M a effects on acquirers store chain retailers stock price an empirical study from vietnam as the target country

M&A Inflow to Vietnam’s Retail market – A Thriving sector BBGV, 2017 Vietnam has been a promising business market not only domestic players but also regional retailers.. Therefore, this

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY

NGUYEN HOAI THU

M&A EFFECTS ON ACQUIRERS (STORE-CHAIN RETAILERS) STOCK PRICE: AN EMPIRICAL STUDY FROM VIETNAM AS THE TARGET COUNTRY

MAJOR: BUSINESS ADMINISTRATION

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DECLARATION

I, Nguyen Hoai Thu, affirm that this paper has not been submitted to any college or instructive institutions beneath any form Data, which recovered from other analysts and websites, has been recognized and recorded as references section This paper may be a portion of the necessity to fulfill the degree of Master of Business Administration at Vietnam Japan University

Nguyen Hoai Thu

Date

11 June 2018

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ACKNOWLEDGEMENTS

Firstly, I would like to express my special gratitude to my two supervisors also the two lecturers who have taught me International Business, and Quantitative Analysis To Associate Professor Vu Anh Dzung, one of the most dedicated professor that I am lucky enough to get connected and known for years Thank you for making the lectures too interesting that make students not be able to get distracted, for being patient with us, and for your support all along the way To Professor Tohru Inoue, thank you for inspiring me that much about spirit I have learnt a lot not only the knowledge about capital market which I am so love to know more from an expert, but also the Japanese cultures and etiquette

Time flies, and people grow up, before writing this acknowledgement, I took time

to re-read the Statement of Purpose to remind me why I want to join the MBA, and VJU Until now, reaching this stage, experience all the moments together with peers, is the best scenario that I could imagine I have learnt a lot, from the endless conversations with the most respected yet warmed Lien-sensei, Hino-sensei, Hanh-sensei, and all Japanese lecturers especially Matsui-sensei (Our lovely grandpa), Kodozawa-sensei, and Heller-sensei about papers, news, and daily life routine To the two most hardworking, affectionate and joyful chi Huong-san and chi Nagano-san, thank you a lot for your caring to the detail I keep telling my friend that being

in VJU is a rare opportunity of lifetime, it is not about getting to know and be friended with many intelligent, gregarious, and courageous peers, but about a pure beautiful environment with full-packed of people who are all giving their best to build and spread the good spirit

I am truly grateful to all of that Besides that, I would moreover like to give a special thanks to my parents and other family‘s members who have bolstered me

a part in numerous choice of my life, and have direct me toward Thank you, father, who have taught me to appreciate to all the love, and support, to gracefully behave

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to everything Thank you, mother, who silently takes care of us so well, who is next

to me any time I get down, a mother, a companion in you Thank you, my so precious brother, and close relatives who bring of delights to my life At last, to all friends who helped me and cheer me a lot through thick and thin Much appreciated!

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TABLE OF CONTENT

DECLARATION i

ACKNOWLEDGEMENTS ii

TABLE OF CONTENT iv

ABSTRACT vi

ABBREVIATIONS vii

LIST OF TABLES viii

LIST OF FIGURES viii

CHAPTER 1: INTRODUCTION 1

1.1 Research Background 1

1.1.1 Vietnam market – A promising target destination to watch 1

1.1.2 Vietnam M&A market 2

1.1.3 M&A Inflow to Vietnam‘s Retail market – A Thriving sector 3

1.2 Research Motivation 4

1.3 Research Questions 5

1.4 Research Objectives 5

CHAPTER 2: LITERATURE REVIEW 7

2.1 Mergers and Acquisitions 7

2.2 Motive of Mergers and Acquisitions 9

2.3 M&A announcement and Stock-Price Movement 10

2.3.1 Bidding companies‘ shareholders 10

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2.3.2 Domestic vs Cross-border M&A 12

