acquisitions. The study also finds that the market-to-book value of target, acquirer’s size are important factors associated with acquirers’ wealth creation.
Keywords: Keywords: Keywords:
Keywords:
acquisitions, announcement returns, domestic, cross-border, related, unrelated, method of payment, cash, non-cash
Hui Chen
Faculty of Management & Organization, University of Groningen, 9700 AV, Groningen, the Netherlands
Table Table Table Table of of of of Content Content Content Content 1. Introduction... 3 2. Literature review...5
2.1 Summery of the literature...5
2.2 CARs by method of payment...7
2.3 Domestic vs. cross-border acquisitions ……….8
2.4 Method of payment in domestic and cross-border acquisitions……… ………...10
2.5 CARs by industry relatedness………...11
2.6 Method of payment in related and unrelated acquisitions……….12
3. Hypothesis………12
4. Data ...13
5. Methodology...13
6. Descriptive statistic of the sample………...14
7. Results analysis...18
7.1 Univariate analysis………...18
7.1.1 CARs by method of payment………...18
7.1.2 Domestic vs. cross-border acquisitions………19
7.1.3 Focus vs. diversification………...19
7.1.4 Domestic vs. cross-border acquisitions classified by the method of payment...20
7.1.5 Related vs. unrelated acquisitions classified by the method of payment……….20
7.2. Multivariate analysis... 21
8. Conclusions... 24
1. 1. 1. 1. III I ntroduction ntroduction ntroduction ntroduction
Recent studies on European M&As document that the method of payment plays an important role in explaining acquiring firms’ announcement returns. In making an M&A activity decision, an acquirer faces with a choice between using cash and stock as deal consideration. Travlos (1987) reports negative abnormal returns for firms financing an acquisition with stock, while normal abnormal returns for those financing with cash. Walking (1987) finds that stock deals are zero or slightly positive returns whereas cash deals are associated with significantly and substantially higher returns. Bradley and Sundaram (2004) also report the announcement returns are positive to acquirers when the targets are acquired with cash, however the announcement returns are negative when the targets are acquired with stock. Conn, Cosh, Guest, Hughes (2005) report domestic acquisitions of public targets result in significantly negative announcement returns, whereas cross-border acquisitions of public targets result in zero announcement returns. They find that cash dominates cross-border and private domestic acquisitions and the announcement period returns of cash deals are worse than non-cash deals. However, for domestic public targets, the non-cash acquirers experience significantly negative announcement period returns, while cash acquirers experience zero announcement period returns.
Another argument for method of payment effect is that cash acquisitions may be forced by the reluctance of cross-border targets to accept foreign stock financing. In this case the signaling effect of the use of cash financing may be neutralized. The positive impact of cash on returns may therefore be more apparent in domestic acquisitions of public firms than in cross-border acquisitions of public firms (Gaughan, 2002).
The above theoretical reasons explain why the performance of cash acquirers differs from non-cash acquirers and why the impact of method of payment varies in cross-border and domestic acquisitions. Since the size of M&A transactions is large in Europe and there is much about the M&A process we do not fully understand, including the impact of method of payment, we think it is important to examine whether the method of payment effects can play an important role in European domestic, cross-border acquisitions and related, unrelated acquisitions and what factors can affect the announcement returns. We do so by examining the announcement period abnormal returns to acquirers of listed targets in 16 European countries (including U.K.) of a sample of 550 acquisitions occurring during 2000 to 2005.
There are several major findings of the study. On average, cash financing acquiring firms outperform non-cash financing acquiring firms. In domestic acquisitions, cash financing acquirers experience significantly positive announcement returns and cash financing acquirers outperform non-cash financing acquirers. However, in related industry, there is no evidence that cash financing acquirers outperform non-cash financing acquirers.
The remainder of the study is structured as follows. Section 2 reviews the existing empirical literature. Section 3 presents the hypothesis. Section 4 describes the data. Section 5 describes the methodology. Section 6 presents the sample characteristics. Section 7 shows the tests of various explanations of the results. Section 8 concludes. Final section is limitation and future study.
2. 2. 2. 2. Literature Literature Literature Literature review review review review 2.1 2.1 2.1 2.1 General General General General literature literature literature literature review review review review
Previous studies report zero and slightly positive cumulative abnormal returns and those report negative cumulative abnormal returns to acquiring firms are evenly distributed. Table A summarizes the findings of 3 studies for U.S. acquirers that report positive cumulative abnormal returns. These returns range from zero to seven percent with different windows. Table B lists 3 studies for U.S. acquirers that report negative cumulative abnormal returns. These negative returns are significantly different from zero and range from less than one percent to one percent with different windows.
