an empirical study of value creation through mergers & acquisitions

183 Pages·2013·6.44 MB·English

AN EMPIRICAL STUDY OF VALUE CREATION
THROUGH MERGERS & ACQUISITIONS
- A STRATEGIC FOCUS
Academic advisor
JAN BARTHOLDY
Associate professor, PhD.
Department of Economics & Business
Daniel Michael Icke
STUD. �: 401910
January 2014, MSc. Finance & International Business
Aarhus University, Business & Social Sciences
Executive Summary
As much M&A research takes its offspring in the US market it was the ambition of the thesis to contribute
to the more sparse understanding of European M&As. The period of analysis covers deals from 2000 to
2008, thus capturing the sixth merger wave. Focus was solely on acquirers as existing evidence
unanimously find targets to gain from M&A, while research on behalf of the acquirer is more ambiguous.
The thesis sought to identify if acquirers experienced abnormal returns at the announcement of M&A and if
such foresight of financial markets was reflected in post-M&A performance. More so, it was of interest to
see if there was a differentiation between the strategic motivations of each sample deal, as M&A is
perceived to be the most visible manifestation of corporate strategy. To answer such questions, an event
study with a battery of tests and a performance study were conducted. Both methodologies infer strict
data requirements, thus the final sample of 131 deals has been meticulously investigated.
It was found that European M&As during the sixth merger wave were value creating for shareholders in
terms of short-term effects, while the post-M&A abnormal performance was significant for both applied
measurements in the first fiscal year post-M&A, while only one measure of such for two fiscal years post-
M&A - findings were robust across benchmarks. However, there was no robust evidence to infer that
results were differentiable across strategic motivations, but multiple control variables were found to be
significant in explaining the value creation.

