Short-term wealth effect of M&As
within European countries
University of Groningen
Faculty of Economics and Business
Abstract: This thesis explores whether cross-border mergers and acquisitions within Europe create value for European bidders and the determinants of such wealth effect. It aims make a fresh contribution to existing research, which is mostly dated and centered around the US. Results show that European bidder indeed gain positive abnormal returns in cross-border deals, but there is no significant difference between overseas and local transaction. Method of payment, relative size, acquirer size and acquirer ROA do have significant influence on bidders’ valuation in overseas transactions. However, corporate governance characteristics do not significant affect bidder wealth.
Author: Mengzhen Zhong
Student number: S2642433 Supervisor: Marnix Reijenga
1 1. Introduction
With the accelerating process of economic globalization and the rapid growth of economies of scale, cross-border mergers and acquisitions (M&As) are becoming one of the salient features of the world economy. According to United Nations Conference on Trade and Development (UNCTAD), the cross-border M&As has become the driving force of foreign direct investment, and is becoming one of the essential strategies to improve multinational business. Obviously, one of the most important issues for researchers and investors is that whether mergers and acquisitions creates value for companies.
So far, research methods and theories about the short-term effects of mergers and acquisitions has been relatively mature, and there are a large number of research results. Among them, Bruner (2002) reviews 130 prior studies during the period of 1971-2001, summarizing that the target companies always receive significant short-term wealth effect, with the average abnormal return of 20% to 30%, some of them even obtain as high as 50%. However, the wealth effect on acquiring shareholders is a controversial issue, and with the sample selection over time, there is a downward trend. Therefore, this thesis mainly investigates the wealth effect on acquirers.
This thesis intends to conduct an investigation in the Europe, since existing research tends to focus on the US market. However, according to the report of Economist Intelligence Unit (2013), the share of Europe of the global M&A market is 40% in 2007, which indicated that Europe market is an attractive market to investors. Furthermore, there is few existing research in this research area, which explores this market, and most of these previous researches uses rather old data. For the US, Moeller et al. (2005) show that acquisitions in 1998-2001 generate large losses to bidding firms’ shareholders, while earlier transactions in that decade result in positive gains. Therefore, this thesis carries out an in-depth analysis of the wealth effect of cross-border M&As conducted by European firms during latest 11 years (2005-2015). The research questions of this thesis are:
2 compared with domestic wealth effect, what is the difference?
2. What can explain the wealth effect of cross-border M&As on acquiring firms? Corporate governance structures or bid and firm characteristics?
This thesis employed an event study and multiple regression analyses to explore the short-term market reaction to mergers and acquisitions, through calculating short-term bidding shareholder’s abnormal returns, and then examine the determinants of different variables on abnormal return by using multiple regression analyses. Finally, drawing conclusions according to the empirical results of the analysis. Results show that European bidder indeed gain positive abnormal returns in cross-border deals, but there is no significant difference between overseas and local transaction. Method of payment, relative size, acquirer size and acquirer ROA do have significant influence on bidders’ valuation in overseas transactions. However, corporate governance characteristics do not significant affect bidder wealth.
2. Literature review
This section consists of two main fields of literature. Firstly, reviewing literature of the concept and key motivations regarding mergers and acquisitions. Secondly, relevant literature arguments and finding will be discussed and shed light on the European takeover transactions and its wealth effects on acquiring firm shareholders.
2.1. Concept of M&As and wealth effect
Mergers and acquisitions (M&As) is a general concept that refers transactions in
3 results. Importantly, this paper mainly focuses on cross-border M&As within Europe, in other words, both target and acquiring firms are from Europe, but from different countries.
From the perspective of empirical research, this thesis studies the reaction of financial market on takeover transactions, that is, whether the published information about M&As will lead to stock price fluctuations, and then causing changes in shareholder wealth or company’s valuation. If takeover transactions stimulated the share price rise, then there is a positive wealth effect, otherwise it is negative; if the stock price remains unchanged, the wealth effect is zero.
2.1.1. Motivation theories for M&As
Companies are motivated to conduct mergers and acquisitions by many factors. To put it simply, the fundamental motivations for mergers and acquisitions can be summarized as “seek development” and “pursue profit”. Companies can realize its development through internal expansion and external acquisitions. Internal expansion is a slow and uncertain process, in contrast, mergers and acquisitions are still filled with uncertainty, but more quickly.
Value-added motives for M&As include those hypotheses that predict an increases in the value of the merged firm after the M&As by combining the resources of both companies. In general, these motives are grouped in following categories: improvement of competitiveness, increasing diversification and reducing risks and improvement of operating efficiency.
4 firm’s local networks of suppliers, customers and marketing channels.
Acquirers can achieve business diversification and reduce business risks through mergers and acquisitions. If the business is over-concentrated on one industry, it could be badly disrupted when an industry recession take place. Diversification not only helps companies to make full use of internal resources, but also can spread the risk. (Feito-Ruiz and Menendez-Requejo,2011). However, to become a diversified business will not happen overnight, firms often encounter many barriers when they enter into new business areas and new markets. For example, Companies need to reach a certain scale of operation, have corresponding technologies, own patents or sale channels. These barriers in short time is not easy to overcome for companies themselves, but the mergers and acquisitions is an appropriate weapon to break the barriers of industries and regions.
Acquirers can obtain synergy effect through mergers and acquisitions. In theory, the most common motivation for mergers and acquisitions is synergy effect, which refers that companies can improve their competitiveness after mergers and acquisitions, and their performance are expected better than before when they exist separately. Its effectiveness could not only be “one plus one equals two”, but, to be exactly, “one plus one more than two” (Feito-Ruiz and Menendez-Requejo,2011).
In contrast, from other perspectives, there are theories, which pointed by other researchers that mergers and acquisitions may destroy the value of acquiring companies. These arguments include the hubris hypothesis and principle-agency theories.
5 bidder returns will be generated in cross-border than in domestic M&As.
