Cross-Border Acquisitions and Shareholder Wealth - Evidence from Spain
©2006
Diplomarbeit
102 Seiten
Zusammenfassung
Inhaltsangabe:Abstract:
Over the last decade product and factor markets have continued to become more integrated, new markets have emerged and the globalization has become an important strategic issue for companies. As a result, international investment opportunities have in-creased while regulatory restrictions on capital markets have been eased and the market for corporate control has become more integrated.
Consequently, the international acquisition activity has increased in both absolute and relative terms over the last decades leading to a significant rise of the proportion of international to domestic merger activity, particularly at the end of the 1990s. As more and more companies consider international diversification as a strategic option for their further growth, the question arises which valuation consequences accompany cross-border acquisitions.
Furthermore, it is to be analyzed whether these consequences differ systematically from domestic acquisitions and what could be possible value drivers in these cases. Although mergers and acquisitions in general have received wide attention in academic research, studies concerning the wealth effects of cross-border acquisitions are limited. Moreover, existing empirical evidence primarily stems from the US and UK capital markets neglecting generally the European perspective.
Spain, Europes fifth largest economy, has seen a series of considerable cross-border acquisitions in the last decade culminating in the merger of Santander with Abbey National in 2004 for over USD 15bn, making it the tenth largest transaction worldwide in 2004.3 The Spanish M&A market boom of the 1990s was initially driven by a consolidation process in the financial services, utilities and telecoms sectors which mostly were formerly state-owned. As a consequence of the increasing market concentration Spanish companies expanded internationally, creating some of the biggest corporations world-wide and becoming South Americas largest foreign investor.
These recent developments and the high acquisition activity from Spain into other countries make it worthwhile to shed light on the valuation consequences and their possible explanations by an empirical analysis. Considering the aforementioned, it is the aim of this thesis to answer the question as to whether the foreign acquisition wave of the last decade in Spain really created value and therewith supports the strategic decisions of the management.
The analysis should […]
Over the last decade product and factor markets have continued to become more integrated, new markets have emerged and the globalization has become an important strategic issue for companies. As a result, international investment opportunities have in-creased while regulatory restrictions on capital markets have been eased and the market for corporate control has become more integrated.
Consequently, the international acquisition activity has increased in both absolute and relative terms over the last decades leading to a significant rise of the proportion of international to domestic merger activity, particularly at the end of the 1990s. As more and more companies consider international diversification as a strategic option for their further growth, the question arises which valuation consequences accompany cross-border acquisitions.
Furthermore, it is to be analyzed whether these consequences differ systematically from domestic acquisitions and what could be possible value drivers in these cases. Although mergers and acquisitions in general have received wide attention in academic research, studies concerning the wealth effects of cross-border acquisitions are limited. Moreover, existing empirical evidence primarily stems from the US and UK capital markets neglecting generally the European perspective.
Spain, Europes fifth largest economy, has seen a series of considerable cross-border acquisitions in the last decade culminating in the merger of Santander with Abbey National in 2004 for over USD 15bn, making it the tenth largest transaction worldwide in 2004.3 The Spanish M&A market boom of the 1990s was initially driven by a consolidation process in the financial services, utilities and telecoms sectors which mostly were formerly state-owned. As a consequence of the increasing market concentration Spanish companies expanded internationally, creating some of the biggest corporations world-wide and becoming South Americas largest foreign investor.
These recent developments and the high acquisition activity from Spain into other countries make it worthwhile to shed light on the valuation consequences and their possible explanations by an empirical analysis. Considering the aforementioned, it is the aim of this thesis to answer the question as to whether the foreign acquisition wave of the last decade in Spain really created value and therewith supports the strategic decisions of the management.
The analysis should […]
Leseprobe
Inhaltsverzeichnis
Martin Renze-Westendorf
Cross-Border Acquisitions and Shareholder Wealth - Evidence from Spain
ISBN-10: 3-8324-9742-0
ISBN-13: 978-3-8324-9742-2
Druck Diplomica® GmbH, Hamburg, 2006
Zugl. European Business School Schloß Reichartshausen, Oestrich-Winkel, Oestrich-
Winkel, Deutschland, Diplomarbeit, 2006
Dieses Werk ist urheberrechtlich geschützt. Die dadurch begründeten Rechte,
insbesondere die der Übersetzung, des Nachdrucks, des Vortrags, der Entnahme von
Abbildungen und Tabellen, der Funksendung, der Mikroverfilmung oder der
Vervielfältigung auf anderen Wegen und der Speicherung in Datenverarbeitungsanlagen,
bleiben, auch bei nur auszugsweiser Verwertung, vorbehalten. Eine Vervielfältigung
dieses Werkes oder von Teilen dieses Werkes ist auch im Einzelfall nur in den Grenzen
der gesetzlichen Bestimmungen des Urheberrechtsgesetzes der Bundesrepublik
Deutschland in der jeweils geltenden Fassung zulässig. Sie ist grundsätzlich
vergütungspflichtig. Zuwiderhandlungen unterliegen den Strafbestimmungen des
Urheberrechtes.
Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in
diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme,
dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei
zu betrachten wären und daher von jedermann benutzt werden dürften.
Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können
Fehler nicht vollständig ausgeschlossen werden, und die Diplomarbeiten Agentur, die
Autoren oder Übersetzer übernehmen keine juristische Verantwortung oder irgendeine
Haftung für evtl. verbliebene fehlerhafte Angaben und deren Folgen.
© Diplomica GmbH
http://www.diplom.de, Hamburg 2006
Printed in Germany
- I -
T
ABLE OF
C
ONTENTS
L
IST OF
T
ABLES
... III
L
IST OF
A
BBREVIATIONS
...IV
L
IST OF
S
YMBOLS
... V
1
I
NTRODUCTION
... 1
1.1 Problem Definition and Objectives... 1
1.2 Course of Analysis ... 2
2
B
ASIC
T
ERMINOLOGY
... 3
2.1 Capital Markets and the Market for Corporate Control... 3
2.2 Definition of Cross-Border Acquisitions ... 4
2.3 Shareholder Wealth as an Indicator for Judging Transactions... 4
3
L
ITERATURE
R
EVIEW AND
T
HEORETICAL
C
ONCEPTS
... 5
3.1 Theoretical Arguments for Domestic and Cross-Border Acquisitions ... 5
3.1.1 Synergistic Acquisitions... 6
3.1.2 Managerialist Acquisitions ... 7
3.1.3 Acquisitions Motivated by Hubris... 9
3.2 Theories Explaining Abnormal Returns of Cross-Border Acquisitions in
Comparison with Domestic Acquisitions ... 10
3.2.1 Imperfections and Costs in Product and Factor Markets... 11
3.2.2 Biases in Government and Regulatory Policies... 13
3.2.3 Imperfections and Information Asymmetries in Capital Markets. 15
3.2.4 Imperfections in the International Market for Corporate Control
and Managerial Factors ... 18
3.3 Empirical Evidence of Value Drivers in Cross-Border Acquisitions ... 20
3.3.1 Overview of Previous Empirical Findings of Cross-Border
Acquisitions... 20
3.3.2 Factors Influencing Abnormal Returns Identified in Empirical
Research... 22
-
II
-
4
T
HE
T
AKEOVER
M
ARKET AND
C
ROSS
-B
ORDER
A
CQUISITIONS IN
S
PAIN
... 25
4.1 The Spanish Economy within the European Union ... 25
4.2 The Spanish Takeover Market ... 27
4.3 Review of Empirical Findings from Spain ... 29
5
C
ROSS
-B
ORDER
A
CQUISITIONS IN
S
PAIN
:
A
N
E
VENT
S
TUDY
... 30
5.1 Research Hypotheses ... 30
5.2 Data Sample ... 33
5.2.1 Data Sources and Selection Criteria ... 33
5.2.2 Data Sample Characteristics ... 34
5.3 Event Study Methodology ... 36
5.3.1 Return Calculations ... 36
5.3.2 Test Statistics ... 39
5.3.3 Definition of Variables for Model Development... 40
5.4 Results of the Event Study ... 42
5.4.1 General Results... 42
5.4.2 Results of Hypotheses Testing... 43
5.4.3 Results of Multivariate Regression Analysis... 49
5.5 Discussion of the Empirical Results and Possible Limitations... 51
6
C
ONCLUSION AND
I
MPLICATIONS FOR
F
URTHER
R
ESEARCH
... 56
T
ABLE OF
A
PPENDICES
... 58
B
IBLIOGRAPHY
... 83
- III -
L
IST OF
T
ABLES
Table 1: Sample Characteristics over Time ...35
Table 2: Announcement Period CARs of all Acquirers...42
Table 3: Hypothesis 1 - Domestic versus Cross-Border Acquisitions...44
Table 4: Hypothesis 2 - EU versus non-EU Acquisitions...44
Table 5: Hypothesis 3 - Industry Diversification Effect ...45
Table 6: Hypothesis 4 - Degree of Intangible Assets...46
Table 7: Hypothesis 5 - Target Country Development ...47
Table 8: Hypothesis 6 - Exchange Rate Effect ...47
Table 9: Hypothesis 7 - Method of Payment ...48
Table 10: Hypothesis 8 - Level of Governance in Target Country...49
Table 11: Multivariate Cross-Sectional Regression Analysis...50
- IV -
L
IST OF
A
BBREVIATIONS
AR
Abnormal
Return
BBVA
Banco Bilbao Vizcaya Argentaria
bn Billion
BSCH
Banco Santander Central Hispanico
CAR
Cumulative
Abnormal
Return
CBA
Cross-Border
Acquisition
EC
European
Community
eds
Editors
EMU
European Monetary Union
EU
European
Union
FDI
Foreign Direct Investment
GDP
Gross Domestic Product
IGBM
Indice General de Bolsa Madrid
m Million
M&A
Mergers and Acquisitions
NPV
Net
Present
Value
OLS
Ordinary Least Squares
R&D
Research and Development
ROE
Return on equity
S&P
Standard & Poor's
SDC
Securities Data Corporation
SEC
Securities and Exchange Commission
SIC
Standard Industrial Classification
tn Trillion
UK
United
Kingdom
US
United
States
USD
United States Dollar
VIF
Variance
Inflation
Factor
w/o
Without
YPF
Yacimientos Petrolíferos Fiscales
- V -
L
IST OF
S
YMBOLS
AR
i
abnormal return of security i at day t
AAR
t
average abnormal return for day t
CAR
cumulative abnormal return
CAR
i
cumulative abnormal return of security i
E(
it
)
expected residual of security i at day t
i security
n
number of securities in the regarded sample
R
it
return of security i at day t
R
mt
return of the market index at day t
SAR
it
standardized abnormal return at day t for security i
s
ift
standard error of the forecast
t
day (t is denoted as index)
t t-statistic,
quantile
of a student-t distribution
T
1
first day of the event window
T
2
last day of the event window
Var(
it
)
variance of the expected residual of security i at day t
intercept of the regression
slope of the regression
error term of the regression
it
disturbance term of security i for day t
standard
deviation
² variance
- 1 -
1
I
NTRODUCTION
1.1
Problem Definition and Objectives
Over the last decade product and factor markets have continued to become more inte-
grated, new markets have emerged and the globalization has become an important stra-
tegic issue for companies. As a result, international investment opportunities have in-
creased while regulatory restrictions on capital markets have been eased and the market
for corporate control has become more integrated. Consequently, the international ac-
quisition activity has increased in both absolute and relative terms over the last decades
leading to a significant rise of the proportion of international to domestic merger activ-
ity, particularly at the end of the 1990s.
