“Stock Price Reaction of Acquisition Announcements and
the Influence of Target Firms’ International Activity”
An event study of U.S. based mergers and acquisitions
Author: Casper Ralph Waal
Supervisor: Dr. H. (Halit) Gonenc
Second assessor: Dr. J.H. (Henk) von Eije
University of Groningen and University of Uppsala
2013
Admiraal de Ruyterlaan 153-4
1056 GA Amsterdam
ABSTRACT
This study examines announcement effects for bidder firms in domestic and cross-border acquisitions undertaken by U.S. firms in the time period from 2002 till 2012. We examine the difference between domestic and cross-border acquisitions. Above all we are interested in the role of target firms’ international activity, measured by the presence of foreign subsidiaries, on bidding firms’ stock returns. We find significant positive CAAR for domestic acquisitions and insignificant negative CAAR for cross-border acquisitions. Also cross-section analysis shows a significant positive relation between bidders return and domestic acquisitions. With respect to international activity, we find a negative relation between the presence of foreign subsidiaries in target firms and bidder returns. Moreover, the CAAR is higher for targets without than with foreign subsidiaries. However, results on international activity are not significant.
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KEYWORDS: Acquisition announcements, domestic versus cross-border, abnormal stock returns, CAR/CAAR, U.S., international activity, foreign subsidiaries.
I. INTRODUCTION
A significant amount of research is conducted in the field of (cross-border) mergers and acquisitions. The research is scattered over the fields of strategic management, international business, finance, industrial economics and culture. The world is experiencing a convergence of markets and a trend of globalization and integration of financial markets. Firms are becoming increasingly internationally oriented and the number of cross-border acquisitions relative to domestic acquisitions is believed to further rise in the future. Results of studies on announcement effects for bidding firms’ shareholders have come up with mixed results. More recent literature and studies tend to find evidence for value destruction in cross-border acquisitions. A similar tendency can be found in study results in the field of international activity on firm performance and value. More recent studies argue there is a negative relationship between multi-nationality and firm performance. (Contractor, Kundu, Hsu, 2003) (Lu, Beamish, 2004) (Bea, Park, Wang, 2008)
by presence of foreign subsidiaries. Earlier studies typically distinguish between domestic and cross-border acquisitions by means of the host country of the targets headquarters, thereby neglecting the international activity of the target. We argue that international targets have similar characteristics and difficulties as cross-border acquisitions. Also following studies on internationality and performance, we rationalize that internationality is negatively related to performance. Therefore, internationality is likely to be negatively valued by investors on acquisitions. We expect to find a negative relation between target firms internationality and bidding firms’ stock return. Moreover, we expect higher stock returns for domestic acquisitions that acquire targets without foreign subsidiaries relative to targets with foreign subsidiaries.
In light of the above, the motivation for this study is as follows. The trend of more international activity and the increasing number of cross-border acquisitions make the value creation of cross-border acquisitions an important subject. Furthermore, the role of target firms’ international activity has not received any attention while it can be of importance and a source of the mixed results found in previous research. We expect to show that the international activity of the target firm plays an explanatory role in the abnormal stock return of bidding firm shareholders, and therefore future research should incorporate this rather than make a distinction based solely on the location of the headquarters.
shareholders. We do not find significant evidence that international activity, in the form of presence of foreign subsidiaries, is related with lower announcement effects for bidding firms’ shareholders. We do find higher returns for targets without than with foreign subsidiaries and find a negative coefficient for the relation between internationality and returns. This suggests that shareholders value domestic acquisitions without foreign subsidiaries higher than with, however, the results are insignificant and we are unable to reject our null hypothesis. Furthermore, we do find a significant relationship for the relative deal size that has a positive relation for domestic and a negative relation for cross-border acquisitions.
II. LITERATURE REVIEW
In this study we examine announcement effects in domestic and cross-border acquisitions for bidder firms’ shareholders. Our main point of interest is the role of target firms’ international activity on announcement effects for bidder firms’ shareholders. A domestic acquisition with a target that has a high level of internationalization is more alike a cross-border acquisition since it experiences many of the same conditions. Domestic- and cross-border acquisitions have at an utmost extent a similar set of underlying sources that create value. However, cross-border acquisitions do possess some characteristics that are unique with regards to domestic acquisitions, and these can create or destroy value for bidding firm shareholders.
In the first part of the literature review we examine the different theories on why acquisitions happen, how they create or destroy shareholder value and how cross-border acquisitions differ from domestic acquisitions. An overview of positive and negative research outcomes is reviewed. Also, the role of international activity on firm performance and value is examined. In the last part we address the relevance of this study and develop our hypotheses in the light of recent study outcomes. To examine the different theories on M&A, we divide the theories in the same way Seth, Song and Pettit (2002) did; mergers and acquisitions motivated by synergies, managerialism and hubris.
2.1 Theories on M&A
Synergy hypothesis
and do so by acquiring other firms. The created value is then shared amongst the shareholders of both the bidding and the target firm. The underlying explanation of the synergy hypotheses is firm growth. Penrose (1959) is one of the first to define the firm as a collection of productive assets. The long run profitability of the firm is associated with the growth in the productive opportunity of the firm. Where ‘productive opportunity’ is defined as the use of tangible and intangible assets of the firm. Changes in economic conditions can lead to these different profit opportunities and potential synergies. Bradley, Desai and Kim (1988) describe an acquisition as an attempt to exploit a profit opportunity that is created by a change in economic conditions. Most profit opportunities and synergies stem from an increase in operational efficiency such as economies of scale and scope. Often synergies also stem from the strengthening of the firms’ competitive position, for example by securing critical inputs, and from financial gains. Furthermore, economic value can be derived from all sorts of improvements such as; more efficient management, improved production techniques, the redeployment of assets to more profitable uses, knowledge, or other value-creating corporate synergy mechanisms. These synergies do not substantially differ between domestic and cross-border acquisitions, whether or not these synergies and profit opportunities occur depends on the specific situation.
frictions in capital, goods, or factor markets across countries create opportunities for firms in one country to benefit by investing in another.” (Seth, Song, Pettit, 2002) We study value creation and destruction of cross-border acquisitions and therefore synergistic effects found in FDI theory are also relevant.
