Do European Cross-Border Acquisitions Create or Destroy Value?

DO EUROPEAN CROSS-BORDER ACQUISITIONS CREATE OR DESTROY VALUE? by Ana Sofia Mendes Santos Moreira Monteiro Master Dissertation in Finance Master Dissertation Supervisor: Miguel Augusto Gomes Sousa, PhD 2013 i BIBLIOGRAPHIC NOTE Ana Sofia Monteiro was born in the 12 th July of 1984 in Porto, Portugal. Currently she is investment analyst at Beta Capital, a venture capital firm focused on investments in innovative start-ups. She joined Beta Capital in 2006 as a trainee and she has being working in venture capital industry ever since. She performs investment analysis and follow-up of portfolio firms as well as drafting of investment and divestment proposals in addition to the provision of information to the unit holders of the Venture Capital Fund. Her academic background includes an Economics BSc degree at Faculdade de Economia da Universidade do Porto, concluded in 2006. ii ACKNOWLEDGEMENTS I would like to appreciate all the time and effort dedicated to this work by my Master dissertation supervisor, Professor Miguel Sousa, PhD. I would also like to thank my brother for its extremely helpful insights and comments. Finally, I would like to deeply thank my family for all the support, joy and suggestions to improve this work as well as my friends from the Master program for sharing their knowledge, experiences and availability to discuss ideas. iii ABSTRACT The present study aims at determining the short-term wealth effects of crossborder acquisitions (CBA) launched by European bidders between 2001 and 2010. It contributes to previous research on European CBA by focusing on the wealth gains of not only target shareholders but also bidder and combined firms shareholders. Additionally, it extends existing literature on the wealth effects of acquisitions by providing an insight of the European CBA recently launched. Using a sample of 114 completed European deals, an analysis of the cumulative average abnormal returns of all involving shareholders and the distribution between them is carried out. The number of completed acquisitions of European firms is similar to those acquisitions of nonEuropean firms and the number of all-cash and friendly acquisitions clearly surpasses the number of all-equity or mixed and hostile acquisitions, respectively. Based on event study methodology the results show that target shareholders always gain from the offer. On the other hand, our results suggest that bidder shareholders lose wealth around announcement day. Notwithstanding bidder shares performance, our results evidence a positive combined wealth effect of cross-border deals suggesting that the target gains offset bidder losses. However this positive combined performance does not occur in the following situations: (i) acquisitions of non-European targets; (ii) acquisitions that occurred after the beginning of the financial crisis; (iii) acquisitions between firms in different business sectors, and (iv) acquisitions by relatively large bidders. A crosssectional analysis has been performed and the results suggest that the relative size and the level of investor protection in the target firm country have an impact on bidder shares performance around announcement date. Concerning to the target shareholders the results suggest that the relative exchange rate and the level of investor protection explain targets CAR. Keywords: Cross-Border Acquisitions, Abnormal Returns, Industry Relatedness, Relative Size, Exchange Rate, Level of Investor Protection. iv TABLE OF CONTENTS BIBLIOGRAPHIC NOTE I ACKNOWLEDGEMENTS II ABSTRACT III TABLE OF CONTENTS IV FIGURES VI TABLES VI 1. INTRODUCTION 1 2. LITERATURE REVIEW 3 2.1 Overview of European M&A 3 2.1.1 Abnormal Returns in M&A 4 2.2 Overview of Cross-Border M&A 5 2.2.1 Abnormal Returns in Cross-Border M&A 7 2.2.2 Abnormal Returns in Domestic and Cross-Border M&A 8 2.3 Value Drivers of Abnormal Returns 10 2.3.1 Cross-Border Characteristics 10 2.3.1.1 Exchange Rate 10 2.3.1.2 Country Development Status 11 2.3.1.3 Level of Investor Protection 12 2.3.2 Bid Characteristics 12 2.3.2.1 Means of Payment 12 2.3.2.2 Bid Attitude 14 2.3.2.3 Industry Relatedness 14 2.3.2.4 Relative Size 15 3. DATA SOURCES, SAMPLE AND METHODOLOGY 16 3.1 Sample Selection and Data Sources 16 3.2 Sample Composition 17 3.2.1 Means of Payment, Deal Attitude, Industry Sector and Relative Size 17 3.2.2 Country of Origin 18 v 3.2.3 Year of Announcement 19 3.2.4 Industry Sector 20 3.2.5 Transaction Value 21 3.3 Methodology 22 3.3.1 Cumulative Abnormal Returns and Test Statistics 22 4. RESULTS 25 4.1 Short-Term Effects of Bid Announcement 25 4.1.1 Abnormal Returns by Target Region 25 4.1.2 Abnormal Returns by Period of Bid Announcement 27 4.1.3 Abnormal Returns by Industry Relatedness 29 4.1.4 Abnormal Returns by Relative Size 31 4.2 Cross-Sectional Analysis 32 4.2.1 The Model 33 4.2.2 Results of Cross-Sectional Analysis 35 4.2.2.1 Bidders 35 4.2.2.2 Targets 37 5. CONCLUSIONS 39 REFERENCES 41 APPENDIX 45 vi FIGURES Figure 1Number of Cross-Border Deals by Region of Target Firm 6 Figure 2 – Value of Cross-Border M&A Acquisitions by Region of Target Firm 7 Figure 3 – Number of Transactions by Bid Announcement Year 20 TABLES Table 1 – Sample Composition 17 Table 2– Number of Cross-Border M&A by Bidder and Target Country of Origin 19 Table 3 – Number of Transactions by Industry Sector 21 Table 4 – Transaction Value by Target Region 21 Table 5 - Cumulative Abnormal Returns by Target Region 26 Table 6 – Cumulative Abnormal Returns by Bid Announcement Period 28 Table 7 - Cumulative Abnormal Returns by Industry Relatedness 30 Table 8 – Cumulative Abnormal Returns by Relative Size 31 Table 9 – Variable Definitions 34 Table 10 –Regressions of Bidders CAR 36 Table 11 – Regressions of Targets CAR 38 1 1. INTRODUCTION Research on mergers and acquisitions (hereinafter “M&A”) generically addresses corporate transactions, such as mergers, takeovers (including friendly and tender-offers), assets acquisitions and buyouts. Such corporate deals can be understood as investment plans carried out in order to achieve strategic goals and generate value to the firm. M&A goals are broadly associated to cost savings and revenue enhancement (Sudarsanam, 2004) but it is the assessment of value generation that can state whether those goals have been achieved. The study of value generation