Cross-Border M&A from a Dutch perspective

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Cross-Border M&A from a

Dutch perspective

Does a strong currency create extra value?

Pieter Moll

Master thesis, 2007

University of Groningen

Faculty of Economics and Business

MSc. Business Administration

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University of Groningen Faculty of Economics and Business Master of Science in Business Administration

Corporate Financial Management Supervisor: dr. P.P.M. Smid Second marker: drs. M. Kramer

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Acknowledgements

From 2006 until 2007 I have been studying Business Administration, specializing in corporate financial management at the University of Groningen. During the final months I have been writing my master thesis. The aim of this thesis is to highlight the effects of cross-border M&A on the returns on shares of Dutch bidding firms.

Throughout writing my thesis I have received help and assistance from a number of people. I would therefore like to thank the following people for supporting me. Firstly I would like to express thanks to my thesis supervisor Dr. Peter Smid who committed his time to giving me valuable feedback and criticism throughout the entire process. - Secondly I would like to thank my family and friends who have also supported me throughout the process of writing my thesis.

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Abstract

The aim of this study is to investigate whether or not more empirical evidence can be found for shareholders wealth creation if Dutch firms announce their involvement in cross-border M&A. A sample of 346 events is taken over a period from January 1993 till July 2007 in this way the last identified M&A wave is included and a division can be made between the guilder and euro era. The abnormal returns on shares of the companies involved around the merger announcement date within an 11-days event window are calculated by means of the event study methodology. The sample is controlled for several variables which possibly affect the returns earned by shareholders of the acquiring company. Variables used in this research are the method of payment, the industry relatedness between the bidder and target, the euro and guilder era and the strength of the Dutch currency, compared to the currency of the target company. Over the window t=-1 to t=0 significant positive cumulative average abnormal returns of 0.0064, 0.0058 and 0.0063 have been found when not controlling for any of the variables. This is in line with the previous study by Goergen and Renneboog (2004). Controlling for the variables that potentially affect the return on shares of Dutch firms active in cross-border M&A leads to significant positive effects in several cases. Controlling for alternative payments, industry related targets, the euro era and targets situated in stronger and weaker currency areas compared to the bidders currency cause these positive effects.

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1. Introduction

One of the most widely discussed topics in the financial literature is that of Mergers and Acquisitions (M&A). Today’s headlines are full of M&A-related topics and most deals cannot pass by unnoticed. Most of these high-volume periods of M&A occur in waves. The last wave identified took place in the period 1993 to 2000. Reasons for this wave were the flourishing economic times, the influence of IT and the introduction of new European stock exchanges. In 2001, however, the economy collapsed and consumer confidence dropped to an all-time low. At this moment a new wave is arising; the economy is flourishing and deal numbers are increasing. U.S. based deals for example as shown in the data on Thomson Financial that were announced through November 2006 totaled $1.3 trillion compared with $1.2 trillion for all of last year and the number of deals exceeding $10 billion is about the same as it was in 2000. In other words, numbers are increasing and a new era might begin.

These waves have been analyzed and discussed in the literature, and divisions have been made according to the variables involved. One of the divisions made within M&A is the separation into domestic and cross-border M&A. At this moment the number of cross-border M&A deals is increasing compared to domestic M&A. In figure 1 the values for cross-border M&A can be seen and a positive trend is visible.

Figure 1: Cross-border M&A by developing and transition economies, by destination, 1987-2005

Source: UNCTAD, cross-border M&A database (www.unctad.org/fdistatistics).

Note: The offshore financial centres included are the Bahamas, Bermuda, the British Virgin Islands and the

Cayman Islands

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period from 1985 to 1995, 1,598 out of a total of 2,505 mergers and corporate restructuring transactions were internationally orientated. In 839 cases (53%), a Dutch firm acted as buyer of a foreign company. This research is from the perspective of Dutch bidders who acquire or merge with a foreign company. In the end, the bidder is the one that makes the final offer, of course taking into account the target’s preferences.

Recent figures of the international orientation of Dutch firms can be found in table 1; a clear increase in international activity since 2003 is visible. Recently published facts by novum news agency in 2007 showed a record number of deals in the Dutch market during the first quarter of 2007. In other words, the M&A figures are currently showing considerable momentum and Dutch firms are certainly involved.

Table 1: Cross-border merger and acquisition overview, 1990-2005 (millions of dollars)

Sales Purchases 1990-2000 (annual average) 2003 2004 2005 1990-2000 (annual average) 2003 2004 2005 Netherlands 4252 9180 13320 29014 5591 8506 9130 95024 Memorandum Germany 4899 25158 35868 63122 8104 19669 18613 41600 United Kingdom 17980 3197 58107 171689 20447 56953 47307 90535 European Union 53668 126018 178772 429146 59437 121208 164677 386757 Europe 56362 142152 185809 445126 66085 129371 176095 413405 Developed economies 104719 244426 315851 598350 108569 256935 339799 626339 World 117889 296988 380598 716302 117889 296988 380598 716302

Source: UNCTAD, World Investment Report 2006; www.unctad.org/wir or www.unctad.org/

The cross-border M&A numbers are increasing, but are these deals leading to the desired return asked by shareholders? This is a widely discussed topic, and one of the most recent discussions on this concerns ABN AMRO. A British hedge fund named TCI started the discussion on the performance of ABN AMRO in relation to its shareholders’ wealth. In recent years, ABN AMRO has been expanding by means of domestic and cross border M&A, resulting in strong positions abroad. However, at this moment, several bidders are interested in taking over ABN AMRO, aiming to split up some of the most recent M&A activities that ABN AMRO was engaged in. These split-ups are a result of a lack of efficiency and poor shareholder performance. The discussion started due to the lack of shareholder performance over the last few years. Most M&A done by ABN AMRO did not produce the most preferred outcome regarding share prices. Today, other firms like Vodafone face the same problem.

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(1995) and McCann (2001) note. This research focuses on the effect of cross-border M&A announcements in the short-run. The short-run in this thesis is the period around the announcement day consisting of 5 days before the announcement day and 5 days after the announcement. During this period the desired outcome regarding shareholder return resulting from cross-border M&A is often an issue for discussion. The possible impact of international activity on the return on shares of acquiring firms is of interest. The aim of this research therefore is to investigate if cross-border M&A announcements of Dutch firms lead to abnormal returns. This basically is the main issue which is going to be addressed in this research and it can be formulated as follows.

Do shareholders of Dutch bidding firms earn abnormal returns once the firm has announced its involvement in cross-border M&A?

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Does the method of payment influence the return on shares of Dutch bidding firms, once they have announced their involvement in cross-border M&A?