Table Table Table Table A: A: A: A:
Studies reporting positive returns to acquirers
Table Table Table Table B: B: B: B:
Studies reporting negative returns to acquirers
Study Study Study Study Event Event Event Event window window window window Cumulative Cumulative Cumulative Cumulative abnormal abnormal abnormal abnormal returns returns returns returns (%) (%) (%) (%) Sample Sample Sample Sample size size size size Sample Sample Sample Sample period period period period Maquieira et al. (1998) (-60,+60) 6,14% 55 1963-1996 Mulherin (2000) (-1,0) 0,85% 161 1962-1997
Kohers and Kohers (2000) (-0,1) 1,26% 1634 1987-1996
Study Study Study Study Event Event Event Event window window window window Cumulative Cumulative Cumulative Cumulative abnormal abnormal abnormal abnormal returns returns returns returns (%) (%) (%) (%) Sample Sample Sample Sample size size size size Sample Sample Sample Sample period period period period
Mulherin and Boone
For European acquirers, Goergen and Ronneboog (2004) analyze the short-term wealth effects of large intra-European acquisitions, and they find that the announcement effects are only 0.7% for the acquirers compared with 9% to the target. The abnormal returns are higher than those of acquisitions involving both a continental European acquirer and target when a UK firm is involved.
The empirical and theoretical literature on acquisitions generally suggests that a number of characteristics of the deals may influence acquirers’ announcement returns. There is evidence that the market-to-book value of target, acquirer’s size, and relative size all can influence the acquirers’ performance. Rau and Vermaelen (1998) show that the a high market to book ratio of the target leads to a substantial low abnormal returns for the shareholders of the acquiring firm, whereas a low market to book ratio of the target leads to higher abnormal returns. Goergen and Renneboog (2004) confirm their result that a high market to book ratio of the target leads to negative price reaction for the acquiring firm, since for a target with strong growth opportunities (as reflected by a high market-to-book ratio), the market expects a premium and is at the same time anxious that the acquirer will overpay for the growth options. MSS (2004) investigate the size effect exhaustively. They find that the announcement abnormal return for small firms exceeds the announcement abnormal return for large firms by 2.24 percentage points and the significantly higher CARs for smaller acquiring firms regardless of the type of target. They also find large firms experience significant shareholder wealth losses when they acquire public firms irrespective of how the acquisition is financed while small firms gain significantly high returns when they acquire public targets. The result supports that managerial hubris playing more of a role in the decisions of large firms. Fuller et al.(2002)
suggest returns in non-cash acquisitions increase in the relative size of the target. Conn, Cosh, Guest, Hughes (2005) find evidence that relative size has a positive impact on non-cash acquirers in domestic acquisitions, while no support for the positive effect for cross-border acquisitions.
Mitchell, Stanford (2000) (-1,0) -0,14% 366 1961-1993
The above literature is in general well-known. For the following literature review, we will discuss a little more fully about the method of payment in European acquisitions, since we believe that this has particular implications for domestic and related acquisitions.
2.2 2.2 2.2 2.2 CARs CARs CARs CARs by by by by Method Method Method Method of of of of Payment Payment Payment Payment
significant negative returns for firms with relatively high managerial ownership should be viewed in light of the consistent evidence that announcements of equity issues are associated with negative abnormal returns. Like the Amihud, Lev and Travlos study, Ghosh and Ruland investigate large deals involving publicly listed targets, and their result also strongly confirms the result of Amihud, Lev, and Travlos’s. Yook (2003) uses the signaling theory and the benefit of debt theory to explain why acquirers offering cash earn higher returns than stock. The author shows that the stock acquisitions and cash acquisitions have different sources of value creation. The synergy effect outweighs the leverage effect in stock takeovers, whereas benefit of debt is the main source of value in cash acquisitions. Bradley and Sundaram’s (2004) also report the market responds positively to acquisitions of public targets when the method of payment is cash, however the announcement effect is negative when the public targets are acquired with stock, especially the larger the relative size of the target the more negative is this effect. Goergen and Renneboog (2004) argue that a stock acquisition is made around the announcement date might signal to the market that the managers of acquiring firms believe that their firm’s shares are overpriced. This is in line with the fact that managers time the issues of shares to happen at the high point of the stock market cycle. There are two alternative explanations for the positive impact of cash acquisitions. One is the signaling theory that states acquirers offer securities when they are overvalued (Myers and Majluf, 1984). The other explanation is that acquirers offer securities when they have a low valuation of the target (Fishman, 1989), the author develops a model of preemptive bidding and securities are offered by lower valuing acquirers and cash by higher valuing acquirers in equilibrium. Consider offering a high payment if the target’s information indicates a profitable acquisition, and a low payment otherwise, a securities offer would induce the target to make an efficient, given its information, accept/reject decision and also allows the target to observe private information on the profitability of an acquisition.