of M&A requires attention to some key points. First of all, it is necessary to define how to measure value creation. Then, one should bare in mind that the conclusions of the acquisitions wealth effects on the bidder shares are much more ambiguous than those on the target shares. Third, the time span of analysis shall be taken into consideration when interpreting the final results. A shortterm analysis and a long-term analysis around announcement may lead to different conclusions on the effects of the acquisition. Prior literature suggests that indeed in some cases M&A create value, however this value creation is dependent on a set of variables such as the means of payment (Servaes, 1991; Barbopoulos and Sudarsanam, 2012), bid attitude (Bhagat et al., 2005), industry relatedness between involving firms (Danbolt, 2004), relative size (Jarrel and Poulsen, 1989; Asquith, Bruner and Mullins, 1983; Moeller et al., 2004), geographical scope (Martynova and Renneboog, 2011; Rossi and Volpi, 2004), exchange rates (Froot and Stein, 1991; Harris and Ravenscraft, 1991; Cebenoyan et al., 1992), the level of development of the firms countries (Doukas and Travlos, 1988) and market regulation (Bris et al., 2008; Anderson et al., 2009). In addition, historical data illustrates that until the 90`s, M&A usually occurred under national boundaries. Globalization and markets regulations contributed to the emergence of a larger number of cross-border deals (Coeurdacier, 2009 ) . The recent transnational pattern of M&A highlights the differences between cross-border acquisitions (“CBA”) and domestic acquisitions, in terms of risk and sources of value. In Europe the number of CBA has improved significantly after 1992, first as result of the implementation of the single market and then from 1999 onwards with the 2 implementation of a single currency (the Euro). Although CBA have increased over the recent years, either in volume as in number, there are several questions that remain unanswered. Most of prior investigation is based on US and UK firms, so it turns it would be interesting to improve existing empirical evidence on the European market for corporate control. Also, prior evidence on CBA is mostly focused on transactions over the 90`s, and on the gains of target firms (Danbolt, 2004; Harris and Ravenscraft, 1991; Cebenoyan et al., 1992) whereas evidence of bidders and combined wealth effects is scarce. The empirical study of foreign transactions presents some constraints, namely in terms of statistical analysis and the set of additional variables that may explain the performance of CBA. The relative lack of research about CBA leads every new research a step ahead in terms of comprehension of these complex operations. For all the above mentioned, the first goal of this study is to assess whether CBA undertook by European bidders between 2001 and 2010 generated value or not. Our intentions are to provide a better understanding of the effects of the cross-border bids on the abnormal returns of bidders, targets and combined firms shareholders around announcement date. In order to achieve these goals the analysis has focused on short-term cumulative abnormal returns (CAR) around announcement day. A standard event study of CAR in several day windows around announcement day has been performed. The sample has been split according to a set of variables that might impact shareholders gains such as: i) target origin region, ii) period of bid announcement, iii) industry relatedness and iv) relative size. After a preliminary insight of some factors that may affect the performance of bidder and target shares, a cross-sectional analysis with cross-border variables (exchange rate, country development status and level of investor protection) along with variables related with bid characteristics (means of payment, relative size, industry relatedness and bid attitude) has been carried out in order to determine the relevant variables that have an impact on those shareholders gains. To our best knowledge, so far none of the existing studies on European CBA has addressed these issues. 9 (2011) shows the opposite, i.e., targets shareholders present higher gains in domestic bids rather than in cross-border bids. General theory of FDI predicts that bidders launch cross-border offers to take advantage of market imperfections and thus generate more value to the firm. On the other hand, bidders are expected to pay higher premiums in cross-border deals than in domestic deals because they have to launch attractive offer prices in order to acquire target shares and the lack of knowledge and uncertainty about a firm from a foreign country turns it more difficult to be aware of target value. Prior empirical evidence of Goergen and Renneboog (2004) and Martynova and Renneboog (2011) has not confirmed a negative effect of the cross-border bid over the bidders wealth. These authors have found positive abnormal returns on bidder shares, although Martynova and Renneboog (2011) find them to be lower in cross-border acquisitions than in domestic acquisitions. Their results suggest that market has anticipated some constrains that could arise from integration process during postacquisition period. For the reasons above mentioned, the combined wealth effect is also expected to be higher in cross-border than in domestic deals. However, Moeller and Schlingemann (2005) find statistically significant negative combined cross-border effect of -0.866% (measured as the difference between abnormal returns in transnational bids and domestic bids) in European transactions. In addition, evidence from Campa and Hernando (2004) also reports higher combined wealth creation in domestic deals. Difficulty on valuating foreign firms due to different accounting standards, exchange rate fluctuations, cultural disparities and other factors may contribute to enlarge valuation errors in CBA (Danbolt, 2004). Literature suggests that the premium paid by bidders depends on specific features of the target country such as corporate governance regimes, ownership concentration, takeover regulation or information transparency. Rossi and Volpi (2004) show that bid premiums are higher in CBA wherein target firms are located in countries with stronger investor protection and that the higher the investor protection of the target firm country, the less likely all-cash bids are. If there is a stronger level of investors protection in the target country, the chance of an unsuccessful bid increases, which makes cash transactions to be avoided and encourages bidders to pay higher premiums. 