2.3.3 Within and diversification M&A 14

2.3.4 Other determinants might affect the stock price 16

CHAPTER 3: METHODOLOGY 17

3.1 Methodology 17

3.2 Hypothesis Development 18

3.3 Methodology of Event Study 19

3.3.1 Market Efficiency 19

3.3.2 Estimation period, event day and event window 20

3.4 Data-set 22

CHAPTER 4: DATA PRESENTATION AND RESULT DISCUSSION 24

4.1 Data Presentation 24

4.2 Result discussion 36

4.2.1 Value Effects of Domestic and Cross-border Transactions 37

4.2.2 Value Effects of Transactions Horizontal vs Diversified M&A 38

4.2.3 Summary of Value Effects of Transactions Comparing within-industry and diversified deal with their Geographical Focus 38

CHAPTER 5: CONCLUSION, IMPLICATION, AND FURTHER RECOMMENDATIONS 40

5.1 Conclusion and implication 40

5.2 Limitations and future recommendation 41

REFERENCES 42

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ABSTRACT

This paper aims to identify the reaction of the stock price of bidder company in retail industry (focus on retail-chain stores retailers) M&A in retail sector especially the retail store has been creating lots of tagline from all the most prestigious business news not only local but also regional Billion dollar deals, whether they would contribute to the wealth of shareholders The empirical result in Vietnam show that there is a strong negative significant in short-term toward the wealth gain of bidding companies‘ shareholders Due to the time span of the deal evaluation, the researcher would not take into account the synergies effects of the deal, this work is focusing on short-term shareholders‘ gain which is the change in stock price of the bidders

Keywords: developing countries, finance, Mergers and Acquisitions (M&A), stock price, bidding company, event study

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ABBREVIATIONS

FDI: Foreign Direct Investment

GDP: Gross Domestic Product

IMAA: Institute of Mergers, Acquisitions and Alliances

M&A: Mergers and Acquisitions

PwC: PricewaterhouseCoopers

UNCTAD: United Nations Conference on Trade and Development

USD: United States Dollar

WEF: World Economic Forum

Figure 4.1: Stock price movement of VIC and Index changes of VnIndex during

the tested time (VIC-OceanGroup) 25

Figure 4.2: Test Result of the Deal between Vingroup and OceanGroup 26 Figure 4.3: Stock price movement of CentralGroup and Index changes of SET

Index during the tested time (Central Group – Nguyen Kim) 27

Figure 4.5: Stock price movement of AEON and Index changes of Topix during the

tested time (AEON-Fivimart&Citimart) 29

Figure 4.6: Test Result of the Deal between Vingroup and OceanGroup 30 Figure 4.8: Test Result of the Deal between Vingroup and Vinatex 32 Figure 4.9: Stock price movement of VIC and Index changes of VnIndex during

the tested time (VIC-Maximart) 33

Figure 4.10: Test Result of the Deal between Vingroup and Maximart 34 Figure 4.11: Stock price movement of CentralGroup and Index changes of BigC

during the tested time (CentralGroup-BigC) 35

Figure 4.12: Test Result of the Deal between CentralGroup and BigC 36

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CHAPTER 1: INTRODUCTION

1.1 Research Background

1.1.1 Vietnam market – A promising target destination to watch

According to the report arranged for APEC CEO Summit by PwC Vietnam – One

of the worldwide counseling firm that has been actively working in Vietnam market, till 4th quarter of 2017, with exchanging stream of USD340 billion Vietnam has been still showing that this is an open economy with 1.6 times its GDP, and has pulled into add up to its foreign direct investment (FDI) with the sum

of USD300 billion in 2016 The FDI inflow has been accounted for around 70% of Vietnam's export turnover, with identical to 22% of the GDP The FDI inflow has helped to cover millions of occupations and contributed incredibly to development and modernization, boosting the economy‘s development (PricewaterhouseCoopers, 2017)

According to the World Bank‘s Doing Business 2017 Report, Vietnam has been showing its improvement with nine positions higher compared with 2016 regarding its ease in doing business in Vietnam (from 91st to 82nd) (WorldBankGroup, 2016)