Another factor of influence is the industry sector in which the target and acquirer are active in. An acquiring company is either interested in a related or unrelated diversification of its company. One of the main motivations for diversification is the possible synergy effect between acquirers and targets. These synergy effects can differ between targets. The information availability between private and public target is one of the reasons for this. As Capron and Shen (2007) points out acquirers are more knowledgeable if dealing with private targets in their own line of business than targets situated in less familiar lines of industry. The Synergies effects in case of taking over private targets in related industries can therefore be greater in perspective of the stock return of acquiring companies. The influence of industry relatedness in cross-border M&A will be tested in this thesis and results in the following sub-question:

Does the industry relatedness of the target and acquirer influence the return on shares of the acquiring Dutch company, once they have announced their involvement in cross border M&A?

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Does the strength of the Dutch currency compared to the targets firms’ currency influence the return on shares of Dutch bidding firms, once they have announced their involvement in cross-border M&A?

Previous studies on the effects of cross-border M&A focused mainly on bidders who were located in U.S., U.K. or Europe as a whole. This study will attribute to the existing literature in that: there is an extensive summary of previous studies on M&A announcement, the perspective is focused on Dutch bidding firms, the variable currency strength is more deeply examined and a dataset which is relatively up-to-date at the moment is used. The main question as well as the sub-questions will be answered using the event study methodology of Brown and Warner (1980 and 1985), and MacKinlay (1997) combined with the Ordinary Least Squares regression (OLS). The tests will be carried out based on the 11 hypotheses stated in chapter 3. One of the assumptions underlying the event study methodology is that the level of market development can give an explanation of merger announcement observations as Scholtens and De Wit (2004) state. In an efficient capital market, like the Dutch market, these effects should be of direct influence on the price of the stock. New information should be quickly and accurately incorporated into stock prices. Fama (1969) described the Efficient Capital Market as a capital market that should fully and correctly reflect all relevant information used in determining security prices. It should therefore not be possible to outperform an appropriate benchmark. This market can be described as a semi-strong efficient market; outsiders can not take advantage prior, during or after the event. Chari et al. (2004) described the stock price reaction as a preliminary measure which should capture any newly available information on M&A. The announcement effects should therefore be analyzed at the moment the financial market can react. This research is based on these assumptions. The period covered will be from January 1993 to July 2007. The reason for this period is the incorporation of the last M&A wave identified as well the incorporation of the most recent M&A in order to get an adequate database. Additionally this period covers part of the guilder and euro era which are of interest to this study. The sample is controlled for the variables used in this research.

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2. Theory and literature review

This research focuses on cross-border M&A. The focus of this thesis will be on how the return on shares of Dutch bidding firms is affected by the announcement of their involvement in cross-border M&A. Some of the variables linking cross-cross-border M&A activities and their effects on share prices will be discussed. The relevant literature to conduct this research will be presented in the upcoming sections. In section 2.1 the theory concerning the value creation for shareholders of Dutch firms involved in M&A will be discussed. A distinction will be made between the variables analyzed. First the method of payment will be touched upon, secondly the industry relatedness of the bidder and target will be examined and thirdly the influence of exchange rates during cross-border M&A described. In section 2.2 the relevant empirical studies concerning the variables discussed will be presented. Finally section 2.3 will give a brief summary of the theory and results discussed. Chapter 2 will be the base for the hypotheses stated in chapter 3

2.1 Value creation

A quoted company is often involved in creating shareholder wealth from the process of M&A. In order to create value a merger or acquisition of a firm must lead to a combined value which is greater than the stand alone values of the individual firms (Brealey et al. (2006)). Basically three types of M&A have been identified namely: horizontal, vertical and conglomerate1 and several motives have been given to show the potential benefits of these types of M&A. These three types are on a domestic or international base. In this research, the focal point will be on cross-border M&A and their influence on the stock return of bidding firms. Shareholder benefits and drawbacks resulting from these deals as well as reasons for these deals will be highlighted in the following paragraphs.

Different motives have been identified as a reason to be internationally active in the field of M&A. Jagersma (2005) extensively studied 2.933 cross-border acquisitions made by European companies during 1976 till 2000. Based on twelve questions Jagersma examined each of the 2.933 cross-border acquisitions. One of these questions involved the motives for cross-border

1_{A horizontal merger is a merger occurring between companies producing similar goods or offering similar}

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M&A as described by Berkovitz and Narayanan (1993). In table 2 the results relating that question are presented. The values represent a relative score expressed as a percentage of the deals that had that specific motive as a reason for acquisition.

Table 2: Why are foreign firms acquired?

Source: Jagersma (2005), p. 17

These motives are an important reason for takeovers. These motives are foremost synergies that can be obtained by merging with or acquiring different companies. The most common driving forces behind M&A, are operating and financial synergies. These driving forces can certainly influence the stock return of Dutch acquiring firms. Positive as well as negative aspects of some of these forces will be discussed in the following paragraphs.

Drawbacks can also be caused by M&A. Pautler (2003) described the effects of conglomerates and pointed out the additional risk involved in entering new areas. Taking additional risk is often related to more uncertainty, resulting in less profitable organizations. Park et al. (2002) added to this that conglomerate types of deals often occur in low-profit industries and this only contributes to the additional risk and lower value creation. The reason is that entering new areas will not only bring about additional risk, as previously stated, but also international factors come into play if new areas as well as new countries are entered into. Goldberg et al. (2002) identified several of these challenges to European cross-border mergers applicable to U.S. firms wanting to merge with a European firm. Some of these challenges are also applicable to European firms merging within Europe. Table 3 shows a selection made based on the challenges proposed by Goldberg et al. (2002) which are also appropriate for European firms active in Europe.

Table 3: Challenges for Cross-Border over Domestic mergers

Source: Goldberg et al. (2002), p. 27

However, firms can also reap the benefits of going international. The introduction of a single currency like the euro as well as the removal of several trade barriers created new opportunities

Economies of skills 32% Expansion 27% Economies of scale 25% Market entry 12% Geographic risk spreading 3% Financial 1%

Cultural incompatibility Government resistance

Less knowledge of each other’s business Language differences

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besides the additional challenges. Anand et al. (2005) described the positive effects of companies gaining access to firms with resources that include various environmental settings. Berger et al. (2004) came up with beneficial variables like cheap factor prices in the host country; import quotas and tariffs; high transportation costs and better access to the host country customers. Francoeur (2005) and Conn et al. (2005) added to this the possibility of firms generating value through the use of their intangible assets, as businesses seek synergies arising from intangible and especially information-based assets.

Besides the more theoretical drivers mentioned, it is possible that emotional drivers and motives can be of influence. Emotional reasons are, for example: M&A that are used by firms to try to change a firm’s negative identity after a crisis, see Sherman (1998). Motives for carrying out M&A, as Berkovitch and Narayanan (1993) mentioned, are hubris2 and agency influence. Often these motives are not valid reasons for realizing certain M&A deals, because of personal interference with the company’s strategy. Motives like these often lead to value-reducing M&A from the perspective of shareholders and value enhancing M&A from the perspective of the managers.

