Macroeconomic Factors Influencing Cross-Border Merger & Acquisitions Value

129 Pages·2014·2.39 MB·English

by  Fredrik Hellberg

Department of Business Administration
FEKN90, Business Administration
Examensarbete på Civilekonomprogrammet
Spring 2014

Macroeconomic Factors
Influencing Cross-Border
Merger & Acquisitions Value

- An empirical study of UK acquirers on foreign targets

Authors:
Jonathan Hegbrant
Fredrik Hellberg

Supervisor:
Rikard Larsson
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ABSTRACT

Title: Macroeconomic factors influencing Cross-Border Merger & Acquisition value

Seminar date: 2014-05-22

Course: FEKN90 Degree Project Master of Science in Business and Economics

Authors: Jonathan Hegbrant and Fredrik Hellberg

Supervisor: Rikard Larsson

Key words: Event study, CBM&A, Cumulative Abnormal Return (CAR), Market Model,
Macroeconomic factors, BRICS, MIKT, Developed, Developing

Purpose: This thesis intends to contribute to research by evaluating how the market responds
to the announcement of a CBM&A transaction for acquiring shareholders and examining the
extent to which macroeconomic & cultural factors influence shareholder value creation as
well as whether there are any differences between developed and developing countries.

Methodology: A quantitative event study with a deductive approach is performed where the
announcement of a CBM&A transaction is investigated during two event windows, [-2, 2 and
-5, 5] to examine if abnormal returns exist. Multiple linear regressions are carried out to find a
relation between abnormal returns and macroeconomic, explanatory variables.

Theoretical perspective: The main theoretical frame is the Efficient Market Hypothesis, the
Signaling theory and theories regarding M&A and CBM&A including motives and factors
affecting shareholder wealth. Previous relevant studies are emphasized.

Empirical foundation: A quantitative assembly of data has been collected to examine the
abnormal returns over two event windows [-2, 2 and -5, 5] for CBM&A transactions during
1997-2012 on foreign targets. The acquirers are listed on the London Stock Exchange.

Conclusions: The authors cannot generally distinguish any abnormal returns in connection
with CBM&A announcements for the event windows. The research cannot also find any
significant relationships between abnormal returns and macroeconomic & cultural factors.
Needless to say, there are still significant differences for these variables between developed
and developing countries.

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ACKNOWLEDGEMENTS

It is with great pleasure that we take this opportunity to extend our sincerest gratitude to those
who have assisted us when writing this thesis. First and foremost, we would like to recognize
the input and guidance received from our supervisor, Professor Rikard Larsson. We also want
to send a special mention to lector Jens Forssbaeck, for his insightful support concerning the
statistical analysis. Furthermore, we are very appreciative for the beneficial critiques provided
by our opponents.

Lund, 9 May 2014

_________________________ _________________________
Jonathan Hegbrant Fredrik Hellberg
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TABLE OF CONTENTS

1. INTRODUCTION.............................................................................................................................................. 1
1.1 BACKGROUND .............................................................................................................................................. 1
1.2 PROBLEM DISCUSSION ................................................................................................................................. 4
1.3 PURPOSE ....................................................................................................................................................... 6
1.4 DEMARCATIONS ........................................................................................................................................... 6
1.5 AUDIENCE..................................................................................................................................................... 7
1.6 THESIS OUTLINE .......................................................................................................................................... 7

2. THEORETICAL BACKGROUND ................................................................................................................. 8
2.1 DEFINITION OF M & A................................................................................................................................... 8
2.2 THEORETICAL FOUNDATION ...................................................................................................................... 9
2.2.1 EFFICIENT-MARKET HYPOTHESIS ...................................................................................................... 9
2.2.2 SIGNALLING THEORY......................................................................................................................... 11
2.3THEORETICAL BACKGROUND FOR M&A..................................................................................................... 12
2.3.1 MOTIVES FOR M & A .......................................................................................................................... 12
2.3.2 FACTORS INFLUENCING SHAREHOLDER VALUE IN M&A .................................................................. 17
2.3.3 EMPIRICAL EVIDENCE ON MOTIVES FOR M & A ................................................................................ 20
2.3.4 EMPIRICAL EVIDENCE ON M&A VALUE EFFECTS .............................................................................. 20
2.4THEORETICAL BACKGROUND FOR CROSS BORDER M&A........................................................................... 21
2.4.1 CBM&A ............................................................................................................................................... 21
2.4.2 MOTIVES FOR CBM & A ...................................................................................................................... 22
2.4.3 FACTORS INFLUENCING SHAREHOLDER VALUE IN CBM&A .............................................................. 23
2.4.4 EMPIRICAL EVIDENCE ON MOTIVES FOR CBM & A ........................................................................... 29
2.4.5 EMPIRICAL EVIDENCE ON CMM&A VALUE EFFECTS ........................................................................ 29