10 Managerial goals may, as well, justify the managers decision of overpaying for corporate acquisitions (Eun et al., 1996) and in case of CBA the stimulus to pay a larger premium is higher. 2.3 Value Drivers of Abnormal Returns Previous studies on the sources of value creation identify a set of factors that affect the profitability of acquisitions. Some of these sources are related to general bid characteristics, others are specific to CBA. 2.3.1 Cross-Border Characteristics Prior research suggests that the performance of CBA depends on a set of factors, namely the exchange rate movements, the countries development status and the level of investor protection. CBA characteristics related with law, accounting standards, corporate governance systems, economic environment, cultural differences, fiscal policy, information transparency and investor protection, among others, require a complex analysis of their effects. The decision for a transnational bid shall bare in mind these differences and the way to minimize the negative effects that may arise on the postacquisition period. Only through an integrated management approach can CBA surpass these obstacles and generate value. 2.3.1.1 Exchange Rate Previous literature suggests that exchange rates not only pursue the choice for CBA instead of domestic deals, but also have an impact on abnormal returns from CBA. Erel et al. (2012) document that currency movements influences the option to launch a cross-border bid, especially when involved firms are from geographically close countries or when bidders are from wealthier countries than targets. Moreover, bidder firms located in countries with relative stronger currencies tend to purchase firms in countries with weaker currencies in order to pay smaller premiums than bidders from 11 countries with relatively weaker currencies (Tolmunen and Tostila, 2005). Bidders that acquire a firm from a country with relative weaker currency become more competitive than domestic bidders (Froot and Stein, 1991). Literature suggests that the strength of the bidder home currency explains part of its gains because the risk associated with information asymmetry may be, in part, surpassed by the relative exchange rate effect, thus contributing to the improvement of the bidder shares performance (Froot and Stein, 1991). Consistent with this argument, Harris and Ravenscraft (1991) and Cebenoyan et al. (1992) find statistical significant effect of the exchange rate on the gains of target firms in acquisitions where the bidders currency is relative stronger than targets currency. Their results show that CBA generate more gains to target shareholders when the bidders currency is stronger than targets` currency. However the work of Eun et al. (1996) and Danbolt (2004) suggest that the exchange rate has no effect over bidder, target and combined abnormal returns around announcement. 2.3.1.2 Country Development Status Prior research has identified the level of economic development of a country as a factor that may influence the performance of CBA. Literature suggests that the bidders profitability is higher when targets are from less developed countries than bidders. Doukas and Travlos (1988) find evidence to support this hypothesis. They find a positive relation between US multinational bidders expanding abroad with no operation in target country and bidders gains around announcement. The positive effect on the bidders gains is stimulated by positive market expectations about the set of opportunities that become available in the new market to those US firms. Erel et al. (2012) suggest that the country development status is related to the quality of accounting standards. Countries with high level of development are associated with better quality accounting standards regimes as well as a sophisticated level of corporate governance regime. Bidders from countries with relative higher development status have greater chance to earn abnormal returns because CBA increase the quality of accounting standards of target firms thus improving the post-acquisition performance. 12 2.3.1.3 Level of Investor Protection Investor protection is provided by the commercial code or corporate law valid in the country of origin of the firm. CBA to target firms in countries with strong level of investor protection have more difficulties on passing without prior market notice before the announcement. A set of regulatory demands turns the bid more predictable. As such, target firms from countries with stronger investor protection are found to earn larger abnormal returns (Bris et al., 2008; La Porta et al., 1998; Anderson et al., 2009) and bidders to pay higher premiums to prevent from competitive bids (Bebchuk, 2005). In addition, CBA wherein bidders are from countries with above-median shareholder protection and targets are from countries with low-median shareholder protection, have positive significant combined abnormal returns at announcement. When the opposite verifies, that is to say, targets are from high-median protection countries and bidders are from low-median protection countries, CBA have significant negative combined abnormal returns (Bris et al., 2008). Other studies show that countries with stronger shareholder protection present larger M&A activity and firms located in countries with weaker investor protection are generally acquired by firms from countries with stronger one (Rossi and Volpin, 2004). 2.3.2 Bid Characteristics Prior literature has shed light on the impact of bid characteristics in M&A gains, in particular, those of targets and bidders shareholders. Factors such as means of payment (cash, equity, mixed), bid attitude (friendly, hostile), firms relative size and industry relatedness are hypothesised to influence wealth creation of M&A. 2.3.2.1 Means of Payment Prior empirical evidence shows that cash offers usually lead to gains not only to targets shareholders (Goergen and Renneboog, 2004) but also to bidders’ (Martynova and Renneboog, 2011) while equity exchange offers have negative effect on the bidders wealth (Franks et al., 1991). Consequently, cash offers are suggested to have positive combined wealth effect (Servaes, 1991). 