All these reasons and motives frequently affect the performance of cross-border M&A, but until now we have only looked at the general factors that can affect cross-border M&A. However, the focus of this research is on the acquirer’s side. Brealey et al. (2006) showed that sellers are often better off than buyers at the end of a merger or acquisition. Brealey et al. (2006) also came up with two reasons that might explain this advantage. Firstly, the size difference between the seller and the buyer often causes relatively uneven gains distribution in favor of the seller. Secondly, several bidders are often involved in the acquisition or merger of the same target and thus drive up the price, resulting in an increased return to the shareholders of the target company. These factors can negatively influence the results obtained by the shareholders of the acquiring company.

Various reasons have been given to explain why M&A can create shareholder value but at the same time can result in serious risk factors. At least it seems clear that M&A activities can affect a company’s performance and its shareholder return. A common method to evaluate the effects of M&A on the return on shares of bidding companies is the event study methodology. In section 2.2 the empirical results of event studies is presented. This will be done in order to get an empirical perspective on the reaction of stock prices on the M&A announcement. Based on the empirical results found in previous studies the hypothesis in chapter 3 will be stated.

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2.1.1 Methods of Payment

Numerous variables, as seen above, can be of influence on shareholder return during cross-border M&A activity. This research will take a more in-depth look at three of those variables. One of the variables which will be analyzed is the method of payment. In addition to the different types of M&A, there are also different methods of payment. In a perfect market in which investors are perfectly rational, pursue utility maximization and in which information should be costless and available to all investors at the same time, investors should be indifferent to the methods of payment. Despite this fact however investor preferences do differ, for example due to asymmetric information which often causes unbalanced reactions. In principle, asymmetric information is inside information which is not publicly available to shareholders, targets or other market participants. Payments can therefore signal information that can be wrongly interpreted. Paying by stocks can signal overvaluation of the acquiring company, while paying by cash can signal the opposite (Myers and Maijluf (1984). Another effect that influences the preferences and returns caused by the methods of payment is the tax effect (Wansley, Lane, and Yang (1983) and Huang and Walkling (1987)). Due to different national tax regulations, different methods of payment are preferred. Tax savings may influence the price and method of payment during deals. Variables affecting the chosen method of payment are placed in the information asymmetry concept or the taxation concept. Both concepts might explain why premiums or discounts are given on the price paid by the bidder and thus influence the stock return of the bidding firm.

An additional effect of influence on the method of payment used is the strategy applied by the bidding and target companies. In this case the strategy relates to the manner in which the takeover is undertaken namely; if it is done in a friendly or hostile manner. Fishman (1989) discussed the influence of strategy on the method of payment and came to the conclusion that the method of payment in hostile takeovers differs from that in friendly takeovers. André et al. (2006) more specifically offered several factors that influenced the method of payment: corporate control considerations, bidder’s financial condition, investment opportunities, information asymmetry and risk sharing between the acquirer and the target, as well as other bidder and target characteristics.

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Others say that it depends on the market efficiency whether the effects cancel each other out. In principal the higher the level of market efficiency, the smaller is the effect of asymmetric information and the greater is the effect of tax benefits. In section 2.2.2 the empirical results found in previous studies regarding the effects the methods of payment have on the return on shares of bidding firms are presented.

2.1.2 Industry relatedness

The benefits and costs of M&A depend on numerous factors, one of these factors is the relatedness between the activities of the acquirer and target. The relation between the target and acquirer depends on the type of M&A. Vertical, horizontal and conglomerates are basically the three main types of M&A. These three forms of M&A all have their own benefits and costs. Horizontal M&A are often driven by synergies, for example economies of skill and scope or the possibility to increase market share and in by this increase their influence on price setting. These synergies should be beneficial to the return on shares of the bidding firm over time. In unrelated takeovers potential synergies are not as straight forward identified as in related takeovers. Hopkins (1987) and Melicher and Rush (1996) confirmed this and showed that cross-border M&A in related areas are less risky and synergies like economies of scale and scope can more easily be achieved and identified. Singh and Montgomery (1987) compared related and unrelated M&A and assumed that unrelated M&A can only achieve financial and administrative synergies and not operational synergies. The absent of operational synergies can account for the fact that there is more value creation in case of related M&A compared to unrelated M&A

Next to the obtainable synergies, diversification plays an important role. By means of diversification a firm can spread its risk and also may enter new profitable industries. This is often the case in vertical and conglomerates types of mergers and acquisitions. Vertical M&A also relate to M&A of firms involved in different steps of the supply chain. This is done to reduce uncertainty of supply, to obtain more specialized production procedures or to get more connected to the consumer. Furthermore of influence is the opportunity to geographically expand. Instead of doing a green field investment3 a company can merge or acquire a foreign firm and use this firm as platform to enter a new region. The link between the acquirer and target can attribute to the value creation of M&A. In section 2.2.3 the empirical results found in previous studies

3_{Green field investment is a form of foreign direct investment where a parent company starts a new venture}

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regarding the effect the industry relatedness of the bidder and target has on the stock return of the bidding firm are presented.

2.1.3 Exchange rate effects

The third variable analyzed is the influence of exchange rate levels on the stock return of bidding firms in cross-border M&A. Gregory and McCorriston (2005) point out that foreign investment is linked to the role of capital market imperfections and to the role of exchange rates commonly associated with Froot and Stein (1991). Froot and Stein (1991) showed that if the bidding firm has a stronger currency compared to the currency of the target company, a more beneficial return to the shareholders of the bidding firm could be obtained, compared to targets with comparable or stronger currencies. As has been said before, different risk factors come into play when carrying out cross-border M&A; one of these factors is the strength of the currency involved. As weaker currencies have the tendency to be volatile and more risky, the price paid and asked will be influenced. Gregory et al. (2005) stated that when the foreign currency of the acquiring company is relatively strong compared to the target’s currency, foreign buyers will have a comparative advantage over there domestic competitors in buying a domestic company.

Because we are analyzing different periods, the influence of the introduction of a single currency within the European Union is also of importance. The idea behind introducing a single currency is that EU economies should become more integrated and cross-border M&A between EU countries should be stimulated due to the removal of uncertain exchange rate effects. In other words some of the previous risks involved would disappear. De Sousa et al (2006) supported this and confirmed that the main reason behind a currency union is the avoidance of destabilizing speculation and improved transparency and credibility of rules and policies.

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dollar between 1999 and 2000. On the other hand, they also showed that a change in economic growth prospects between Europe and the U.S. led to a decrease in the US dollar/euro exchange rate, resulting in an increase in M&A activity of European firms on American soil.

The currency strength of the firms involved during cross-border M&A can be of influence on return on shares and the overall value creation of M&A, as the above mentioned factors explain. In section 2.2.4 the empirical results found in previous studies regarding the currency effects on returns on shares will be discussed.