Characters excl. blanks and including figures, tables and footnotes: 153.749
Table of Content
1 Acknowledgements ...................................................................................................................................... 4
2 Introduction ................................................................................................................................................. 4
2.1 Problem Statement .............................................................................................................................. 6
3 Delimitation.................................................................................................................................................. 7
4 Literature Review ......................................................................................................................................... 8
4.1 Theoretical Perspectives of M&A ........................................................................................................ 8
4.1.1 Merger Waves: Clusters of Strategic Motives .............................................................................. 9
4.1.2 Neo-Classical School and Economic Perspectives ...................................................................... 10
4.1.3 Behavioral Finance - The Opposing Doctrine ............................................................................. 14
4.1.4 Why Merger Waves Occur: Behavioral Versus Neoclassical School .......................................... 16
4.1.5 Economic Similarities of Merger Waves .................................................................................... 16
4.1.6 Merger Waves of Europe: Determinants and Characteristics ................................................... 17
5 Empirical Evidence ..................................................................................................................................... 19
5.1 Announcement Effect of M&A ........................................................................................................... 19
5.2 Post-M&A Performance ..................................................................................................................... 20
5.3 Critique and Reflection of Empirical Evidence ................................................................................... 22
6 Formulated Strategic Motivations ............................................................................................................. 23
6.1 Essential Considerations of Strategy Formulation ............................................................................. 24
6.2 Sources of Inspirations ....................................................................................................................... 24
6.3 Defining the Strategic Motivations .................................................................................................... 25
7 Hypothesis and Control Variables .............................................................................................................. 27
7.1 Control Variables ................................................................................................................................ 28
7.2 Hypothesis .......................................................................................................................................... 28
8 Methodology .............................................................................................................................................. 28
8.1 Event Study ........................................................................................................................................ 29
8.1.1 Theoretical Analysis of Abnormal Returns (ARs) ....................................................................... 29
8.1.2 Issues of Interpretation .............................................................................................................. 33
8.2 Performance Study............................................................................................................................. 33
8.2.1 Theoretical Measurement of Operating Performance .............................................................. 33
8.2.2 Construction of a Comparable Benchmark: Measuring Abnormal Performance ...................... 38
8.2.3 Executing the Framework for Detecting Abnormal Performance (AP) ...................................... 40
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8.2.4 Statistical Tests ........................................................................................................................... 43
8.3 ANOVA and Multiple Comparisons & Cross-Sectional Analysis ......................................................... 44
9 Data Collection ........................................................................................................................................... 45
10 Empirical Results .................................................................................................................................... 49
10.1 Event Study ........................................................................................................................................ 49
10.1.1 Full Sample: Results and Statistical Properties .......................................................................... 49
10.1.2 Strategies: Results and Statistical Properties ............................................................................. 50
10.2 ANOVA and Multiple Comparisons: Event Study ............................................................................... 53
10.3 Performance Study............................................................................................................................. 56
10.3.1 Full Sample: Results and Statistical Properties .......................................................................... 57
10.3.2 Strategies: Results and Statistical Properties ............................................................................. 59
10.4 ANOVA and Multiple Comparisons: Performance Study ................................................................... 63
10.5 Cross Sectional Analysis ..................................................................................................................... 66
10.5.1 Cross-Sectional Analysis: CAR .................................................................................................... 67
10.5.2 Cross-Sectional Analysis: AP ....................................................................................................... 71
11 Conclusion .............................................................................................................................................. 74
12 Bibliography ........................................................................................................................................... 76
13 Appendix ................................................................................................................................................ 82
13.1 Submitted CD: Files and Folders ........................................................................................................ 82
13.2 M&A Developments in Europe .......................................................................................................... 83
13.3 Empirical Evidence: Event Study ........................................................................................................ 84
13.4 Empirical Evidence: Post-M&A Performance ..................................................................................... 86
13.5 Classification of Strategic Motivations ............................................................................................... 88
13.6 Overview of Sample Deals: Strategies and External References ....................................................... 91
13.7 Descriptive Statistics: Strategies and Control Variables .................................................................. 102
13.8 Cross-Sectional Analysis: Construction of Control Variables ........................................................... 105
13.9 Formulas and Description of Tests (Event Study) ............................................................................ 106
13.9.1 Parametric ................................................................................................................................ 106
13.9.2 Non-Parametric Test ................................................................................................................ 110
13.9.3 Matlab Code of Event Study and Test Output ......................................................................... 113
13.9.4 Overview of Test Results .......................................................................................................... 113
13.10 Formulas and Description of Tests (Performance Study) ............................................................ 116
13.11 Methodology of ANOVA ............................................................................................................... 120
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13.11.1 Assumptions of ANOVA:....................................................................................................... 120
13.11.2 Formulas and Hypotheses .................................................................................................... 120
13.11.3 Multiple Comparison Tests .................................................................................................. 121
13.12 Statistical Properties of Applied Methodologies ......................................................................... 123
13.12.1 Cross-Sectional Analysis: Event Study (CAR) and Performance Study (AP) ......................... 123
13.12.2 Assumptions of Cross-Sectional Analysis: CAR and AP ........................................................ 123
13.13 Test Results .................................................................................................................................. 128
13.13.1 Cross Sectional Analysis: CAR of Event Study ...................................................................... 128
13.13.2 ANOVA on CAR (Event Study) .............................................................................................. 134
13.13.3 Performance Study: Miscellaneous ..................................................................................... 134
13.13.4 Cross-Sectional Analysis on Performance Measures (Performance Study) ......................... 135
13.13.5 ANOVA on AP (Performance Study) ..................................................................................... 141
13.14 Event Study: M&A Clustering and Corporate Restructuring ........................................................ 142
13.15 Deriving at the Final Sample: Decisions & Procedures ................................................................ 144
13.15.1 Retrieving Accounting Data from Offline and Online Orbis ................................................. 144
13.15.2 Merging Offline & Online Accounting Data/Information ..................................................... 146
13.15.3 Completion Date Test: Finding the Fiscal Year End Dates of Acquirer and Target .............. 155
13.15.4 Identifying Overlap in Performance Study ........................................................................... 158
13.15.5 Performance Study: The Suitable Sample ............................................................................ 162
13.15.6 Performance Study and Event Study: Considerations and Exclusions ................................. 167
13.15.7 Definition of Corporate Restructuring, Strategic Partnerships and M&A ........................... 179

List of Selected Abbreviations
AR Abnormal Return
CAR Cumulative Abnormal Return
AP Abnormal Operating Performance
BLUE Best Unbiased Estimator
VIF Variance Inflation Factors