At the same time, the country got placed at 60th out of 138 economies in the World Economic Forum's 2017 in its Global Competitiveness Report A country of almost

100 million individuals, with more than 60% are younger than 35, Vietnam is very much situated to supply a youthful, rich and quality workforce at competitive labor cost With the effort of creating a stable political environment, with good social and also the macro-economic environment, Vietnam has consistently enhanced its institutional structure and transparency to be steady line up with global standards The legislature of Vietnam has focused on making good conditions for any entity and organizations, as they execute their long-haul venture with strong contribution

to the global supply chain and value Vietnam is as of now concentrating on enhancing the business condition and expanding its aggressiveness, bolstered by the administration's responsibilities with effort to keep up the yearly normal GDP

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development rate of 6.5% to 7% over the time of 2016 – 2020 Vietnam hopes to end up a dynamic economy and an appealing speculation goal in ASEAN, and endeavors to incorporate into the local and worldwide esteem chains (WEF, 2017)

Three pillars which are technology, knowledge and people are believed to be the economy's next development motors to achieve towards a medium-to-high-income economy by reaching 2050 Vietnam is still in its golden-age period with dominants

in the demographic are youth with high capabilities in technology and learning would be a strong-backbone for the economy (PricewaterhouseCoopers, 2017)

1.1.2 Vietnam M&A market

According to Prof Dr Christopher Kummer, the president of the Institute of Mergers, Acquisitions and Alliance which based in Vienna, Austria - IMAA, Vietnam has showed its attractiveness by higher its positions in M&A area worldwide contrast with 2014 The Vietnamese M&A market marked its US$5.2 billion in total sum in 2015 and US$3 billion in the first two quarters of 2016, increase 28% year-on-year

There had been more and more foreign investors which have anticipated in the deal from US$30 million to mega-deals around US$1 billion (IMAA, 2016) Thus, John Ditty, Managing Partner and Head of Deal Advisory at KPMG Vietnam in the presentation at Vietnam M&A Forum 2016, believed in the bright prospectus of the economy, and the stronger inflow of M&A to the market as the result of Vietnam‘s wider economic development and global integration As Vietnam joins the merely

to the global supply chain through FTAs, global and regional players are progressively anxious to take advantage of this transition to accelerate their business

to capture this opportunity The quickest method to do as such is by means of M&As with Vietnamese companies As of late, Korean, Singaporean, and Japanese companies have been extremely dynamic in directing M&As inflow to Vietnamese entities These days, as more Japanese companies search for development openings abroad, the market likewise witness offers from medium-sized Japanese firms, other

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than the typical combinations Other than bunches of expected combinations originates from FTAs, Vietnam has additionally made intense lawful upgrades to welcome the foreign investment flow Notable examples include the amendment of Investment Law, Enterprise Law, and Real Estate Law Foreign institutions have demonstrated distinct fascination, yet it is similarly critical that Vietnam has an adequate number of great items for worldwide M&As (Ditty, 2016)

1.1.3 M&A Inflow to Vietnam’s Retail market – A Thriving sector

(BBGV, 2017) Vietnam has been a promising business market not only domestic players but also regional retailers The country of 91.7 million residents in 2015, 34.8% of whom are in the working age of 20-39 which can be calculated to around 32.5 million individuals Moreover, the activation of different FTAs especially the AEC-ASEAN Economic Area, the Vietnam – EU would be a tipping point for retail market since the players would not can capture the borderless market The result from that, there are lots of movements from not only rich-cash-flow regional players but also from domestic players which aggressively promote M&A Examples respectively like a case of Vingroup for domestic player, or regional player like AEON the Japanese store chain retailer which acquired 30% and 49% of local Fivimart and Citimart

