1 | P a g eABSTRACT This paper analyzes the influence of merger and acquisition announcements on the stock price of 15 seller's companies listed on a stock exchange in 20 cases of M&A f
INTRODUCTION
Rationale of the research
The Covid-19 pandemic has significantly impacted global economies, prompting companies of all sizes to merge in order to diversify their business lines and navigate the crisis Over the past three years, the frequency and value of mergers and acquisitions (M&A) have surged in emerging Asian markets, particularly in Vietnam M&A serves as a vital strategy for attracting both domestic and foreign capital, enabling businesses to expand their operations As M&A activities gain traction, research on this topic has also increased, with recent studies highlighting their positive effects on the financial positions of the involved companies.
The Vietnamese market is significantly influenced by merger and acquisition (M&A) announcements, a topic often overlooked in studies that focus on developed regions like North America and Europe Vietnam, ranked 25th globally and 14th in Asia in terms of GDP (PPP) according to the IMF, is experiencing rapid growth and a surge in M&A activity over the past five years These transactions serve as a vital investment channel, enabling companies to expand, restructure, and enhance their international presence Additionally, successful mergers can yield substantial benefits for shareholders, highlighting the importance of understanding M&A impacts on the Vietnamese stock exchange.
Mergers and acquisitions (M&A) remain a contentious topic among investors Proponents argue that M&A can enhance the business systems of enterprises, ultimately benefiting shareholders Conversely, critics contend that shareholders of the acquiring company may incur losses due to the performance of the seller's company.
Research objective
M&A activity is increasing globally, driven by globalization and ongoing technological advancements In the finance sector, merger events are extensively studied, with empirical research primarily focusing on daily stock returns around announcement dates and post-merger periods.
Global researchers have explored the effects of mergers and acquisitions (M&A) on the value of both the acquiring and target firms Evidence shows that shareholders of target companies often experience significant abnormal returns not only during the announcement period but also in the weeks following it, with stock prices frequently surging upon acquisition Notably, a substantial portion of this price increase occurs before M&A announcements, suggesting either a highly perceptive financial market or potential leaks regarding upcoming deals Some studies link this pre-announcement surge to prevailing rumors and toe-hold acquisitions, while others indicate that the price-volume dynamics align more closely with the market anticipation hypothesis than with insider trading.
The purpose of this study is to examine the effect of M&A announcements on the stock price of listed companies on Vietnam stock exchange This study covers the
10 | P a g e period from 2007 to 2021 and uses event study methodology The objectives of this paper are:
(a) investigating the effect of merger announcement for listed company’s stock price in Vietnam
(b) using the event studies examine whether there is an insider transaction before the M&A announcements are available
(c) studying the comparison of stock prices before the announcement of merger and post announcement stock prices patter.
Thesis disposition
This research is divided into 5 main parts
LITERATURE REVIEW
Theoretical background
2.1.1.1 Definition of Mergers and acquisitions:
Mergers and acquisitions (M&A) refer to the consolidation of companies or assets through various financial transactions While the terms are often used interchangeably, they have distinct meanings.
An acquisition occurs when one company buys a majority stake in another, typically over 50% of its shares, allowing the acquirer to control the target company's assets without needing approval from other shareholders Despite this control, the acquired company retains its name and organizational structure Hostile takeovers, where the target company resists the purchase, are also classified as acquisitions The distinction between a merger and an acquisition often depends on the nature of the deal—whether it is friendly or hostile—and how it is communicated.
A merger involves the combination of two similarly sized companies to form a new, unified organization, rather than continuing to operate independently This process requires the approval of both companies' boards of directors, as well as the consent of their shareholders.
Consolidation involves merging core businesses to form a new company while discarding outdated corporate structures This process requires the approval of stockholders from both companies, who will then receive common equity shares in the newly established firm (Hayes, 2022).
Besides, according to Vietnam Competition Law 2018 – 23/2018/QH14, M&A is defined as follows:
Acquisition refers to the process where one enterprise purchases all or part of the contributed capital and assets of another enterprise, enabling it to control and dominate the acquired business or a specific line of its operations.
A merger occurs when one or more companies transfer all their assets, rights, obligations, and legitimate interests to another company, resulting in the termination of their business operations or the dissolution of the merged entity.
Consolidation occurs when multiple enterprises combine their assets, rights, obligations, and legitimate interests to create a new entity, while simultaneously ceasing the operations or existence of the original businesses.
Mergers involve the consolidation of companies to create a new business entity, resulting in the dissolution of the merged companies, while consolidation leads to the termination of both parties involved In contrast, an acquisition occurs when one company takes over another, becoming its owner without forming a new legal entity In summary, mergers and acquisitions (M&A) represent enterprise restructuring activities that include capital contributions, share purchases, and member investments.