1
As more and more companies consider international diversification as a strategic option
for their further growth, the question arises which valuation consequences accompany
cross-border acquisitions. Furthermore, it is to be analyzed whether these consequences
differ systematically from domestic acquisitions and what could be possible value driv-
ers in these cases. Although mergers and acquisitions in general have received wide
attention in academic research, studies concerning the wealth effects of cross-border
acquisitions are limited. Moreover, existing empirical evidence primarily stems from
the US and UK capital markets neglecting generally the European perspective.
2
Spain, Europe's fifth largest economy, has seen a series of considerable cross-border
acquisitions in the last decade culminating in the merger of Santander with Abbey Na-
tional in 2004 for over USD 15bn, making it the tenth largest transaction worldwide in
2004.
3
The Spanish M&A market boom of the 1990s was initially driven by a consoli-
dation process in the financial services, utilities and telecoms sectors which mostly were
formerly state-owned. As a consequence of the increasing market concentration Spanish
companies expanded internationally, creating some of the biggest corporations world-
wide and becoming South America's largest foreign investor.
4
These recent develop-
ments and the high acquisition activity from Spain into other countries make it worth-
1
See E
VENETT
(2003), pp. 6-9.
2
See O
CAÑA
/P
EÑA
/R
OBLES
(1997), p. 145.
3
See E
CONOMIST
I
NTELLIGENCE
U
NIT
(2005), pp. 35-40.
4
See M
YRO
/D
ÍAZ
M
ORA
(2001), pp. 15-17; M
ÜLLER
(2005), p. 58; E
CONOMIST
I
NTELLIGENCE
U
NIT
(2005), p. 39.
- 2 -
while to shed light on the valuation consequences and their possible explanations by an
empirical analysis.
Considering the aforementioned, it is the aim of this thesis to answer the question as to
whether the foreign acquisition wave of the last decade in Spain really created value and
therewith supports the strategic decisions of the management. The analysis should re-
veal insights about the "cross-border effect" in international acquisitions from a Spanish
perspective including country-specific factors which could have influenced the empiri-
cal results. The findings build a fertile basis for further cross-country analysis and
should increase the understanding of cross-border acquisitions in European capital mar-
kets.
1.2
Course of Analysis
The rest of the thesis is structured as follows: first, basic terms will be clarified in order
to build the basis for a common understanding which will be necessary throughout the
thesis. Second, a literature review of theoretical concepts and prior empirical evidence
will be given. Having set out all relevant theoretical concepts and explanations, a com-
parison with empirical findings will verify whether theoretical considerations are really
supported by empirical evidence. Therefore, an outline of relevant value drivers which
were identified empirically in prior academic research will round up this section. Third,
the reader will be introduced into the Spanish takeover market starting with a brief de-
scription of the Spanish economy and its integration into the European Union. Next, the
characteristics and development of the Spanish takeover market will be presented before
a review of existing empirical research in the field of cross-border acquisitions in Spain
will conclude the section. Fourth, the thesis will present an event study investigating
cross-border acquisitions in Spain from 1990 till 2004. Before beginning with the em-
pirical analysis, the author will derive hypotheses based on the prior illustrated theoreti-
cal considerations in order to test these on the selected sample. Having described the
characteristics of the data sample and having explained the event study methodology the
results with regard to the different hypotheses will be presented and interpreted. A dis-
cussion of possible limitations and a conclusion of the results will round up the event
study presentation. Fifth, the thesis will conclude the new results acquired in the event
study presenting possible further fields of research that should be covered in the future.
- 3 -
2
B
ASIC
T
ERMINOLOGY
2.1
Capital Markets and the Market for Corporate Control
Financial markets consist of money markets and capital markets. While money markets
are covering short-term products, capital markets are markets for long-term debt (usu-
ally with a maturity over one year) and equity shares. Common shares posses the right
of dividend payment and a voting right which plays an important role in takeovers.