The strong interest investment inflow to Vietnam‘s retail market through M&A can

be easy to interpret since it matches well with the world trend, traditional mortar retailers are grappling with serious challenges A study from BCG (Friedman, 2016) which is a worldwide consultation firm showed that these include sluggish economic growth in the countries where they have a presence, along with relentless pressure from online rivals as well as big-box and innovative specialty retailers There is an increasing number of companies are taking advantage of cash-rich balance sheets and a reviving market to drive growth through acquisitions and

brick-and-to capture revenue and cost synergies

For the period of three years till 2016, the global retail sector has seen more than

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150 M&A deals greater than $250 million in value—a 45% increase over the previous three years However, the retail sector has unique characteristics that make M&A particularly challenging Due to owe to lease obligations, store footprints cannot be changed quickly Supply chains have taken on international proportions Each company has its own pricing philosophy and models

However, like other M&A deals in other industries, snapping up companies is not enough to overcome those challenges and achieve the hoped-for growth Therefore, the studies on deal-evaluation whether the specific M&A deal is a value creation to shareholders or not makes the strong motivation for not academic researchers but also practioners like M&A deals‘ makers

The analysis with aligned methodology in different time-horizon frame might differ depend on the scope of the researcher (Julio, N M., and Marta, S G, 2018)

However, due to different reasons especially regarding the time-horizon of the deal

to evaluate long-term value creation, the researcher would only examine market responses to and M&A announcements

The research from (Konigs, A & Schiereck, D , 2006) emphasize that the study on one-specific industry would pose deeper insight into the value drivers and success factors of M&As

1.2 Research Motivation

Although M&A topic is common in Vietnam, M&A in retail sector is newly a trend This thriving trend is well perceived by investors since the huge market size with full of opportunities In additionally, there are limited researches study on the bidding companies in term of both domestic and cross-border deals There is no paper solely study about the M&A announcement and stock price effect for the deals with target is Vietnam There are several rare papers study within Asia Pacific

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Although this study has some limits since it focuses on only short-time evaluation (investors‘ reaction, effect on bidders‘ stock price), a comprehensive analysis on the wealth gains for the company‘s shareholders is still the gap

1.3 Research Questions

The inspiration introduced above are the principal centers for this proposition, and it

is the desire to direct the investigation in accordance with previous academic proof

in the field of M&A Therefore, this paper will focus on M&A deals in retail-store chain which target to Vietnam, profitability from a quantitative perspective by examining the cumulative abnormal stock returns to shareholders in the period surrounding the announcement date using the event study methodology in a short-term window to see whether the findings of developed capital market, and also regional market are still applicable to Vietnam M&A data in specific sector The following research question will be investigated:

Do M&A announcement in the store-chain based targeting to Vietnam create value for shareholders of respective bidding companies in the short-term window?

In order to have a boarder and solid analysis, the following sub-question would be examined as connected directly with the main research question:

(1) What are the effects of M&A announcement to the shareholders‘ gain?

(2) What are the differences in market reaction among different geographical acquirers?

(3) What are the differences in term of M&A types? (Horizontal M&A, and Diversified)

1.4 Research Objectives

Followed by the research objectives that have been mentioned, there are objectives which need to be fulfilled in this paper

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o Announcement effects for the shareholders of acquirers‘ companies

o Potential differences in market reaction among different geographical acquirers‘ companies (between domestic and cross-border M&A deals)

o Potential differences in market reaction toward the type of M&A (horizontal M&A, and Diversified)

The research would step by step, presenting and analyzing the previous researches, and then compare and contrast with the empirical result tested in Vietnam market in order to have a solid view about the market performance or so call shareholders‘ reaction toward the deal in this specific industry

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CHAPTER 2: LITERATURE REVIEW

In this chapter, the related definition and also previous paper related to a topic of the thesis will be reviewed and analyzed

2.1 Mergers and Acquisitions

Mergers and acquisitions (M&A) has always been one of the most crucial strategic tool which is widely used to achieve specific business objectives (Sudarsanam, 2003)