2.3 2.3 2.3 2.3 Domestic Domestic Domestic Domestic vs. vs. vs. vs. cross-border cross-border cross-border cross-border acquisitions acquisitions acquisitions acquisitions
Vishny (1990), they all report that domestic acquisitions in 1980s destroyed shareholder value. Recent studies like Maquiera et al. (1998), Schwert(2000), Eckbo and Thorburn (2000) show that there are zero or small positive abnormal returns created for the shareholder of acquiring firms, whereas Healy et al. (1992), Mitchell and Stafford (2000), Walker(2000) find that there are small negative returns for the acquirers.
There are some empirical evidence supports that the international acquisitions create value for the shareholders of the acquiring firms. Kim and Lyn (1986), Grant (1987) investigate the performance of multinationals in 1972 and 1972-1984 respectively, although they use different performance measures, they all find that the performance of multinationals is superior to that of domestic firms. For U.S. cross-border acquisitions, Markides and Ittner (1994) examine 276 U.S. international acquisitions over the period of 1975 to 1988 and report that on average international acquisitions create value for the acquiring firms. One important argument for expecting the returns from cross-border acquisitions to be higher than those in domestic acquisitions is based on the gains from diversification when acquirers seek synergies arising from especially information based and intangible assets (Baldwin and Caves, 1991; and Morck and Yeung, 2003).
reason for expecting relatively low returns arises from cross-border acquisitions due to the difficulties of managing the post acquisitions process when cultural differences make integration a time consuming, expensive, and difficult process. The bigger the cultural gap the worse the problems may be. These problems clearly influence cross-border compared to domestic acquisitions (Baldwin and Caves, 1991, Schoenberg, 2000). Campa and Hernando (2004) investigate the announcement returns for the European firms over the period 1998 to 2000 and they find that shareholders of acquiring firms obtain lower CARs in cross-border deals than in domestic deals, the explanation for the lower cumulative abnormal returns to acquirers in the cross-border acquisitions is that acquirers in cross-border acquisitions may face obstacles (e.g. cultural gap) that offset their advantages when entering new markets.
2.4 2.4 2.4 2.4 M M M M ethod ethod ethod ethod of of of of payment payment payment payment in in in in domestic domestic domestic domestic and and and and cross-border cross-border cross-border cross-border acquisitions acquisitions acquisitions acquisitions
Conn, Cosh, Guest and Hughes (2005) examine the announcement and post acquisition abnormal returns of UK acquirers in over 4,000 acquisitions of domestic, cross-border, public and private targets and they find that for domestic public targets, non-cash acquirers experience significantly negative announcement abnormal returns while cash acquirers experience zero announcement abnormal returns. They also suggest their finding is in line with the theory that acquirers offer securities to acquire domestic public targets when the acquirer is overvalued.
2.5 2.5 2.5 2.5 CARs CARs CARs CARs by by by by industry industry industry industry relatedness relatedness relatedness relatedness
2.6 2.6 2.6 2.6 M M M M ethod ethod ethod ethod of of of of payment payment payment payment in in in in related related related related and and and and unrelated unrelated unrelated unrelated acquisitions acquisitions acquisitions acquisitions
There is very little previous work on the impact of method of payment in related and unrelated acquisitions. Wansley, Lane, and Yang (1987) study 199 acquisitions of listed targets over the period of 1970 to 1978 and find that in related acquisitions, cash acquirers gain more than securities acquires. They also suggest that when acquisitions employing securities are considered, unrelated acquisitions appear to reward acquirers with greater abnormal returns than related acquisitions. When only cash transactions are considered, however, unrelated acquisitions are associated with slightly lower abnormal returns than related acquisitions.
3. 3. 3. 3. Hypothesis Hypothesis Hypothesis Hypothesis
Many previous studies support the augment that acquisitions financed by cash create more value for shareholders of acquiring firms than those financed by non-cash. Walking (1987) reports the abnormal returns associated with cash offers are significantly higher than those associated with stock offers. Bradley and Sundaram’s (2004) also report the market responds positively to acquisitions of public targets when they are acquired with cash, however the announcement effect is negative when the public targets are acquired with stock. Therefore, this suggests the hypothesis 1,
Hypothesis Hypothesis Hypothesis Hypothesis 1: 1: 1: 1:
Cash financing acquirers outperform non-cash financing acquirers of listed targets.