5
A third market, the takeover market, can also be described as a market for corporate
control. Corporate control is defined as "[...] the rights to determine the management of
corporate resources that is, the rights to hire, fire and set the compensation of top-level
managers".
6
Consequently, the takeover market, or the market of corporate control "[...]
is an arena in which alternative management teams compete for the rights to manage
corporate resources".
7
Takeover specialists and arbitrageurs facilitate these transactions
by acting as intermediaries making the market more efficient.
8
If a company's manage-
ment team therefore is not capable to maximize the firm value, the stock price will fall
and the firm will become an attractive takeover target for those who believe that they
manage the firm more efficiently.
9
Generally after a takeover, the current management
will be replaced by a more efficient team. The market for corporate control can there-
fore function as a monitoring device in firms where ownership and control are sepa-
rated.
10
The market for corporate control has two basic functions:
11
1.
Market Function An efficient evaluation of the rights to manage corporate re-
sources is guaranteed by the forces of supply and demand. The control over a
company constitutes a valuable asset which is independent from economic inter-
ests in the respective firm and can be traded on the market for corporate con-
trol.
12
2.
Control Function Managers are disciplined by other companies that act in the
market for corporate control. The threat of becoming a takeover target incentives
5
See R
OSS
/W
ESTERFIELD
/J
AFFE
(2005), p. 17f and 818.
6
J
ENSEN
/R
UBACK
(1983), p. 5; see also F
AMA
/J
ENSEN
(1983), p. 313.
7
J
ENSEN
/R
UBACK
(1983), p. 42.
8
See J
ENSEN
/R
UBACK
(1983), p. 6.
9
See M
ANNE
(1965), p. 113.
10
See F
AMA
/J
ENSEN
(1983), p. 313.
11
See G
ÜNTHER
(1997), p. 34.
12
See M
ANNE
(1965), p. 112.
- 4 -
managers to minimize value gaps themselves, increase company value and act in
the interest of shareholders.
13
2.2
Definition of Cross-Border Acquisitions
An acquisition is realized if the acquiring company controls the target firm. Control is
hereby defined as having a majority vote on the board of directors.
14
In most cases this
is achieved if one controls 50% plus one of all common shares. Generally, acquisitions
include mergers or consolidations, acquisition of stock and acquisition of assets. In this
paper, an acquisition or precisely control transaction comprises all these three
forms.
15
Moreover, an acquisition can be classified according to the industry relatedness
of the target. Horizontal, vertical and conglomerate acquisitions can be distinguished.
The term takeover, which is somewhat imprecise, will be used interchangeably with the
terms transaction and acquisition.
16
A cross-border acquisition fulfils the characteristics of a domestic acquisition described
above with the only difference that the target firm is not of the same nationality as the
bidder company. The target company's headquarters and its main market are different
from those of the bidder. Acquiring a foreign company is also referred to as interna-
tional diversification or as foreign direct investment (FDI).
17
These terms will be used
interchangeably throughout this paper. As a result of this acquisition the bidder as-
suming that it had not prior international operation becomes a multinational enterprise
that controls and manages production facilities located in at least two countries.
18
2.3
Shareholder Wealth as an Indicator for Judging Transactions
The value, which a shareholder owns of a company, is represented by the share price
multiplied by the number of shares. This shareholder wealth is to be maximized by the
13
See M
ANNE
(1965), p. 113.
14
See R
OSS
/W
ESTERFIELD
/J
AFFE
(2005), p. 817f.
15
See R
OCK
/W
AGHTER
(2003), p. 463.
16
In fact, the term takeover is general and refers to the transfer of control of a firm from one group of
shareholders to another. Takeover can also include proxy contests and going private. However, the lat-
ter two forms will not be dealt with in this paper. See R
OSS
/W
ESTERFIELD
/J
AFFE
(2005), p. 818f.
17
In fact, cross-border M&A can be viewed as part of foreign direct investment. In our analysis, how-
ever, we assume that motives for both M&A and FDI are equal. For a differentiation, see U
NITED
N
A-
TIONS
C
ONFERENCE ON
T
RADE AND
D
EVELOPMENT
(2005), pp. 303-328.
18
See T
EECE
(1985), p. 233.
- 5 -
operation and the management of the company. As Rappaport
(
1983
)
states, the best
measurement of company performance is consequently the shareholder value since ac-
counting measures often fail to reflect the true value of the company.
19
Share prices
reflect also expectations and future returns making them a forward looking indicator.
These advantages hold true in the valuation of mergers and acquisitions.
20
An acquisition is therefore defined as successful if the value of the company increases
and as failed if the value decreases. As in efficient markets new information is reflected
rapidly in the stock price, the takeover effect can be measured already at the announce-
ment date of the takeover.
21
However, the length of the time window for which this re-
turn is calculated is still an open question in academic research.
22
The abnormal return
which is the difference between realized returns and expected returns reveals whether
the firm value has increased or decreased through the acquisition.
23
To include all value
effects, especially synergistic gains, an analysis should not merely measure abnormal
returns of the acquiring firm or the acquired firm but the abnormal returns of the com-
bined entity.