2.2 Review of empirical studies

The focus of this study is on the return on shares of Dutch bidding firms involved in cross-border M&A and the possible variables affecting this return. Previous studies have analyzed the effects of the earlier mentioned variables in different manners. This study will analyze the effects by means of the event study methodology. The event study methodology is a favorite method of testing the different variables involved. In this section an overview of the empirical results found in previous studies will be presented. Due to the increasing numbers of variables affecting M&A, outcomes are however not yet conclusive. In the following sections, the empirical results of previous literature relating to this study are summarized and interpreted. In section 2.2.1 the empirical results regarding the bidding firms are discussed. In section 2.2.2 the empirical results regarding the method of payment and its effect are presented. In section 2.2.3 the effect with respect to the relatedness of the target and bidding company is discussed and in section 2.2.4 the empirical results concerning the currency effect are discussed.

2.2.1 Empirical results regarding the return on shares of bidding firms.

The returns on shares of bidding firms are a difficult topic to address due to the many variables that are of influence. In the upcoming paragraphs the focus is on the return on shares of bidding firms active in domestic and cross-border M&A.

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announcement day, see: Trifts and Scanlon (1987); Lahey and Conn (1990); deLong (2003) and Cornett et al. (2003). Houston and Ryngaert (1994) focused on bank mergers and found no significant returns at all, which is the tendency in the studies on banking mergers in which stock returns of acquirers are seldom significantly positive on the day of the announcement.

Some studies made a division based on certain aspects of M&A when calculating the abnormal return on shares of the bidding firms. One of these divisions is based on the difference between the targets involved. Hansen and Lott (1996), Chang (1998) and Bradley and Sundaram (2004) categorized targets into public and private targets, resulting in positive returns to acquiring firms taking over private targets and negative returns to those firms taking over public targets. For most of these studies the perspective is on the return of shares of U.S bidding firms involved in domestic M&A, next the results on cross-border M&A are presented.

As the previous results were focused on domestic M&A, focusing on the return on shares of bidding firms regarding the effects of cross-border M&A also leads to opposite results. Early research by Doukas & Travlos, (1988) and Markides & Ittner, (1994) showed positive returns on shares regarding announcement effects for US firms engaged in international acquisitions. Doukas & Travlos (1988) only found significant returns on shares of the bidding firm at the moment the bidding firm did its first overseas acquisition. As a reason for value creation Markides & Ittner (1994) came to the conclusion that firms created value due to exploitability of their intangible assets overseas. More recent research by Corhay & Rad (2000) and De Jong et al. (2006) also showed positive returns but in this case on shares of Dutch firms engaged in international acquisitions. Corhay & Rad (2000) found as explanation for these positive returns that the stock return of Dutch acquiring firms was greater if firms had less overseas exposure and diversified outside their core business. Besides positive returns also negative returns on shares of bidding firms involved in cross-border M&A were found, see Mathur, Rangan, Chachi and Sundaram (1994), Kane (1999) and Beitel, Schiereck, and Wahrenburg (2004).

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The difference between the results on cross-border M&A and domestic M&A is minimal. Tourani-Rad and Van Beek (1999) analyzed a sample of 56 different bidding banks in acquisitions in Europe between 1989 and 1996 and did not found a significant difference in the shareholder return between cross-border compared to domestic M&A. As Walker (2000) pointed out the overall returns obtained by shareholders of bidding firms at the time of a bid announcement remains an issue for discussion.

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Table 4: Previous empirical results of event studies on the return on shares of acquiring firms

Author % CAR or % AAR Acquirer Event window Sample

size Year Domestic vs. Cross-border Domestic Domestic country Firth (1980)

ACAR: -0.045 ACAR of the

Announcement month

642 1969-1975 U.K.

Dodd (1980) ACAR: -0.23 ACAR(-40,40) 151 1970-1977 U.S.

James and Wier (1987) ACAR: 12.55** and 3.77** ACAR( - 1, 0) 60 1972-1983 U.S.

Neely (1987)

AR: -1.23** CAR: 1.92** and 2.82** AR(0)

CAR(0,1week) CAR(0,2 week)

26 1979-1985 U.S.

Trifts and Scanlon (1987)

CAR: -2.52** CAR(average CAR

over the announcement week)

21 1982-1985 U.S.

Bradley, Desai, and Kim (1988)

CAR: 4* in the 1960’s

-2.93* percent in the 1980s CAR (-5,5) 921 1963-1984 U.S.

Franks and Harris (1989) AR: 1%** AR T=0 is based on 1 month 861 1955-1984 U.K. Lahey and Conn (1990) CAR: market adjusted model: - 2.46

CAR: mean adjusted model: -0.49

CAR, T=0 CAR is based on 1 month

91 1960-1979

U.S. Lang et al. (1989) CAR: opposed bids -0.14, unopposed

bids 0.8 CAR(-5,5) 87 1968-1986 U.S.

Loderer et al. (1990) CAR: 1.72* (1966-1968)

CAR: 0.57* (1968-1980) CAR(-5,0) 5172 1965-1984 U.S.

Cornett and De (1991) CAR: 0.55** CAR (-1,0) 152 1982-1986 U.S.

Lang et al (1991) CAR: 6** CAR(-5,5) 87 1968-1986 U.S.

Cornett, Tehranian (1992) CAR:-0.8** CAR (-1,0) 30 1982-1987 U.S.

Agrawal et al. (1992) CAR: -1.53 CAR

(1month-12month) 1157 1955-1987 U.S.

Baradwaj et al. (1992) CAR:- 0.01384* CAR(-1,0) 108 1981-1987 U.S.

Madurai, Wiant (1994) CAR: 0.25 CAR, T=0 is based

on 1 month 152 1983-1987 U.S.

Houston and Ryngaert (1994)

CAR:-0.023

CAR: 5 days 153 1985-1991 U.S.

Leeth and Borg, (1994) Market adj. model AAR: 1.27* Market model AAR: 0.17

1 month from

announcement 191 1905-1930 U.S.

Hansen and Lott (1996) CAR: Private target 1.15*

CAR: Public target -0.98* CAR(-14,5) 252 1985-1991 U.S.

Siems (1996) AAR:0,9, -1,59* AR(-1), AR (0) 19 1998 U.S.

Houston and Ryngaert (1997)

CAR: -0.23

CAR (-1,1) 184 1985-1992 U.S.

Subrahmanyam et al.(1997) CAR: -0.90* CAR (-1,1) 263 1982-1987 U.S.

Rau and Vermaelen (1998) CAR: -1.39** CAR(1, 12) in

months 2823 1980-1991 U.S.

Chang(1998)

Private target: stock offer 2.64*, Cash offer 0.09. Public target: Stock offer -2.46*, Cash offer -0.02

CAR (-1,0) 281 1981-1992 U.S.

Toyne, Tripp (1998) CAR: -2.24* CAR (-1,0) 68 1991-1995 U.S.

Hubbard and Palia (1999) CAR related target: 1.62*

CAR diversifying targets:0.24 CAR(-5, 5) 392 1984-1987 U.S.

Esty, Tufano and Narasimhan, (1999)

CAR: -0.01

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Walker (2000) CAR: -0.84 CAR (-2,2) 278 1980-1996 U.S.