In the second step, the study tries to test the difference in the method of payment in domestic acquisitions. Conn, Cosh, Guest and Hughes (2005) report non-cash acquirers experience significantly negative announcement returns, while cash acquirers experience zero announcement returns in domestic acquisitions of public targets. And the study supposes that the same results as Conn, Cosh, Guest and Hughes (2005) will be found. Thus, H H H H ypothesis ypothesis ypothesis ypothesis 2: 2: 2: 2:
Finally, the study tries to test whether there is difference in the method of payment in the related industry. There is limited empirical literature on this issue. According to Wansley, Lane, and Yang (1987), in related acquisitions, cash acquirers gain more than securities. Therefore, we can come out with the following hypothesis:
H H H H ypothesis ypothesis ypothesis ypothesis 3: 3: 3: 3:
the cash acquirers gain more than non-cash acquirers in related acquisitions. 4. 4. 4. 4. D D D D ata ata ata ata
Our empirical analysis is based on a final sample of 550 European M&A acquisitions over the period 2000 to 2005. The sample acquisitions are drawn from the database ZEPHYR and each acquisition in my sample meets the following selection criteria: (a) The acquiring firms are from EU countries;
(b) Both the acquiring and target firms are listed;
(c) The acquirers and targets are both non-financial firms; (d) The acquisition is successfully completed;
(e) The deal value is equal or greater than 5 million dollars.
To be included in our sample, both the acquirer and the target must be quoted, and the announcement date must be available. The stock price data for the acquirer should be available on Datastream around the announcement date of the acquisition and the acquirer’s book value of assets, market value, the market-to-book value, the deal value, and the target’s book value of assets, market value, and market-to-book value are all from Datastream. The ratio of relative size in my sample is defined as the deal value divided by the acquirer’s book value of assets. My sample also includes the method of payment, the names of the acquiring and target firms involved in the acquisition, the countries in which the acquirer and target were incorporated, the type of industry, acquirer’s and the target's Standard Industrial Classification (SIC) code.
5. 5. 5. 5. M M M M ethodology ethodology ethodology ethodology
+1) around the announcement date. Brown and Warner’s (1985) estimate the abnormal returns by using the market-adjusted model, where the benchmark return is the contemporaneous return on the Datastream equal weighted market index. They also estimate the t-statistics by using the cross-sectional variation of abnormal returns. Since there is a high possibility in the sample that previous transactions would be included in the estimation period and the acquirers make frequent acquisitions, therefore the beta estimation becomes less meaningful. Brown and Warner (1980) report weighting the market return by the firm’s beta for short-window event studies does not improve estimation significantly. Andrade et al.(2001) suggest that for acquisitions studies, the three-day event window is one of the two most commonly used event windows and the results of the three days event window typically insensitive to the model chosen for expected returns. The other event windows are most likely used begins before the announcement date and ends with the completion of the acquisitions and the longer window makes it possible to take acquisition revisions and competition into account.
6. 6. 6. 6. D D D D escriptive escriptive escriptive escriptive statistics statistics statistics statistics of of of of the the the the sample sample sample sample
Table 1 shows the number of acquisitions by home country of the acquirer. There is some variation in the number of acquisitions across acquiring countries. From table 1, we can see large majority of deals involve U.K. acquirers (24.5%) and there are relatively few acquisitions in Austria (1.3%), Belgium (2.5%), Denmark (3.1%), Finland (2.4%), Greece (1.3%), Ireland (1.1%), Norway (2%), and Portugal (3.3%). Because the sample is dominated by U.K. acquisitions, so we consider U.K. acquirers separately and define a dummy variable for the U.K. acquirers to control the possibility that U.K. acquisitions may overwhelm the results from other countries.
Table Table Table Table 1: 1: 1: 1:
Distribution of acquisitions by home country of the acquirer
Table 2 presents descriptive statistics when acquisitions are classified by the method of payment. Transactions are classified as all cash, all stock or mixed. According to Martin (1996) and FNS (2002), we define cash as the amount paid in cash and newly issued notes and stock as the amount paid in the stock of the acquiring company. It shows that most European acquisitions are cash financed. Specifically, the sample contains 405 (73.6%) pure cash deals, 58 (10.5%) pure stock deals, and 87 (15.8%) combination of cash and stock deals. Cash deals are predominant across all countries, which is consistent with the findings in previous European M&A studies. Table 2 also shows that there are approximately 56.5% acquisitions are cross-border deals and 43.5% acquisitions are domestic deals. We use three-digit SIC codes to classify industries, there are 78.4% acquisitions within industry, while there are only 20.5% acquisitions in unrelated industry.