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1 Acknowledgements
Thanks to my fellow students for their constructive criticism and support throughout the process. Special
thanks to fellow thesis student, Marco Demontis (ID: 300167) with whom I shared an office and wrote the
Matlab codes and Søren Hjort Aabling, who guided and assisted me in the creation of VBA codes for sorting
data and to develop a code for identifying benchmark firms.
Most importantly I would like to thank my girlfriend Jannie and family - without their love and support there
would be no end product.
This milestone is dedicated in loving memory of my little brother William Henrik Icke - this one is for you. I
love and miss you every single day.
2 Introduction
The thesis investigates one of the most studied, yet puzzling aspects of corporate finance, namely mergers
and acquisitions often referred to as M&A, but when studying the phenomena the typology may well have
been the abbreviation for mayhem and anxiety. This analogy is especially true when investigating both the
announcement effect on acquirer's stock return and their post-M&A performance, as empirical findings are
found to be inconclusive and the reason as to why researchers have not yet presented a clear-cut answer to
whether M&A is value creating or not is full of ambiguity.
Despite the unflattering analogy of mayhem and anxiety, M&A activity has following a brief spell of
downward activity triggered by the financial crisis in 2008, again gained prominence as a managerial tool to
achieve growth. The increased activity is puzzling and contradictory considering the empirically stated high
failure rates on behalf of acquirers (Straub et al., 2012), yet history shows that M&A activity occur in clusters,
so-called merger waves and the explanation as to why these occur and reoccur are many (Kummer & Steger,
2008). One explanation was presented by Gorton et al. (2005) who found that merger waves are a result of
defensive strategies, where firms fearing takeover would mitigate such risks by increasing their own size
through M&A. Consequently, as explained by Gorton et. al (2005) the doctrine of eat or be eaten is ingrained
into the business sphere, thus M&A is an inherent part of a company's life cycle and a necessary action to
survive as an independent entity in an increasingly cutthroat business environment (Kummer & Steger, 2008;
Dickerson et al. 1997). More so, the sentiment of eat or be eaten can assist in explaining why merger waves
continue to reoccur despite evidence of unprofitability a perception shared by Kummer and Steger (2008) in
what they term the bandwagon effect, namely when a firm starts to consolidate within an industry,
competitors will follow and engage in M&A out of fear of being left behind. They also mention multiple other
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motives for engaging in M&A, some originating in strategic rationality others from human irrationality, but
emphasize that the primary motivation of M&A is to achieve growth. In cohesion with Dickerson et al.
(1997), they find that M&A serves as an option for achieving growth, especially when organic growth does
not materialize. Dickerson et al. (1997) focuses on how it is advantageous in comparison to organic growth as
it provides a ready-made and fully operational investment in terms of personnel, freeing up managerial
resources compared to if it were to be build it from scratch. M&A may also provide access to otherwise
unavailable markets and essential in less competitive markets it eliminates a competitor. Kummer and Steger
(2008) instead infer that external pressure for high growth that is unachievable through organic growth is
what leads management to overconfidently and unrealistically turn to M&A as the solution.
Regardless of what triggers the desire to embark on M&A instead of organic growth and thereby contribute
to the occurrence of merger waves, it is interesting that each merger wave throughout both the European
and US markets are found to be characterized by a unique strategic motive (Sudarsanam, 2010; Lipczynski et
al., 2009). As a result, one may ask whether M&A always originates from a strategic decision. As proclaimed
by Straub et al. (2012) M&A is one of the most dramatic and visible manifestations of corporate level
strategy, but executing an M&A transaction is not strategy, it is merely an instrument to achieve objectives
or as Bower (2001) puts it - the means to an end, while he emphasizes that if a firm desires to undertake
M&A, the strategy as to why must be thoroughly developed - otherwise there are other easier avenues to
follow for achieving the objective. Inarguably, the goal of M&A from a shareholder perspective should be to
improve profitability (Sudarsanam, 2010: Hillier et al., 2008 and many others). But despite decades of
research, the existent findings still show a trail of inconsistency in conclusions; hence recommendations of
whether M&A is an appropriate tool to successfully achieve managerial goals are unclear (Straub et al.,
2012).
Despite this unsolved puzzle as to whether M&A is a good or bad choice for future growth, it is remarkable to
see that M&A activity (not only) in Europe continues to flourish, thus as argued by Straub et al. (2012) it calls
for a more differentiated analysis on the topic to understand if management is gambling with shareholder
wealth when undertaking M&A. This is shared by Bower (2001), who stress that M&A deals as a whole are
non-singular of nature, thus must not be treated as were they all alike, particularly important when assessing
the success of individual deals. This leads to the problem statement of the thesis, which will address how it
will contribute in collecting the pieces of the puzzle and reduce ambiguity.

