The announcement effect of cross-border M&A on shareholders' value

79 Pages·2013·1.29 MB·English

by  Vera Grønsund

The announcement effect of
cross-border M&A on shareholders’
value:

An event study of Scandinavian target firms

Vera Grønsund

Thesis for the degree
Master of Economic Theory and Econometrics

Department of Economics

UNIVERSITY OF OSLO

January 2013

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The announcement effect of cross-border M&A on
shareholders’ value:
An event study of Scandinavian target firms

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© Vera Grønsund
2013
The announcement effect of cross-border M&A on shareholders’ value:
An event study of Scandinavian target firms
Vera Grønsund
http://www.duo.uio.no/
Trykk: Reprosentralen, Universitetet i Oslo
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Summary
The majority of research on merger and acquisition (M&A) in Scandinavia is related to
domestic M&A. In addition to a lack of research on cross-border M&A for the Scandinavian
market, the many obstacles associated with this form of take-overs make it fruitful to
investigate the phenomenon in Scandinavia. This thesis investigates the announcement effect
of cross-border mergers and acquisitions (M&A) on target firm shareholders’ value in
Scandinavia in the short-term. A short-run perspective is chosen in order to isolate the impact
of one particular event by preventing cofounding events during the event period. Evidence on
long-run effects is therefore left out of the analysis. A sample of 98 Scandinavian target firms
has been analyzed in the time span between 1997 and 2011 in order to find empirical evidence
that supports the hypothesis that the announcement of cross-border M&A generates value for
target firm shareholders.
The announcement effect of cross-border M&A activity is in this thesis evaluated on the basis
of the shareholders’ value approach. This approach compares shareholders’ value, measured
by stock returns, subsequent to the announcement of cross-border M&A to an estimated value
that is calculated based on the assumption that the M&A had not occurred. Since the purpose
of this thesis is to look at the effect of M&A announcement on shareholders’ value, the impact
of M&A on other stakeholders1 is not examined.
The event study methodology has been applied in order to detect abnormal returns during an
event period of five days, where the abnormal return is the difference between the observed
return of a security and the return of a security that are expected to be observed if no event
occurs (Peterson, 1989). The event period over which the abnormal returns are examined
spans from two days prior to the announcement of cross-border M&A to two days after the
announcement of cross-border M&A.
This study finds significant and positive average abnormal returns on both of the days prior to
the announcement day. These results indicate that news about mergers and/or acquisitions on
some occasions reached the market before the actual day of the announcement, possibly due
to information leakage or rumors. In addition, a significant and positive abnormal return is
found on the first day following the announcement day, indicating that news about mergers

1 Other stakeholders include employees, customers, management and the society
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and/or acquisitions in some cases reached the market after trading hours which made it
impossible for market participants to react to the news on the actual day of the announcement.
The cumulative average abnormal returns of the securities in the sample represent an estimate
at the time of the M&A announcement of the expected discounted value to shareholders
generated by the take-over (Campa & Hernando, 2004). The empirical evidence of this study
suggests that target shareholders in Scandinavia experience a statistically significant
cumulative average abnormal return of 14.7% during the five days under which the returns of
the stocks are examined. The main conclusion of this thesis is that the announcement of cross-
border M&A generates value to target firm shareholders in Scandinavia in the short-run.

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Preface
I would first and foremost like to thank my academic advisor, Karen Helene Ulltveit-Moe, for
her help and guidance through the process of writing this master thesis.
BI-Norwegian Business School deserves my deepest gratitude for making this thesis possible
by granting me access to financial databases which contains the data used in this study.
I would also like to express special gratitude to my father and my two elder brothers for
taking their time to review this thesis and providing me with essential and constructive
criticism.
Finally, I would like to thank my mother and my boyfriend for their invaluable support and
encouragement along the way.
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Table of contents

1 Introduction ......................................................................................................................................... 1
1.1 Problem statement ..................................................................................................................... 3
1.2 Delimitations ............................................................................................................................... 7
2 Theoretical and empirical background ........................................................................................... 8
2.1 Types of M&A ............................................................................................................................. 8
2.2 Merger and acquisition waves.................................................................................................. 9
2.3 Motives, risks and obstacles of M&A .................................................................................... 11
2.3.1 Neoclassical theories ....................................................................................................... 11
2.3.2 Behavorial theories ........................................................................................................... 13
2.3.3 Main obstacles of cross-border M&A ............................................................................. 15
2.4 Cross-border M&A in Scandinavia ........................................................................................ 17
3 Literature review .............................................................................................................................. 21
4 Data description ............................................................................................................................... 25
5 The econometric methodology ...................................................................................................... 27
5.1 Event Study Framework .......................................................................................................... 28
5.2 Assumptions of the Event Study Methodology .................................................................... 30
5.3 Determination of event and estimation Windows ................................................................ 31
5.4 Calculation of abnormal returns ............................................................................................. 34
5.5 Test statistics ............................................................................................................................ 38
6 Empirical evidence .......................................................................................................................... 41
7 Evaluation and suggestions for further research ........................................................................ 46
8 Conclusion ........................................................................................................................................ 49
Bibliography ......................................................................................................................................... 51
Appendices .......................................................................................................................................... 56

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List of figures
Figure 1: Cross-border M&A in Scandinavia in the time span during 1997 and 2011…...p.19
Figure 2: Timeline………………………………………………………………………….p.33
Figure 3: Average Abnormal Returns during event period………………………………...p.42
Figure 4: Average Abnormal Returns during estimation period…………………………...p.43

List of tables
Table 1: Number of cross-border M&As with Scandinavian firms as targets in the
sample………………………………………………………………………………………p.26
Table 2: Average Abnormal Returns during the event period and test statistics…………..p.44

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