A well-known theory on cross-border value creation is the Internalization theory. The Internalization theory as described by Morck and Yueng (1991) states; “Direct foreign investment occurs when a firm can increase its value by internalizing markets for certain of its intangible assets.” Intangible assets are information based assets and include brand name, technical knowledge, superior production skills, managerial skills, patents, consumer goodwill and R&D expenditure. When a firm conducts a cross-border acquisition it expands its geographic boundaries and internalizes the synergies created by these intangible assets. If not internalized, these synergies become lost due to market failures. The acquisition of cross-border targets permits the firm to exploit the possibilities of economies of scale and scope for its intangible assets. This also works the other way around when a target is acquired in order to benefit of skills and resources valuable in the home country. The expertise of the target combined with the bidder leads to opportunities for the newly combined firm. This is known as Reverse Internalization and can be a source of synergy for the acquiring firm.
diversification benefits are not associated with domestic acquisitions, since the investor can easily hold a diversified investment portfolio. Furthermore, multinational companies can benefit from financial diversification by exploiting tax benefits. This risk reduction activity creates shareholder value in an international environment. Gozzi, Levine and Schmukler (2008) share this view and distinguish between three positive theories on internationalization; the Segmentation-, Bonding- and Hot Market theory. The Segmentation theory argues that firms conduct cross-border acquisitions to circumvent regulations, poor accounting systems, taxes and illiquid domestic markets. They state; “Internationalization can lower firms’ cost of capital and facilitate corporate expansion relative to firms that do not internationalize.” (Gozzi, Levine, Schmukler, 2008) The Bonding and Hot Market theory we will discuss briefly below at ‘managerialism’.
When a firm diversifies in means of industry, academics and literature generally agree that value is destroyed. In a reputable MBA finance book, Ross, Westerfield and Jaffe (1999) clearly state; ‘‘Diversification, by itself, cannot produce increases in value’’. The underlying explanation is that it is easier and cheaper for the stockholder to diversify than for the corporation.
coordination difficulties, information asymmetry, incentive misalignment and poor communication. Considered most important in literature is the cultural fit between acquirer and target. The bigger the cultural gap between the acquirers’ home market and target market, the more problems may arise in managing the post-merger process. Datta and Puia (1995) examine the role of cultural fit and find it to be positively related with wealth creation for bidding firm shareholders. Cartwright and Cooper (1992) also show that cultural differences can be the source of target firms’ management resistance to an acquisition and can increase the acquisition costs. In their study, Chatterjee, Lubatkin, Schweiger and Weber (1992) find that differences in culture between bidder and target firm are negatively related with shareholder wealth creation for bidder firms. The overall consensus is that cultural fit is positively related to wealth effects for bidding firm’s shareholders. (Datta, Puia, 1995)
Managerialism hypothesis
Besides the negative role managers fulfil, they can also acquire cross-border for ‘good’ reasons. Internationalization can reduce the expropriation of corporate resources by firm insiders. This is called the Bonding theory. Firms are believed to ‘bond’ themselves to better corporate governance frameworks, thereby lowering expropriation by firm insiders. (Gozzi, Levine, Schmukler, 2008) Furthermore, they state that cross-border acquisitions allow firms to use market timing and benefit from ‘booming’ and temporary ‘hot’ markets. Besides, managers can acquire cross-border in order to reduce risk. By acquiring cross-border rather than domestic, the managers can influence and stabilize the earning stream, given a level of correlation between the markets’ earnings. (Seth, Song, Pettit, 2002)
Hubris hypothesis
The third motive is the hubris hypothesis signifying that acquisitions stem from errors in the valuation process. The bidding firms’ managers do not correctly value the targets and conduct acquisitions based on the assumption that their calculations are correct. Roll (1986) states that the managers of the bidding firm can make errors and both over- or under valuate targets. However, the observed error is typically in the same direction, and the bidder overpays for the target.
2.2 Previous research on wealth effects of acquisitions
So far we examined theories on motives, value creation and differences between domestic and cross-border acquisitions. Theories on cross-border acquisitions and FDI often assume bidders to be able to exploit imperfections in factors and capital markets. Therefore theories often expect bidders in cross-border acquisition to receive higher premiums compared to domestic acquisitions. A common method used in finance literature to study the value creation on mergers and acquisitions is to examine the stock market reactions on the days surround the acquisition announcement, a so-called event study. Previous research has come up with mixed results on value effects for bidder firms with a tendency of more recent research to find value destruction in cross-border acquisition and FDI.
2.2.1 Positive research outcomes
Walker (2000) finds evidence in his research for what he calls the ‘strategic alignment’ hypothesis where acquiring firms shareholders earn a higher return following a takeover that expands the firms operations geographically or increases its market share by cross-border acquisitions. Also von Eije and Wiegerinck (2010) study private cross-border acquisitions by EU firms to China and the United States. Their results indicate that bidder firms’ shareholders to both countries receive significant positive abnormal returns. They do not find evidence for the theories that suggest a higher return to developing markets, such as the ‘Hot Market’ motive of Gozzi, Levine and Schmukler (2008). Furthermore, a study using U.S. targets by Cakici, Hessel and Tandon (1996) studies 195 acquisitions. They find significant wealth gains for bidders of nearly 2%. They find R&D intensity, deal size, overseas exposure, value of currency and industry all to not be related to the returns.