24
In conclusion, measuring the share price performance and thus measuring
shareholder wealth is a proxy as to whether the transaction is value-creating or value-
diminishing. This approach will be used in this paper to judge the success of an acquisi-
tion.
25
3
L
ITERATURE
R
EVIEW AND
T
HEORETICAL
C
ONCEPTS
3.1
Theoretical Arguments for Domestic and Cross-Border Acquisitions
In this section, a systematic overview of reasons and motivations for both domestic and
international acquisitions will be presented. These factors are the basis for further con-
siderations why international acquisitions might yield higher returns than domestic ones
in the following sections. Generally, acquisitions can be motivated by synergy, manage-
19
See R
APPAPORT
(1983), pp. 33-38.
20
See R
APPAPORT
(1983), p. 38.
21
See F
AMA
, et al. (1969), p. 20.
22
Typical lengths of event windows range from 21 trading days before the event until 121 trading days
after the event. See P
ETERSON
(1989), p. 38.
23
To calculate the expected return academic research proposes three methods using all historic data: the
mean-adjusted models, the market-adjusted models and the market models. The latter one has become
standard in event studies. For a good overview of methodologies, see P
ETERSON
(1989), pp. 39-41.
24
See B
RADLEY
/D
ESAI
/K
IM
(1988), p. 4; S
ETH
/S
ONG
/P
ETTIT
(2002), p. 922.
25
See B
HAGAT
/R
OMANO
(2001), p. 1.
- 6 -
rialism and hubris.
26
In reality, however, a combination of the stated motivations applies
to most acquisitions.
3.1.1
Synergistic Acquisitions
Basically, synergies occur when the value of a combined firm is greater than the sum of
the values of the individual firms.
27
This increase in value is divided among the owners
of the acquiring and and those of the target company in proportion to the competition of
ownership. Hence, it can be assumed that in cases where there is high to perfect compe-
tition among bidders nearly all benefits of future synergies will be captured by the
shareholders of the target company.
28
Synergies are driven mainly by three factors: asset
sharing, market seeking and financial diversification, which may coexist in synergistic
acquisitions.
29
First of all, the asset sharing of the companies results in an increase of operational effi-
ciency and economies of scale. While before the acquisition excess resources could not
be transferred from one company to another costlessly due to rigidities in the labor, fac-
tor and output markets, the combined company can deploy resources more efficiently.
30
Overhead costs can be spread through sharing central facilities and processes so that
doubled activities can be eliminated. Other sources of cost reductions can be economies
of vertical integration and complementing resources, making the coordination of closely
related operating activities easier.
31
In the case of natural resources, this applies espe-
cially to cross-border takeovers. The transfer of intangible assets e.g. production know-
how between the companies in order to reduce transaction costs of sharing proprietary
knowledge is also a form of asset sharing. This transfer is called internalization or re-
verse internalization depending on the direction of the transfer.
32
A second reason for synergies lies in new growth opportunities through market seeking.
The combined company can achieve higher revenues through economies of scope,
cross-selling and more effective sales and marketing efforts. Cross-border and industry
diversifying transactions offer new markets that can be developed when current growth
26
There are various ways to structure motivations for acquisitions in literature. The presented structure is
adopted from S
ETH
/S
ONG
/P
ETTIT
(2000), p. 388.
27
See B
RADLEY
/D
ESAI
/K
IM
(1988), p. 4.
28
See B
RADLEY
/D
ESAI
/K
IM
(1988), p. 31.
29
See S
ETH
/S
ONG
/P
ETTIT
(2000), p. 389.
30
See S
ETH
/S
ONG
/P
ETTIT
(2002), p. 924.
31
See R
OSS
/W
ESTERFIELD
/J
AFFE
(2005), p. 826.
32
The idea of internalization was first developed by C
OASE
(1937), p. 390ff. Later C
AVES
(1971), p. 2f
and H
ELPMAN
(1984), p. 470 applied this concept on multinational corporations.
- 7 -
is limited. Since the combined company has gained in market share, the firm is able to
use its market or monopoly power to reduce competition and increase margins. The lat-
ter effect is however limited by anti-trust regulation.
33
Lastly the combined company profits from diversification benefits resulting from indus-
try, market, product, or country diversification. These benefits arise from the reduced
variability in earnings due to less than perfect correlation between the respective two
companies.
34
The so-called co-insurance effect reduces the default risk of the combined
entity giving it a higher debt capacity than single-line business of similar size. Besides
better company financing options, this creates value by increasing interest tax shields. A
further tax advantage arises from the different treatment of gains and losses in tax
codes.
35
Hence, diversified firms are predicted to have a higher leverage and lower tax
payments.
36
Furthermore, this effect reduces bankruptcy costs for the combined com-
pany. The reduction in variability can reduce the cost of borrowing and make creditors
at the cost of shareholders better off than before, if the total value of the company
does not change.
37
Notwithstanding these advantages of financial diversification, there
is widespread discussion whether these effects really exist. As capital market integration
increases, individual investors can diversify their investment portfolios obtaining the
same risk reduction at lower cost. This also applies increasingly to international diversi-
fication and international capital markets.
38
Furthermore, Stulz
(
1990
)
and Jensen
(
1986
)
argue that the management of diversified firms invests its excess cash flows in projects
with poor investment opportunities as agency costs and managerial discretion rise in
diversified companies.