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2.1 Problem Statement
During the new millennia Europe became the world's largest economic block and M&A activity reached
record heights, yet little is known about the wealth effects of European acquirers (Sudarsanam, 2010). More
so, no published article deals with the strategic motive of M&A nor works with a sample appropriate for
comparability across wealth appropriating methods. Thus the ambition is to contribute to clarify if M&As by
European acquirers are value enhancing or value destroying with a focus on the strategic motivation of the
deal. This focus is inspired by the work of Straub et al. (2012) who on the basis of European M&A, but by
using an unorthodox methodology find that strategic logic is cornerstone for explaining performance. To
achieve comparability between their findings and the vast amount of empirical evidence published on wealth
effects of M&A, their idea of strategic logic will be developed and another methodology commonly used for
capturing performance will be applied. As a result the thesis will formulate its own non-generic strategic
motivations and investigate if the inconsistency of empirical findings concerning M&A is attributable to not
distinguishing between strategic motivations.
The applied methodology is influenced by Bouwman et al. (2009), who when investigating the performance
of US acquirers contingent to different stock market conditions apply a variety of approaches. These include
an event study of the announcement effects on stock returns and a post-M&A performance study based on
accounting data, both of which will be deployed in the thesis to answer the following problem statement:
"How does the financial market react to European M&As in general and does the strategic motivation
underlying such deals trigger different reactions and are such reactions warranted in terms of post-M&A
operating performance?"
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3 Delimitation
Due to the scope of the thesis it certain delimitations and assumptions have been inferred.
Firstly, focus is exclusively on the acquiring firm's shareholders, a limitation deemed appropriate by vast
amount of evidence finding that target shareholders conclusively experience positive abnormal returns at
M&A announcements (Mackinlay, 1997; Sudarsanam, 2010). Also, as targets often cease to exist as
independent entities post-M&A, it was inherent only to construct a cross-comparable study with acquirers1.
Secondly, well-aware that the period of analysis concerns a change of accounting practices from national
GAAP to IFRS potential accounting data distortions will not be dealt with. For the performance study, it is
assumed that the inferred selection criteria concerning the finale equity stake will result in sample deals,
which merit sufficient ownership to control both financial and operating policies, thus qualifying for
consolidation in the accounts of the acquiring firm (Kothari & Barone, 2011). Yet, an investigation of
differences in consolidation models and which are utilized by each firm is not provided for such one should
address the work of Kothari and Barone (2011). As advocated by Kothari and Barone (2011) certain initial
ownership stakes that represent non-controlling yet substantial interests may require incorporation into the
consolidated accounts of the parent, but what constitutes a substantial stake is a conceptual discussion not
within scope and assumed to be of negligible importance due to the maximal initial ownership stake inferred
in the data collection. Thirdly, according to Sudarsanam (2010) mergers and acquisitions are two distinct
corporate events warranting unique accounting treatment, this despite being expressed in a united
abbreviation; M&A and used interchangeably in existent research. He states that mergers are a pooling of
interest, where both set of shareholders continue to have an interest in consolidated firm, while an
acquisition involves a purchase of interest, thus the acquired firm's shareholders cease to have any interest
or influence post-M&A. The thesis assumes that an equity stake above 50 percent is enough to infer control
over consolidated assets; hence a purchase of interest calling for acquisition accounting, where goodwill is
recognized and amortized2. This assumption is deemed reasonable, as Sudarsanam (2010) states that merger
accounting is rarely employed in Europe, while what constitutes goodwill or how it is estimated or what
influences such estimation is not discussed. Finally, the abbreviation M&A is still used to cover acquisitions to
create consistency with referenced work despite assuming that sample deals are pure acquisitions
substantiating the usages acquisition accounting. More so, a distinction of acquirer types has not been done,
despite recent research by Wiggenhorn et al. (2007) finding that newly public firms in the US undertaking

1 Even when possible to identify independent targets data was unavailable.
2 From 2008 and onwards goodwill is not amortized but instead undergoes an impairment test (Kothari & Barone,
2011), this will is of little influence as all deals are completed prior to 2009.
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M&A experience significantly higher positive returns than more mature public firms3. Such a distinction
would improve the generalization of findings, but the focus has been to provide valuable and much needed
information about the strategic motivations of M&A. Finally, merger waves are of interest as they facilitate
an understanding of how the strategic motivations of M&A have evolved - an evolution of thought that can
assist in analyzing the motivations of the recent merger wave. The thesis introduces two schools of thought,
which aside from providing examples of different motivations, also theorize how such motivations can
explain why merger waves are recurrent phenomena. Such theories are presented due to their
interrelatedness with strategic motivations per se, but the thesis refrains from testing if these explanations
are legitimate or not. They are introduced to clarify that managerial motivations are multifaceted, but not
inferring that a primary motivation is unidentifiable. Finally, it is not in the scope to analyze whether
synergies related to the formulated strategic motivations materialize or not.
4 Literature Review
The literature review is divided into four sections. The first provides a brief overview of the history of merger
waves and the prevailing motives of each wave. This is followed by a comprehensive elaboration of the
theoretical motivations for conducting M&A and if these are driven by a desire to create value for
shareholders. The third section addresses the perspectives as to why M&A activity is found to cluster and
develop into recurrent merger waves. Based on this understanding the fourth section will shed light on the
characteristics and determinants of European M&A activity at the turn of the century, facilitating an
understanding of the time period under analysis.
4.1 Theoretical Perspectives of M&A
The emphasis here is to elaborate on how various schools of thought within economic and financial theory
perceive the motivation for engaging in M&A as a strategic tool and these theories will be essential for
formulating the tested strategies. The section will start by touching on the history of merger waves and
proceed by presenting two contrasting conceptualizations, which are fundamental to our understanding of
contemporary finance and motives for M&A. This will facilitate an understanding as to why M&A activity
throughout history have accumulated in merger waves and why such with time seemingly change
characteristics. The first conceptualization that will be addressed is the neoclassical school of thought, which
by Harford (2005) links the economic perspectives of what motivates M&A with the assumption of the

3 Wiggenhorn et al. (2007) defined a newly public firm to have completed an M&A within a year of its IPO.
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