Table2: Table2: Table2:
Table2:
Descriptive statistics for deal
Table 3 shows that cash is the primary method of payment in both cross-border acquisitions (42.2%) and domestic acquisitions (31.5%). However, the use of stock is relatively very small in both cross-border (4.7%) and domestic acquisitions (5.8%). Acquisitions between firms in related industries (defined as the same three-digit SIC codes) occur in 44.9% of the cross-border sample and 34.4% of the domestic sample, while acquisitions between firms in unrelated industries is about 11.6% for cross-border acquisitions and 9.2% for domestic acquisitions.
Table3:able3:able3:
able3:
Descriptive statistics for cross-border acquisitions versus domestic acquisitions
Table 4 presents that although most acquisitions use cash as the primary method of payment, the deal value (87609 dollars) for cash transactions is smaller than those for stock transactions (118299 dollars) and mix transactions (131093 dollars). As we defined before, relative size is measured by deal value divided by assets of acquirers, since cash deals have the lowest deal value and highest assets of acquirers, the ratio of relative size for cash deals is the lowest (0.04), whereas stock deal and mix deal have much higher relative size, 0.15 and 0.2 respectively. For cross-border acquisitions, the number of assets of acquirers is much more than those of domestic acquisitions and the deal value is similar to those of domestic deals, thus the ratio of relative size for cross-border acquisitions is much smaller (0.02) compared with domestic acquisitions (0.09).
T T T T able able able able 4 4 4 4 : Sample statistics No. No. No. No. of of of of observation observation observation observation Percent Percent Percent Percent
Cross-border acquisitions All-cash 232 42.2
All-stock 26 4.7
Mix 53 9.6
Diversified 63 11.6
Focus 244 44.9
Domestic acquisitions All-cash 173 31.5
Acquirer Assets of Acquirer 24778197.31 3551746.50
Market value of Acquirer 15074.29 2226.06
Market to book value of
Acquirer 2.98 1.84
Deal value 870211.89 94882.00
Assets of Target 4595638.33 322277.00
Market value of Target 3572.04 273.56
Market to book value of Target 3.91 1.95
Relative size 0.39 0.05
All-cash acquisitions Assets of Acquirer 24603103.36 4471698.00
Market value of Acquirer 15515.59 2923.18
Market to book value of
Acquirer 3.01 1.81
Deal value 409093.34 87609.00
Assets of Target 4810959.58 341150.00
Market value of Target 3804.63 282.88
Market to book value of Target 3.13 1.96
Relative size 0.14 0.04
All-stock acquisitions Assets of Acquirer 12118384.93 1670572.50
Market value of Acquirer 13184.69 1567.58
Market to book value of
Acquirer 3.53 2.24
Deal value 2296651.38 118299.00
Assets of Target 5392908.10 249083.00
Market value of Target 3121.24 226.01
Market to book value of Target 5.50 1.68
Relative size 1.02 0.15
Mix acquisitions Assets of Acquirer 34033164.79 2023334.00
Market value of Acquirer 14279.68 1270.90
Market to book value of
Acquirer 2.46 1.75
Deal value 2293777.57 131093.00
Assets of Target 2910638.93 230687.00
Market value of Target 2747.24 256.57
Market to book value of Target 6.53 2.24
Relative size 1.30 0.20
Cross-border
acquisitions Assets of Acquirer 33166756.28 6086287.00
Market value of Acquirer 19490.02 5065.17
Market to book value of
Acquirer 3.05 1.97
7. 7. 7. 7. R R R R esults esults esults esults analysis analysis analysis analysis 7.1 7.1 7.1 7.1 U U U U nivariate nivariate nivariate nivariate analysis analysis analysis analysis 7.1.1 7.1.1 7.1.1 7.1.1 CARs CARs CARs CARs by by by by method method method method of of of of payment payment payment payment
Table 5 presents that the majority of acquisitions are cash offers (405 out of 550 or 73.6%), 10.5% of the offers are all-stock offers and the rest used mixed method of payment. The 3-day abnormal returns classified by the method of payment (cash only, share only and the combination of both) are also presented in Table 5. The estimates reveal that 3-day abnormal returns for acquirers that pay in cash are positive (1.1%), while for acquirers that pay in share and pay in mixed method are negative, 0.8% and -0.3% respectively. The difference between cash deals and stock deals are significant at 5% level and the difference between cash deals and mix deals are significant at 10% level.
Overall, for cash deals and non-cash deals, the difference is significant at 5%.