39
3.1.2
Managerialist Acquisitions
The managerialism hypothesis argues that managers knowingly overpay in acquisitions.
The goals of managers and the goals of shareholders may differ because managers try to
maximize their own utility at the expense of the shareholders of the acquiring firm.
40
33
In fact, most of the early literature on mergers concentrated on possible negative outcomes due to
higher market concentration; see D
EWEY
(1961), p. 256f; M
ANNE
(1965), p. 111f.
34
See L
EWELLEN
(1970), p. 523.
35
As long as one or two segments of a conglomerate experience losses, the combined company pays less
taxes than its segments would pay separately, see M
AJD
/M
YERS
(1987), p. 95f.
36
See B
ERGER
/O
FEK
(1995), p. 41.
37
See T
RAVLOS
(1987), p. 945f.
38
See S
TULZ
(1999), p. 933.
39
See J
ENSEN
(1986), p. 328; S
TULZ
(1990), p. 23; B
ERGER
/O
FEK
(1995), p. 41.
40
See M
ARRIS
(1963), p. 185f.
- 8 -
The theoretical basis for this hypothesis lies in the theory of the managerial corporation,
the agency theory and the division of ownership and control of firm's assets. Since man-
agers have room for discretional behavior, governance systems are installed incurring
agency costs by monitoring the management.
41
Generally, two explanations of manage-
rial behavior can be distinguished: growth maximization and risk reduction.
42
As Marris
(
1963
)
already shows, managers are particularly concentrating on the growth
rate of the firm neglecting risks accompanied with the investment project.
43
Since man-
agers do not own the company, potential losses or bankruptcy would only harm share-
holders. Growth maximization without considering risk or profit issues will decrease the
total firm value. Additionally, managerial compensation is frequently linked to the
amount of assets under management even further enforcing the agency conflict.
44
Hence, in situations when the company generates large free cash flows managers often
use this excess capital to invest in acquisitions that have only poor return opportunities
or even negative NPVs instead of paying it back to shareholders.
45
Doing so, they pro-
tect and increase their decision power and control horizon. As a side effect, image and
prestige are associated with the management of huge corporations. Shleifer/Vishny
(
1989
)
further argue that managers acquire special assets in order to increase the firm's
dependence on the management.
46
The effect of these explanations stays the same: ac-
quisitions result in the extraction of value from the stockholders by the management of
the bidding company.
47
In contrast to the above mentioned the second explanation for managerialist acquisitions
lies in the risk aversion of the agent, namely the manager. While the principal, here the
shareholders, can easily diversify their investment portfolio by dividing their wealth
among many different assets, the manager receives normally the greatest part of his in-
come from employment. Since his remuneration is closely related to the firm's perform-
ance, the risk associated with the manger's income is also closely tied to the firm's risk.
This risk cannot be diversified by the manager's personal investment portfolio as human
capital cannot be traded on competitive markets. Hence, to the manager diversification
41
See J
ENSEN
/M
ECKLING
(1976), p. 308f.
42
See S
ETH
/S
ONG
/P
ETTIT
(2000), p. 391.
43
See M
ARRIS
(1963), p. 186.
44
See S
ETH
/S
ONG
/P
ETTIT
(2002), p. 926.
45
See J
ENSEN
(1986), p. 323f.
46
See S
HLEIFER
/V
ISHNY
(1989), pp. 123-125.
47
See B
ERKOVITCH
/N
ARAYANAN
(1993), p. 350.
- 9 -
is a means to reduce his employment risk.
48
By not doing so, the manager would suffer
a welfare loss as he would bear more risk than necessary.
49
Consequently, he is willing
to pay more for diversification than shareholders who can diversify their portfolio at
lower cost. In absence of strong governance mechanisms management might overpay
for these acquisitions. For this reason conglomerate takeovers are generally considered
as non-value maximizing.
50
Besides the so far presented explanations, the disciplining effect of the market for cor-
porate control can be understood as a solution for managerialist acquisitions. As already
described above, the market operates as a governance mechanism to control managerial
discretion and solve agency problems. Inefficient management is eliminated by corpo-
rate takeovers which can close the value gap of the sub-optimally managed company.
51
The study of Mitchell/Lehn
(
1990
)
, for example, shows that bidders in value diminish-
ing takeovers are more likely to be taken over themselves.
52
Undervaluation of compa-
nies is therefore a reason for takeovers and a result of the competition on the market for
managerial labor. In absence of effective internal governance structures also shareholder
themselves can undertake the governance by a proxy contest.
53
Value gains after an ac-
quisition are achieved mostly by synergies showing that this motive for takeovers can
not be discussed without overlap with the previous section.
54
3.1.3
Acquisitions Motivated by Hubris
While in managerialist acquisitions management knowingly overpays, acquisitions mo-
tivated by hubris are characterized by an unintended overpayment. The hubris hypothe-
sis, developed by Roll
(
1986
)
, suggests that the overpayment merely reflects a random
error in the evaluation of the target firm.
55
Roll argues that the key element of an acquisition is the valuation of the target by the
bidder; a valuation of an asset that already has an observable market price, which is an
average of all valuations of market participants. Since the average cancels out irrational
behavior of certain individuals the market price should reflect rational behavior. Possi-
48
See A
MIHUD
/L
EV
(1981), p. 606.