More recent is the study of Conn, Cosh Guest and Hughes (2005) that compares domestic and cross-border acquisitions and studied announcement returns. They find that domestic public targets yielded in significant negative announcement returns while the acquisitions of cross-border public targets resulted in zero announcement returns. Private acquisitions, both domestic and cross-border, resulted in significant positive announcement returns.
acquisitions. Meanwhile there are several studies that found negative outcomes on wealth creation effects in acquisitions for both domestic and cross-border acquisitions. The most common reason for failure and value destruction is cultural discrepancies between the home and the target firms’ country. It is argued to be the decisive factor determining the success or failure of cross-border mergers and acquisitions.
2.2.2 Negative research outcomes
Diversification theory has been shown in research to destroy value and leads to negative stock returns for bidder firms’ shareholders. Moeller and Schlingemann (2005) find evidence that stock returns of firms who acquire cross-border targets are negatively correlated with an increase in both global and industrial diversification. Walker (2000) finds positive abnormal stock returns for bidder firms in cross-border acquisitions but acquiring firms with the diversification motive experience negative abnormal stock returns of -3.35%.
The more recent studies have a tendency to find value destruction for cross-border acquisitions. Even when cross-border acquisitions yield positive results, the results are lower compared to domestic acquisitions. The main reasons for value reduction found in these studies are cultural discrepancies between home and target firms’ country and industry diversification.
2.3 International activity
studied in relation with firm value and firm performance. As a measure for international activity often a ratio of foreign sales, foreign assets or foreign subsidiaries are used.
Several older studies examine the effect of international operations on market value for the firm. Not surprisingly, they find similar motivations for internationality as the motives for cross-border acquisitions, namely; imperfections in product and factor markets, different international taxation, and imperfections in financial markets. In their study Errunza and Senbet (1981) use foreign earnings as a measure for international involvement to study the relation with firm value. They find a positive relationship between firm value and degree of international involvement. Kim and Lyn (1986) also study the relationship between excess market value and the degree of international involvement and find similar results. As a measure for international involvement they use foreign sales percentage and find a positive and significant relationship.
performance when expanding international, however firms are believed to learn from their experience and this boosts firm performance. (Ruigrok, Wagner, 2003).
The Inverted-U model and the Sigmoid model argue somewhat the opposite. The Inverted-U hypothesized that over time the costs of coordinating a dispersed network of operations outweighs the benefits on performance. (Hitt, Hoskisson, Ireland, 1995) (Geringer, Beamish, daCosta, 1989) Gomes and Ramaswamy (1999) argue that multi-nationality brings benefits in the form of economies of scale, arbitrage differences and factor costs. However, the firms have to adopt to more costly organizational structures and less familiar settings with higher cultural diversity and higher transaction costs. The Sigmoid relationship by Hitt, Hoskisson and Ireland (1994) contends to the inverted U shape, however they point out that the actual shape of the curve is more accurately depicted as multiple waves. Riahi-Belkaoui (1990) tests the relationship between the foreign sales ratio and the return on assets. He finds a negative relationship for a low ratio of foreign sales. However, the relationship becomes positive and finally negative again when the ratio rises. This is also found by Contractor, Kundu and Hsu (2003) who find a three-stage Sigmoid relationship between multi-nationality and performance. Also more recent; Lu and Beamish (2004), Bea, Park and Wang (2008) find a Sigmoid relationship.
domestic acquisitions, the target can be active internationally. When an internationally active firm is involved in an acquisition, this will have negative effects for the bidding firms’ performance. We rationalize that bidding firms’ shareholders will be more reluctant to acquisitions in which the firm has to cope with similar difficulties as in cross-border acquisitions. Therefore we expect a negative relation between targets firm internationality and bidding firms’ wealth effects.
2.4 Relevance of this study
The world is experiencing a trend of worldwide convergence of markets and integration of financial markets. Cross-border acquisitions are likely to become increasingly more frequent. Currently, cross-border acquisitions account for about one third of all acquisitions. (Erel, Liao, Weisbach, 2012) Theories on mergers and acquisitions and FDI often predict foreign bidders to be able to take advantage of market imperfections and internalize markets. Therefore they expect to yield positive wealth effects. However, research has come up with mixed results and more recent outcomes suggest cross-border acquisitions to destroy value. The worldwide trend to globalization and market convergence has led to a decrease in the possibilities to take advantage of market imperfections. Individual investors are better able than before to diversify their investment portfolio by themselves and therefore value cross-border acquisitions less. In their research Moeller and Schlingemann (2005) study cross-border acquisitions between 1985 and 1995 and find what they call the ‘cross-cross-border effect’ to yield higher returns for the second half of their sample period, inferring a decrease in wealth gains for bidding firms shareholders.
contribute to firms’ performance. More recent research outcomes however assume an Inverted-U model and Sigmoid model. Both assume the level of internationality is negatively related to firm performance. In our study we examine acquisitions and the role of international activity by distinguishing between targets based on presence of foreign subsidiaries. Because international activity is believed to destroy value we rationalize and expect targets with foreign subsidiaries to yield lower announcement effects than targets only active in the home country.
III. HYPOTHESES AND EXPECTATIONS
In previous research the international activity of the target firm has not received any attention. Acquisitions are commonly arranged into domestic or cross-border depending on the country of the headquarters. Target firms’ international activity has hardly received any attention. We argue that a target with a high level of international activity is more alike a cross-border acquisition and therefore international activity is likely to influence announcement effects for bidding firms’ shareholders. We examine the returns in the days surrounding the announcement, known as the Cumulative Abnormal Returns (CAR) and study the average of the CARs for our sample known as the Cumulative Average Abnormal Returns (CAAR).
We distinguish between domestic and cross-border by using the country of the mother company as an indicator, as is common in finance literature. We study if domestic and cross-border acquisitions experience a difference in announcement effects for the bidding firms’ shareholders by means of the following hypothesis.