Besides, principle-agency theories suggest that managers may execute mergers and acquisitions for their own interest rather than maximize shareholders’ wealth (Jensen and Meckling, 1976). In other words, although there is no value created, the company manager still decides to take such transactions because they can receive some individual benefit, leading to the negative wealth effect to bidder shareholders.
2.2. Wealth effect on acquiring-firm shareholders
Previous researchers prefer to apply event study to examine the wealth effect of takeover transactions on shareholders by evaluating the stock price changes. Despite different researchers select different event window and different sample, a common conclusion can be drawn about the effect of the merger and acquisitions on target firms: gain significant abnormal returns (about 20% to 30%) during takeover announcement in domestic M&As. And after comparing target wealth effect between cross-border and domestic acquisitions, empirical researchers provide evidence that cross-border M&A created more value for target firms. (see, e.g., Jensen and Ruback, 1983; Delong, 2001; Danbolt and Maciver, 2012).
6 markets.
In contrast, other researchers pointed out different arguments and they found that cross-border M&As may destroy acquiring-firm’s valuation. According to Roll (1986), the reason behind that is possibly due to the increased hubris problems. With expanding to overseas, the possibility of target valuation error is more likely to happen since cross-border takeovers are riskier and costly than domestic transactions, if managers make greater mistakes and over-valuate the foreign target, they may pay higher premium to target shareholders for such deals. Furthermore, increased asymmetric information also could have a negative effect on acquiring-firm shareholders’ valuation.
Existing studies found ambiguous evidence on bidder shareholders’ wealth effect in cross-border takeovers. Conn and Connell (1990) reviews fifteen researches and states, in general, the cumulative abnormal returns (CARs) for acquiring firms from United States and United Kingdom is zero or negative in cross-border M&As. In contrast, some more recent researches report bidder companies earn a small positive cross-border wealth effect both in Europe and in United States (see, e.g., Goergen and Renneboog, 2004; Feito-Ruiz and Menendez-Requejo, 2011). Starks and Wei (2013) reported foreign acquiring firms earn less when acquiring United States firms than United States bidders. However, Kang (1993) draws the opposite conclusion.
This thesis is conducted to examine the bidder wealth effect of cross-border and compared it with domestic mergers and acquisitions within Europe during 2005 and 2015. In line with the above, the first hypothesis of this thesis is introduced:
H1: European bidders can obtain higher cumulative abnormal returns during announcement date in domestic than in cross-border M&As.
2.3. Wealth effect determinants
7 wealth effect.
2.3.1. Bid and Firm Characteristics
(a) Payment method.
Generally, there are two kinds of payment method in M&A, including cash and equity. Different payment methods are expected to have a strong impact on wealth valuation. According to Martynova and Renneboog (2006), cash payment is an indicator that acquiring firms might believe there will be a value increase in the merged firm and they do not want to share it with target shareholders; conversely, stock payment reveal that they want to spread risk though remaining the status of target shareholders in the merged firm. Asymmetric information seems to affect the choice of payment methods.
Gaughan (2002) states that in cross-border M&As, acquiring firms are more likely to make stock offers since the overseas targets are more difficult to evaluate than domestic ones and consequently there exists more uncertainty.
Asymmetric information theory emphasizes that the impact of different payment on mergers and acquisitions is very large. According to Pecking order theory based on asymmetric information condition (Myers and Majluf, 1984), if acquiring-firm’s managers take into account that the market is overvaluing stock price of their company, they will prefer to use stock as a method to payment, on the contrary, they would like to make a cash offer when they believe that their stock price were undervalued. Therefore, stock payment might transfer a signal to outside investors that the existing stock price of acquiring firms was overvalued, which may generate negative effect.
8 Officer, 2009) found that compared with cash, stock offers generate higher abnormal returns to acquiring companies. Thus, the previous studies show ambiguous results. This thesis follows the asymmetric information hypothesis and the second hypothesis of this thesis is introduced:
H2a: In cross-border M&As, cash transactions associated with higher wealth
effect for European acquiring companies. (b) Business relatedness
Not surprisingly, business relationship of the bidder and target has drawn some researchers’ attention, but conclusions are ambiguous. Synergy effect theory states that related-industry acquisitions are easier to obtain operating synergies than unrelated-industry deals. Buying a firm from related industry can achieve economies of scale, and acquirers are familiar with the target firms’ market situation, technology and management skills, leading to reduce the time and cost of post-merger integration, decreasing the risk of failure, thereby improving the valuation of acquiring company (Jensen and Ruback, 1983).
However, Jensen and Ruback (1983) also pointed that by acquiring unrelated businesses, bidder companies can gain financial synergies as well as administrative synergies. However, the potential synergies of cross-border M&As are difficulty to estimate especially when takeovers occur in different industrial businesses. If the management of acquiring firm is overconfidence about the potential synergies, they will pay a higher premium for the takeover transactions. Doukas et al. (2002) support this hypothesis, stating that diversification strategies trigger negative value to bidders.
Since the acquiring-companies is more familiar with the related business which increase their confidence about price negotiations and performance after M&As, therefore, the third hypothesis of this thesis is introduced:
H2b: In cross-border M&As, bidders seem to receive more value when acquiring business-related target.
(c) Listing status of target firm
9 more abnormal returns by acquiring private target (Officer et al.,2009; Conn et al., 2005; Moeller et al., 2004). The first reason behind that is when acquiring private targets, there will be some liquidity discount because private firms are not easy to be bought and sold, the second is that bidders are likely to cost more to gain reliable information on unlisted company (Chang, 1998). as a result, they might receive a discount when acquiring unlisted target.John et al. (2010) conducted a research about cross-border acquisitions by US bidders and showed a significant positive CAR of 0.53% when acquiring private-target and an insignificant negative CAR of -0.31% when acquiring public-target. Therefore, the fourth hypothesis of this thesis is introduced:
H2c: In cross-border M&As, bidders seem to receive more value when acquiring
private target.