Mulherin and Boone (2000) CAR: -0.37 CAR (-1,1) 1305 1990-1999 U.S.

Becher (2000) CAR: -1.08* CAR (-5,5) 558 1980-1997 U.S.

Andrade et al. (2001) CAR: -0.7 CAR (-1,1) 3688 1973-1998 U.S

DeLong(2001) CAR: -1.68* CAR(-10,1) 280 1988-1995 U.S.

Fuller, Netter, Stegemoller (2002)

CAR: 1.77*

CAR(-2,2) 539 1990-2000 U.S.

Hart and Apilado (2002) Abnormal return mean: −0.4156 T=0 158 1994-1997 U.S.

DeLong, (2003) CAR: -2.51* CAR(10,1) 438 1988-1999 U.S.

Cornett et al. (2003) CAR: -0.74% CAR(-1,1) 423 1988-1995 U.S.

Sundarsansam and Mahate (2003)

BHAR Mean adjusted: -1.39*

BHAR markets adjusted:-1.47* CAR(-1,1) 519 1983-1995 U.K.

Moeller, Stulz, Schlingemann, (2003)

CAR: 1.103*

CAR(-1,1) 12,023 1980-2001. U.S.

Bradley and Sundaram (2004)

Public targets CMAR –0.17* and

private targets1.95* CAR(-2,2) 12,476 1990-1999 U.S.

DeLong and DeYoung(2004)

CAR:-2.39*, -3.15* CAR(-5,5)

CAR(-10,1) 216 1987-1999 U.S.

Becher, and Campbell II (2004)

CAR:-1.2

CAR(-5,1) 332 1990-1997 U.S.

Antoniou, Petmezas, and Zhao (2005)

CAR:1.26*, Public -0,57 and Private

1,54* CAR(-2,2) 618 1985-2004 U.K.

Masulis, Wang and Xie, (2006)

CAR: 0.215**

CAR(-2,2) 3333 1990-2003 U.S.

Cross-border Cross-border

Doukas and Travlos (1988) AR:0.8 AR (t=0) 301 1975-1983 Cross-border

Conn and Connell (1990) CAR: -15** CAR(1,12) in

months 73 1971-1980 Cross-border

Markides & Ittner, (1994) CAR:0.32*** CAR(-1,0) 276 1975-1988 Cross-border

Mathur, Rangan, Chhachhi and Sundaram (1994)

CAR: -.082 and -1.429** CAR(-1,0)

CAR(2,6) 77 1984-1988 Cross-border

Cakici, Hessel and Tandon (1996)

Foreign taking over US CAR:0.63*

Us taking over foreign CAR:-0.36 CAR(0,1) 195 1983-1992 Cross-border Tourani-Rad and Van Beek

(1999)

AR:-0.32 CAR:-0.19

AR(t=0)

CAR(-5,5) 26 1989-1996 Cross-border

Eckbo and Thorburn (2000)

CAR :-0.19 CAR(0) daily

returns during month of the announcement

390 1964-1983 Cross-border

Kane (1999) CAR:-1.5** CAR(0) on the

announcement day 110 1991-1998 Cross-border Cybo-Ottone, Maurizio

Murgia (2000)

AAR: Around 1 AAR(0) average

daily returns over 1 month

54 1988-1997 Cross-border Floreani and Rigamonti

(2001)

CAR: 3.65%

CAR(-20, 2) 56 1996-2000 Cross-border Beitel and Shiereck, (2001) CAR:-0.14, 0.46 CAR(0)

CAR(-5,5) 98 1985-1997 Cross-border

Cornett, et. Al (2003) CAR:-0.78** CAR(-1,1) 423 1988-1995 Cross-border

Scholtens and de Wit(2004) Europe 2.56

US. -1.86 CAR(-3,31) 81 1990-2000 Cross-border

Beitel, Schiereck, and Wahrenburg (2004)

CAR: -0.14, -0.01 CAR(0)

CAR (-1,1) 98 1985-2000 Cross-border

Chari, Quimet, Tesar (2004) CAR:2.43**, 1.26 CAR(-1,1)

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Significant at *=1% **=5% ***=10%

CAR: Cumulative abnormal return, this term however relates to CARs which are calculated over the sample used in the relevant study, which in all case consists of more than 1 event and thus is similar to the cumulative average abnormal return.

CMAR: Cumulative market-adjusted returns ACAR: Average cumulative abnormal return AAR: Average abnormal return

AR: Abnormal return

BHAR4: The buy-and-hold abnormal return U.S.: united States

U.K.: United Kingdom

2.2.2 Empirical results on the effects of methods of payment

The previous empirical results on the returns on shares of bidding firms regarding the effect of the method of payment during M&A will be examined. Prior studies suggest that the abnormal returns on shares of the target, bidder and combined firms may be affected by the choice of payment method used to finance the M&A activity, see section 2.1.1. As mentioned, signaling and tax effects are both related to the efficient market hypothesis and thus influence the method of payment chosen.

The most distinctive methods of payment that have been identified in previous studies are: cash payments, stock payments and alternative methods of payments. Alternative payments can consist of a combination of cash and stock, but in principle refer to other methods of payment that are not labeled as cash or stock payments. The definition of each of these payments differs widely, some studies for example focus on pure cash deals, while others focus on deals of which cash is a 4 _      + − + = − =

C

(1 ,) (1 , ) , benchmarkt t t i pre i R R

BHAR , where Ri,t is the weighted average return of the

acquirer-target portfolio, and Rbenchmark,t is the equally weighted average return of the benchmark portfolio

for month t. Lowinski, Schiereck and Thomas (2004)

CAR:0.52*, 0.52 CAR(0)

CAR(-5,5) 114 1990-2001 Cross-border

M. S. B. AW and R. A. CHATTERJEE (2004)

Market model CAR:-.3.8

Market adjusted model CAR:-4.46 CAR(6months) 79 1991-1996 Cross-border Goergen M., Renneboog L.

(2004)

CAR: 2.38*,3.09* CAR(-1,0)

CAR(-2,2) 56 1993–2000 Cross-border

Campa and Hernando (2004)

CAR: Regulated EU acquirers -1.96

CAR(-30,30) 262 1998-2000 Cross-border Martynova and Renneboog

(2006)

AR: 0.4

AR(0) 2109 1993-2001 Cross-border

Amar en André (2006) CAR: 1.63 CAR(-1,1) 152 1998-2002 Cross-border

Dutch acquirers Corhay and Tourani Rad (2000)

CAR European:1.44 CAR US:0.68

CAR East Europe:-0.87

CAR(-5,5) 111 1990-1996 Cross-border

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certain percentage of the method of payment. When analyzing the empirical results found in previous studies the only distinction made will be between cash, stock and other methods of payments and will not be based on the percentage of cash or stock involved in the method of payment. The definition used in this research is presented in chapter 4.

