Impact of Cross Border Mergers on Shareholders
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Companies are involved in mergers and acquisitions to achieve certain strategic or financial objectives. Recent years have seen a huge arise in such activity over £ 1 and half billion worth of deals including UK targets in 2007. (National Statistics online). Success and failure of these deals affects a huge range of individuals, could be managers, shareholders, advisers. Mergers and acquisitions also have a significant impact on the economy as a whole and therefore governed by very strict regulations in certain countries to prevent the competition in the market. (Arnold, 2008).
Due to the increase in global competition firms are finding necessary to compete in foreign markets as well as their domestic markets in order to remain competitive. Numerous theories explain that FDI decision and the foreign acquisition decision have been devolved over the last forty years. These theories have been drawn from a wide range of disciplines such as, industrial economics, organisational economics, various competitive strategy models, finance, international economics and trade. There are different reasons why firms seek to engage in mergers and acquisitions and these motives expand further when considering cross-border activity. Firms possesses certain competitive advantage that can be use to create the foreign production decision. Sometimes home location does not suite for production and firms decide to make products outside. (Sudarsanam, 2003). Cross border M&A diversify risk and helps to access cheap labour or specific raw materials and taking advantage of exchange rate effects. As international mergers are attractive, there are also some problems associated with such foreign deals that may not be an issue in dealing with domestic mergers. These include culture or political barriers, or sometimes foreign bidders show lack of trust by host country shareholders. Cross border mergers and compare to the domestic mergers will form major part of this study.
‘A literature review is a critical evaluation of the existing body of knowledge on a topic, which guides the research and demonstrates that relevant literature has been located and analysed'. (Collis and Hussey, 2009, P.100)The main purpose of this study is to examine the impact of mergers and acquisitions on the shareholders wealth including the foreign and domestic (UK) firms.
Focus of this study will be
To examine the impact of cross -border Mergers and acquisitions on shareholders returns both in the bidder and target companies during the announcement period.
To examine why firms engage in cross border mergers and acquisitions.
Examine the role of large shareholders and institutional investors in cross border mergers and acquisitions?
Previous studies show an extensive research into how mergers and acquisitions affect on shareholders wealth and whether or not they increase their wealth gains as intended. Studies by Antoniou, Petmezas and Zhao between period of 1987 to 2004 reports significant gain on shareholders wealth in the short- and in the long run. (Antoniou, Petmezas and Zhao, 2004). Some more studies by Carline, Linn and Yadev (2002) including some recent papers such manasakis (2006).these papers generally used event study approach to examine the wealth effect of shareholders, results suggest that targets' shareholders earned significant abnormal returns upon the announcement of horizontal and diversifying deals. Almost all studies are in agreement that target shareholders experience significant wealth gains as compare to the bidder shareholders.
Studies by Floreani and Rigaminti examine the stock valuation of mergers considering a period from 1996 to 2000 in Europe and in the US with the help of sample of 56 deals. Data indicates that mergers enhance value for bidder shareholders and they earn significantly positive abnormal returns. (Floreani and Rigaminti, 2001). Others studies have found that bidders experience zero returns (N.Cakici et al, 1996) and even bidders experience negative returns (Sudarsanam,2003). Another study by Antoniou, petmezas and zhao (2004) found that bidder shareholders suffer losses in response to that fuller et al. (2004) who suggest that acquiring private and subsidiary firms always create values for bidders because bidder shareholders wealth effects cannot be based solely on the short-run event study. More recent study by Gregory and Matatko (2005) find that bidding companies experience significant wealth losses in the long run.
With respect to the cross border M&A there are only few studies that examine distinguish between foreign and domestic acquisitions with respect of gains and there result are largely inconclusive. Studies by N.Cakici et al (1996) examines shareholder wealth gains for 195 foreign companies that acquired U.S targets during (1983-93 and 112 U.S acquisitions of foreign targets over the same period. This study found that target shareholders receive large abnormal returns, in the domestic and cross border acquisitions. In another study of cross-border acquisitions into the UK, Danbolt (1995) finds that Overseas bidding companies suffer significant negative abnormal returns and cross-border bidders appears to be significantly worse than the performance of domestic.
UK bidders (Danbolt, 1996) a similar study to that of Conn and Connell (1990) is that of Feils (1993), who analyze Target and bidding companies in cross-border acquisitions between the UK and the US, as well as German acquisitions of US firms during the time period 1980 to 1990.Using the market model for an 11-day event window ("5 days relative to the day of the bid Announcement, she concludes that UK target company shareholders gain significantly less (cumulative log abnormal returns of 16.33%) than do US target company shareholders and according to this paper target company shareholders gain more in cross-border then in domestic acquisitions.(Danbolt, 2004) Goergen and Renneboog in their studies find that foreign deals result in lower gains as compare to the domestic deals.( Goergen and Renneboog,2005). Another original analysis on cross border merger and acquisitions on banking efficiency in France, Germany, Spain, U.K and the U.S during 1990. Find that domestic banks in these countries have higher cost efficiency and higher profit efficiency then foreign banks. (Berger, Young, Genay and Udell, 2001). This study is very important part of this research.