49
See J
ENSEN
/M
ECKLING
(1976), p. 349.
50
See M
ORCK
/S
HLEIFER
/V
ISHNY
(1990), p. 31f; B
ERGER
/O
FEK
(1995), p. 59f; W
ALKER
(2000), p. 64;
L
INS
/S
ERVAES
(1999), p. 2236.
51
See M
ANNE
(1965), p. 113; J
ENSEN
/R
UBACK
(1983), p. 24f.
52
See M
ITCHELL
/L
EHN
(1990), p. 396f.
53
See D
ODD
/W
ARNER
(1983), p. 405.
54
See Section 3.1.1, where the correction of managerial failure also could have been presented.
55
See R
OLL
(1986), p. 199.
- 10 -
ble valuations can therefore be considered "as a random variable whose mean is the
target firm's current market price".
56
Clearly, offers are only made if the valuation is
higher than the current market price because target shareholders would not sell below
the current market price. Hence, the market price represents a lower bound of observed
offers leading to the circumstance that the left tail of the distribution of valuations can
never be observed. As a result, the observed error always points into the same direction,
namely too high. Since takeovers reflect individual decisions which are not always ra-
tional under uncertainty, according to Roll it is likely that managers assume that their
own valuation and not the market price mirrors the full economic value of the combined
entity. Thus, the manager is overconfident in his valuation.
57
But still, even if synergy gains exist, at least parts of the observed takeover premium
could be caused by valuation error as the left tail of the distribution of valuations is
truncated by the current market price. Roll compares the observed premiums with the
"winner's curse" which is a term from auction theory describing that the winner always
has the most biased valuation and the least profit. The hubris hypothesis is consistent
with strong efficient markets that reflect all information about individual firms. There-
fore, the null hypothesis states that there is no systematic association between variables
of synergy gains and total gains.
58
Roll predicts that around a takeover the bidder's
value declines, the target's value rises and slightly negative gains are realized by the
combined firm. In conclusion, Roll gives an explanation why takeover may not increase
the value of the combined firm.
59
3.2
Theories Explaining Abnormal Returns of Cross-Border Acquisitions in
Comparison with Domestic Acquisitions
Based on the explained motives of synergy, managerialism and hubris, this section deals
with theoretical concepts that explain why international diversification is favorable from
a shareholder perspective. In the following, insights from two research streams the
56
R
OLL
(1986), p. 199.
57
Roll assumes irrational human behaviour opposing the synergy hypothesis which implies rational
profit-maximization; see R
OLL
(1986), p. 212f.
58
In the extreme version of the hubris hypothesis states that there are no synergistic gains. Later research
concentrated on a moderate version of the hubris hypothesis which acknowledges that hubris and syn-
ergy can coexist. For further detail, see S
ETH
/S
ONG
/P
ETTIT
(2000), p. 390f; B
ERKOVITCH
/N
ARAYANAN
(1993), p. 360f.
59
See R
OLL
(1986), p. 213f.
- 11 -
foreign direct investment theories and the theory of the multinational corporation are
integrated.
3.2.1
Imperfections and Costs in Product and Factor Markets
Traditional economic models assuming perfectly competitive markets provide no incen-
tive for firms in one country to invest in another country as the free movement of prod-
ucts and factors of production assures that supply meets demand and that prices are
equalized. Thus, it would be impossible to generate abnormal returns by an international
acquisition compared to a domestic one.
60
Since frictions in cross-border flows of goods and factors of production are observable
in reality, opportunities arise to invest abroad and capitalize on monopoly rents.
61
These
frictions are often country-specific factors such as the availability of natural resources,
low cost of labor or rate of technological innovation. Clearly, a company will align its
investment strategy to the supply and costs of scarce resources. Although there is a
world market price for most natural resources today, firms are attracted to invest in lo-
cations where the supply of needed raw material is secured. Reasons are firm-specific
factors which can be among others a high dependency on special raw materials, high
transport costs or gains through vertical integration due to technological progressive-
ness.
62
The same approach can be applied to labor markets. Investments are predicted to
flow from high-labor-cost countries to low-labor-cost countries yielding synergies and
cost reduction as the production of personnel-intensive goods can be shifted abroad.
63
Similarly, inequalities in technology markets may drive investments from higher ad-
vanced countries to lower advanced countries where certain technologies do not yet
exist.
64
Doing so, monopoly rents can be captured by the investing company. All previ-
ous situations use arbitrage of market disequilibria to generate value. However, this im-
plies that opportunities are only of temporary nature because the investment itself has an
equilibrating effect in the long run. In the absence of any external distortions the market
60
See C
ALVET
(1981), p. 43.
61
For an overview of frictions in international product and factor markets, see K
RUGMAN
(1987), p. 143.
62
See D
UNNING
(1988), p. 4.
63
Recent literature confirms this view, see H
ATZIUS
(2000), p. 138.
64
The direction of technology flow is still subject to discussion. Modern models incorporate technology
as an endogenous variable. See D
UNNING
(1995), p. 462; A
NAND
/K
OGUT
(1997), p. 446.