13 The explanation is that cash offers deserve more reflection from bidders’ management since it is hard for a firm manager that has cashed in to spend the money in unprofitable businesses. Moreover, the means of exchange of the offer may be a market sign of bidder shares value. The underlying idea is that in periods of high equity market valuations and information asymmetry, bidders managers that think the firms share are overvalued prefer to exchange them in M&A, instead of paying the offer with cash. The hypothesis of means of payment is confirmed in the works of Servaes (1991) and Martynova and Renneboog (2011) that suggest cash bids to provide positive abnormal returns to targets and moderate abnormal positive returns to bidders. Goergen and Renneboog (2004) show that target shareholders present larger gains in all-cash offers and their abnormal returns are indeed sensitive to the means of payment, albeit they do not find evidence consistent with this hypothesis when it comes to bidders. The authors find that bidder shareholders report statistically significant larger gains in all-equity bids than in all-cash bids suggesting that means of payment do not act as a market sign of under or overvaluation of bidder shares. Furthermore in case of high uncertainty around the target firm value, bidders may prefer the stock exchange payment, instead of cash, in order to prevent the negative consequences from information asymmetry. Information asymmetry is hence, one of the causes highlighted to the use of earnouts as part of the payment. The use of earnouts allows reducing the risk from information asymmetry since a part of the price is contingent to some events and so limits the adverse selection problem. As such the means of payment may contribute to risk diversification in M&A, thus improving the bidder shares performance in relation to transactions where there are no earnouts (Barbopoulos and Sudarsanam, 2012). Barbopoulos and Sudarsanam (2012) suggest that the higher the proportion of price paid as earnouts, the better the bidders performance in post-acquisition period. To the extent that targets valuation is more complex in CBA we would expect bidders to prefer equity bids. However, the means of payment in CBA is dictated by the preference of target shareholders for cash, instead of foreign equity. Not consistent with previous evidence some studies do not find significant abnormal returns for bidder shares nor for targets attending hypothesis of means of exchange (Leeth and Borg, 2000; Bhagat et al., 2005). 14 Finally, some authors have studied the relation between the means of payment of M&A and the firms’ size concluding that cash bids are more likely to occur when they involve small targets (Goergen et al., 2004) 2.3.2.2 Bid Attitude Bid attitude hypothesis suggests that hostile takeovers are more profitable than friendly acquisitions. A possible explanation is the market expectation that the impact of bidder management on target firm is higher in hostile than in friendly bids, thus resulting in larger value creation (Bhagat et al., 2005). Prior empirical evidence supports larger positive abnormal returns to target shares in hostile rather than in friendly bids around announcement day (Goergen and Renneboog, 2004; Martynova and Renneboog, 2011; Servaes, 1991). Concerning to bidders performance, prior empirical evidence is not consistent with the theoretical bid attitude framework. Bhagat et al. (2005) show that bidders of friendly M&A outperform bidders of hostile ones. Consistent with their findings, Goergen and Renneboog (2004) also find negative abnormal returns for bidders in hostile European bids whereas positive abnormal returns in friendly bids in short-term windows around announcement day. Sudarsanam and Mahate (2006) confirm that in long event windows post announcement period bidders also experience negative abnormal returns in hostile bids. Rossi and Volpi (2004) study the likelihood to launch a hostile bid and their results show that hostile bids are more likely to occur in countries with stronger shareholders protection. 2.3.2.3 Industry Relatedness M&A can be driven by focus or diversification strategies, whether the offer goes for a firm in same or different business sector. The industry hypothesis suggests that diversification strategy tend to be less profitable for bidders than focus oriented ones, due to lack of knowledge of the new business they are entering into. Prior research has shown that target firms tend to experience larger positive abnormal returns in M&A driven by diversification rather than focus goals suggesting 15 that bidders overpay for the acquisitions (Martynova and Renneboog, 2011). Consistent with previous evidence, Danbolt (2004) confirms that the industry relatedness between firms explains part of targets abnormal returns. The research of Martynova and Renneboog (2011) shows that in short event windows around announcement focus oriented M&A tend to be more profitable to bidder shareholders than diversified ones. Evidence from Agrawal et al. (1992) also shows that in the post-acquisition period bidders of acquisitions cross-industry present significant higher losses than those in oriented acquisitions. Not consistent with previous results Eun et al. (1996) provides evidence that in CBA of US target firms operating in different business area, bidders experience higher share price variation around announcement than peers that entered into related industry acquisitions. Additionally, Doukas and Travlos (1988) suggest that in CBA of bidders expanding into new geographical markets the industry relatedness between firms has a positive impact in the bidders gains. These authors defend that bidders benefit from acquisition when they diversify in terms of industry and geographical market. 