3. METHODOLOGY .......................................................................................................................................... 32
3.1 RESEARCH APPROACH ............................................................................................................................... 32
3.2 CHOICE OF ACQUIRER AND TARGET ......................................................................................................... 32
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3.2.1 THE ACQUIRER ................................................................................................................................... 32
3.2.2 THE TARGETS ..................................................................................................................................... 33
3.3 DATA COLLECTION .................................................................................................................................... 35
3.4 SELECTION CRITERIA ................................................................................................................................ 36
3.5 MEASURES OF M & A PROFITABILITY ........................................................................................................ 38
3.6 EVENT STUDY - MEASURING SHORT-TERM ABNORMAL RETURNS ............................................................ 39
3.6.1 INTRODUCTION .................................................................................................................................. 39
3.6.2 THE EVENT STUDY ............................................................................................................................. 39
3.6.3 ANNOUNCEMENT DATE ................................................................................................................. 40
3.6.4 ESTIMATION PERIOD AND EVENT WINDOW ................................................................................. 40
3.7 CUMULATIVE ABNORMAL RETURN (CAR).................................................................................................. 42
3.7.1 ABNORMAL RETURNS ........................................................................................................................ 42
3.7.2 RAW RETURN ..................................................................................................................................... 42
3.7.3 NORMAL RETURN ............................................................................................................................... 43
3.7.4 CALCULATING CAR............................................................................................................................. 45
3.7.5 SIGNIFICANCE AND HYPOTHESES....................................................................................................... 45
3.8 REGRESSION ANALYSIS.............................................................................................................................. 47
3.8.1 DIAGNOSTIC TESTING......................................................................................................................... 48
3.8.2 DEPENDENT VARIABLE....................................................................................................................... 49
3.8.3 INDEPENDENT VARIABLES.................................................................................................................. 49
3.8.4 CONTROL VARIABLES......................................................................................................................... 52
3.9 METHOD LIMITATIONS............................................................................................................................... 54
3.9.1 MEASUREMENT AND INTERPRETING DIFFICULTIES.......................................................................... 54
3.9.2 VALIDITY............................................................................................................................................ 55
3.9.3 RELIABILITY....................................................................................................................................... 56

4. RESULTS AND ANALYSIS .......................................................................................................................... 57
4.1 DESCRIPTIVE STATISTICS AND DATA ANALYSIS........................................................................................ 57
4.2 CUMULATIVE ABNORMAL RETURN ANALYSIS........................................................................................... 59
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4.2.1 RESULTS.............................................................................................................................................. 59
4.2.2 ANALYSIS............................................................................................................................................ 63
4.3 MULTIPLE LINEAR REGRESSION RESULTS AND ANALYIS.......................................................................... 66
4.3.1 REGRESSION ANALYSIS FOR ENTRE SAMPLE – CAR 5........................................................................ 66
4.3.2 REGRESSION ANALYSIS FOR ENTRE SAMPLE – CAR 11....................................................................... 68
4.3.3 REGRESSION ANALYSIS FOR SUB SAMPLES ....................................................................................... 69
4.4 DIFFERENCES IN SUB SAMPLES.................................................................................................................. 74
4.5 HYPOTHESIS FINDINGS............................................................................................................................... 75
4.5.1 DEPENDENT VARIABLE ...................................................................................................................... 76
4.5.2 INDEPENDENT VARIABLE ................................................................................................................... 76

5. CONCLUSION………………………………………………………………................................................. 80
5.1 CONCLUSION............................................................................................................................................... 80
5.2 RESEARCH CONTRIBUTION AND PRACTICAL APPLICATION...................................................................... 82
5.3 SUGGESTIONS FOR FURTHER RESEARCH................................................................................................... 83

REFERENCES .................................................................................................................................................... 84
APPENDIX 1 – COMPILATION OF DATA ............................................................................................ 102
APPENDIX 2 – DIAGNOSTIC TESTING ................................................................................................ 112
APPENDIX 3 - ARTICLE............................................................................................................................ 121

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LIST OF FIGURES

TABLE 1 – METHOD FOR CATEGORIZING M&A…………………………………….……………. 9
TABLE 2 – DATABASES AND SOURCES…………………………………..…………………….......... 35
TABLE 3 - SAMPLE DISTRIBUTION PER YEAR………………………………….……………….... 57
TABLE 4 – SAMPLE DISTRIBUTION PER COUNTRY…………………………….………….….… 58
TABLE 5 – SAMPLE DISTRIBUTION PER MARKET INDEX…………………….……….…….… 58
TABLE 6 – DISTRIBUTION OF DUMMY VARIABLE…………………….……….………….….… 59
TABLE 7- ABNORMAL AVERAGE RETRUNS OVER EVENT WINDOWS……………………... 60
TABLE 8 – OVERVIEW OF EVENT WINDOW FOR ENTIRE SAMPLE…………………………. 61
TABLE 9 – OVERVIEW OF EVENT WINDOW FOR DEVELOPED COUNTRIES………………. 62
TABLE 10 – OVERVIEW OF EVENT WINDOW FOR DEVELOPING COUNTRIES……………. 63
TABLE 11 – MULTIPLE LINEAR REGRESSION FOR ENTIRE DATA SAMPLE – CAR 5….… 66
TABLE 12 – MULTIPLE LINEAR REGRESSION FOR ENTIRE DATA SAMPLE – CAR 11…… 68
TABLE 13 – MULTIPLE LINEAR REGRESSION FOR DEVELOPING DATA SAMPLE …..…... 70
TABLE 14 – MULTIPLE LINEAR REGRESSION FOR DEVELOPED DATA SAMPLE ……...… 71
TABLE 15 – DIFFERENCES BETWEEN DEVELOPING AND DEVELOPED SAMPLES …….… 74
TABLE 16 –SUMMARY OF EXPECTED RESULTS VERUS FINDINGS…………………………… 75
DIAGRAM 1 - GLOBAL FOREIGN DIRECT INVESTMENT 1992-2007……………………..……. 1
DIAGRAM 2 - EXAMINED FACTORS AFFECTING VALUE IN CBM&A…………………..……… 3
DIAGRAM 3 - THE COMPONENTS OF THE EVENT STUDY………………………………………. 40
DIAGRAM 4 – SAMPLE DISTRIBUTION PER YEAR………………………………….…………….. 57