Hypothesis 1
H0: There is no difference in announcement effects between domestic and cross-border acquisitions for bidding firms’ shareholders.
H1: There is a difference in announcement effects between domestic and cross-border acquisitions for bidding firms’ shareholders.
outcomes we expect cross-border acquisitions to destroy bidding firms’ shareholder value. On the other hand, domestic acquisitions are expected to profit from synergies and create value. Moreover, they are expected to yield higher announcement effects relative to cross-border acquisitions for bidding firm shareholders.
As we stated earlier we argue that a domestic acquisition with a target that is internationally active has cross-border issues of concern and can be seen as a sort of cross-border acquisition. We expect cross-border acquisitions to destroy value for above-mentioned reasons. Furthermore, we argue in favour of the Sigmoid and Inverted-U model and believe internationality to reduce firms’ performance. A domestic target with international activity is likely to reduce the bidders performance and the acquisition has to cope with the same difficulties as cross-border acquisitions. Therefore we expect target firms international activity to have a negative relationship with bidder firms’ shareholders announcement effects. We study the role of foreign subsidiaries on value creation for domestic bidding firm shareholder by hypothesis 2.
Hypothesis 2
H0: The presence of foreign subsidiaries of domestic target firms has no impact on bidding firms announcement effects.
H1: The presence of foreign subsidiaries of domestic target firms has impact on bidding firms announcement effects.
IV. METHODOLOGY
The study consists out of two parts; first we conduct an event study methodology and examine abnormal stock returns on the days surrounding the acquisition announcements. Secondly, we perform a cross-section analysis to examine the difference between domestic and cross-border acquisitions, as well as the role of foreign subsidiaries.
4.1 Event Study
An event study is used to study the impact of a particular event by examining the impact on the firms’ stock price. This is done by examining the difference between the actual returns and the returns in case that would have occurred if the event would not have taken place. It is assumed that the stock price reflects all available information about the future prospects for the firm.
Market Model
To measure the abnormal returns we first have to determine the ‘normal (benchmark) returns. These are the expected returns in case the event did not take place. To estimate the normal returns, different models can be used. Most common are the Market Model (MM), the Mean Adjusted Returns Model (MAR) and the Market Adjusted Returns or Index Model (IM). We use the Market Model (MM) to estimate the bidder firms normal (benchmark) returns. The Market Model assumes there is a linear relation between the market and the stock return explained by the equation;
(1)
R
it= α
i+
βi.R
mt+ ε
itE(εit) = 0 Var (εit) = σ2εi
Rit is the return of the stock of the acquiring firm at time t.
Rmt is the return of the market at time t.
εit is the zero mean disturbance term
αi , βi and σ2εi are the parameters of the market model
Abnormal Returns
The Abnormal Returns (AR) are the returns surrounding the event that exist due to the event. We define the acquisition announcement as the event, denoted T=0. Since we use the announcement date rather than the acquisition date, we assume there is no information leakage into the market prior to the event. Furthermore we assume the capital market to digest the information and capture the implications of the event in short time. The event period yields a 3-day period starting 1-day prior to- and ending 1 day after the announcement. This event period is most common in finance literature and suggested by MacKinlay (1997). The event period is defined as T1 = -1 till T2 = 1. By using the parameters estimated with the OLS regression we calculate the normal returns for each individual stock using the Market Model. By subtracting the normal returns from the real returns, the Abnormal Returns for the event periods are obtained, as shown in equation 2.
(2)
AR
it= R
it– (α
I+
βi.R
mt)
ARit is the abnormal return of the stock of the acquiring firm at time t.
Rit is the actual return of the stock at time t.
(αI + βi . Rmt) is the predicted normal return of the stock at time t.
Winsorizing technique at a 90% confidence interval (at 5 and 95 %), outliers are converted to the first value within this interval. This is done to limit the effect of possible spurious outliers by limiting extreme values.
Explaining the abnormal returns is only meaningful if the returns are significantly different from zero and not due to pure change. Therefore the CARs and the CAAR have to be tested for significance. We test if the CAAR for the samples significantly differ from zero. Formulas for t-statistics can be found in Appendix A. Furthermore we conduct a non-parametric test that does not rely on a normal distribution. The One-sample Wilcoxon Signed Rank test is the non-parametric alternative for the Student t-test. The test does not assume a normal distribution and is a powerful alternative for the Student t-test. It tests if the median is equal or significantly different from a specified value (zero). An advantage of the Wilcoxon test is that it considers both the sign and the magnitude of the outcomes. Also we test for equality with the Satterthwaite-Welch t-test that allows for unequal cell variances.
4.2 Cross-sectional analysis
We study the CARs of all acquisitions in a cross sectional regression analysis to study the relation of domestic versus cross-border, and the international activity of the target firm. We examine the relation between the presence of foreign subsidiaries in the target firm and the CAR for the bidding firms’ shareholders. We use Ordinary Least Squares (OLS) regression analyses and use the CAR of each event as the dependent variable. The relation is examined by the equation;
CARi is the cumulative abnormal return for the bidder firm in acquisition announcement i, DOMi is a dummy variable to distinguish between domestic and cross-border acquisitions based on the host country of the mother firm and equals 1 if the acquisition is domestic and zero if cross-border. The (DOMi * IAi) is an interactive variable to distinguish between domestic targets with and without foreign subsidiaries. IAi stands for International Activity and equals 1 when there are foreign subsidiaries and zero if not. RELDi is the relative deal size of the acquisition calculated by dividing the stock market value of the acquiring company by the deal value of the acquisition, FCi is the dummy variable for acquisition announcements during the financial crisis and equals 1 if the announcement is made during the crisis and 0 otherwise. Equation 3 enables us to test for our second hypothesis and we expect to find a negative relationship between CARs and international activity of the target firm.
