Research question and motivation
The field of Mergers and Acquisitions (M&As) has been thoroughly examined in the previous literature. However, cross-border acquisitions are a promising area for future research, because of the globalized era that we live on. During the fifth merger wave, which was during the decade of 1990, cross-border M&As increased dramatically (Shimizu et al., 2004). Cross-border acquisitions can be used from firms in order to gain access to international markets and expand their productivity (Shimizu et al., 2004). However, one of the main factors that concern companies, when they perform a merger or acquisition, is the method of payment. It is proven, from prior research, that the method of payment matters and most of the times it determines the returns of the bidder or the target firm during an M&A activity. There are three types of payment: cash, common stock, or a mixture of both. Each of them has its own implications on the announcement of a merger. Stock-financed acquisitions are commonly perceived to have a negative impact on the stock price of the acquiring firm. As Myers and Majluf (1984) state in their paper, this is due to adverse selection problem, where companies only issue equity when their stock is overvalued, followed by a negative reaction of the market. This theory is consistent with the findings of Travlos (1987), who concludes in his paper that stock-financed acquisitions convey information about the overvaluation of the bidder firm. However, a more recent paper from Golubov, Petmezas and Travlos (2015), which examines the impact of the method of payment in US firms by following a different approach and distinguishing the stock-financed acquisition in two different components: the takeover and the equity issue, finds no value distraction from this method of payment. Additionally, the same study was conducted for cross-border acquisitions in Canadian acquires by Dutta, Saadi, PengCheng Zhu (2012) and concluded to a positive effect for stock-financed acquisitions. Thus, it would be an interesting subject to examine the impact on European acquirers, since European firms are known to have more concentrated ownership and as mentioned in Faccio and Lang (2005) paper, when there is large concentration of ownership, cash as a method of payment is preferred due to corporate control incentives.
From all the above mentioned, the following research question emerges:
Do stock-financed cross-border acquisitions destroy value? A study on European cross-border mergers and acquisitions
To the best of my knowledge, there is no similar paper examining the impact of the method of payment of cross-border acquisitions by European acquirers. Most of the studies have been conducted in the US and some of them in Canada and UK. Additionally, many studies have been conducted on the determinants of the payment method and not on the impact on the stock price. Academically it will be interesting to examine if the theories about the issuance of equity are consistent when firms acquire with stock and practically it will be informative for European firms that perform cross-border acquisitions. Our results can be compared with the finding of Golubov, Petmezas and Travlos (2015), on US firms, although they are using a different approach in their paper. An additional paper that could be comparable to the results of the thesis is the already mentioned paper by Dutta, Saadi, PengCheng Zhu (2012), which examines Canadian firms.
Conceptual Framework and Variables
During this section, I explain the main hypotheses that the research will be based on.
Hypothesis 1: There is a negative market reaction on the stock of the acquirer when a stock-financed acquisition is performed
Hypothesis 2: The method of payment will not have any impact on the long-term stock performance of the acquirer
Hypothesis 3: Acquisitions over 50% of the target company have a more negative effect when they are stock-financed
Hypothesis 4: Firm-specific characteristics or geographic distances play a role in the market reaction
Stock returns (dependent variable):
Stock returns will be used in order to find the abnormal returns (AR) and the cumulative abnormal return (CAR) during the event window.
Buy and Hold abnormal returns (dependent variable):
This method will be used in order to determine the long-term stock profitability of the acquirer, as it was used in the paper of Dutta, Saadi, PengCheng Zhu (2012).
Method of payment (independent variable):
The method of payment will be probably a dummy variable, depending if it is cash, stock or both and will be the independent variable to observe its relationship with the CAR.
Percentage of ownership (independent variable):
Another dummy variable depending on the percentage of ownership and along with the method of payment will examine the impact on CAR.
Firm size, market capitalization, market to book ratio (independent variables):
These are firm-specific variables that will assist us in order to distinguish the effect on different types of firms.
Geographic distance (independent variable):
This variable will be measured in kilometers between the capitals of the two countries, following the procedure of Dutta, Saadi, PengCheng Zhu (2012) paper.
Data and Methodology
The data on M&A deals needed for this research will be obtained by the database of Thomson one and Zephyr, which are the most common databases used in the relevant literature. Additionally, the stock returns of each firm will be obtained by DataStream.
The methodology that will be used in order to examine the hypotheses will be in line with the one used in Dutta, Saadi, PengCheng Zhu (2012) paper. A first OLS regression, using the market model will be performed to determine the abnormal returns and the CARs. Afterwards, a panel regression will be used with several dummy variables mentioned above and as the CAR obtained before as a dependent variable in order to find the effect of the method of payment to the cumulative abnormal returns of the firm. Additionally, another regression with control variables will be performed in order to observe this effect on different firm or geographic characteristics. Finally, to determine the long-term stock return, a buy and hold strategy will be used in line with the article mentioned.