(d)Target location: Continental Europe versus UK/Ireland
According to LaPorta et al. (1998), civil law is originating in Europe while
10 acquiring a target from Continental Europe than biding a target from United Kingdom/Ireland. Therefore, in line with them findings, the fifth hypothesis of this thesis is introduced:
H2d: In cross-border M&As, bidders seem to receive more value when the target is located in Continental Europe than in United Kingdom and or Ireland.
(e) Relative size of acquired firm to acquiring firm.
The viewpoint of the wealth effect on bidders are strongly influenced by the relative size of the acquired company to the acquiring company was first introduced by Asquith et al., (1983), and they show that when target size is 50% of acquiring firm’s size, returns of bidder is 1.8% higher than that of target size is only 10%. Similarly, Kusewitt (1985) put forward “critical mass”, stating that the degree of synergy effect realization is positive correlated to the relative size of acquired to acquiring company. Although large-scale mergers and acquisitions can help acquiring-firms develop rapidly, the large amount of financial payment pressure and the integration costs that comes along are important factors that might destroy acquiring-firm’s valuation (Beitel et al., 2004).
Empirical studies find a mixed result according to this characteristic. When focus on domestic acquisitions, Australian studies find that relative size of the target has a negative influence on bidder’s returns (Le and Schultz, 2007). In contrary, the international studies of Feito-Ruiz and Menendez-Requejo (2011) on cross-border acquisitions suggested that the relative size of target to bidding firm has a positive influence on bidder’s wealth. Conn et al. (2005) draw a conclusion that the larger the target size, the better the acquiring firms can evaluate it, since there is more information released about the target firm and therefore less adverse selection problems. As a result, the sixth hypothesis of this thesis is introduced:
H2e: In cross-border M&As, bidders seem to receive more value with the increasing level of relative size.
(f) Acquiring firm’s size
11 acquisitions for their own interest rather than maximize shareholders’ wealth (Jensen and Meckling, 1976). Large-scale companies tend to have greater separation of ownership and management control, and principle-agency problem is pronounced in these firms, which could destroy bidder’s valuation.
There is some evidence to support this hypothesis: Moeller et al. (2004) investigated M&A announcements of public companies of the United States occurred in the period 1980-2001, and found that small acquirers gain approximately two percentages higher abnormal return than larger peers; Feito-Ruiz and Menendez-Requejo (2011) find the similar result that M&As by small acquiring companies generate more value for their shareholders. Thus, the seventh hypothesis of this thesis is introduced:
H2e: In cross-border M&As, bidders seem to receive more value when the size of acquiring firm is relatively small.
2.3.2. Corporate governance characteristics
Since LaPorta et al. (1998), the issue of whether corporate practices have impact on firm value caused extensive discussion. A number of researches claimed that wealth effect of cross-border takeovers is strongly influenced by differences between acquiring and target companies (see, e.g., Bris and Cabolis, 2008; Martynova and Renneboog, 2008; Starks and Wei, 2013). When acquiring-company’s corporate governance system is better than that of target company, the level of corporate governance in target firms seems to improve after M&As. Martynova and Renneboog (2008) find evidence on positive abnormal returns for involved companies after investigated more than 2000 takeovers in Europe.
12 bootstrapping effect in overseas takeovers. That is, when the acquiring firm from a country with weaker corporate governance, this company voluntarily follows the target company’s governance standards, improving the level of its corporate governance system, so that its shareholders would receive better investment protection.
Similarly, Starks and Wei (2013) selected sample of cross-border takeovers when acquired firm is located in US and found that there is a positive relationship between the corporate governance quality of the bidder’s home country and the wealth effect for bidders when takeover transactions are completed with stock. Indicating that target shareholders will be compensated if they face the risk of adopt a poor corporate governance system, and they stated that (Starks and Wei, 2013 pp.288) “the acquiring shareholders’ abnormal returns should be increasing with the quality of corporate governance when acquisitions completed with full stock”. This suggest that with stock or mixed payment, target-firm shareholders might continue to actively resist the behavior of management damage shareholder’s wealth. In this case, bootstrapping effect may be stronger. Therefore, in cross-border M&As, when there is significant difference between the two sides of deals of corporate governance, acquiring-firms could gain positive abnormal returns because such transactions.
After analyzing wealth effects on both sides shareholders involved in mergers and acquisitions into and out of the United Kingdom, Danbolt and Maciver (2012) provide evidence of target shareholders obtain significantly higher cumulative abnormal returns when bidding firms have better accounting quality, higher anti-director rights index and higher shareholder protection index.
13 follows the conclusion of Starks and Wei (2013) and builds the following hypothesis:
H3: European bidder can obtain positive cumulative abnormal returns during the period of announcement if they have better corporate governance in cross-border M&As.
3. Empirical research design
This thesis will employ event study and regression analysis to explore the short-term market reaction to mergers and acquisitions, through calculating short-term bidding shareholder’s abnormal returns, and then examine the determinants of different variables on abnormal return by using multiple regression analysis. Finally, drawing conclusions according to the empirical results of the analysis.
3.1. Event study
Firstly, following previous researches, this thesis also uses event study methodology to calculate the cumulative abnormal return (CARs), which is proxy for takeover premium. The first object of this research is to examine whether cross-border M&As create wealth for European bidders, and compare it to domestic wealth effects. Nonetheless, calculating the premium directly is not easy, in other words, to capture exactly how much value does mergers and acquisitions have been created or destroyed to a company is difficult. In previous studies stock price behavior has been well applied for measure wealth effects of an event, such as a takeover, on a firm’s valuation.
MacKinlay (1997) claimed that, when the capital market is effective, daily stock prices can fully reflect the expected future earning of one company. Event study is based on this theory, examining abnormal returns on stocks and the impact on company’s wealth when an event occurred. Therefore, this thesis also follows this methodology to explore the effect of cross-border M&As in European acquirer’s share price and corporate wealth.