4.3 Control variables
For the cross section analysis we control for the deal size of the acquisition with the variable RELDi. Large acquisitions are more likely to have an impact on abnormal stock returns. We control for deal size by using the relative size; the value of the deal divided by the market value of the acquirer at the t=0. Goergen and Renneboog (2004) in their study find that the relative size of the target to the size of the bidder did not have an impact on wealth effects. They argue this might be due to the fact that they focus on large acquisitions and therefore the relative size is pretty homogeneous. However, earlier studies have reported on such a relation.
2008, the date Lehmann Brothers fell. It can be argued that because of the crisis, companies are increasingly implementing strategies allowing them to access new geographies and focus on growth outside their home country. (Grave, Vardiabasis, Yavas, 2012). We implement a dummy variable in the equation that equals 1 if the acquisition takes place during the financial crisis and zero if otherwise.
V. DATA
5.1 Sample of acquisitions
needed for our study are inevitable. Descriptive statistics, distribution of acquisitions over the time period and an overview of relative deal value can be found in Appendix C.
The returns of the firms stock are obtained with the ISIN numbers and collected from the database DATASTREAM. Both the stock prices for the estimation period and the event period are gathered. The S&P500 index is used to proxy for the market. This index is retrieved from Datastream.
For multiple acquisitions the relative deal value yielded abnormal high returns. After examination most of the extreme values were due to ‘reverse mergers’. Reverse mergers are in most cases deployed for accounting purposes only. We cope with this by assuming that the deal value represents the market value of the acquirer. We then divide the market value of the target on the day of the acquisition announcement by the market value of the acquirer.
5.2 International activity
Data gathering on target international activity proved to be difficult. Through the ORBIS database we found data on target firms’ subsidiaries. Originally we wanted to create an internationality index by dividing foreign sales by total sales. This proved to be impossible because of data constraints. ORBIS does provide sales figures for subsidiaries, however a great amount of them is private and therefore no data can be collected. Furthermore, information on ownership and operating revenue was often missing.
and without foreign subsidiaries to study the relation between international activity and value creation/destruction. ORBIS finds 27 of 87 domestic acquisitions in our sample to have subsidiaries. Of these 27, 23 have one or more subsidiaries abroad.
VI. RESULTS
6.1 CAARs domestic versus cross-border targets
Table 1 shows the descriptive statistics for all used samples and the relative deal size. An overview of all individual events’ CARs and related significance tests is included in Appendix D.
Table 1. Descriptive statistics
Variable Mean Min. Max. S.D.
CARs entire sample
0.017 -0.123 0.210 0.081 CARs cross-border -0.020 -0.123 0.049 0.049 CARs domestic 0.024 -0.123 0.210 0.084
CARs domestic with subs
0.008 -0.123 0.206 0.076 CARs domestic no subs
0.030 -0.123 0.210 0.087
Relative deal size
0.259 0.000 1.013 0.273
yield a return of 2.4% significant at the 1% level, while cross-border acquisitions show an insignificant CAAR of -2%.
This is in line with the expectations of our first hypothesis that expects different announcement effects for border and domestic acquisitions. As expected, cross-border acquisitions seem to destroy value for bidding firm shareholder while domestic acquisitions yield positive returns for bidding firms’ shareholders. The t-test for domestic acquisitions is significant indicating a positive announcement effect for bidders. The t-test for equality shows the means of the samples to significantly differ from each other. Therefore we reject the null hypothesis of ‘no difference in announcement effects’ and accept the alternative hypothesis.
Significance tests for event studies assume a normal distribution. We also conduct the non-parametric Wilcoxon Signed Rank Test since the samples do not follow a normal distribution. For the domestic sample the median of the CAR is significantly different from zero at the 10% level, the result for the entire and cross-border samples are insignificant. Overall, the outcomes suggest that cross-border acquisitions destroy value while domestic acquisitions create value. Unfortunately the CAAR of cross-border acquisitions is not significant, most likely due to the small amount (16) of acquisitions in our sample.
Table 2. Cumulative Average Abnormal Returns (CAARs) for the samples of domestic and cross-border targets
All Domestic targets Cross-border targets Sample 103 87 16 CAAR (mean) 0.017 0.024 -0.020 t-statistic 2.208 (**) 2.730 (***) -1.625 Median 0.000 0.006 0.005
Wilcoxon Signed Rank 1.280 1.870 (*) 1.473
T-test for equalitya 2.921
p-Value 0.006
Note: a(equality test between samples domestic and cross-border) Satterthwaite-Welch t-test (allows for unequal cell variances) * significant at the 10% level.
** significant at the 5% level.
*** significant at the 1% level.
Critical values of the t-statistic with n-2 degrees of freedom at the 1% significance level for the sample are respectively; 2.364; 2.374 and 2.583
Wilcoxon Signed Rank Test to test Median = 0
6.2 International activity
To study the influence of international activity of target firms, we divide the sample by presence of foreign subsidiaries. Also we perform a cross sectional analysis. Table 3 shows results of tests on presence of foreign subsidiaries of targets and on the financial crisis. Domestic acquisitions without foreign subsidiaries show a CAAR of 3.0 % significant at the 1 % level. CAAR of targets that are internationally active and do have foreign subsidiaries show a lower CAAR of only 0.8%. However, this CAAR is not significant different from zero.
that are internationally active and do have foreign subsidiaries, yield lower announcement effects for bidding firm shareholders during an acquisition. This is in line with our expectations that domestic acquisitions with international active targets have a negative relation to acquirer firms’ shareholder value. Although the CAAR of targets with foreign subsidiaries is not significant, results point in the direction of value destruction for bidding firms’ shareholders. This is in line with theory that internationalisation over time reduces firm performance and value. Firms have to adapt to more costly organizational structures, higher cultural diversity and higher transactions costs.
Panel B shows results on the financial crisis. Results indicate no significant differences between acquisitions during or before the financial crisis, although our sample finds a higher CAAR for acquisitions before the financial crisis.