2.3.2.4 Relative Size Prior studies on M&A performance support the relation between bidders returns and target firm relative size, suggesting that the larger the target size, the higher the abnormal returns to bidders around announcement (Asquith et al., 1983; Jarrel and Poulsen, 1989; Moeller et al., 2004; Martynova and Renneboog, 2011). They suggest that relative larger bidders overpay in larger scale and the size of premium paid is positively related with relative size of the bidder firm (Moeller et al., 2004). Large firms tend to have more regulation constrains than small firms which may explain evidence of higher abnormal returns on shares of small bidders. Nonetheless, the research of Agrawal et al. (1992) does not confirm that the bidders relative size is a statistically significant variable to explain bidders post-acquisition performance (up to 60 months) in completed mergers. Also, prior research of Asquith et al. (1983) has not found evidence of the impact of relative size in target shares performance. From a different perspective, Tolmunen and Tostila (2005) and Erel et al. (2012) suggest that large firms are more likely to be acquirers in CBA than small firms. 16 3. DATA SOURCES, SAMPLE AND METHODOLOGY 3.1 Sample Selection and Data Sources For the purpose of this study a CBA is a transaction between two firms, each one with primary location in different countries. In order to perform the analysis, a sample of CBA announced between January 2001 and December 2010, by European bidders, has been selected. Our sample was selected using S&P Capital IQ database. First, all CBA transactions launched by bidders with primary location in Europe over the last decade were collected. The data was then restricted to deals involving public firms (bidder and target) at the announcement date. Deals with at least one firm operating in the financial industry were excluded due to specificities of this industry in terms of accounting information and nature of operations, which has led to 1,641 CBA deals. Then, 1,186 deals were dropped as they did not involve the acquisition of a majority stake. This was due not only to the fact that, according to Rossi and Volpi (2004), the acquisition of a stake below 50% is affected by severally cross-country differences in disclosure requirements but also to the combined wealth effect that this study is trying to assess makes sense if bidders gain control over targets with the acquisition. From the remaining 455 deals only successful deals (closed or effective deals on or prior December 2012) were considered. At this stage 87 deals were dropped. Finally, for methodology purposes, from the 368 deals only those that, for both bidder and target firms, share price were available throughout the 60 month-period before the announcement date were kept in our sample. Given all these constrains the sample comprises 114 CBA occurred between 2001 and 2010 where bidder firms are from 18 European countries and target firms are from 26 European and non-European countries. For each deal in the sample data, the share prices (in domestic currency) and shares outstanding were collected from the Reuters Datastream database. The shares price was then converted ton US dollars using the historical exchange rate, also collected from Thompson Reuters database. Additional information on the offer such as means of payment (cash, equity, mixed), 17 deal attitude (hostile, friendly, friendly to hostile) and industry relatedness were collected from S&P Capital IQ database. 3.2 Sample Composition 3.2.1 Means of Payment, Deal Attitude, Industry Sector and Relative Size As expected and consistent to prior evidence from Danbolt (2004) and Goergen and Renneboog (2004) Table 1 shows that a large part of the sample is represented by all-cash deals (86%). In CBA the offer is more likely to be accepted if it is an all cashoffers. Table 1 – Sample Composition Nr. of Cross-Border Bids Target Region Europe United States and Canada Asia / Pacific Latin America and Caribbean Africa / Middle East Total Panel A: Means of Payment AllCash 42 45 6 1 4 98 AllEquity 5 3 - - - 8 Mixed 4 2 1 - 1 8 Panel B: Deal Attitude Friendly 50 48 7 1 5 111 Friendly to Hostile - 1 - - - 1 Hostile 1 1 - - - 2 Panel C: Industry Sector Different 9 13 1 - 1 24 Same 42 37 6 1 4 90 Panel D: Relative Size Small Bidders 30 17 - - - 47 Large Bidders 21 33 7 1 5 67 Total 51 50 7 1 5 114 Source: Own calculations based on S&P Capital IQ data 18 The sample is also dominated by friendly acquisitions (97%) and of firms from the same industry (roughly 79%), suggesting that bidders were not looking for business diversification. In terms of relative size, in 47 deals (about 41% of total sample) the target market capitalization exceeds in more than 10% of bidder market capitalization. The relative size was measured six months before announcement following Asquith et al. (1983). Therefore, most of the sample deals (59%) comprise relative large bidder firms. 3.2.2 Country of Origin Table 2 shows that 55% of European offers in the sample targeted firms from a country outside Europe, in particular, from US and Canada (44%). In fact, Europeans firms have acquired US and Canadian firms as much as European firms. This bid exposure is different from the studies based on the 90 decade where most of the crossborder acquisitions were intra-European. Bidder firms are mainly from the UK (23%), France (17%), Germany (11%) and Switzerland (10%) whereas most target firms are located in the US (37%), UK (15%) and Canada (7%). Firms from Anglo-Saxon countries are far more active in the market for corporate control than Continental European firms, either as target or bidder firms. Cultural similarities and historical development of equity markets may justify the relevance of these countries. Notwithstanding, bidder firms from France and Switzerland are far beyond the most active Continental European firms with predominance to make cross-border acquisitions outside Europe. On the contrary, bidder firms from German and Netherlands are more focused in cross-country acquisitions within the European market. 25 4. RESULTS 4.1 Short-Term Effects of Bid Announcement This section presents the effects of bid announcement in targets, bidders and combined firms shares over the following event windows: [-1;0], [-1;+1], [0;0], [-5;0], [-5;+1] and [-5;+5]. The results of the tests of sample split by means of payment and deal attitude are not presented because the sample is dominated by all-cash (85.96%) and friendly (95.61%) acquisitions so the conclusions would be very similar to the ones presented in following section 4.1.1. 