The empirical results of previous literature are fairly consistent in that cash offers outperform share or other methods of payments in the short run, see: Travlos (1987); Draper and Paudyal (1999); and Walker (2000). These results are in line with the information asymmetry concept as cash payments can signal undervaluation of the firm’s value, see studies by Huang and Walking (1987); McCabe and Yook (1997); Greogory (1997); Loughran and Vijh (1997); and Fuller, Netter and Stegemoller (2002),in which the abnormal returns at the time of the bid announcement are higher for acquirers offering cash compared to offering stock. The returns found by Martin (1996) are in line with this. However he claimed that besides the overvaluation as a reason for paying with stocks, the uncertainty regarding the value of the target is a reason that stocks are preferred compared to cash. Antoniou and Zhao (2004) showed that, when the operation is financed with stocks, bidders’ returns are lower than in the case of a combination of cash and stock or purely cash.

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Table 5: Previous empirical results on the influence of method of payment on the return on shares of bidding firms

Author Bidder Conclusion Event window Time Sample

size Wansley, Lane and

Yang (1983) CAR: Cash 33.49 CAR: Securities 17.22 CAR: Combination 11.77 CAR(-40,0) 1970-1978 151

Travlos (1987) CAR: stock exchange (-1.60) CAR: cash-financing (-0.13)

CAR(-10,10)

1972-1981 167

Franks et al. (1988)

CAR: US: equity -0.009**, cash 0.020* CAR: UK: Equity -0.011 cash 0.007

CAR(0) daily returns during announcement

month

1950-1985 2500

Amihud, Lev et al. (1990)

CAR: cash 0.44, stock-1.19** CAR(-1,0)

1981-1983 209

Servaes and Henry (1991)

Weighted average abnormal return: Cash payment (3.44) Securities exchange (-5.86) Mixed payment (-3.74) WAAR(-11,0) 1972-1987 704 Cornett and De (1991) CAR: stock-financed 0.71* CAR: cash-financed 0.34 CAR: stock- and cash 0.89**

CAR(-1,0)

1982-1986 132

Martin (1996) PRECAR: cash 1.03, stock 0.97, mixed 0.98

PRECAR(-255,-6) 1978-1988 846 Grullon, Michaely and

Swary(1997)

CAR: Stock payment -2.46 CAR: Cash payment -0.87 CAR: Combined -1.03

CAR(-1,1)

1981-1990 146

Gregory (1997)

API: Cash-offers 0.31 API: Equity offers -11.57* API: Mixed offers 4.12

24 month

period 1984-1992 420 McCabe and Yook

(1997)

CAR: Cash -0.59 CAR: Stock-3.36

CAR(-1,0)

1976-1986 234 Loughran and Vijh

(1997)

CAR: Pure Stock -24.0** CAR: Pure Cash 30.5 CAR: Mixed 0.1

CAR(1,5) in

years 1970-1989 947

Rao and Vermealen (1998)

CAR: Glamour stocks: Merger cash -1.25* equity -7.03*

CAR: Value stocks Merger cash 3.97** equity -4.8

CAR(1,12) months

1980-1991 1087

Chang (1998)

AAR: Private target: stock 2.64*, Cash 0.09

AAR: Public target: stock -2.46*, Cash -0.02

AAR(-1,0)

1981-1992 281

Draper and Paudyal (1999)

CAR: cash 0.13, 0.98, stock 1.26***, -1.49, alternative -1.73,-1.52

CAR(-1,1)

CAR(-5,5) 1988-1996 581 Becher (2000) CAR: cash mix -0.32

CAR: stock only -1.55

CAR(-5,5)

1980-1997 558

Walker (2002) CAR: cash 2.38** CAR(-2,2) 1980-1996 556

Fuller et al. (2002) CAR: cash 1.78*, stock 1.25* and combo 2.20*

CAR(-2,2)

1990-2000 3,135 Heron and Lie (2002) AAR: Cash 0.0009, Stock 0.003 and

Mixed 0.0056

AAR(-1,1)

1985-1997 859

De Long (2003) CAR share -2.51* (-10,1) 1988-1999 54

Sundarsansam, and Mahate(2003)

BHAR Glamour mean, cash 0.52, equity 0.26, Medium mean, cash 1.17**, equity 1.21, Value mean, cash 0.13, equity

-BHAR(-1,1)

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2.54**

Beitel et al. (2004) CAR: Cash ratio 82.64%, top 30 firms -0.32, Bottom 30 firms 0.68**

CAR(-1,1)

1985-2000 98 Antoniou and Zhao

(2004)

Cash(-0.0638), Stock (-0.1708) CAR(0, 3

years) 1991-1998 179 Song and Walkling

(2004)

Positive Cash impact Negative share impact

CAR(-1,0)

1985-2001 5726 Moeller et al. (2004) CAR: cash 0.693**, equity -0.96** CAR(-1,1) 1980-2001 9712

Officer, (2004) CAR: Cash 0.27, mixed 0.14, stock -1.96*

CAR(-1,1)

1991-1999 1,366 Antoniou and Zhao

(2007)

CAR: cash 0.64*, stock 0.03 combo 0.98

CAR(-2,2)

1985-2004 4173 Significant at *=1% **=5% ***=10%

CMAR: Cumulative market-adjusted returns WAAR: Weighted average abnormal return ACAR: Average cumulative abnormal return AAR: Average abnormal return

AR: Abnormal return

BHAR: The buy-and-hold abnormal return

PreCAR: Cumulative abnormal return preceding the event API: The abnormal performance index

2.2.3 Empirical results of the effects of industry relatedness

In this section the empirical results on the returns on shares of bidding firms regarding the industry relatedness between the bidder and target will be discussed. As mentioned in the theory the relatedness of the bidder and target can be of influence on the benefits obtained due to synergies between companies. In table 6 a summary is given on previous studies regarding the effect of industry relatedness on the return on shares of bidding firms. Related M&A are attributing to small significant returns on shares of the bidding firms, while returns on shares of bidding firms involved in unrelated M&A are often not significant. Reason for these differences in return are seen in studies by Stigler (1964) who noticed that the companies involved in horizontal takeovers can benefit at the expense of their customers and suppliers. The costs and benefits associated with related M&A are opt to be higher than in case of unrelated M&A see, Rhoades (1973); and Kitching (1974). Maquieira et al. (1998) and Bruner (2002) found benefits that include positive revaluations for horizontal merger announcements. Fan and Goyal (2006) found comparable positive wealth effects in cases of vertical M&A. Benefits like synergies however are obtained during time and difficult to measure in the short-run.

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compared to domestic M&A. Studies by Berger and Ofek, (1995); and Denis et al., (1997) found that product diversification negatively impacts performance in general. Combining the empirical results presented in table 6 with the reasons given above, a difference between the effects on return on shares of bidding firms regarding the relatedness of the bidder and target can be confirmed.