T T T T able able able able 5 5 5 5 ::: :
3-day cumulative announcement abnormal returns of acquiring firms by method of payment and the T-statistic results
Assets of Target 4096699.61 269930.00
Market value of Target 2097.46 275.41
Market to book value of Target 5.25 2.36
Relative size 0.32 0.02
Domestic acquisitions Assets of Acquirer 138625541.09 1180489.00
Market value of Acquirer 9328.29 794.46
Market to book value of
Acquirer 2.89 1.65
Deal value 899877.03 83043.00
Assets of Target 5151274.64 370235.50
Market value of Target 5332.43 272.65
Market to book value of Target 2.46 1.72
** represents significant at 5% level * represents significant at 10% level
7.1.2 7.1.2 7.1.2 7.1.2 Domestic Domestic Domestic Domestic versus versus versus versus cross-border cross-border cross-border cross-border acquisitions acquisitions acquisitions acquisitions
In this section, we distinguish between domestic and cross-border acquisitions. 43.5% of European acquisitions are domestic. Table 6 shows that acquirers’ CAR (-1,+1) for cross-border and domestic acquisitions amount to 0.4% and 1.1% respectively. The average cumulative abnormal returns are larger in domestic acquisitions, although the difference is not significant. T T T T able able able able 6 6 6 6 ::: :
3-day cumulative announcement abnormal returns of acquiring firms for cross-border vs. domestic acquisitions and T-statistic results
7.1.3 7.1.3 7.1.3 7.1.3 Focus Focus Focus Focus versus versus versus versus diversification diversification diversification diversification
In this section, we compare three days abnormal returns between the acquisitions in focus industries and diversified industries. The evidence presented in table 7 shows that acquirers’ CAR (-1,+1) for diversified and focus acquisition are -0.01% and 1% respectively, although cumulative abnormal returns are larger in focus acquisitions, the difference is insignificant. T T T T able able able able 7 7 7 7 ::: :
3-day cumulative announcement abnormal returns of acquiring firms: Diversified versus focus acquisitions and the T-statistic results
All-cash vs. all stock -1.98 0.048**
7.1.4 7.1.4 7.1.4 7.1.4 Domestic Domestic Domestic Domestic vs. vs. vs. vs. cross-border cross-border cross-border cross-border acquisitions acquisitions acquisitions acquisitions classified classified classified classified by by by by the the the the method method method method of of of of payment payment payment payment
Table 8 presents that the returns to acquirers in domestic and cross-border acquisitions classified by the method of payment. Domestic and cross-border acquisitions are both dominated by cash. Acquisitions are classified according to whether the acquisition is made with an all cash deal, or non-cash deal. Non-cash deals include stock deals and the combination of cash and stock. The three days announcement abnormal returns reveal that in domestic acquisitions, the difference between non-cash deals and cash deals is significant at 1%. However, in cross-border acquisitions, the difference between cash financing and non-cash financing deals is not significant.
T T T T able able able able 8 8 8 8 ::: :
3-day cumulative announcement abnormal returns for domestic and cross-border acquisitions by method of payment
*** represents significant at 1% level
7.1.5 7.1.5 7.1.5 7.1.5 Related Related Related Related vs. vs. vs. vs. unrelated unrelated unrelated unrelated acquisitions acquisitions acquisitions acquisitions classified classified classified classified by by by by the the the the method method method method of of of of payment payment payment payment
Table 9 reports that the announcement returns to acquirers in related and unrelated business classified by the method of payment. Focus and diversification acquisitions are also both dominated by cash. The CAR (-1,+1) also shows that in focus acquisitions, the difference between non-cash deals and cash deals is significant at 5% level. However, in diversification acquisitions, the difference between non-cash and cash financing acquisitions is not significant.
T-statistic T-statistic T-statistic T-statistic Sig. Sig. Sig. Sig. Diversified vs. focus -1.24 0.22 No. No. No. No. of of of of observation observation observation observation Mean Mean Mean Mean of of of of CAR CAR CAR CAR (-1,+1) (-1,+1) (-1,+1) (-1,+1)
Domestic acquisitions Non-cash 66 -0.01
Cash 173 0.02
Cross-border acquisitions Non-cash 79 -0.001
Cash 232 0.006 T-statistic T-statistic T-statistic T-statistic Sig. Sig. Sig. Sig.
Domestic non-cash vs.domestic cash -2.98 0.003***
Cross-border non-cash vs.