4.1.1 Abnormal Returns by Target Region As shown in Table 5, target shareholders experience, on average, positive wealth gains while bidder shareholders, generally, present wealth losses around bid announcement day. These results suggest that the market does not expect the bid to benefit bidder shareholders. The combined effect is positive though statistical significance is not found in the case where the target is a non-European firm. Panel A of Table 5 shows that the bid announcement has positive effect on target shareholders wealth in all event windows. The target shareholders CAAR [-5;+5] is higher than the one observed by Martynova and Renneboog (2011) for European CBA (12.17%), however it is lower than the one reported by Eun et al. (1996) for CBA of US targets (37.02%). The results also show that the CAAR [-1;+1] of target shareholders equal to 17.55% is higher than the one observed in Campa and Hernando (2004) and Martynova and Renneboog (2011) of, 4.08% and 11.52%, respectively. The CAAR [-1; 0] of 12.33% is also higher than the 11.25% reported by Goergen and Renneboog (2004). The results also show that CBA of non-European target firms provide a higher abnormal return to target shareholders, which means that bids to overseas firms priced larger premiums. Assuming that the acquisition of European firms by European firms may be similar to domestic M&A due to harmonized framework of corporate law and monetary policy, these results suggest that cross-border acquisitions provide higher 26 returns than domestic deals, confirming evidence from Goergen and Renneboog (2004) but not from Martynova and Renneboog (2011) nor Moeller et al. (2005). Table 5 - Cumulative Abnormal Returns by Target Region This Table shows the cumulative abnormal returns measured over several event windows for targets, bidders as well as combined paired sample by target region. Event window (days) Total Sample European Targets Non-European Targets CAAR (%) Positive CAR (%) CAAR (%) Positive CAR (%) CAAR (%) Positive CAR (%) Panel A: Targets [-1 ; 0] 12.33*** 71.93 9.26*** 68.63 14.81*** 74.60 [ 0 ; 0 ] 11.08*** 71.93 8.42*** 72.55 13.23*** 71.43 [-1;+1] 17.55*** 78.07 12.23*** 70.59 21.86*** 84.13 [-5 ; 0] 14.20*** 72.81 12.23*** 74.51 15.80*** 71.43 [-5;+1] 19.43*** 75.44 15.20*** 70.59 22.85*** 79.37 [-5;+5] 18.87*** 66.67 15.34*** 64.71 21.72*** 68.25 Observations 114 51 63 Panel B: Bidders [-1 ; 0] -0.82* 40.35 -0.15 41.18 -1.36** 39.68 [ 0 ; 0 ] -0.15 42.98 0.49 45.10 -0.67 41.27 [-1;+1] -0.43 40.35 0.16 37.25 -0.91 42.86 [-5 ; 0] -2.90*** 31.58 -2.62* 23.53 -3.12** 38.10 [-5;+1] -2.51** 33.33 -2.32 25.49 -2.67* 39.68 [-5;+5] -4.73*** 31.58 -5.79** 27.45 -3.87 34.92 Observations 114 51 63 Panel C: Combined [-1 ; 0] 1.50** 52.63 3.19*** 62.75 0.13 95.24 [ 0 ; 0 ] 1.88*** 55.26 3.30*** 66.67 0.72 100.00 [-1;+1] 2.61*** 51.75 4.95*** 54.90 0.71 93.65 [-5 ; 0] 0.66 47.37 1.87 49.02 -1.27 85.71 [-5;+1] 1.77 47.37 4.82** 43.14 -0.69 85.71 [-5;+5] 0.18 41.23 2.61 41.18 -1.80 74.60 Observations 114 51 63 Source: own calculations. t-statistic follows a t-student distribution. ***, **, * denotes for 1%, 5% and 10% significance level for a two-tailed test. 27 Contrary to targets scenario, Panel B of Table 5 shows that CBA announcement causes short-term negative effect on the wealth of bidder shareholders. The negative performance of bidder shares is worse in longer windows, which is consistent with Eun et al. (1996). The losses of bidder shareholders around announcement suggest that market does not expect CBA to generate value to bidder shareholders. At announcement day, bidder shares present a negative CAAR of 0.15%, which is opposite to positive CAAR of 0.39% found by Martynova and Renneboog (2011). Our results also document statistically negative CAAR [-1;0] of -0.82% in bidder shares which is also opposite to the results found by Goergen and Renneboog (2004) that report a positive and significant CAAR of 2.38% for European bidders. In the longest event window ([-5;+5]) the CAAR of bidder shareholders remains negative and statistically significant (-4.73%). This result is consistent with Eun et al. (1996) that find that the cross-border acquisition of US targets cause wealth destruction for bidder shareholders. The results also show that CBA of non-European firms motivate higher losses for bidder shareholders than those of European firms. These results suggest that bidder firms pay larger premiums to acquire non-European firms. While CBA of European firms provide a positive and statistically significant combined (bidder and target firms) effect, the same does not happen in the case of CBA of non-European target firms, where the CAAR is positive (less than 1%) but not statistically significant. The statistical significant positive effect of CBA announcement on combined shareholders wealth suggests that the bidders losses are offset by targets gains. Nevertheless, our evidence is contrary to Moeller and Schlingemann (2005) that report a negative and statistically significant combined CAAR [-1;+1] . 4.1.2 Abnormal Returns by Period of Bid Announcement Table 6 shows the results of bid announcement effect before and after the financial crisis of 2008. As shown in Table 6, the main conclusions on targets and bidders gains around announcement remain the same. The bid announcement effect on target shares is once more, strongly positive, although higher in post-2008 period. Providing that the sample is composed only by closed or effective CBA, the results show that target shareholders 28 earn larger abnormal returns in stages of economic and financial constraints transactions suggesting they retain more benefits in period of economic crisis than other periods. Table 6 – Cumulative Abnormal Returns by Bid Announcement Period This Table shows the cumulative abnormal returns measured over several event windows for targets, bidders as well as combined paired sample, by period of bid announcement (pre-2008, post-2008). Event window (days) Pre-2008 Post-2008 CAAR (%) Positive CAR (%) CAAR (%) Positive CAR (%) Panel A: Targets [-1 ; 0] 10.55*** 69.05 17.31*** 80.00 [ 0 ; 0] 9.34*** 69.05 15.96*** 80.00 [-1;+1] 16.50*** 76.19 20.51*** 83.33 [-5 ; 0] 11.19*** 69.05 22.65*** 83.33 [-5;+1] 17.14*** 70.24 25.85*** 90.00 [-5;+5] 16.62*** 63.10 25.17*** 76.67 Observations 84 30 Panel B: Bidders [-1 ; 0] -0.90* 42.86 -0.60 33.33 [ 0 ; 0] -0.36 45.24 0.42 36.67 [-1;+1] -0.60 40.48 0.05 40.00 [-5 ; 0] -3.10*** 32.14 -2.33 30.00 [-5;+1] -2.81** 34.52 -1.68 30.00 [-5;+5] -4.89*** 35.71 -4.29 20.00 Observations 84 30 Panel C: Combined [-1 ; 0] 1.59** 54.76 1.25 46.67 [ 0 ; 0] 1.80*** 55.95 2.08 53.33 [-1;+1] 2.43** 54.76 3.10 43.33 [-5 ; 0] 0.42 50.00 1.34 40.00 [-5;+1] 1.27 50.00 3.19 40.00 [-5;+5] -0.42 42.86 1.85 36.67 Observations 84 30 Source: own calculation. t-statistic follows a t-student distribution. ***, **, * denotes for 1%, 5% and 10% significance level for a two-tailed test. The Post-2008 period includes the period from 2008 (including) to 2010. 