Table 3: Tests on CAAR of domestic acquisitions
N CAAR p-Valuea
Panel A: Foreign subsidiaries
No foreign subsidiaries 64 0.030 0.006
Foreign subsidiaries 23 0.008 0.599
p-Valueb 0.253
Panel B: Financial crisis
Before financial crisis 49 0.022 0.039
During financial crisis 38 0.010 0.377
p-Valueb 0.461
Note: a p-Values based on a t-test of the alternative hypothesis of inequality to zero b p-Values based on Satterthwaite-Welch t-test of differences (allows for
6.3 Cross-section analysis
Table 3 shows results of the cross-sectional regression analysis where the CARs are the dependent variable. First the regression is performed on the total sample and we find a significant positive relation between the domestic dummy and CARs. This indicates that on average domestic acquisitions have different announcement effects than cross-border acquisitions. We can reject the null hypothesis and accept the H1 that domestic acquisitions yield different announcement effects compared to cross-border acquisitions.
Our second hypothesis suggests that the presence of foreign subsidiaries in domestic acquisitions has an impact on the CARs for bidding firms. We expected a negative relationship between international activity and CARs since international activity and cross-border acquisitions are theorized to destroy bidding firms’ shareholder value. In our regression we find a negative relationship, however the relation is not significant and we are unable to reject the null hypothesis.
of Goergen and Renneboog (2002), but similar to other studies that find relative deal size to have an impact such as the study of Seth, Song and Pettit (2002).
For the FC dummy (Financial Crisis) the cross-sectional analysis shows a negative coefficients indicating lower CARs for acquisitions during the financial crisis. However, the results are all insignificant. Furthermore, we find small outcomes for the R-squared that asses the fit of our model. The outcomes of the F-test are significant on the 5% level for the entire and the domestic samples.
Table 4: Results of cross-section analysis
Domestic targets All Cross-border Domestic Foreign subs No foreign subs DOM 0.046 (**) (0.022) (DOM*IA) -0.027 -0.029 (0.019) (0.020) RELD 0.057 (*) -0.098 (*) 0.081 (**) 0.066 0.088 (**) (0.029) (0.046) (0.032) (0.048) (0.042) FC -0.014 -0.028 -0.014 -0.028 -0.010 (0.015) (0.025) (0.017) (0.032) (0.021) Constant -0.024 0.003 0.015 -0.003 0.012 (0.020) (0.016) 0.016 (0.026) (0.021) Observations 103 16 87 23 64 R-squared 0.098 0.272 0.092 0.133 0.039 F-statistic 2.675 2.434 2.822 1.545 2.289 p-Value of F-test 0.036 0.126 0.043 0.237 0.109 Note:
DOM has a value of 1 when the acquisition is domestic and 0 if cross-border. AI has a value of 1 when the domestic target has foreign subsidiaries and 0 otherwise. RELD measures the acquisition deal value divided by the market value of the acquirer on the day of the event. FC equals 1 if the event takes place during the financial crisis and 0 if before. Constant is the constant term of the equation. Robust standard errors in parentheses.
VII. CONCLUSION
We study announcement effects for bidding firms’ shareholders on the days surrounding an acquisition announcement for cross-border and domestic acquisitions. Moreover, we study if presence of foreign subsidiaries of domestic target firms has an influence on the CARs for bidding firm shareholders. Theory and recent study outcomes suggest domestic acquisitions to yield higher bidder value than cross-border acquisitions, where cross-border acquisitions often result in value destruction. This because shareholders are better than before able to diversify their investment portfolio by themselves, and because firms that perform cross-border acquisitions have to cope with cultural differences, complicated structures and higher transaction costs. Furthermore, we argue for the Sigmoid and Inverted-U model where international activity is negatively related to firms’ performance. We rationalize that investors will be more reluctant to internationally active domestic targets since the international activity will decrease bidding firms’ performance and the acquisition will face similar difficulties as cross-border acquisitions.
acquisitions. To study the role of international activity we distinguish between targets with and without foreign subsidiaries. We find positive significant returns for target without foreign subsidiaries of 3.0% and a lower and insignificant return of 0.8 % for targets with foreign subsidiaries. In the cross-section analysis results indicate the presence of foreign subsidiaries in target firms to be negatively related to CARs for bidder firms shareholders. This suggests that shareholders value domestic acquisitions without- higher than with foreign subsidiaries. However the results are insignificant. This is most likely due to our relatively small sample. Furthermore, we find significant coefficients for the relative deal size. We find a positive coefficient for domestic and a negative coefficient for cross-border acquisitions. The larger the deal value the larger the impact on the value creation in domestic acquisitions and the value destruction in cross-border acquisitions.
Our findings have some implications for future research. A common method to compare between domestic and cross-border acquisitions is to use the country of the mother company as decisive variable. However, the level of internationality of targets shows to have impact on investors temper. This effect has been neglected by earlier research and might be an explanation for varying study outcomes.
VIII. APPENDIX
Appendix A. Formulas for t-statistics
CAR CAAR 𝑡!"#(!!,!!) = 𝐶𝐴𝑅! T𝜎!𝐴𝑅 ! 𝑡!""#(!!,!!)= 𝐶𝐴𝐴𝑅(!!,!!) 𝜎!""#(!!,!!) 𝜎!"#(!!,!!) = 𝑇𝜎!𝐴𝑅 ! 𝜎𝐶𝐴𝐴𝑅 𝑡!, 𝑡! = 1 𝑁! 𝑇𝜎!𝐴𝑅! ! !!!