Merger and acquisitions takes place when there is a combination of two legal entities‗ assets and liabilities Acquisition generally means a larger company absorbing a smaller company, with the smaller company either becoming a subsidiary of the larger company, or with the smaller company combined into the larger company, hence losing its identity, and larger company will take control of smaller company‗s assets and liabilities Merger is generally used to reflect consolidation of two companies on an equal status basis Mergers and acquisitions are generally being used interchangeably and abbreviated as M&A in business world This is because mergers and acquisitions basically lead to the same outcome whereby two entities become one entities (Weber, 2013)

(Zentes, J., Morschett, D., and Scharamm-Klein, H., 2017) Organizations additionally have the choice of outside development, that is, to grow by getting assets from different organizations Extension through mergers and acquisitions (M&A) includes the union or buying of existing retail organizations or retail outlets

In a merger, two organizations are consolidated and no less than one of them loses its legitimate autonomy In a securing, one organization gets a greater part of enthusiasm for another or assumes control over specific resources (stores) of another organization The term securing is regularly utilized confined to a full takeover The legitimate freedom of the obtained organization can stay flawless M&A have assumed a noteworthy part in basic changes in the retailing segment in

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the course of the most recent decades and constitute an entrenched development instrument M&A permit fast extension by beating the bottleneck made by the trouble of building up and creating satisfactory retail stores, which can take a long time from the site determination to at last opening a store Inside a brief timeframe,

a procurement makes a whole heap of assets accessible to an organization Particularly when first mover favorable circumstances are sought after in another market, this can be a significant achievement factor

Obtaining by and large means a bigger organization retaining a little organization, with the littler organization either turning into a backup of the bigger organization,

or with the littler organization joined into the bigger organization, henceforth losing its character, and bigger organization will take control of little organization's advantages and liabilities A merger is, for the most part, used to reflect a combination of two organizations on an equivalent status premise Mergers and acquisitions are by and large being utilized conversely and shortened as M&A in the business world This is on account of mergers and acquisitions essentially prompt a similar result whereby two substances end up one element (Anderson, H., Havila,

V & Fredrik Nilsson, 2013)

M&A can be sorted into two types congeneric M&A and conglomerate M&A A congeneric M&A can be classified down to horizontal M&A and vertical M&A

Horizontal M&A takes place when the two entities which are going to be the alliances are within industry, and in some cases, they are competitors (Chen, C & Findlay, C , 2003) The main drivers behind this movement is horizontal M&A are aimed to achieve the operation optimization and growth strategy by cost saving, increase market presence and join a new market segment

Vertical M&A happens when the acquirer and company being acquired are having business relationships of upstream supplier and downstream buyer in the value chain (Chen, C & Findlay, C , 2003) The motives behind a vertical M&A will

2.2 Motive of Mergers and Acquisitions

There are lots of research papers have discussed about the motives behind the aggressive M&A movement of lots of companies worldwide (Giddy, 2009) showed that the dominant rationale used to explain M&A activity is that acquiring firms seek improved motives is considered to improve financial performance From different discussions in papers (Fidrmuc, J P & Xia, C., 2017), (Giddy, 2009), and (Motis, 2007) the researcher summarize following motives are considered to improve financial performance:

 Synergy: This refers to the fact that the fixed costs by removing combined company can often reduce its duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins

 Increased Revenue or Market Share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices

 Economy of scale: For example, managerial economies increased opportunity of managerial specialization Another example is purchasing economies due to increased order size and associated bulk-buying discounts

 Taxation: A profitable company can buy a loss maker to use the target's loss

as their advantage by reducing their tax liability In the United States and many other countries, rules are in place to limit the ability of profitable companies to