14 test the significance of abnormal returns and empirical results and interpretations (Mackinlay, 1997)
Firstly, this thesis intended to investigate the impacts of cross-border M&As on European acquirers’ wealth. Thus, the time of interest is defined as the date of mergers and acquisitions announcement published (if the stock markets is closed on that day, the event date is defined as the first trading day after the market opened), referred as day 0. Other dates are referred as the difference between the day and announcement date, for example, 100 days before the event, referred as -100, and the period from one day before the event date to the date after the event date referred as [-1, +1]. Estimation window is the period used to estimate normal return if such an event (mergers and acquisitions in this thesis) do not take place. The estimation window generally be long enough and before the event period. The choice of the estimation period is arbitrary (for example, Danbolt and Maciver (2012) used [-260, -41] as estimation period while Goergen and Renneboog (2004) used 9-month period ending 6-month prior to the event date). In this thesis, the estimation window starts from -241 days to -41 days [-241, -41] prior to the announcement date. Event window is the period to examine abnormal stock price volatility (Mackinlay, 1997).Considering the subjectivity of event window selection, this thesis firstly selected two short event window to compare, including a three-day event window [-1, +1] and five-day event window [-4, +4].
As discussed by MacKinlay (1997), abnormal return equals to the difference between the actual return of stock and expected daily return. To calculating abnormal return, firstly, a model must be employed to measure the normal return and this thesis uses commonly used market model to estimate the normal return. According to Mackinlay (1997), market model assumes that there is a linear relationship between stock return and stock market portfolio returns:
N𝑅𝑖𝑡 = 𝛼̂𝑖+ 𝛽̂𝑖𝑅𝑚𝑡+ 𝜀𝑖𝑡, (t = -241… t = -21) (1)
Where N𝑅𝑖 is the normal return of stock i, 𝛼̂𝑖 is the intercept of regression line,
15 𝜀𝑖𝑡is the zero mean disturbance term.
The abnormal return of stock i on day t is defined as following: 𝐴𝑅𝑖𝑡 = 𝑅𝑖𝑡− 𝑁𝑅𝑖𝑡, (t = -1…t = +1), (t = -2… t = +2) (2)
Where 𝐴𝑅𝑖𝑡 is the abnormal return of stock i on day t, 𝑅𝑖𝑡 is the actual return of stock i on day t, 𝑁𝑅𝑖𝑡 is the normal return of stock i on day t, which is calculated in equation (1).
The cumulative abnormal returns (CARs) are the sum of abnormal returns over the event window period, the CARs of a company from event window [𝑇1, 𝑇2] are
defined as following:
𝐶𝐴𝑅𝑖(𝑇1, 𝑇2) = ∑𝑇2 𝐴𝑅𝑖𝑡
𝑡=𝑇2 (3)
Because a single sample cannot reflect the overall situation, in order to test the null hypothesis, in this case, that is the stock market are not affected by mergers and acquisitions, in other words, cumulative abnormal returns of acquirer should be zero, there is a need to accumulate all the singe samples, and then calculates the cumulative average abnormal return. It is defined as following:
𝐶𝐴𝐴𝑅𝑖(𝑇1, 𝑇2) = 1
𝑁∑ 𝐶𝐴𝑅𝑖(𝑇1, 𝑇2) 𝑁
𝑡=1 (4)
This thesis will use T-test to test null hypothesis discussed above. By examine whether the mean of CAAR is significantly different from zero to determine whether this involved companies have significant abnormal return, thereby to determine whether the financial market have significant response to the mergers and acquisitions.
3.2. Regression model
16 controlled in the regression. Following is the regression equation:
𝐶𝐴𝐴𝑅𝑖 = 𝛼𝑖 + 𝛽1𝐶𝑜𝑟𝑟𝑢𝑝𝑡𝑖𝑜𝑛𝑇 + 𝛽2𝑙𝑒𝑔𝑎𝑙_𝑜𝑟𝑖𝑔𝑖𝑛𝐵−𝑇 + 𝛽2𝑙𝑒𝑔𝑎𝑙_𝑜𝑟𝑖𝑔𝑖𝑛𝐵−𝑇 + 𝛽3𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟_𝑝𝑟𝑜𝑡𝑒𝑐𝑡𝑖𝑜𝑛𝐵−𝑇+𝛽4𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔_𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑠𝐵−𝑇+𝛽5𝐶𝑎𝑠ℎ+𝛽6𝑆𝑡𝑜𝑐𝑘 +𝛽6𝑅𝑒𝑙𝑎𝑡𝑒𝑑𝑛𝑒𝑠𝑠+𝛽7𝑃𝑢𝑏𝑙𝑖𝑐+𝛽8𝑈𝐾+𝛽9𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒_𝑠𝑖𝑧𝑒+𝛽10𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟_𝑠𝑖𝑧𝑒+𝛽11𝑆𝑡𝑎𝑘𝑒 +𝛽12𝑆𝑐𝑎𝑙𝑒+𝛽13𝐴𝑞𝑢𝑖𝑟𝑒𝑟_𝑅𝑂𝐴
Where 𝛽1 to 𝛽13 are the estimated coefficients relating to the variables of interest. All the variables are as in section 3.2.1.
3.2.1. The independent variables
The thesis uses the following five different proxies to measure corporate governance quality:
Corruption index of target country is the first proxy. The measure of this variable
in this thesis is defined by the transparency international as “how corrupt a country’s public sector is perceived to be”, and the range of this score is from 0 to 100. According to Simonnv and Gianetti (2002), investors behaviors are affected by the corruption level, individuals who have access to information are more likely to invest in firms where have more opportunity to gain private benefits. Therefore, when acquiring overseas, the firm must get involved with local political system where the target firm operates.
Shareholder rights are the second proxy, measured as the anti-self-dealing index,
Djankov et al. (2008, pp 431) defined it as “The index measures the protection of minority shareholders against expropriation by insider, ranging from 0.08 to 1.0 for 72 countries”. In the regression analysis, the difference in the variable between bidder and target countries are used.
Legal origin is the third proxy. It is a dummy variable and coded as one when the
company is originating from a country with English common law legal system, otherwise coded as zero. In the regression analysis, the difference in the variable between bidder and target countries are used.