29 In terms of bidder shareholders our evidence only shows a significant and negative CAAR in longer windows in pre-2008 period where bidder shareholders face greater losses, which may suggest that in pre-crisis period bidders pay large premiums for targets. The CBA undertook before 2008 present positive combined wealth effect, although only statistically significant for shorter windows. For CBA launched on or after 2008, although the combine effect is still positive, it is not statistically significance in any time window. 4.1.3 Abnormal Returns by Industry Relatedness Panel A of Table 7 shows that in shorter event windows target firms shareholders experience higher CAAR in CBA between firms from different industry than in those from same industry which is consistent with previous evidence from by Martynova and Renneboog (2011). However, for lengthen event windows ([-5;0] and [-5;+5]) CBA within same industry are more profitable for shareholders of target firms. Panel B of Table 7 shows that bidder shareholders tend to lose more in CBA between firms from the same industries than from different industries. For longer event windows CBA involving firms from the same industries have a significant negative impact in the bidder shareholders wealth. The effect on bidder shareholders wealth is negative but not significant in case of CBA between firms operating in different industries. Panel C of Table 7 shows that CBA between firms from the same industries have higher and positive combined wealth effect, although only statistically significant in shortest windows around announcement day. 30 Table 7 - Cumulative Abnormal Returns by Industry Relatedness This Table shows the cumulative abnormal returns over several event windows for targets, bidders as well as combined paired sample by industry code (different industry, same industry). Event window (days) Different industry Same industry CAAR (%) Positive CAR (%) CAAR (%) Positive CAR (%) Panel A: Targets [-1 ; 0] 13.49*** 62.50 12.02*** 74.44 [ 0 ; 0] 14.50*** 66.67 10.17*** 73.33 [-1;+1] 19.10*** 83.33 17.14*** 76.67 [-5 ; 0] 12.48*** 70.83 14.66*** 73.33 [-5;+1] 18.09*** 75.00 19.79*** 75.56 [-5;+5] 15.10*** 66.67 19.87*** 66.67 Observations 24 90 Panel B: Bidders [-1 ; 0] -1.09 54.17 -0.75 36.67 [ 0 ; 0] -0.84 41.67 0.03 43.33 [-1;+1] -0.92 41.67 -0.30 40.00 [-5 ; 0] -2.56 50.00 -2.99** 26.67 [-5;+1] -2.39 45.83 -2.55* 30.00 [-5;+5] -3.37 45.83 -5.09** 27.78 Observations 24 90 Panel C: Combined [-1 ; 0] 0.67 54.17 1.72** 52.22 [ 0 ; 0] 1.23 66.67 2.05*** 52.22 [-1;+1] 0.82 50.00 3.09*** 52.22 [-5 ; 0] -0.63 66.67 1.01 42.22 [-5;+1] -0.47 58.33 2.37 44.44 [-5;+5] -1.94 50.00 0.74 38.89 Observations 24 90 Source: own calculation t-statistics follows a t-student distribution. ***, **, * denotes for 1%, 5% and 10% significance level for a two-tailed test. 31 4.1.4 Abnormal Returns by Relative Size In this section the bid announcement effect is tested according to the relative size. The market capitalization of the firms six month before the bid announcement was used as proxy of the relative size, as per Asquith et al. (1983) and Agrawal et al. (1992). Table 8 – Cumulative Abnormal Returns by Relative Size This Table shows the cumulative abnormal returns over several event windows for targets, bidders as well as combined paired sample by relative size (proportion of market capitalization of target firm over market capitalization of bidder firm). Event window (days) ≧ 10% (Relatively Small Bidders, Large Targets) <10% (Relatively Large Bidders, Small Targets) CAAR (%) Positive CAR (%) CAAR (%) Positive CAR (%) Panel A: Targets [-1 ; 0] 11.69*** 70.21 12.77*** 73.13 [ 0 ; 0 ] 10.95*** 76.60 11.17*** 68.66 [-1;+1] 14.93*** 80.85 19.40*** 76.12 [-5 ; 0] 13.74*** 76.60 14.53*** 70.15 [-5;+1] 16.97*** 76.60 21.16*** 74.63 [-5;+5] 15.53*** 65.96 21.21*** 67.16 Observations 47 67 Panel B: Bidders [-1 ; 0] -1.41* 36.17 -0.41 43.28 [ 0 ; 0 ] -0.53 48.94 0.11 38.81 [-1;+1] -1.36 38.30 0.22 41.79 [-5 ; 0] -4.94*** 23.40 -1.47 37.31 [-5;+1] -4.89*** 23.40 -0.84 40.30 [-5;+5] -9.01*** 21.28 -1.73 38.81 Observations 47 67 Panel C: Combined [-1 ; 0] 3.81*** 59.57 -0.12 59.57 [ 0 ; 0 ] 4.02*** 65.96 0.37 65.96 [-1;+1] 5.48*** 63.83 0.59 63.83 [-5 ; 0] 3.19** 57.45 -1.11 57.45 [-5;+1] 4.86** 53.19 -0.39 53.19 [-5;+5] 2.18 42.55 -1.23 42.55 Observations 47 67 Source: own calculation. t-statistics follows a t-student distribution. ***, **, * denotes for 1%, 5% and 10% significance level for a two-tailed test. 32 The results presented in Table 8 show that for relative small bidders, i.e., the case the target market capitalization represents more than 10% of the bidder market capitalization, the CAAR is positive for target shares, negative for bidder shares and the combined effect is also positive and statically significant in longer event windows. These results suggest that the abnormal returns of target shares have compensated the negative abnormal returns of bidder shares. In case of relative large bidders (the target represents less than 10% of the bidder market capitalization), although the effect on target shareholders is still positive and statistically significant, the effect on bidder shareholders and the combined effect are not statistically different from zero. Panel A of Table 8 shows that in cross-borders acquisitions shareholders of small target firm experience larger wealth creation than shareholders of large target firms. Panel C of Table 8 shows that in CBA of relative larger targets, the combined effect of bid announcement is positive and significant which means that the losses observed in bidder shares are completely offset by the gains on target shares. It may also suggest that bidders offered too high premiums and there was a distribution of wealth from bidders to targets. In CBA of relative large bidders, the combined wealth effect is negative but not statistically significant. 