2.1.1.2 Strategy of mergers and acquisitions:
M&A have been classified into three categories: horizontal, vertical and conglomerate
A horizontal merger occurs when two companies operating in the same industry join forces, often to achieve economies of scale and increase market power by reducing competition These mergers frequently draw scrutiny from government antitrust agencies due to their potential impact on market dynamics (Arnold, 2013).
Vertical mergers involve the combination of firms at different stages of the production chain, leading to enhanced supply certainty and market access This integration can significantly lower costs associated with searching, contracting, payment collection, advertising, communication, and production coordination (Arnold, 2013).
A conglomerate merger involves the combination of two firms operating in unrelated business sectors, allowing companies to diversify their offerings and potentially increase profits While these firms may serve the same customer base, they provide different products or services that can be complementary This strategic alliance not only enhances revenue through cross-selling opportunities but also creates a convenient shopping experience for consumers Additionally, conglomerate mergers enable businesses to explore new industry areas, thereby reducing risk and gaining access to previously untapped resources.
14 | P a g e and markets This is often done to diversify into other industries, helping to reduce risks and save entry costs
M&A deals focus on influencing key decisions within the merged or acquired business rather than just acquiring share ownership These transactions offer numerous advantages to companies, which typically pursue M&A for four primary reasons: synergy motives, superior management motives, managerial motives, and third-party motives.
The merger will create a value that exceeds the individual worth of each company, driven by enhanced revenue and reduced costs This increased value may stem from complementary skills or market access that allows the combined firms to sell more products Additionally, sharing resources or production facilities can strengthen the firm's competitive advantage.
Market power refers to the ability of a company to influence the price of its products, often achieved through monopoly, oligopoly, or dominant producer positions When a firm holds a significant share of the market, it can exert considerable control over pricing, especially when customers have limited alternative suppliers Even without complete market dominance, a small number of firms can facilitate collusion, allowing them to agree, either explicitly or implicitly, to maintain higher prices and avoid undercutting one another (Arnold, 2013).
Larger organizations often experience economies of scale, leading to a decrease in the cost per unit of output By consolidating manufacturing operations at fewer, larger facilities, companies can achieve significant cost savings through the use of advanced machinery Additionally, marketing efficiencies can be gained by utilizing shared distribution channels and collaborative promotional efforts Cost reductions are also evident in areas such as administration, research and development, and purchasing (Arnold, 2013).
Empirical research
Nguyen Thu Hien and Le Tuong Luat (2011): The research team has studied over
The analysis of 20 M&A cases involving companies listed on the Vietnam Stock Exchange reveals that M&A announcements are perceived as negative news for shareholders of acquiring firms, while the impact on target companies varies Specifically, when the status of acquirers is not taken into account, M&A information is generally viewed positively for target firms However, if the acquiring firms are also listed on Vietnam’s Security Market, the effects on target firms turn negative Additionally, the research indicates that acquirer firms prioritize synergistic value as a key motivation for pursuing mergers and acquisitions.
Nguyen Viet Bao Trung et al (2014) investigated the impact of merger and acquisition announcements on the stock prices of acquiring companies in the Vietnamese market Analyzing 30 M&A deals from 2008 to 2014, the study found that abnormal returns reached their highest point on the announcement day of these events.
The Vietnamese stock market is considered a young and promising sector with significant potential for future development, supported by a stable political environment Additionally, Vietnam presents an attractive opportunity for foreign companies due to its low labor costs and favorable government incentives, further enhanced by political stability.
The Vietnamese market experiences a high volume of mergers and acquisitions (M&A), yet the value of these transactions remains relatively low from 2000 to 2014 The selling prices in M&A deals are often significantly lower compared to global standards, primarily due to inadequate brand valuation As a developing country, Vietnam's government promotes entrepreneurship, leading to many startups with limited brand recognition Consequently, larger brands can easily undermine potential competitors by leveraging their resources to expand their market presence.
Leveraging advanced technology from international acquirers, Vietnamese companies can rapidly bridge the quality, design, and service gap with developed nations.
During the period from \( t-1 \) to \( t+1 \), the Average Return (AR) exhibited significant fluctuations, making it challenging to identify a clear trend in the Vietnamese market On day \( t+1 \), the average AR for 30 transactions reached 2.45% Furthermore, it is suggested that the leaked information originated from within the company, with the leaker potentially profiting from this insider knowledge Given that Vietnam's market capitalizations are relatively small compared to global standards, there is a heightened risk of foreign companies acquiring local market shares, which could pose economic challenges for Vietnam in the future.
Vo Hoang Oanh (2015) analyzes the influence of mergers and acquisitions (M&A) on the stock price of the Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) By utilizing daily closing price data for BID stock, the study investigates the impact of the merger announcement involving the Mekong Delta Housing Development Commercial Joint Stock Bank on BIDV's share price volatility The findings reveal that the M&A announcement significantly boosted BIDV's stock price, resulting in substantial returns for shareholders.