T T T T able able able able 9 9 9 9 ::: :
3-day cumulative announcement abnormal returns for focus and diversification acquisitions by method of payment
** represents significant at 5% level
7.2 7.2 7.2 7.2 M M M M ultivariate ultivariate ultivariate ultivariate analysis analysis analysis analysis
We now turn to multivariate tests to examine the effect of the determinants on cumulative abnormal announcement returns. Table 10 presents the regression results examining the 3-day announcement abnormal return generated by European acquisitions. Because of the missing information for some of the variables we used, the sample size drops from 550 to 414 acquisitions.
The dependent variable in the regression is the 3-day announcement abnormal return. The model includes an indicator (cash) for whether the payment was made in cash (1) or non-cash (0), an indicator (domestic) for whether the acquisition was a domestic deal (1) or not (0), an indicator (focus) for whether the acquisition in the same industry (1) or not (0), an indicator (U.K.) for whether the acquirer was incorporated in the U.K. (1) or not (0). As control variables, we also include factors found to be related with acquirers’ abnormal returns in the previous studies. Lang, Stulz, and Walkling (1989) use targets’ Tobin’s q which is measured as the ratio of the firm’s market value to its book value to see whether it has impact on acquirers’ CARs. Lang, Stulz, and Walkling (1989), (1991) and Servaes (1991) find that U.S. acquirers’ CARs are higher when the target’s Tobin’s q is higher. Therefore, we use market value plus book value of debt divided by total assets as Tobin’s q to measure the impact on acquirers’ CARs. Maquieira, Megginson, and Nail (1998) report acquirers’ abnormal returns are higher in within-industry acquisitions than in diversifying acquisitions. Therefore, to control for whether the acquisition is within the same industry, we include an indicator variable to determine whether the acquirer and the
No. No. No. No. of of of of observation observation observation observation Mean Mean Mean Mean of of of of CAR CAR CAR CAR (-1,+1) (-1,+1) (-1,+1) (-1,+1)
Focus acquisitions Non-cash 111 -0.004
Cash 320 0.01
Diversification acquisitions Non-cash 33 -0.01
Cash 80 0.003 T-statistic T-statistic T-statistic T-statistic Sig. Sig. Sig. Sig.
Focus non-cash vs. cash -2.24 0.03**
target are in related industry (1) or not (0). MSS (2004) find that large firms experience significant shareholder wealth losses when they acquire public firms while small firms gain significantly high returns when they acquire listed targets. We use natural logarithm of book value of assets of the acquiring firm (size of acquirer) to measure the size effect. Asquith, Bmner, and Mullins (1983), Jarrell and Poulsen (1989), and Servaes (1991) report the size of the target relative to the size of the acquirer is positively correlated with the acquirer’s cumulative abnormal returns for U.S. acquirers. Their evidence is in line with that of Eckbo and Thorbum (2000) and Bae, Kang, and Kim (2002), they find similar results for Korea and Canada respectively. We use relative size measured as deal value divided by acquirer assets to control for this factor.
T T T T able able able able 10 10 10 10 ::: : Regression results
*** represents significant at 1% level ** represents significant at 5% level * represents significant at 10% level
In table 11, we include two interaction variables, one is cash*domestic, the interaction variable between cash deals and domestic acquisitions which equals to domestic acquisitions if payment is cash, zero if non-cash. The other one is cash*focus, which is the interaction variable between cash deals and focus acquisition, if payment is cash equals to focus acquisition, zero if non-cash. The combination variable (for cash and domestic acquisitions) is positive and significant at 10% level, which means cash financing acquirers experience significantly positive announcement returns and cash acquirers outperform non-cash acquirers in domestic acquisitions. Although domestic acquisitions have a negative impact on three days announcement abnormal returns on its own, it can serve to offset the potential damage to three days announcement abnormal returns in cash acquisitions. However the coefficient of the other combination variable (for cash and focus acquisitions) is negative but insignificant, therefore there is no evidence that cash financing acquirers outperform non-cash financing acquirers in related acquisitions. The variable of market-to-book value of target and the size of the acquirer still remain negative and significant at 5% and 10% level respectively. The market-to-book value of acquirer is still insignificant, which means that this variable is not related to acquirer wealth creation. The same can be applied to the variables of relative size, U.K., domestic and focus. Relative size always comes out insignificant but positive
Variables Variables Variables Variables Estimated Estimated Estimated Estimated coefficient coefficient coefficient coefficient T-statistic T-statistic T-statistic T-statistic P P P P value value value value Intercept 0.008 0.29 0.77 Cash 0.029 3.67 0.00*** Domestic 0.008 1.11 0.27 Focus 0.009 1.11 0.27 Size of acquirer -0.003 -1.64 0.10* Relative size 0.002 1.21 0.23
Market-to-book value of acquirer 0.0005 0.58 0.56
Market-to-book value of target -0.0008 -2.25 0.03**
which contrasts the pervious studies by Markides and Ittner (1994), they report relative size is strongly and positively related to acquirer’s wealth creation. Since we only investigate listed targets acquisitions, maybe it is the reason why the coefficient for the relative size is not significant here. The same can be said for the variables of U.K. and focus, which come out positive but insignificant in the two tables. The coefficient of the variable domestic is positive in table 10 but negative in table 11, but both are insignificant, which means the domestic acquisitions are not important associated with acquirer’s wealth creation. Contrary to the result in table 10, the form of payment (cash) is insignificant in table 11. This is consistent with the study by Morck and Yeung (1992) who report that stock financing is not significant related to abnormal returns, we get the same result when we only consider cash financing acquisitions. However, there is an increase in the R2s as a result of introducing the two interaction variables, R2s go from
4.7% to 5.3%, suggesting the two interaction variables increase the explanatory power of the regression model.