Shareholder Protection, according to Danbolt and Maciver (2012), shareholder
17 managers and directors. this thesis uses the revised anti-director index ranging from 1 to 5 in Djankov et al. (2008). The rule of law assesses the law and order tradition in a country. (LaPorta et al., 1998).
Accounting standard. The baseline of this measures is different national
corporate reporting review, including information from accounting standards, financial statements, stock prices and other items which can refer different countries’ transparency (LaPorta et al., 1998).
Cash is a dummy variable, which has value 1 if the M&A is paid by cash; Stock
is a dummy variable, which has value 1 if the M&A is paid by shares; Relatedness is value as 1 if the first two digits of SIC code between target and acquiring firm is the same. Public is value as 1 if the target is a public company; Relative size is the logarithm of deal value divided by pre-deal acquirer market capitalization; Acquirer
size is logarithm of pre-deal acuities operating revenue; Acquired stake (%) is the
percentage that bidder acquires the target; Scale is the deal value of M&A; Acquirer’s
ROA is earnings before income and tax divided by total assets of acquirer.
4. Data
4.1. Data collection
Following two categories composing the data collection:
(1) Deals information on European companies involved in M&As, such as the deal price, announced date and completed date and so forth. All of these data are obtained from Orbis/Zephyr database;
(2) Daily stock price of the involved individual security and stock market index on which these stocks are traded around the period of mergers and acquisitions announcement. All of these data are obtained from DataStream database.
This study covers M&A transactions take place during past 11 years (2005-2015) within Europe from Orbis/ Zephyr database. When selecting sample, these criteria should be meet:
18 is announced during this period. In order to avoid any impact due to the possibility perception of deal completion on the measure of M&A value creation, the deals should be completed.
(2) Only European transactions are included, and bidder companies must be listed companies and traded on European stock exchanges.
(3) The bidder companies should acquire at least 50% stake, with the last percentage of stake minimum 100%.
(4) Only deal price exceed 100,000 euro are retained in the sample. In addition, all samples excluding acquisitions in financial sector since the operation of financial industry is unique.
Very important, this thesis using event study, and the assumption of this methodology is that the financial markets are efficient. Also, this thesis mainly investigates the impact of mergers and acquisitions on bidding firm shareholders, therefore other events that occurred during the event window are ignored.
4.2. Descriptive statistics
According to the sample screening mentioned previously, finally, there are 2878 deals have taken place in Europe from 2005 to 2015, including 701 cross-border takeovers and 2177 domestic mergers and acquisitions.
19
Table 1. Sample descriptive Number of cross-border M&As Number of domestic M&As Total number of M&As
Panel A: Distribution of acquisitions by calendar year, 2005-2015.
2005 106 261 367 2006 70 286 356 2007 95 290 385 2008 59 185 244 2009 36 143 179 2010 57 169 226 2011 67 157 224 2012 43 157 200 2013 30 156 186 2014 58 170 228 2015 80 203 283 Total 701 2177 2878
Panel B: Distribution by target geographical area
20 Continued Serbia 2 59 61 Slovakia 3 1 4 Slovenia 2 1 3 Spain 32 98 130 Sweden 44 152 196 Switzerland 35 72 107 Turkey 5 23 28 Ukraine 3 0 3 United Kingdom 161 1057 1218 Total 701 2177 2878
* This table shows the sample distribution of 2878 listed Europe companies that acquired a public or private foreign target during 2005-2015. Panel A shows the distribution of acquisitions by calendar year, 2005-2015. Panel B shows the distribution by target geographical area.
Table 2 illustrates how the sample is distributed by industry. Overall, during last decade, industry concentration phenomenon is obviously observed in European listed companies. In cross-border M&As, the most transactions were happened in manufacturing industry, account for 37.8% of all deals, which is far more than other industries. Next comes the information and communication industry, which makes up 20.1%. the professional, scientific and technical industry also made actively takeovers, this constitutes 13.7%. These industries are developed relative rapidly over the last 10 years, with the continuous development and integration of industry, the behavior of M&As within these industries are expected to increase in the future. However, European bidding firms seem to show no interest in industries of agriculture, forestry and fishing, public administrations and other services, a limited amount of deals occurred in these particular industries. Possible reason is that these industries are relatively mature, future growth space is limited, industry integration has been basically completed, therefore, the number of M&As occurred are relatively small. In domestic M&As, most transactions occur in information and communication industry, which is followed by manufacturing industry.
5. Empirical Results
21 This thesis applied an event study to calculate bidder’s abnormal return. Firstly, a tendency chart of European bidders’ CAAR of cross-border M&As has been showed to offer an intuitive understanding about wealth effect of overseas takeovers during last 10 years. Then, one-sample t-test is used to avoid the accidental observed abnormal return, checking whether the abnormal return is significantly different from zero. In addition, this thesis compared the wealth effect of cross-border with that of domestic, and used Mann-Whiney non-parametric test to determine the significance of mean difference.
Table 2. Sample distribution by industry
Cross-border Domestic
SIC code Acquirer Target Acquirer Target
01-03 Agriculture, Forestry and Fishing 0 2 11 12
05-09 Mining and Quarrying 33 35 59 54
10-33 Manufacturing 265 229 508 405
35 Electricity, Gas, Steam and Air
Condition Supply 15 18 43 37
36-39 Water Supply, Sewerage, Waste
Management and Remediation Activities 6 6 21 38
41-43 Construction 7 13 94 95
45-47 Wholesale and Retail Trade; Repair
and Motor Vehicles and Motorcycles 65 75 182 256
49-56 Transportation and Storage 26 31 105 92
58-63 Information and Communication 141 142 580 576
69-75 Professional, Scientific and Technical
Activities 96 101 342 346
77-82 Administrative and Support Service
Activates 30 31 168 176
84 Public Administration and Defense 0 1 0 3
85-88 Education 4 5 33 56
90-93 Arts, Entertainment, and Recreation 11 12 14 19
94-96 Other Service Activities 2 0 17 12
Total 701 701 2177 2177
* This table shows the distribution by Industry of 2878 listed Europe companies that acquired a public or private foreign target during 2005-2015.