Appendix B. Sample overview
Acquiror name
Country
code Target name
Country code
1 LEGEND INTERNATIONAL HOLDINGS INC. US NORTH AUSTRALIAN DIAMONDS LTD AU
2 LIBERTY GLOBAL INC. US TELENET GROUP HOLDING NV BE
3 CLEVELAND-CLIFFS INC. US CENTENNIAL ASSET AMAPÁ
PARTICIPAÇÕES SA
BR
4 NEWMONT MINING CORPORATION US FRANCO-NEVADA MINING
CORPORATION LTD
CA
5 SUNBURST ACQUISITIONS IV INC. US SIERRA MINERALS INC. CA
6 STILLWATER MINING COMPANY US MARATHON PGM CORPORATION CA
7 DIGITAL RIVER INC. US LML PAYMENT SYSTEMS INC. CA
8 DUKE ENERGY CORPORATION (OLD) US WESTCOAST ENERGY INC. CA
9 DEUTSCHE BANK DE VIVANCO GRUPPE AG DE
10 PERNIX GROUP INC. US TRANSRADIO SENDERSYSTEME
BERLIN AG DE
11 KENNAMETAL INC. US WIDIA GMBH DE
12 CARNIVAL CORPORATION US P&O PRINCESS CRUISES PLC GB
13 CITIGROUP INC. US BANCO CUSCATLAN DE GUATEMALA
SA GT
14 MENTOR GRAPHICS CORPORATION US VALOR COMPUTERIZED SYSTEMS
LTD
IL
15 MORGAN STANLEY US SSANGYONG CORPORATION KR
16 IAC/INTERACTIVE CORPORATION US ELONG INC. KY
17 MARKET CENTRAL INC. US PALADYNE CORPORATION US
18 BRAINWORKS VENTURES INC. US ASSURANCEAMERICA CORPORATION US
19 MAINSOURCE FINANCIAL GROUP INC. US FIRST COMMUNITY BANCSHARES
INC. (INDIANA)
US
20 IDEC PHARMACEUTICALS CORPORATION US BIOGEN INC. US
21 HILLENBRAND INDUSTRIES INC. US MEDIQ INC. US
23 CHESAPEAKE ENERGY CORPORATION US CONCHO RESOURCES INC. US
24 EMC CORPORATION US VMWARE INC. US
25 AXONYX INC. US OXIS INTERNATIONAL INC. US
26 US HOME & GARDEN INC. US IONATRON INC. US
27 SEGMENTZ INC. US EXPRESS-1 INC. US
28 BIOFARM INC. US FRIENDLYWAY CORPORATION US
29 AETNA INC. US MAGELLAN HEALTH SERVICES INC.'S
BEHAVIORAL HEALTHCARE DIVISION US
30 ADVANCED COMMUNICATIONS
TECHNOLOGIES INC. US PACIFIC MAGTRON INTERNATIONAL CORPORATION US
31 GLACIER BANCORP INC. US CITIZENS BANK HOLDING COMPANY US
32 BOK FINANCIAL CORPORATION US VALLEY COMMERCE BANCORP NA
(PHEONIX, ARIZONA)
US
33 IFT CORPORATION US LAPOLLA INDUSTRIES INC. US
34 TECHNOCONCEPTS INC. US ASANTE TECHNOLOGIES INC. US
35 YDI WIRELESS INC. US PROXIM CORPORATION US
36 CYPRESS SEMICONDUCTOR
CORPORATION
US SUNPOWER CORPORATION US
37 RELATIONSERVE MEDIA INC. US SENDTEC INC. US
38 COGNITRONICS CORPORATION US THINKENGINE NETWORKS INC. US
39 INTERCELL INTERNATIONAL
CORPORATION
US NEWMARKET CHINA INC. US
40 VIVA INTERNATIONAL INC. US RIVER HAWK AVIATION INC.(OLD) US
41 SECURED FINANCIAL NETWORK INC. US VIRTUAL PAYMENT SOLUTIONS LLC US
42 DTS INC. US SPATIALIZER AUDIO LABORATORIES
INC.
US
43 ENDEAVOR ACQUISITION CORPORATION US AMERICAN APPAREL INC. (OLD) US
44 CTK WINDUP CORPORATION US STRASBAUGH INC (OLD) US
45 MOTORSPORTS EMPORIUM INC. US INTERNATIONAL BUILDING
TECHNOLOGIES GROUP INC.
US
46 YP CORPORATION US LIVEDEAL INC. US
47 VIRGINIA FINANCIAL GROUP INC. US FNB CORPORATION US
48 LASALLE BRANDS CORPORATION US LASALLE BRANDS INC. US
49 SONTRA MEDICAL CORPORATION US ECHO THERAPEUTICS INC. (OLD) US
50 GLOBAL SERVICES PARTNERS
ACQUISITION CORPORATION
US SOUTHPEAK INTERACTIVE LLC US
51 GENESIS HOLDINGS INC. US BIOAUTHORIZE INC. US
52 KENTUCKY USA ENERGY INC. US KY USA ENERGY INC. US
53 CET SERVICES INC. US BIOMEDICAL TECHNOLOGY
SOLUTIONS INC.
US
54 JUMPTV INC. US NEULION INC. US
55 XTREME OIL & GAS INC. US SMALL CAP STRATEGIES INC. US
56 ALPHA NATURAL RESOURCES INC. US FOUNDATION COAL HOLDINGS INC. US
57 FORD-SPOLETI HOLDINGS INC. US EAGLE OIL HOLDING COMPANY US
58 JAMAICA JIM INC. US MYCONTACTCARD INC. (OLD) US
59 PROSPECT ACQUISITION CORPORATION US KENNEDY-WILSON HOLDINGS INC. US
60 QUALSEC US VITAMIN SPICE INC. US
61 WILLIAMS PARTNERS LP US WILLIAMS PIPELINE PARTNERS LP US
62 FORMULAWON INC. US REACH MESSAGING INC. US
63 US NATURAL GAS CORPORATION US WILON RESOURCES INC. US
65 CALIX INC. US OCCAM NETWORKS INC. US
66 REGAL-BELOIT CORPORATION US UNICO INC. US
67 ENERJEX RESOURCES INC. US BLACK SABLE ENERGY LLC US
68 KUPPER PARKER COMMUNICATIONS INC. US PRINCIPAL SOLAR INC. US
69 KENTUCKY FIRST FEDERAL BANCORP INC. US CKF BANCORP INC. US
70 VIEWPOINT FINANCIAL GROUP INC. US HIGHLANDS BANCSHARES INC. US
71 PROSPERITY BANCSHARES INC. US EAST TEXAS FINANCIAL SERVICES
INC.