 Resource transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources

Since the customer base of the acquired retail company can often be preserved, market share is gained quickly After an acquisition, either the integration process includes a change in the brand name of the outlets, or the original retail brand of the acquired retail outlets is retained The latter is often the case, when the acquisition is used to expand into other retail sectors or formats The acquired company‘s existing resources management expertise, personnel, sites, etc focus on their established field of businesses and an objective also often pursued with an acquisition is that of exploiting the know-how and dedicated assets of the acquired company However, integration costs following an acquisition can be high Acquisition is believed a very fast growth strategy when adequate take over objects are available, but the associated risk is substantially higher than with organic growth (Giddy, 2009)

2.3 M&A announcement and Stock-Price Movement

2.3.1 Bidding companies’ shareholders

Numerous studies have estimated the effects of M&A on stock prices of acquirer and target firms around the time of announcement of an acquisition using daily stock prices Evidence indicates that target shareholder earns significantly positive

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abnormal returns in the days around an M&A announcements (Dodd, P & Ruback,

R , 1977) analyzed abnormal returns around the time of a takeover announcement and found that both the target and bidding firms‘ shareholders earned positive and significant gains from a successful takeover (Asquith, P & Kim, E., H., 1982) examined returns to stock holders of target firms around the date of the initial announcement or completion of a merger They concluded that the stockholders of target firms gained, while those of bidding firms did not Jensen and Ruback (1983) reviewed 13 studies on the abnormal returns around takeover announcements They found that the average excess returns to target firms‘ stockholders are of 30% and 20% for the successful tender offers and mergers, respectively; while bidding firms‘ stockholders gained an average of 4% around tender offers but no abnormal return around the merger Frank et al (1991), however, found no evidence to support significant abnormal returns of acquiring firms over a three-year period after the bid date

Agrawal et al (1992) concluded that bidding firms lost from the acquisitions over several years but Ruback (1977), Kummer and Hoffmeister (1978) and Dodd (1980) indicated that bidding firms gained from the acquisitions Chang (1998) examined bidder returns at the announcement of a takeover proposal when target firms were privately held He indicated that bidders experienced no abnormal return in cash offers but a positive abnormal return in stock offers The monitoring activities and information asymmetries were reasons for a positive wealth effect The study from (Martynova and Renneboog 2011) presented that majority of European takeover deals are expected to generate synergy value: they trigger substantial share price increases at the announcement, most of which are captured by the target firm's shareholders The researchers found that large announcement effects (of 9.13%) for the target firms compared to a (statistically significant) announcement effect of merely 0.53% for the bidding firms

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The result from (Konigs, A & Schiereck, D , 2006) also posed the similar result where the paper showed significantly positive M&A announcement effects for shareholders of both luxury targets and acquirers in European countries However, there would be no significant differences in the announcement returns between domestic and cross-border luxury transactions—indicating

The study for Asia-Pacific region showed different way around The paper from (Shah and Arora 2014) showed that bidder firms do not show statistically significant CAAR across all the event windows

Who gained and who lost in the M&A game? The results are somewhat mixed Since this paper is aimed to test shareholders‘ short-term gain, the experience abnormal returns around M&A announcement periods is to test the short-term gain, thus propose the following hypothesis:

Hypothesis: The cumulative abnormal returns (CAR) of the bidding firms

surrounding the announcement period is significantly negative

It hopes that the results will provide important implications to all those involved in the M&A game in specific industry in emerging market like Vietnam

2.3.2 Domestic vs Cross-border M&A

The number of firms engaged in merging with or acquiring companies outside their home country has continued to increase in the 21st century, to the point that it has become a major strategic tool for corporate growth (Delios & Beamish, 2004) Driving forces behind cross-border M&A, besides growth, are imperfections in product markets (Caves, 1971), imperfections and asymmetries in capital markets (Chan et al., 1992, Cooke & Author: 1988), differences in taxation (Weston et al., 2001), and to capture rents resulting from market inefficiencies (Serveas & Zenner., 1994)