4.2 Cross-Sectional Analysis After the comprehensive assay of the firms CAAR in several sub-samples for assessing the value created/destroyed in CBA transactions a step further will be taken in the analysis of variables that may impact the CAAR of bidder and target shares in order to allow us to have a better understanding under what circumstances the bidder firms overpay and target shareholders present larger gains. 33 4.2.1 The Model The impact of all variables on bidders and targets CAR was tested, by running the following regression 5 : +++++= +− iiiii ATTITSIZELNINDUSTPAYCAR 4321 )5;5 )( ( ββββα iiii INVPROEXRCNTR ε β β β + + + + 765 The dependent variables are the cumulative abnormal return (CAR) of bidders (targets) shares within the event window [-5;+5] 6 around announcement day and the explanatory (exogenous) variables are presented in Table 9 The exogenous variables can be split in two groups, the cross-border variables (target country status of development, relative exchange rate and level of investor protection in target country) and the bid characteristics variables (means of payment, industry relatedness, relative size and bid attitude) which will be considered separately and together. Regarding the cross-border variables the variable PAY is used to test the hypothesis of means of payment, that is to say if bidder and target shares tend to have better performance in all-cash or other type of offers around announcement date. Therefore if all-cash offers have better impact on shares price change than equity and mixed offers, this variable should have a positive sign. The variable INDUST is used to capture the effect of focus and diversification goals of cross-border bids on bidders and targets shares and so if acquisitions within same industry sector are better for shareholders than acquisitions of firms in different industries this variable should have associated a positive coefficient. The variable ATTIT tests whether hostile bids provide better returns to bidder and target shareholders than friendly ones. If true the coefficient associated to this variable should assume a negative value. SIZE explanatory variable is used to test if the relative size of both firms involved has an impact on shares CAR around announcement. This variable is composed by the linear logarithm of target 5 The regression has been run using White (1980) procedure for purposes of control of heteroskedasticity. 6 The regression has also been conducted for [-1;+1] and [-1;0] windows, nonetheless the results obtained were not statistically significant in the case of the bidders (which may be a sign that the bids were, on average, foreseen by the market) and were similar to the results of the CAR regression over [-5;+5] window in the case of the targets and so, for purposes of brevity, the results are not reported . 34 firms’ market capitalization of target firm in relation to the bidders market capitalization, following Asquith et al. (1983) and Jarrel and Poulsen (1989). For instances, if acquisitions of relative large targets provide better CAR for bidder shareholders around announcement, this variable should have a positive sign. Table 9 – Variable Definitions Variable Description CAR Cumulative Average Returns of bidders/targets shares within event window around announcement day. PAY A zero-one dummy variable taking the value 1 if the bid is all cash paid and 0 otherwise (equity or mixed) INDUST A zero-one dummy variable taking the value 1 if involving firms operate in the same industry sector and 0 otherwise. ATTIT A zero-one dummy variable taking the value 1 in case of a friendly bid and 0 otherwise (hostile or hostile to friendly). SIZE The ratio between target and bidder market capitalization six months prior the bid announcement. CNTR A zero-one dummy variable taking the value 1 if target is from a less developed country and 0 otherwise (see details in Appendix I) EXR The ratio of the difference between the yearly average exchange rate of target home currency (units of target home currency per unit of bidder home currency) and the exchange rate of target currency in the announcement year divided by the average exchange rate of the target relative to the bidder in the 2001-2010 period. INVPRO A zero-one dummy variable measuring the level of investor protection of target country. It takes 1 if target is from a country with strong or medium investor protection and 0 otherwise. It follows classification of “Strong”, “Medium” and “Weak”, as per Anderson et al., 2009 (see details in Appendix I). Regarding the cross-border variables, the variable CNTR is a dummy one-zero variable (following Doukas and Travlos, 1988) that is meant to capture the degree of economic development of the target firm country. 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Long-Term Value Creation and Top Management Turnover in Hostile and Friendly Acquirers”, British Journal of Management, Vol. 17, S7–S30.  Tolmunen, Pasi and Tostila, Sami, (2005), “Cross-Listing and M&A Activity: Transatlantic Evidence”, Financial Management, Vol. 34, No. 1, pp. 123-142.  White, Halbert (1980), “A Heteroskedasticity Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity” Econometrica, Vol. 48 Issue 4, p. 817-838, 22 p. 45 APPENDIX Appendix I - Status of Development and Level of Investor Protection in Target Country Target Country Target Country Status of Development Target Country Level of Investor Protection Australia Developed Strong Austria Developed Medium Belgium Developed Weak Canada Developed Strong Chile Non-developed Weak China Non-developed Strong Cyprus Non-developed Weak Czech Republic Developed Weak Finland Developed Strong France Developed Weak Germany Developed Medium Hungary Developed Weak Israel Developed Weak Italy Developed Weak Japan Developed Strong Netherlands Developed Weak Norway Developed Medium Philipppines Non-developed Weak Poland Developed Weak Portugal Developed Weak South Africa Non-developed Weak Spain Developed Weak Sweden Developed Strong Switzerland Developed Medium United Kingdom Developed Strong United States Developed Strong 46 Appendix II - Correlation Matrix between Exogenous Variables PAY INDUST SIZE ATTIT CNTR EXR INVPRO PAY 1.000 -0.023 0.061 -0.066 0.012 -0.199 0.013 INDUST -0.023 1.000 0.011 -0.085 0.058 -0.084 -0.085 SIZE 0.061 0.011 1.000 0.000 -0.204 0.033 0.074 ATTIT -0.066 -0.085 0.000 1.000 0.045 0.012 -0.092 CNTR 0.012 0.058 -0.204 0.045 1.000 -0.043 -0.412 EXR -0.199 -0.084 0.033 0.012 -0.043 1.000 0.033 INVPRO 0.013 -0.085 0.074 -0.092 -0.412 0.033 1.000