Essays on Corporate Acquisitions [Elektronische Ressource] / Marc Rustige. Frankfurt School of Finance & Management

Marc Rustige

Informations

• Publié par: goethe_universitat_frankfurt_am_main
• Publié le: 01 janvier 2011
• Nombre de lectures: 18
• Langue: English

Extrait

ESSAYS ON
CORPORATE ACQUISITIONS

PhD Thesis submitted by

Marc Rustige

at the
Frankfurt School of Finance & Management


2011




Essays on corporate acquisitions 1



TABLE OF CONTENT

Acknowledgement .............................................................................................. 2
Introduction ........................................................................ 3
Why do foreign acquirers pay more? ................................................................ 12
Differences between takeover premiums across countries ............................... 50
The conglomerate discount revisited ................................ 82
Curiculum Vitae .............................................................................................. 121
Declaration of authorship ............................................................................... 122


Essays on corporate acquisitions 2

ACKNOWLEDGEMENT

Foremost, I would like to thank my advisor Prof. Michael H. Grote for the
enthusiastic supervision of my thesis. I gratefully appreciate all his contributions of
time, ideas and funding to make my PhD experience as great as it was! Working
with him has been an extraordinary pleasure and I am grateful for many insightful
discussions not only about research.
I also wish to thank the members of my PhD committee, Prof. Christina Bannier
and Prof. Reinhard H. Schmidt, for their interest in my work, their time and their
insightful comments and suggestions for the further development of the articles.
Throughout not only the time of this thesis but of all my education my parents'
support has been beyond measure! They have always been there with endless
patience, encouragement and confidence and have served as an invaluable source
of stability for me – I want to thank them.
Finally, to Cristina: Thank you so much for your love, understanding and for your
companionship through all the ups and downs of writing this thesis!


Essays on corporate acquisitions 3
INTRODUCTION

Over the past decades, European mergers and acquisitions (M&A) have
become a substantial fraction of global M&A business. With a total transaction value
of more than 514bn € in 2010, the European market for corporate control has
emerged to almost the same size as the market in the United States (US 2010:
1581bn €). In terms of deal volume, Europe even surpassed the US in 2010 with
15,761 announced deals in Europe versus 8,228 announcements in the US. The
quantity of research on the European market for corporate control, however, does
not yet reflect this increased importance. Most scholarly studies still focus on
transactions of US companies (Martynova and Renneboog (2006)). At least in parts,
this is due to the unsatisfying data coverage on European acquisition in the relevant
databases. However, as the data-availability on acquisitions outside the North
Americas has been steadily improving over the last decade, research on M&A in
Europe gains increasing attention. This development opens up new opportunities
since the structural conditions in Europe, with its multiple borders, legal systems and
domestic markets, provide a fundamentally different setting for research on mergers
and acquisition than the US.
Financial scholars have started to advance research on the European market
for corporate control at two ends. On the one hand, effects that are well documented
in the context of US acquisitions are tested for their validity on other markets and
interesting new evidence is brought to light. Alexandridis et al. (2010), for instance,
show that the well known negative wealth effects incurring to the shareholders of
acquiring firms upon acquisition announcements in the US are not universally valid.
Instead, acquisitions in countries other than the US, the UK and Canada are, on
average, not associated with a decline in shareholder value. In continental Europe
the mean abnormal returns of the acquirers are even significantly positive. These
results foster the notion that acquisitions in Europe are fundamentally different and
underscore the importance of investigating markets outside the United States. On
the other hand, research has leveraged the unique structural conditions in Europe.
The high density and increasing integration of the domestic markets in Europe offer
the opportunity to shed light on questions that cannot be answered in the US
context. Among others, the dynamics of cross-border acquisitions can better be

1Data as reported by the Deal Analysis module in Thomson One Banker. Essays on corporate acquisitions 4
examined using European data. Almost half of the transactions in Europe are cross-
border (Martynova and Renneboog (2006)), whereas only a small number of deals
in the US involve acquirers and targets from different countries (Rossi and Volpin
(2004)).
This cumulative dissertation adds to the growing research on the market for
corporate control with a special emphasis on Europe. All three chapters empirically
investigate takeover premiums and stock returns in the contest of corporate
acquisitions. In doing so, we challenge common beliefs that have manifested as
almost axiomatic attitudes among the market participants, financial scholars and
practitioners alike.
In the first contribution, we scrutinize the common notion that higher takeover
premiums in cross-border transactions are a pure reflection of higher market access
synergies. Although we find that premiums are indeed significantly higher in cross-
border deals, we provide evidence that private benefits of management play a vital
role in the amount offered. The second contribution investigates the differences in
takeover premiums between the US and Europe with respect to the influence of
investor protection. Our findings suggest that higher levels of shareholder protection
neither directly nor indirectly explain the heterogeneity in bid premiums. Instead, we
argue that the target shareholder composition, i.e., the proportion of inside versus
outside shareholders, drives the difference and we find support for this hypothesis.
In the third article, we challenge the view that corporate diversification reduces firm
value. Our results from an event study analysis of announcement returns suggest
that, on average, diversifying acquisitions endow as much value as focusing deals.
However, the extent to which the acquirer is already diversified constitutes an
important parameter to be taken into account. We argue that the marginal costs of
diversification outweigh the marginal benefits with increasing number of business
segments the acquirer is already active in. Our empirical results support that
moderate diversification is indeed beneficial for acquiring shareholders. In the
following section we will portray each article giving special emphasis to the
motivation and the main findings.



Essays on corporate acquisitions 5
Article 1: “Why do foreign acquirers pay more? – Evidence from European
acquisition premiums”
The first article, which is co-authored with Michael H. Grote, picks up on the
structural research conditions in Europe. We address the question of why average
takeover premiums offered for target firms in cross-border acquisitions are
systematically higher than premiums offered in domestic transactions. Financial
scholars have documented this effect before (Rossi and Volpin (2004)) and the
common notion among the market participants that this is a reflection of higher
market synergies, has manifested. However, empirical evidence on the wealth
effects of cross-border acquisitions from event studies suggests that international
acquisitions do not enhance shareholder value. In fact, cross-border transactions
are frequently associated with negative announcement returns (Moeller and
Schlingemann (2005)). This is a sharp contradiction to the argument that higher
premiums in cross-border are an exclusive reflection of higher synergies.
In a large pan-European sample of acquisitions, which is sufficiently balanced
between cross-border and domestic deals, we document that premiums offered by
the acquirers in domestic transactions are significantly lower than those offered in
cross-border acquisitions. The average premium for domestic targets amounts to
24.4%, whereas the mean premium in cross-border transactions is 34.8% - a
significant 10.4 percentage points difference. This “cross-border premium” is robust
also if we control for common deal and firm characteristics in a multiple regression
model.
We investigate three possible explanations for this result. First, information
asymmetries between the target shareholders and the acquirer may be higher if
both firms are not located in the same country. Cultural, language and
organizational barriers may result in a reduced transparency for the target
shareholders when assessing the growth prospectives and the motives of the
acquirer. Hence, when the acquisition is finance with equity, the target shareholders
will demand