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The theory of market imperfections and failures suggests that buyers will recognize profitable opportunities to take advantage of cheap labor, latent consumer demand, deregulations, trade, and country integration of capital and product markets into global markets Asymmetries in capital markets allow firms to exploit favorable exchange rates movements as variations in exchange rates can make one country‘s firm cheaper or more expensive to buyers from another country For example, Froot and Stein (1991) examined the relationship between exchange rate and foreign direct investments (FDI) and found that the relative wealth of countries because of strong currencies have a systematic effect on FDI

A firm‘s decision to make acquisitions cross-border is based on the theory that if the firm poses a resource or a unique advantage specific to the firm, then it provides the firm with the competitive edge required to undertake and sustain FDI activity The sources of such advantages include intangible assets, technology, management skills, and common governance that arise from the organization of ownership advantage with complementary assets that could lead to economies of scale and scope (Cartwright & Cooper, 1993) Alternatively, cross- border M&A provide opportunities to obtain and internalize valuable and unique resources such as marketing skills, production skills, patens etc that complement and strengthen a firm‘s own resource base The complications of cross-border M&A from the bidder‘s perspective is liability of foreignness like lack of country and firm specific knowledge of the foreign target firm that potentially would lead to unsuccessful acquisitions and wrong valuation of foreign targets especially in the situations where the foreign target has high levels of intangible assets (Reuer et al., 2004) The result of information asymmetry would be greater acquisitions costs and bid premiums that would benefit foreign target shareholders in the short term, but lead

to zero or negative shareholder wealth effects for bidders (Datta & Puia, 1995)

A number of studies have examined the wealth impact of shareholders involved cross-border acquisitions Doukas et al (1988) presented evidence on the effect of

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international acquisitions on stock prices of 301 US acquirers engaged in M&A activity for the period 1973-19 Moeller & Schlingemann (2005) found in a comparison of UK and US acquirer, domestic announcements generating more wealth than cross- border announcements Likewise, Campa & Hernando (2004) reached a similar conclusion for bidders in a sample of 262 European M&A announcements over the period 1998-2000, while targets gained substantially more from cross-border mergers

This overview illustrates that there are no clear empirical results confirming the shareholder wealth effects of the bidding firm due to domestic or cross-border takeover announcements, whereas target shareholders seems to gain in both domestic and cross-border M&A, however it is expected that target‘s shareholder gain is higher for cross-border announcements

2.3.3 Within and diversification M&A

The final hypothesis deals with the relatedness between the bidder and the target; a deal is considered a related or focus-oriented strategy if the bidder and the target are from the same industry All other M&A are classified as unrelated or diversification strategies (Morgan et al: 2004 based on relatedness is important because of the relative high volume of European M&A transactions motivated in part by a theory

of need to focus or diversify Diversification may be explained in terms of different perspectives (economic, strategy-based, finance theoretic) that has already been discussed However, theory also suggests that diversification may create value as a result of increase market power i.e the ability to affect the prices of goods hence hold down entrants and current single business rivals in the market (Pindyck & Rubinfeld, 2005) This could be achieved through mutual forbearance, cross-subsidizing, and reciprocal buying strategies that a single- business competitor will not enjoy and may be driven out of the market (Chevalier: 2004) The problem is that a curvilinear relationship seems to exist between the extent of diversification and market power which suggests that as diversification increases, the firm initially

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enjoy greater market power, but beyond a certain level of diversification, market power starts to decrease (Palich, et al, 2000) Likewise, empirical evidence on market power of conglomerates is mixed at its best (Sundarsanam, 2003) Thus there is not much support of the market power proposition in the discussion of focus versus diversification strategies Secondly, advocates of diversification such as Williamson (1975) and Stein (1997) argue that in the case of capital market failure diversified firms can benefit from the creation of an internal capital market as the cash flow generated internally can be pooled and may allow a more efficient capital allocation of risk capital However, because of the greater diversity and complexity

of diversified firms and a lack of control to monitor and evaluate a firm‘s investment decisions, opponents argue that this reduce the attractiveness of internal capital markets relative to external markets (Stulz, 1990, Matsusaka & Nanda, 1997; Rajan et al, 2000) Also, because investors require more information to value diversified compared to focused firms, but in general are not provided more information by the diversified firms, asymmetry of information arises that might cause diversified firms to be traded at a discount relative to focused firms (Scharfstein & Stein, 2000) Thus, unrelated diversification is inefficient and a result of agency costs that will not benefit shareholders of the firm