Mergers and acquisitions have been classified into three types; one common method is to label them as being either as horizontal vertical or conglomerate (Gaughan, 2007). Horizontal merger occurs with two competitors combine and they are engaged in similar lines of activity. These combinations are often expected to increase power and benefit from economies of scale. George wimpey and Taylor Woodrow and supermarkets Wm. Morrison and Safeway are examples of such merger.vertical mergers occurs when firms belongs to different stages of the production process like combination of manufacturer and retailer of a particular good. These mergers help to increase market power and transaction costs. Finally conglomerate merger occurs with combination of two firms operating in unrelated business areas like GE buys companies in area as diverse as jet engines, in conglomerate mergers firms' intent to occur for financial synergy motives and risk diversification. (Arnold, 2008).
A study was conducted by (Halbheer and Gartner, 2006) to prove if mergers come in waves activity pattern they took date from 1973 and their result shown that there were only single wave and that have been kicked off between the third and fourth quarter of 1995. And by putting the same model of study in to UK mergers activity between 1969 and 2003 clearly identifies two UK merger waves, one in the early 70s and second in the late 80s. The reason for this discrepancy could be the difference in methodology. Some studies allude to the theory that we are going through a wave now, some expert disagree with this point so we can conclude that the theory is open for debate.
There have been many studies into Mergers and acquisitions over the last few decades but still this discussion is open, theories identify the four classes of merger motives such as synergy, bargain buying, managerial motives and third party motives (Arnold, 2008). When two firms combined their business they will have a value greater than the sum of its parts known as synergy motive PVab= PVa+PVb+gains (Arnold, 2008). This motive suggests the reasons of takeovers are due to economic gains that result from merging the resources of two firms it also helps to enhance shareholders wealth. (Berkovitch and Narayanan, 1993)Mergers and acquisitions of two firms help to increase their profitability, market power, economies of scale, internalisation of transactions, and it helps to enter into new markets and industries. As an example of market merger is The Reliance industries Limited and Reliance petroleum limited. They merger with each other in the UK financial market. These types of mergers help to increase power of the combined firms (Arnold, 2008).
According to the bargain buying motive ‘Target can be purchased at a price below the present value of the targets future cash flow when in the hands of new management' that leads to elimination of inefficient and misguided management. In the managerial motive the risk of agency problems arises if the bidding firm has competent management and takes over a target with less competent managers. The fifth motive is hubris motive it has important in explaining the merger activity. This motive discussed by Richard Roll in 1986 in three steps as in the first target firm is identified by the bidder firm and then valuation of the equity of that target firm carried out and finally the value compared to the current market price. (Arnold, 2008). As mentioned above general motives of mergers and acquisitions there are some different motives that explain why firms wish to acquire abroad. These can be categorised in to operational motives, strategic and other motives. Why firms like to acquire abroad and how these motives effect in mergers and acquisitions will be the important part of this study.
There are very few studies that examine the role of institutional investors in cross-border mergers acquisitions. A recent study by Ferreira and Matos, ( 2007) by using the equity holdings over the 2000-2005 period to investigate the role of institutional investor in cross border mergers and acquisitions and this study suggest that some institutional groups are effective monitors of the firm they invest in. Their presence as foreign and independent institutions enhances the shareholders wealth. This study indicates that the firms held by foreign and independent institutions have higher valuations. Another very recent study by Ferreira and Massa (2007) examine the role of institutional investors in the international markets. This study results that institutional investors facilitates cross-border Mergers and acquisitions and also helps to reduce bargaining and transaction costs associated with these deals. Finding of this study suggest that effect of foreign investors on cross-border mergers and acquisitions will be stronger if legal institutions are weaker or the capital markets are less devolved. Results of this study confirm that institutions holding both target and acquirer stocks are compensated by higher returns. Finally evidence support to the institutions as they are facilitator in cross-border deals by reducing the transaction costs and the information asymmetry associated with cross-border takeover bids.
This literature review has explained some of the motives of the firms to engage in M&A activity and some previous empirical studies have been briefly described and we have seen that mergers and acquisitions have not any positive impact on shareholders wealth gains but target firms receive some wealth gains. We also examined cross border mergers and acquisitions with contrast of domestic mergers and acquisitions and at the end we examined the role of institutional investors in cross border mergers and acquisitions. The summary of hypotheses from the literature review is as under.
As a result of mergers and acquisitions both target shareholders and bidder shareholders experienced no wealth gains from deals.
Target shareholders experience wealth gains and bidder shareholders suffer wealth losses as a result of merger and acquisitions.
Shareholders of the target firms do not receive significant returns when acquirer firm is a foreign firm.
Shareholders of bidder firm do not receive any return when target firm is foreign firm.
Domestic deals give higher returen as compare to the foreign investment.
Large institutional investor enhances the value for shareholders and reduces the costs.
Word Count: 1997
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