- 12 -
should find its equilibrium automatically. The existence of market disequilibria per se is
necessary but not sufficient to rationalize cross-border acquisitions.
65
Besides market disequilibria, theory therefore explains foreign direct investment also
with differences in market structures. Market structure imperfections are characterized
by deviations from purely market determined prices brought about by the existence of
monopolistic or oligopolistic structures. In these situations growth and profit are inter-
dependent with the decisions of the other market participants. Moreover, barriers to en-
try are important to prevent a rise in competition. Both features can justify international
expansion as part of strategic oligopolisitic behavior and market seeking.
66
The product
lifecycle hypothesis states, for example, that companies expand internationally as a re-
action to the threat of losing market share capturing the remaining rent of the product's
development.
67
Additionally, international investment can strengthen barriers to entry
through economies of scale of product development.
68
Lastly, international acquisitions can be fostered by market failure due to three types of
imperfections: (1) external effects and public goods, (2) risk and uncertainty and (3)
economies of scale.
69
Market failure is especially prominent in the field of knowledge,
R&D and intangible assets. They all are characterized by a high inventive input to pro-
duce it and the high degree of externalities along the inventive process. This creates
problems in both the production and international transfer of knowledge. Furthermore,
if the knowledge can not be protected by e.g. a patent, there are few incentives to create
knowledge.
70
Again, the existence of different market frictions does not sufficiently
justify the rise of multinational corporations, but these imperfections accord systematic
and special advantages to multinational corporations over uninational ones.
71
The theory of internalization gives the reasoning why multinational corporations are
results of the previous explained market imperfections generating higher returns. In
cases where market coordination is inefficient it is replaced by hierarchical coordination
65
See C
ALVET
(1981), p. 44f.
66
See C
AVES
(1971), pp. 11-17.
67
Similar to this approach are the "follow the leader" or the "exchange of threats" strategy. See C
ALVET
(1981), p. 46f.
68
See C
AVES
(1971), p. 9f.
69
See D
UNNING
(1988), p. 3.
70
See J
OHNSON
(1970), p. 36 and K
OGUT
/Z
ANDER
(1993), p. 627ff.
71
See E
RRUNZA
/S
ENBET
(1981), p. 402.
- 13 -
within a company saving transaction costs and capturing additional rents.
72
This fre-
quently occurs with intangible assets such as productions skills, patents, marketing
abilities, managerial skills or consumer goodwill due to their pubic goods character.
73
Transacting in international markets incurs substantial costs that decrease the value of
proprietary knowledge while transferring this knowledge within the firm produces
nearly no costs.
74
As a consequence, the potential to transfer valuable assets within the
combining companies represents a source of synergy and, thus, constitutes a value in
itself. The value of the company enhances with international expansion and control of
foreign operations. Costs can be spread over a number of markets yielding a cost advan-
tage whereas the control of sensitive information assures competitive advantages. R&D
protected by patents can establish barriers to entry and monopoly power. Moreover, it is
expected that gains from applying these assets in a foreign market can more than com-
pensate the higher costs of operating a foreign subsidiary.
75
Similarly, gains can also be
achieved by reverse internalization meaning that companies acquire skills and resources
from foreign firms that are of value in their domestic markets. In contrast to internaliza-
tion where the acquirer seeks opportunities to reuse his existing knowledge in new con-
texts, the reverse internalization is characterized by the search for new knowledge. The
flow of knowledge is the opposite.
76
As a result, certain assets may be worth more to a
foreign bidder than to a domestic one.
77
In conclusion, imperfections and costs in product and factor markets explain why a
cross-border acquisition can yield higher returns than a domestic one. Internalization
serves as a solution to overcome market frictions offering the opportunity to earn a mo-
nopoly rent by combining firm specific and location specific advantages.
3.2.2
Biases in Government and Regulatory Policies
While the precedent section dealt with inherent frictions of markets and firms' busi-
nesses, this section will focus on the regulatory and policy environment. Cross-border
acquisitions are influenced by a wide range of external policies such as tariff and trade
72
This idea goes back to C
OASE
(1937), p. 404f. See also C
AVES
(1986), pp. 2-23 and D
UNNING
(1995),
pp. 473-480, who extents the model also to corporate networks and alliances.
73
See M
ORCK
/Y
EUNG
(1991), p. 165.
74
See C
AVES
(1971), p. 6.
75
See M
ORCK
/Y
EUNG
(1991), p. 167f.
76
See S
ETH
/S
ONG
/P
ETTIT
(2002), p. 925.
77
See H
ARRIS
/R
AVENSCRAFT
(1991), p. 827.
Details
- Seiten
- Erscheinungsform
- Originalausgabe
- Jahr
- 2006
- ISBN (eBook)
- 9783832497422
- ISBN (Paperback)
- 9783838697420
- DOI
- 10.3239/9783832497422
- Dateigröße
- 1.1 MB
- Sprache
- Englisch
- Institution / Hochschule
- European Business School - Internationale Universität Schloß Reichartshausen Oestrich-Winkel – Finanzwirtschaft & Rechnungswesen
- Erscheinungsdatum
- 2006 (August)
- Note
- 1,1
- Schlagworte
- kapitalmarkt globalisierung merger shareholder value