22 CAARs fluctuates around 0, and great changes can be seen in the interval of [-1, +1], peaking at almost 15% while reaching a bottom at -6%. From time series, CAAR experiences a fluctuation before and after the financial crisis. However, there is a dramatically increase in the last two years.
Graph 1. European bidders’ wealth effect of cross-border M&As
While taking of the subjectivity of the event window into account, this thesis selected two different window to conduct a sensitivity tests. Table 3 shows the cumulative average abnormal return (CAAR) for European acquiring-firm shareholders around the announcement of the M&A. Overall, the mean of acquiring-firm’s CAAR is positively significance at 1% level, with 0.26% and 0.23% under the 3-day and 9-day event window respectively. It indicates the announcement of mergers and acquisitions can create value for bidders within short-term period. In this sample, bidders in domestic transactions outperform the ones in cross-border deals. Therefore, hypothesis 1: European bidders can obtain higher cumulative abnormal returns during announcement date in domestic than in cross-border M&As, cannot be accepted.
Although there are many related researches suggesting that bidding-firm’s CAAR are generally negative, the positive result of this thesis is consistent with Martynova and Renneboog (2006). This results indicates that investors hold a relative
-10 -5 0 5 10 15 2004 2006 2008 2010 2012 2014 2016 CA AR Year
European bidders' wealth effect of cross-border M&As
23 optimistic attitude to European M&As, they might regard this behavior as an opportunity for the development of companies and it allows firms make better use of its own resources through takeovers.
Table 3. Cumulative Average Return for the acquiring firm around the M&A announcement Event
window CAAR % t-value
Domestic
CAAR t-value
Cross-bor
der CAAR t-value
Differenc e (p-value) [-1, +1] 0.2602*** 7.526 0.2657*** 6.487 0.2431*** 3.857 0.354 [-4, +4] 0.2312*** 9.501 0.2482*** 8.187 0.1786*** 5.34 0.529
Cumulative Average Return for the acquiring firm around the M&A announcement. In order to test the statistical significance of CAAR, one-sample t-test have been used, and the test for mean difference of CAAR in cross-border and domestic is Mann-Whitney non-parametric test.
*Significant at the 10% level. **Significant at the 5% level. ***Significant at the 1% level.
5.2. The influence of bid and firm characteristics on acquiring firm’s wealth valuation
This section explores the influence of bid and firm characteristics on European acquiring firm’s wealth effect by using univariate analysis. Firstly, cross-border and domestic transactions are compared, and the whole sample was divided into different groups regarding different bid and firm characteristics, including method of payment, business relatedness, target status, target location (Continental Europe and United Kingdom and or Ireland), relative size and acquirer size.
(1) Method of payment.
24 median difference is significantly at 10% level. This implies that there might exist an information leakage phenomenon in the acquiring firm which used stock payment, because of significant wealth effect and well performance in stock market in such
Table 4. Acquiring-firm shareholder valuations according to bid and firm characteristics CAAR (-1, +1) Cross-border (N=701) Domestic (N=2177) Difference (p-value) Mean t-value Mean t-value
Panel A: By method of payment
Cash (N=1725) 0.1742* 2.591 0.1960*** 4.766 p=0.780
Shares (N=445) 0.9920* 3.61 0.4754*** 3.186 p=0.136
Difference(p-value) p=0.051* p=0.891
Panel B: By business relatedness
Related (N=1323) 0.2267* 2.646 0.2825*** 4.38 p=0.635
Unrelated (N=1555) 0.2607* 2.803 0.2524*** 4.787 p=0.732
Difference(p-value) p=0.873 p=0.949
Pane C: By target listing status
Private (N=2613) 0.2471*** 3.901 0.2645*** 6.443 p=0.830
Public (N=174) -0.4489 -1.133 0.1778 1.023 p=0.261
Difference(p-value) p=0.465 p=0.123
Panel D: By target location Continental Europe
(N=1451) 0.2637*** 3.488 0.3036*** 4.055 p=0.716
UK/Ireland (N=1336) 0.1837 1.645 0.2459*** 5.062 p=0.158
Difference(p-value) p=0.615 p=0.671
Panel E: By relative size
Above (N=1205) 0.0810 1.227 0.0769 1.918 p=0.345
Below (N=1207) 0.4793*** 3.942 0.3641*** 5.273 p=0.568
Difference(p-value) p=0.043** p=0.001***
Panel F: By acquiring firm’s size
Larger (N=1251) 0.1246** 2.178 0.2446*** 5.287 p=0.538 Smaller (N=1251) 0.2847** 2.292 0.2823*** 3.974 p=0.705
Difference(p-value) p=0.087* p=0.545
Cumulative Average Abnormal Return (CAAR) for the acquiring firm according to firm and transaction characteristics. One sample t-test used for testing the significance of CAARs, Mann-Whitney
non-parametric used for testing mean difference and Wilcoxon signed-rank test used for median difference.
25 deals. In contrast, bidders with cash offer gain relatively small positive returns, there could reduce the payment risk caused by information asymmetry between target and acquiring companies by equity payment. This is opposite to the conclusion, which is under effective market theoretical framework of Myers and Majluf (1984), who stating that the CAAR is generally higher with cash payment than with stock payment. Nonetheless, this result is consistent with the Security Market Drive Acquisition based on behavioral finance theory, referring that during stock market upsurges, it is better for acquiring firm to make stock offer than cash offer in short-term period (Shleifer and Vishny, 2003).
Therefore, hypothesis 2a: cash transactions associated with higher wealth effect for European acquiring companies, is rejected.
(2) Business relatedness
There are 1323 deals in which bidder and target operate in related business, and 1555 transactions occurred in unrelated-industry, which indicated that bidder tend to increase competitive advantage through M&As. The results of Panel B in Table 4 show that regardless of related or unrelated business the target is operate, the acquirer’s CAAR is positive and significant. However, the mean difference between cross-border and domestic performance is not statistically significant, neither, there is no significant difference in abnormal returns whether buying a related or unrelated business. This result is contradicting to Martynova and Renneboog (2006) but in line with Danbolt and Maciver (2012, pp.1049) who stating that “whether the acquisition is focused or diversifying appears to have limited impact on the level of either to target or bidding company abnormal return”. As a result, hypothesis 2b: In cross-border M&As, European bidders seem to receive more value when acquiring business-related target, are rejected.