US
72 LANTIS LASER INC. US RAPTOR NETWORKS TECHNOLOGY
INC. US
73 ORACLE CORPORATION US TALEO CORPORATION US
74 5BARZ INTERNATIONAL INC. US CELLYNX GROUP INC. US
75 IHS INC. US XEDAR CORPORATION US
76 CONNECTICUT WATER SERVICE INC. US BIDDEFORD & SACO WATER
COMPANY
US
77 CONAGRA FOODS INC. US RALCORP HOLDINGS INC. US
78 INVESCO VAN KAMPEN TRUST FOR
INVESTMENT GRADE NEW YORK MUNICIPALS
US INVESCO NEW YORK QUALITY
MUNICIPAL SECURITIES
US
79 INVESCO QUALITY MUNICIPAL INCOME
TRUST US INVESCO QUALITY MUNICIPAL INVESTMENT TRUST US
80 PACIFIC CONTINENTAL CORPORATION US CENTURY BANK (OREGON) US
81 CLEAN HARBORS INC. US SAFETY-KLEEN INC. US
82 NUVEEN DIVERSIFIED CURRENCY
OPPORTUNITIES FUND US GLOBAL INCOME & CURRENCY FUND INC. US
83 NUVEEN MICHIGAN QUALITY INCOME
MUNICIPAL FUND INC. US NUVEEN MICHIGAN PREMIUM INCOME MUNICIPAL FUND INC. US
84 NUVEEN MICHIGAN QUALITY INCOME
MUNICIPAL FUND INC. US NUVEEN MICHIGAN DIVIDEND ADVANTAGE MUNICIPAL FUND US
85 SEQUENTIAL BRANDS GROUP INC. US HEELYS INC. US
86 SYNERGY PHARMACEUTICALS INC. US CALLISTO PHARMACEUTICALS INC. US
87 STANDARD MOTOR PRODUCTS INC. US DANA CORPORATION'S AUTOMOTIVE
AFTERMARKET GROUP'S ENGINE US
88 ST PAUL COMPANIES INC., THE US TRAVELERS PROPERTY CASUALTY
CORPORATION
US
89 WALTER INDUSTRIES INC. US MUELLER WATER PRODUCTS INC. US
90 LIFETIME BRANDS INC. US SYRATECH CORPORATION US
91 COCONUT PALM ACQUISITION
CORPORATION
US EQUITY BROADCASTING
CORPORATION
US
92 PNC FINANCIAL SERVICES GROUP INC.,
THE
US STERLING FINANCIAL CORPORATION US
93 VECTOR INTERSECT SECURITY
ACQUISITION CORPORATION
US CYALUME LIGHT TECHNOLOGIES
INC.
US
94 RHAPSODY ACQUISITION CORPORATION US PRIMORIS CORPORATION US
95 FMG ACQUISITION CORPORATION US UNITED INSURANCE HOLDINGS LC US
96 NUVASIVE INC. US OSIRIS THERAPEUTICS INC.'S
OSTEOCEL BIOLOGICS BUSINESS
US
97 LIGAND PHARMACEUTICALS INC. US PHARMACOPEIA INC. US
98 SCHULMAN A INC. US ICO INC. US
99 HARBINGER GROUP INC. US SPECTRUM BRANDS HOLDINGS INC. US
100 MONOTYPE IMAGING HOLDINGS INC. US MARLBOROUGH SOFTWARE
DEVELOPMENT HOLDINGS INC.
US
101 DIGITALGLOBE INC. US GEOEYE INC. US
102 AT&T INC. US NEXTWAVE WIRELESS INC US
Appendix C1. Descriptive statistics
Table 1. Descriptive statistics
Variable Mean Min. Max. S.D.
CARs entire sample
0.017 -0.123 0.210 0.081 CARs cross-border -0.020 -0.123 0.049 0.049 CARs domestic 0.024 -0.123 0.210 0.084
CARs domestic with subs
0.008 -0.123 0.206 0.076 CARs domestic no subs
0.030 -0.123 0.210 0.087
Relative deal size
0.259 0.000 1.013 0.273
Appendix C2. Distribution of data sample Acquisition year Sample Domestic Acquisitions Cross-border Acquisitions 2012 16 15 1 2011 8 8 0 2010 11 9 2 2009 8 6 2 2008 11 11 0 2007 8 7 1 2006 11 7 4 2005 6 6 0 2004 10 8 2 2003 9 9 0 2002 4 2 2 2001 2 0 2 Total 104 88 16
Appendix C3. Distribution of relative deal size
Appendix D. Overview of CARs and t-statistics
Bid CAR t-value Significance
Bid089 5,12% 1,274 Bid090 4,05% 2,333 * Bid091 -‐5,66% -3,177 *** Bid092 -‐2,45% -1,228 Bid093 1,05% 1,702 Bid094 -‐0,34% -1,019 Bid095 1,50% 1,727 Bid096 3,55% 0,958 Bid097 -‐9,81% -2,603 * Bid098 2,18% 1,034 Bid099 -‐1,96% -2,603 * Bid100 4,19% 2,009 * Bid101 21,07% 2,341 * Bid102 -‐1,78% -4,018 ** Bid103 2,68% 0,291 Winsorized at 5% and 95 %
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