T T T T able able able able 11 11 11 11 ::: :
Regression results (including two interaction variables)
** represents significant at 5% level * represents significant at 10% level
8. 8. 8. 8. Conclusions Conclusions Conclusions Conclusions Variables Variables Variables Variables Estimated Estimated Estimated Estimated coefficient coefficient coefficient coefficient T-statistic T-statistic T-statistic T-statistic P P P P value value value value Intercept 0.021 0.70 0.49 Cash 0.016 0.82 0.41 Domestic -0.014 -1.01 0.31 Cash*Domestic 0.029 1.82 0.07* Cash*Focus -0.002 -0.08 0.93 Focus 0.009 0.56 0.58 Size of acquirer -0.003 -1.71 0.09* Relative size 0.002 1.10 0.27
Market-to-book value of acquirer 0.0004 0.48 0.63
Market-to-book value of target -0.001 -2.41 0.02**
The study examines the wealth created for shareholders of European listed acquirers (including U.K. and Continental Europe) of listed targets around announcement date of a sample of 550 acquisitions occurring during 2000 to 2005. This study includes acquisitions of both domestic and cross-border targets and acquisitions in related and unrelated industry. In the univariate test, the announcement returns for acquirers that pay in cash are positive, while for acquirers that pay in non-cash are negative and the difference between cash deals and non-cash deals is significant. For domestic and cross-border acquisitions, although the announcement returns are larger in domestic acquisitions, the difference between the announcement returns of domestic and cross-border acquisitions is not significant. For acquisitions in related and unrelated industry, the announcement returns are larger in related acquisitions, but the difference is insignificant as well. Cash deals dominate both domestic and cross-border acquisitions. The announcement returns show that in domestic acquisitions, the difference between non-cash deals and cash deals is significant. However, the cross-border acquisitions exhibit insignificant difference between non-cash and cash deals. Cash deals also dominate both related and unrelated acquisitions. The announcement returns show that in related acquisitions, the difference between non-cash deals and cash deals is significant. In contrast, in unrelated acquisitions, the difference between non-cash and cash financed acquisitions is not significant.
period returns and cash financing acquirers outperform non-cash financing acquirers in domestic acquisitions. The effect of cash financing can offset the potential damage to announcement period returns caused by the negative impact of domestic acquisitions. However the other combination variable (Cash*Focus) is negative but insignificant, therefore there is no evidence that cash financing acquirers outperform non-cash financing acquirers in related acquisitions. The variables of market-to-book value of target and the size of acquirer still remain negative and significant in this new model. Moreover, the form of payment (cash) is insignificant compared to the significant and positive impact in the previous model. The other variables, like market-to-book value of acquirer, relative size, domestic, focus and U.K. still remain insignificant, which means they are not important associated with acquirer’s wealth creation.
9. 9. 9. 9. Limitations Limitations Limitations Limitations and and and and further further further further stud stud stud stud y y y y
There are a lot of determinants affecting the acquirers’ announcement period returns and it is difficult to measure all the determinants. The study does not take into account all the determinants that may influence the announcement period returns of the acquirers. However the factors examined in this study are some important factors that impact the acquirers’ announcement period returns.
Second, previous studies like Conn, Cosh, Guest and Hughes (2005) examine both the announcement period returns and the long term abnormal returns for the domestic and cross-border acquisitions. Due to the time constrain, this study does not make any formal tests on long term abnormal return for acquiring firms. Following studies on the wealth creation of shareholders of acquiring firms in Europe could conduct rigorous tests on long term abnormal returns for both domestic and cross-border acquisitions.
R R R R eference eference eference eference
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