(3) Listing status of target firms
26 confirm that the announcement of an acquisition of a private firm generates significantly positive abnormal returns of 0.25% and 0.26% to bidding firms in cross-border and domestic M&A respectively, although there is no difference between overseas and local deals. However, when focus on cross-border sub-sample, the CAAR is negative (-0.45%) when target company is listed, although it is not significant. This results are consistent with Martynova and Renneboog (2006). The wealth effect of different listing status of target firms is not statistically significant. Therefore, Hypothesis 2c: bidders seem to receive more value when acquiring private target, should be rejected.
(4) Target location (Continental Europe and United Kingdom/Ireland)
As reported in the Penal D of Table 4, European bidders gain positive and
significant abnormal returns when target is located in Continental Europe, both in cross-border and domestic acquisitions (0.26% and 0.30%, respectively). Whereas the cross-border wealth effect of bidders acquire a United Kingdom target is not significant from zero and this result is consistent with Martynova and Renneborg (2006) who also find that the short-term wealth effects is not significantly different from zero when target is located in United Kingdom. However, no statistically significant difference between cross-border and domestic acquisitions is found in the interval of [-1, +1]. Neither, there is little difference between the CAAR of the different target location (Continental Europe and United Kingdom). This is contradicting to previous findings. Therefore, Hypothesis 2d is rejected.
(5) Relative size
27 confirmed that the smaller the relative size, the higher abnormal return of bidders, this is in line with Beitel et al. (2004), who pointed out the large amount of financial payment pressure and the integration costs that comes along with large scale of takeovers would negatively affect acquiring-firm’s valuation. However, there is no evidence that the difference between cross-border and domestic M&As are significant.
(6) Acquirer’s size
The sample is divided into larger and smaller of the median of acquirer size, which is defined as pre-deal acquirer operating revenue. Regardless of smaller or larger size the acquiring firm is, the CAAR is positive and statistically significance in the 3-day event window. Strikingly, the CAAR of smaller size of acquirer is significantly higher than those of larger size (0.24% compared with 0.12%) at the 10% significance level. Therefore, the hypothesis 2f: is accepted. This result supported the argument that smaller firms generally have concentrated ownership and consequently principle-agency problem is less likely to happen in these companies. This finding is consistent with Moeller et al. (2004) and Feito-Ruiz and Menendez-Requejo (2011). However, no significant difference has been found in cross-border and domestic M&As.
5.3.The influence of corporate governance difference on acquiring firm’s wealth valuation
5.3.1. Multiple Linear Regression analysis
28 5.3.2. Variables statistical descriptive
Before regression testing, this paper firstly applied descriptive statistical analysis through SPSS 23.0. Table 5 shows the mean, standard deviation and sample number of each variables. Results display that the mean of CAAR are 0.25%, which indicate that the European bidders can gain positive returns in cross-border M&As; corruption index seems a little bit high among target countries; Generally, the acquiring firms in the sample have higher corporate governance scores than the targets.
Table 5. Variables statistical descriptive
Variables Mean Std. Deviation N
CAAR % 0.245 1.614 473 Corruption index 79.45 11.174 473 Shareholder rights (△) 0.512 0.274 473 Legal origin (△) 0.160 0.333 473 Shareholder protection (△) 3.533 1.185 473 Accounting standards (△) 3.956 8.638 473 Relative size 0.610 1.881 473 relatedness 1.470 0.500 473 Acquired stake (%) 98.692 6.922 473 Acquirer size 5.066 1.357 473
Scale (million Euro) 325.940 1371.05 473
Acquirer ROA 0.043 0.162 473
UK 0.249 0.433 473
Cash 0.696 0.461 473
Equity 0.097 0.297 473
Public 0.021 0.046 473
5.3.3. Correlation analysis of variables
29
Table 6. The correlation between variables
*Significant at the 10% level. **Significant at the 5% level. ***Significant at the 1% level.
CAAR CO SR Legal SP ACC_S related stake A_SIZE SCALE A_ROA R_SIZE CASH STOCK UK PUBLIC
30 Including all the country variables in the same regression analysis could lead to problems of multicollinearity, and therefore this thesis further analyses the impact of corporate governance variable one at a time in Model2, Model3, Model4 and Model5 respectively.
5.3.4. regression results analysis
In order to explore the determinants of the acquiring-firm shareholders’ valuation of the cross-border M&A announcement, a least square regression is carried out. The explanatory variables are the differences of corporate governance characteristics between target and acquiring firms, including corruption index of target, shareholder rights, legal origin, shareholder protection and accounting standards. Besides, bid and firm characteristics are controlled.
Table 7 shows the results of regression. When examine the impact of differences in bidder and target country corporate governance system. There are non-robust results for corruption, shareholder rights, and legal origin and accounting standards. In Model 1, which considers the whole variables discussed above, and truly, the results in this model show that the difference of governance do affect the CAAR of biding firm. Taking into account of the high correlation of the five proxies for governance characteristics, more regressions are carry out. Strikingly, the coefficients of four variables is not significant any more. Therefore, the results of model 1 is affected by multicollinearity and consequently not reliable.
31 affect the wealth of bidders. Therefore, target shareholders will be compensated if they face the risk of adopt a poor corporate governance system. This is in line with Starks and Wei (2013).