Phan Thi Hong Hanh (2016) investigates the volatility of stock prices for 25 listed companies in Vietnam during acquisition and merger announcements from August 26, 2008, to April 8, 2015 The study focuses on 17 deals involving listed acquirers and includes additional acquisitions from 2013 to 2015 Utilizing the event research method, the author calculates abnormal returns within various event windows surrounding the announcement dates The findings indicate that abnormal returns for acquiring companies are generally greater than or equal to zero in short event windows, specifically [-3; +3], [-5; +5], and [-10; +10], as well as in the post-event periods [+1; +3] and [+1; +5] Additionally, similar results are observed for abnormal returns following the announcement date, suggesting that the market perceives mergers and acquisitions as a means to enhance business value through economies of scale.
Domestic research indicates that mergers and acquisitions (M&A) are primarily motivated by synergies and scaling-up incentives Most studies utilize qualitative methods, limiting the ability to demonstrate the impact of M&A announcements on stock prices Oanh (2015) partially explored the effect of M&A on BID's stock price, but the focus on a single deal restricts broader conclusions The question remains: do M&A events influence the seller's share price? Bao Trung et al (2014) conducted one of the few quality studies in Vietnam, yet it primarily examines acquirers, leaving the impact on target firms during the acquisition of Vietnamese enterprises by foreign entities inadequately assessed.
Miroslav Mateev (2017): The author studied the short-term effects of 2,823 M&A announcements involving firms of 32 countries in Europe based on payment method, geographical location and status of the target company
The research indicates that cash or stock deals are more likely to yield extraordinary returns for shareholders of the acquiring company Analyzing data from non-financial firms between 2002 and 2010, the study utilized five event windows: [-5; +5], [-2; +2], [-1; +1], [-1;0], and [-2; +1] It was found that UK contractors involved in cross-border acquisitions can achieve significantly higher profits, while domestic transactions also result in increased profits However, significant variations in shareholder wealth effects were noted across the two markets when considering deal-specific characteristics.
Prior research indicates that the payment method can significantly impact stock returns following merger or acquisition announcements An analysis of intra-European acquisitions reveals that shareholders of bidding companies experience higher abnormal returns with all-stock offers compared to other payment methods Notably, all-stock payments yield larger announcement effects, particularly among Continental European bidders The observed higher abnormal returns for stock offers may stem from a greater number of acquisitions involving unlisted targets Specifically, bidders acquiring unlisted targets tend to achieve larger abnormal returns when using stock rather than cash Conversely, for bidders targeting listed companies, the announcement effect is statistically significant only for stock offers, with similar trends noted across both Continental Europe and the UK, though the significance is stronger among UK bidders.
According to monitoring theory, when bidding companies achieve significant abnormal returns in bids for unlisted targets using stock as payment, it signals that shareholders value the creation of block holders through acquisitions This is because the management of the acquired targets becomes partial owners of the combined entity The presence of outside block holders can enhance the value of the acquiring company, as they encourage management to prioritize the overall interests of the company This insight could have implications for future acquisition strategies.
38 | P a g e behavior of management when considering what target to buy: one that adds prestige or one that adds value, and what method of payment to choose
In cross-border acquisitions, UK bidders targeting Continental European companies achieve higher abnormal returns, while domestic deals yield higher returns for acquisitions of Continental European targets However, the differences in returns between the two groups of countries are not statistically significant Additionally, an analysis based on the industry relatedness of bidders and targets reveals no significant impact on short-term wealth effects from the degree of industry relatedness in either scenario Notably, evidence of information leakage effects is found exclusively for deal announcements involving UK bidders.
The author examined the short-term impacts of various payment methods—cash, stock, and a combination of both—on acquisition deals Notably, the all-stock payment method significantly influenced markets in the UK and continental Europe, with a 1% significance level observed only for acquisitions from continental Europe The findings suggest that higher abnormal returns for stock offers may stem from a greater number of acquisitions involving unlisted targets using the bidder's equity Furthermore, the analysis revealed that bidders acquiring unlisted targets experienced larger abnormal returns when using stock instead of cash However, the effects of these payment methods on acquisitions in continental Europe did not show significant differences between the two cases.
Adnan and Hossain (2016) analyzed the closing price data from 2015 for 50 target and 50 acquirer companies listed on the New York, American, and NASDAQ stock markets, using non-M&A companies as a comparison Their findings indicate that both acquiring and target companies experience positive abnormal returns, with the cumulative abnormal return (CAR) showing an upward trend following the announcement The study employed a window of [-5; +5] to facilitate easy comparison in charts between the two types of companies.