Empirical evidence on the stock market‘s reaction to focused versus diversification strategies is scarce Morck et al (1990) compared abnormal return to focus-oriented deals and diversification US deals during the 1975-1987 based on the SIC code categorization described above The authors found no significant difference between the abnormal return in focus-oriented deals (within the same two-digit industry) and diversification deals (outside the two-digit industry) to target and acquirers around the M&A announcement On the contrary, Sicherman and Pettway (1987) reported in a sample of 147 US M&A announcements, that related firms enhances the shareholder wealth of acquiring firms whereas the opposite is true for unrelated firms The difference between the two is significant

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2.3.4 Other determinants might affect the stock price

Aside from the major determinants like form of payment, the price movement also change accordingly with the other determinants High price is often cited in communications between managements and shareholders about pending mergers or acquisitions It is also cited by the media as a simple yardstick with which to put the bid price in context

An important takeaway from these anecdotes is that reference points may be salient

to a variety of agents involved in a merger transaction—advisors, boards, investors and financiers of both the bidder and the target, and the media (which is important

to the extent that it helps to inform and shape the views of smaller investors) It is precisely because reference point prices can affect so many stakeholders in a given transaction that we focus the empirical work on documenting the effects of reference point prices on specific merger outcomes In other words, the odds of success in our empirical work increases from the numerous overlapping and reinforcing predictions noted above At the same time this makes it difficult to provide a full attribution of the results to particular categories of agents, psychological mechanisms, and negotiating strategies (Asquith, P & Kim, E., H., 1982)

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CHAPTER 3: METHODOLOGY

This third chapter present the methodology of the research Based on the research questions that need to be solved regarding the bidders‘ shareholders‘ wealth gain in short-term

 Accounting studies Estimating returns from reported financial statements provides a credible indirect measure of economic value creation Beside the possible incomparability of data for different years, companies and countries important downsides of these studies are a backward-looking perspective and ignoring the value of intangible assets

 Surveys of managers Insights into value creation that may not be known in the stock market are strength of studies that present a sample of executives with a standardized questionnaire At the same time respective methodology characterized with a necessity to recall historical results and a low rate of participation makes this research approach vulnerable to criticism of generalizability

 Clinical studies Case studies are not suitable to hypothesis testing due to

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small number of observations However, an inductive research with objective and in-depth information often induces new insights and unveils new patterns and behaviours

This research is focused on the effect of M&A announcement on the stock price of bidding companies Therefore, the event-study would be employed to access the performance of the company in the certain point-of-time

The empirical analysis is based on the event study methodology originally introduced by Fama et al (1969) The event of interest is defined as the announcement of any M&A activity involving at least company Data on returns on individual equities and market indices is extracted from Data-stream The market portfolio selection takes the geographical distribution of the firms of interest into account: In this analysis, the individual stock price performance is measured in comparison to the most appropriate principal local index Information on the most appropriate principal local market index can be recalled from Datastream This concept of using individual local market indices also refers to the market portfolio selection performed by Maede and Salkin (2000, p 263) A risk adjusted market model approach is employed A detailed description of the methodology can be found in Brown/Warner (1980, p 208), MacKinley (1997, pp 18-21) or Cable and Holland (1999, p 333)

3.2 Hypothesis Development

Sekaran (2003) has found that a hypothesis could be defined as logically conjectured relationship between two or more variables express in the form of a testable statement The relationships are conjectured on the basic of the network of associations established in the theoretical framework formulated for the research study Hypothesis as known as H1 shows the relationship between CAR and shareholders‘ gain

Alternative hypotheses: Hn # H0