Table 6: Previous empirical results on the influence of method of payment on the return on shares of bidding firms

Author Bidder Conclusion Event window Time Sample

size

Lubatkin (1987)

CAR: Product concentric, 0,0084* Horizontal and Market

concentration, -0,019 Conglomerate, 0,043 Vertical, 0,125*

CAR (-18,-1) 1948-1979 315

Singh and Montgomery (1987)

CAR: related, -0,006

Unrelated, -0,019 CAR(-5,25) 1975-1980 105

Morck et al. (1990) Mean return difference between related and

unrelated acquisitions is 6.97%

CAR(-1,1) 1975–1987 326

Sudarsanam et al. (1996) _{CAR: related acquisitions 0.04**}

Unrelated acquisition insignificant CAR(-20,40) 1980-1985 429 Hubbard and Palia

(1999) CAR: related 1.62*, Unrelated 0.24 CAR-5,5 1961-1970 392 Walker (2000) _{CAR: related 1,59%**}

Unrelated acquisitions −1.6%**.

CAR(-2,2) 1980–1996 278

Lepetit et al. (2002) CAR diversification :2,058**

CAR specialization:1.423 CAR(-7,7) 1991-2001 180 Significant at *=1% **=5% ***=10%

2.2.4 Empirical results of the effects of the currency used

In this section the empirical results found in previous studies on the returns on shares of bidding firms regarding the currency used will be presented. Various studies have looked at the exchange rate effects on foreign direct investment (FDI). Cross-border M&A is a form of FDI. Vasconcellos, Madura, and Kish (1990) and Vasconcellos and Kish (1993) found that the exchange rate could affect the momentum of success during cross-border M&A. Harris and Ravenscraft (1991) confirmed the significant role of currency fluctuations in FDI. From a U.S. situated targets perspective they concluded the following: “When a buyer's currency is strong

relative to the dollar, target gains in cross-border acquisitions are higher” (Harris and

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information hypothesis and said that bidding firms acquiring foreign companies can have bidding advantages due to asymmetric information.

Aminian, Campart and Pfister (2005), showed that the appreciation of the euro against Asian currencies corresponded to a simultaneous increase in cross-border M&A activity carried out by European countries in Asia. They furthermore stated that: “A currency collapse and large

exchange rate depreciation make foreign investment more profitable or, to put it differently, a relatively stronger home currency leads to a higher level of M&A activity and an increase in the wealth of the target and acquirer’s shareholders around M&A announcements”. (Aminian et al

(2005) pp.3) These results are in line with earlier research by Froot & Stein (1991); Markides & Ittner (1994); and Conn et al. (2005) who analyzed the possible strong currency effects on shareholders return of bidding firms around M&A announcements. They came to the conclusion that acquirers can experience gains due to a stronger currency in comparison to their targets, which often causes lower financing costs for the acquirer. Looking at the post event window of cross-border M&A, negative effects can also occur due to the strength of the acquiring firm’s currency. Campa (1993) showed in his study the influence currency fluctuations on the uncertainty about future profits. Empirical evidence shows that if for example firms acquire targets in weaker currency areas than their own they can lose in the future due to the fact that the profits earned in the target country are often registered in their home country and the currency effect backfires.

2.3 Summary of previous literature

Previous studies came up with numerous variables affecting the return on shares of bidding firms. Due to the increase in cross-border M&A the number of variables is only increasing. It is of importance to incorporate some of these variables before drawing conclusions on the effects cross-border M&A have on the return on shares of Dutch bidding firms. In this research a selection is made based on previous empirical results, the data availability and criteria stated in chapter 4. The variables for which the total sample of cross-border M&A announcements by Dutch firms will be controlled for are: the method of payment, the industry relatedness and the currency strength of the bidder compared to the target.

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on shares of bidding firms. If looking at the industry relatedness, results are more mixed, overall however related M&A more positively affect the returns on shares of bidding firms compared to unrelated M&A. If looking at the exchange rate effects, a stronger currency of the bidder compared to that of the target is positively associated with the return on shares of the bidding firm. The results found on the effect of the exchange rate are however insignificant.

Based on previous empirical results the hypotheses applied in this research will be stated in chapter 3.

3. Hypotheses

This research will focus on how cross-border M&A by Dutch firms affect stock return of bidding firms. In order to see if cross-border M&A done by Dutch bidding firms have an effect on their returns on shares, several hypotheses are stated. In the following paragraphs, the hypotheses used will be stated and discussed.

The first hypothesis is related to the value creation resulting from cross-border M&A.

H1: Cross-border M&A announcements made by Dutch bidding firms do not influence the

short term returns on their shares.

This hypothesis is tested two-tailed for all announcements which relate to M&A and which fulfill the requirements as stated in the data analysis between January 1993 and July 2007.

The second series of hypotheses tested is related to the method of payment involved during cross-border M&A carried out by Dutch firms. Three main methods have been identified and will be tested. The methods that will be looked upon in this research are cash, stock and alternative payments. In chapter 4 the definition of these methods will be discussed in more in detail.

H2: Cross-border M&A announcements made by Dutch bidding firms involving stock

payments do not influence the short term returns on their shares.

H3: Cross-border M&A announcements made by Dutch bidding firms involving cash

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H4: Cross-border M&A announcements made by Dutch bidding firms involving alternative payments do not influence the short term returns on their shares.

These hypotheses will also be tested two-tailed for all announcements which relate to M&A and which fulfill the requirements as stated in the data analysis between January 1993 and July 2007.

The third series of hypotheses tested is regarding the industry relatedness between the target and bidder. This series contains two hypotheses of which the first hypothesis will relate to the related M&A and the second hypothesis is regarding unrelated M&A. The time era in which the returns are looked upon are from January 1993 to July 2007.

H5: Cross-border M&A announcements made by Dutch bidding firms involving related

targets do not influence the short term returns on their shares.

H6: Cross-border M&A announcements made by Dutch bidding firms involving unrelated

targets do not influence the short term returns on their shares.

These hypotheses will be tested two-tailed for all announcements which relate to M&A which fulfill the requirements as stated in the chapter 4.

The fourth series of hypotheses tested will relate to the exchange rates involved. The first hypothesis will relate to the influence the guilder has on the return on shares of Dutch bidding firms and the second will relate to the euro. The time eras in which the returns are looked upon are from January 1993 to December 1998 and January 1999 to July 2007.

H7: Cross-border M&A announcements made by Dutch bidding firms between January 1993

and December 1998 do not influence the short term returns on their shares.

H8: Cross-border M&A announcements made by Dutch bidding firms between January 1999

and July 2007 do not influence the short term returns on their shares.

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The fifth series of hypotheses will also relate to the exchange rate effects. These hypotheses will be tested on samples of the total sample from January 1993 and July 2007. These sub-samples are made based on the strength of the currency of the acquiring company in comparison to the target’s currency. This process is described in more detail in chapter 4. The following hypotheses are related to the sub-samples made.

H9: Cross-border M&A announcements made by Dutch bidding firms announcing takeovers

in areas which have a stronger currency than the Dutch currency do not influence the short term returns on their shares.

H10: Cross-border M&A announcements made by Dutch firms announcing takeovers in areas

which have a comparable currency as the Dutch currency do not influence the short term returns on their shares.