Table 7. Determinants of acquirer abnormal returns: cross-border M&As
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Panel A: Corporate governance characteristics Corruption index 0.117* 0.021 (0.087) (0.660) Shareholder rights -0.259* -0.097 (0.073) (0.420) Legal origin 0.136** 0.043 (0.021) (0.399) Shareholder protection -0.230*** -0.094** (0.000) (0.048) Accounting standards 0.099 0.032 (0.171) (0.586)
Panel B: Bid and firm characteristics
Cash 0.090 0.078 0.079 0.079 0.090 0.079 (0.130) (0.194) (0.186) (0.183) (0.132) (0.184) Stock 0.155*** 0.148*** 0.152*** 0.147*** 0.158*** 0.147*** (0.005) (0.007) (0.006) (0.008) (0.004) (0.008) relatedness 0.016 0.007 0.013 0.007 0.010 0.007 (0.725) (0.874) (0.785) (0.880) (0.824) (0.884) Public -0.004 0.008 0.009 0.010 0.010 0.007 (0.939) (0.853) (0.852) (0.833) (0.831) (0.885) UK 0.134 -0.036 -0.056 -0.049 -0.012 -0.053 (0.290) (0.459) (0.643) (0.341) (0.802) (0.377) Relative size 0.106* 0.106* 0.104* 0.108* 0.118** 0.107* (0.058) (0.060) (0.064) (0.055) (0.036) (0.056) Acquirer size -0.043 -0.073 -0.078 -0.086 -0.074 -0.070 (0.495) (0.236) (0.197) (0.157) (0.215) (0.258) Acquired stake (%) 0.006 0.009 0.011 0.005 0.007 0.009 (0.902) (0.843) (0.813) (0.919) (0.880) (0.847) Scale 0.038 0.035 0.037 0.042 0.032 0.034 (0.453) (0.478) (0.458) 0.400 0.522 0.496 Acquirer ROA 0.103* 0.099* 0.100* 0.099 0.108 0.100 (0.046) (0.058) (0.056) 0.058 0.039 0.054 F 2.384*** 1.814** 1.770* 1.820 ** 2.126** 1.780* R-square 0.073 0.041 0.041 0.042 0.048 0.041
32 The coefficients on target corruption index is not significant possibly can explained as Bris and Cabolis (2008) who pointed out corruption cannot be imported through overseas acquisitions Among the corporate governance characteristics, the difference of accounting standards is not significant might because the widespread adoption of IFRS, which increased accounting harmonization.
Regarding to bid and firm characteristics, the CAAR for stock-based foreign acquisition is significantly positive, this finding is in line with the univariate analysis. Similarly, relative size of target to acquiring firm are positively affect acquiring-firm’s valuation, supporting the fact that the larger the target relative size of the bidder, the higher the bidder’s wealth effect. Also, acquirer’s return on assets has a positive impact on CAAR, which indicate that acquirer’s financial performance can influence its CAAR in cross-border M&As.
Importantly, the low R-square in Table 7 is typical in the studies using abnormal returns as a dependent variable (see e.g. John et al., 2010; Starks and Wei, 2013) abnormal returns are residuals from the estimation model, and thus low R-square is inevitable in this setting. Therefore, the interpretation of a specific coefficient in this thesis is not likely to be significantly influenced by the value of R-square.
5.3.5. Robustness
33 6. Conclusions
This thesis mainly examines the short-term wealth effect of cross-border M&As on acquiring firms within Europe, with total sample of 2878 takeovers, which include 701 overseas deals and 2177 local transactions. After analyzing this sample, the results showed that the CAAR is significantly positive for European bidders in the interval of [-1, +1], indicating that cross-border M&A do create value for European bidders, possibly because investors hold a relative optimistic attitude to European M&As, they might regard M&A as an opportunity for the development of companies. This positive result is consistent with Martynova and Renneboog (2006). In addition, this thesis compared the wealth effect of overseas to domestic takeovers, and found that bidders in domestic transactions outperform the ones in cross-border deals (although not significance).
Then, the determinants of short-term cross-border M&A on bidders also are investigated. The empirical results showed that stock offers can generate higher CAAR to an acquiring firm than cash offers in cross-border M&As, indicating that in overseas takeovers, bidders use equity to pay for the transaction possibly not because they believe their stock price are overvalued, but because they want to use stock payment to spread risk, most likely as a result of the greater asymmetric information between bidder and target firms. Similar to Beitel et al. (2004), who pointed out the large amount of financial payment pressure and the integration costs that comes along with large scale of takeovers would negatively affect acquiring-firm’s valuation, this thesis also confirmed that the smaller the relative size, the higher the abnormal return of bidders. The result in addition supported the size of acquiring firm are negatively related to its CAAR since smaller firms generally have concentrated ownership and consequently principle-agency problem is less likely to happen in these companies. This finding is consistent with Moeller et al. (2004) and Feito-Ruiz and Menendez-Requejo (2011).
34 corporate governance variables, except shareholder protection. To some extent, these results are in line with those of Martynova and Renneboog (2008). The negative coefficient on shareholder protection variable imply that the difference in the shareholder protection of involved firms will negatively affect the wealth of bidders. Therefore, target shareholders will be compensated if they face the risk of adopt a poor corporate governance system. This is in line with Starks and Wei (2013).
This thesis has strong implications for European managers and their financial decisions. The findings suggest that they bid and firm characteristics, especially the method of payment, relative size of target to acquiring firms, and acquirer’s ROA have significant influence on wealth effect of cross-border M&As on bidders, Important, the difference of shareholder protection between target and bidding firms do affect the wealth effects. Therefore, managers and investors should pay attention to these characteristics. Although this thesis does not find strong evidence that other proxies for corporate governance differences have influence on bidder’s valuation, managers and investors should still careful assess the institutional factors before enter into foreign markets.
7. Discussion & Limitations
This thesis selected overseas takeovers announced by European listed companies during the period of 2005 till 2015 as sample, analyzes short-term wealth effect of cross-border M&As on bidders, and examines its determinants. Although to some extent I have found some determinants of the cross-border wealth effect, this thesis has some limitations:
a. In general, cross-border M&As involve many related parties and the process can be qualified as complicated as there are many variables in play. This research in this particular field might has not been to the depth, and therefore, some issues require further investigation.
35 period, the cross-border sample, in particular, the deals matching the screening condition is relatively small. Therefore, you could argue that the sample size is limited. Nevertheless, the findings of this thesis could be strengthened by future research.
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