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1. INTRODUCTION
This chapter begins by introducing the reader to the general mergers and acquisitions
subject, which characteristics influence value creation for acquirers and the purpose of
investigating macroeconomic and cultural factors in relation to cross-border deals. To
conclude, demarcations, intended audience and outline of the remaining thesis are presented.

1.1 Background
Foreign direct investment (FDI) is a way for companies to expand their business into foreign
markets. The majority of FDI belongs to cross-border M&A activity, peaking at over eighty
percent in 1999 according to UNCTAD (2000). With a constantly growing globalization,
Cross-Border Merger & Acquisitions (CBM&A) are gaining in importance. The global
CBM&A value increased from $200 billion in 1990 to $1637 billion in 2007 (Sudarsanam,
2010).
Diagram 1 - Global foreign direct investment, net inflows (% of GDP) in the period 1992-
2007.

Source: World Bank Development Indicators
Due to the amount invested and its strategic importance for firms, the interest in M&A
research has grown immensely. The M&A activity subsided in connection with the most
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recent financial crisis, however, new research has shown that the M&A activity is on the rise
again. A study involving 868 corporate managers performed by McKinsey, highlights the
importance of M&A as a means to grow and create value (Uhlaner & West, 2011). In
connection with increased research, interest the variety of questions related to M&A has
expanded. Questions such as, why M&A exists, which motives drive the activity, whether it
creates value and if so which factors affect value creation are commonly asked. It is in
particular the latter question which has dominated research attention, does M&A create value
and if so, whether it is the shareholders of acquiring or target firm who benefit from the
transaction. Previous research has provided a mixture of results; however, the majority of
research agrees on that it is the shareholders of the target firm who benefit from M&A
transactions, whereas the shareholders of the acquiring firm in general do not experience any
effect (Gaughan, 2007). Seth (1990) argues those firms who utilize resources optimally to
enhance productivity under current environmental restraints and opportunities are those that
maximize the value creation process.
In an M&A setting, the foundation for value creation is the combination of the merging firms’
resources and the situational opportunities and constraints. The ability for two or more firms
to generate greater value as a single entity rather than separately, is often referred to as
synergy (Goold and Campbell, 1998). Researchers have been able to conclude a range of
characteristics, which affect value creation; industrial diversification (Doukas, Holmen &
Travlos, 2002; Flanagan, 1996), relative size of the deal (Asquith, Bruner & Mullins 1983;
Gupta & Misra, 2007; Bieshaar, Knight & van Wassenaer, 2001; Moeller, Schlingemann &
Stulz, 2004), method of payment (Asquith et al., 1983; Yook, 2003), previous experience of
acquirer (Fuller, Netter & Stegemoller, 2002; Haleblian & Finkelstein, 1999), attitude of
transaction (Tuch & O’Sullivan, 2007) and pre-bid performance of acquirer (Rau &
Vermaelen, 1998; Sudarsanam & Mahate, 2003).
All the aforementioned characteristics also hold for cross-border deals. These characteristics
are described in Cross-border M&A (Shimizu, Hitt, Vaidyanath & Pisano, 2004; Doukas &
Travlos, 1988). Since the national conditions between countries differ a great deal, the
authors’ contribution to the research is to investigate the effects of macroeconomic and
cultural factors in CBM&A as a compliment to previous studies on acquiring shareholder
value creation. Furthermore, these macroeconomic and cultural differences will be compared
based on the target country’s stage of development.
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To better illustrate how the authors intend to contribute to past research, the characteristics
affecting value creation have been divided into different categories i) macroeconomic and
cultural factors ii) firm factors iii) deal factors iv) geographical diversification v) industrial
diversification. As mentioned, this thesis focuses on macroeconomic and cultural factors
whilst controlling for the remaining variables, as shown in Diagram 2.
Diagram 2 – Examined factors affecting value in CBM&A

Wealth effect factors

Macro-
Deal specific Firm specific Industrial Geographical
economic &
cultural

Method of Previous Diversification Diversification
payment performance

Size of the Acquirer Language
deal experience

GDP Inflation

GDP per Political
capita stability

GDP growth Culture

Interest rate

Source: Authors
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