H11: Cross-border M&A announcements made by Dutch firms announcing takeovers in areas

which have a weaker currency than the Dutch currency do not influence the short term returns on their shares.

These hypotheses are tested two-tailed for all announcements which relate to M&A and which fulfill the requirements as stated in the data analysis between January 1993 and July 2007.

The above stated hypotheses will be tested with the methodology described in chapter 5. The data used to test these hypotheses is presented in the following chapter.

4. Data

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4.1 List of M&A involved

The list of M&A activities has been found in the Zephyr database5, a database concerning information on M&A worldwide. The sample period covers January 1993 to July 2007 this period is chosen because it includes deals within the guilder era and euro era. January 1993 is chosen as starting point because cross-border M&A by Dutch firms started to occur in more frequent numbers. The M&A carried out during this period will have to fulfill certain constraints. These will be discussed in the following paragraphs.

Characteristics of the acquirer

This research looks at the return on shares of Dutch bidding firms. The bidder has to be situated in the Netherlands and has to be a public quoted company listed on the Euronext Amsterdam. No other constraints are applied with respect to the acquirer.

Characteristics of the target

Because we are looking at cross-border M&A, and because currency influence is of importance during this research, the target should not have his headquarter within the Netherlands between 1/1/1993 and 31/12/1998. From 1/1/1999 to 30/6/2007 the target should not be having its headquarter within the EMU area. There are no further constraints with respect to the target company and no distinction is made between public or private targets.

Types of Deals

Only pure M&A will be looked at. Management buy-outs (MBO), leveraged buy-outs (LBO) and initial public offerings (IPO) will not be included in the sample. Adding deals like these would require a far more in-depth look at other information, which would go beyond the scope of this research. Within M&A no distinctions will be made between the different types mentioned in the theory.

Deal status

The returns on shares of bidding firms around the announcement day are of importance. It is therefore of importance that the announcement day is clearly stated. The deal status has to be announced in order to be included in our data set and the deal does not have to be completed. Rumors are neglected. When controlling for these constraints, a dataset of 219 M&A deals

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involving Dutch firms is found during the period 1/1/1993 to 31/12/1998 and a dataset of 589 during the period 1/1/1999 to 30/6/2007. First the data will be adjusted to be correct when using the event study methodology. Of great importance is the non-existence of overlap between certain events. Transactions concerning the same firm should be at least 110 days apart. The stock prices and total return index of the Dutch market prices during these 110 days were found using DataStream6. The Dutch index is calculated by Datastream and is given by TOTMKNL. This is a Datastream index for the equity market of the Netherlands and is broader than existing indices like the AEX. The total Dutch index is taken as benchmark in case of the market and market and risk adjusted model. The stock and the Dutch index data are taken on return index (RI) measurement base, because of the incorporation of dividends. If these 2 requirements are applied, a dataset of 346 M&A deals between 1/1/1993 and 30/6/2007 is found. The acquiring firms involved in this research are presented in appendix I. This data set will be used in the remaining part of this research and will be adjusted to the hypotheses stated. The adjustments made for each hypothesis is explained below.

Value creation in case of Dutch acquirers

The complete data set of 346 events will be used when analyzing the returns obtained by the shareholders of acquiring Dutch companies on the day of the announcements, so no further adjustments have been made.

Methods of payments

Many variables influence the methods of payment; a clear categorization is therefore made. Zephyr was used to determine the method of payment. A distinction is made between cash deals and stock deals; this is selected in the search menu within Zephyr. If a deal is not confirmed to be a cash of stock deal it is classified as an alternative method of payment deal.

• Share deals are defined by zephyr as follows: “Share deals are seen as a deal where

shares are a part of the deal structure; the consideration contains at least an element of shares. The bidder gives its own shares to the Vendor”. In other words the method of

payment consist of a percentage shares which in this research is not restricted combined with other methods of payment like converted debt for example. Of great importance is that there is no element of cash included.

6_{DataStream: a comprehensive statistical database in terms of equity markets, indices and macro}

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• Cash deals are defined by zephyr as follows: “Cash deals are seen as a deal where cash

is a part of the deal structure; the consideration contains at least an element of cash. Cash normally refers to payment by check or transfer of funds”. In other words the

method of payment consist of a percentage cash which in this research is not restricted combined with other methods of payment like loans notes for example. Of great importance is that there is no element of shares included.

• Alternative payments are methods of payment which can consist of converted debt, debt assumed, deferred payment, earn out, loan notes or other methods. Furthermore included in alternative payments are methods of payments which consist of cash as well as shares.

Based on these three groups the dataset containing 346 events is split up into 269 deals regarding alternative methods of payment, 63 in respect to cash and 14 concerning stocks.

Industry classification

The industry classification is based on the first 1 digit ICB code given in zephyr database. Zephyr identifies 10 industries. The number of events per first ICB code (industry) are presented in table 7. A transaction is related if the bidding and target company have a similar first 1 digit ICB code and unrelated otherwise, results of this division are presented in table 8.

Table 7: Total sample by industry classification

Industry classification Acquirer

# of events Industry classification Target

# of events

0.Oil-gas 3 0.Oil-gas 6

1.Basic Materials 13 1.Basic Materials 22

2.Industrials 92 2.Industrials 101

3.Consumer Goods 78 3.Consumer Goods 55

4.Health care 15 4.Health care 12

5.Consumer services 48 5.Consumer services 64

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Table 8: Related or unrelated cross-border M&A # of events Related 206 Unrelated 140 Total 346 #: number Euro/Guilder era

The 346-event dataset is divided into the guilder and euro eras, namely 1/1/1993 to 31/12/1998 and for the latter 1/1/1999 to 30/6/2007, resulting into 270 euro era events and 76 events during the guilder period.

Exchange rate effects

The exchange rate effects concern the whole data set of 346 events, the division is based on the strength of the acquiring currency in comparison to the target currency. The exchange rates are obtained from http://fx.sauder.ubc.ca/data.html. The target countries involved are presented in appendix II. If an exchange rate is not available the event will be removed from the sample. In order to decide if the takeover is done in a stronger, weaker or comparable currency area at the moment of announcement, the following steps are undertaken based on the model of Harris and Ravenscraft (1991). The first step is to take the average daily exchange rate over the period 1993 to 31/12/1998 for the guilder and 1/1/1999 to 1/07/2007 for the euro. The exchange rate for the guilder was measured as follows: Guilder/Target currency, for example 1 guilder is worth 50 dollar cents, so the ratio would be 1/0.5=2. The same method is applied in case of the euro. The average exchange rate is the daily average exchange rate calculated over the period 1993 to 31/12/1998 for the guilder and 1/1/1999 to 1/07/2007 for the euro, dependable on the number of observations during that period and is mathematically expressed as:

N et t Guilder h AverageExc N i currency       =

∑

=1 arg (1)

Cross-Border M&A from a Dutch perspective