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Value Creation Through Mergers and Acquisitions Empirical Evidence from Acquirers in a Nordic Context

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Value Creation Through Mergers and Acquisitions Empirical Evidence from Acquirers in a Nordic Context Value creation through mergers and acquisitions Empirical evidence from acquirers in a Nordic context Master’s thesis Martin Andersen Rasmus Davidsen Rejnhardt Student number: 58059 Student number: 82822 Cand.merc.FIR Cand.merc.FSM Frederiksberg, 15 May 2018 Supervisor: Christian Aarosin Department of Accounting and Auditing No. of standard pages (characters): 120 pages (272,283/273,000) Copenhagen Business School Abstract In this thesis, we investigate whether acquiring companies within Denmark, Finland, Norway and Sweden create short-term shareholder value when announcing acquisitions. Firstly, we discuss what value creation is and how it should be measured. After comparing a multitude of income and value metrics, we conclude that abnormal returns are the relevant definition and measure. We next identify and test a series of deal, company and other economic drivers behind value creation. The seven drivers we investigate are: 1) the effects from companies with high cash flows; 2) acquisitions within merger waves; 3) the effect from previous multiple acquisitions within a short time span; 4) effects from the use of financial advisers; 5) cross-border acquisitions; 6) the effect from payment methods; and 7) strategic rationales and motives behind acquisitions. We compile a unique dataset from several reputable data sources using a strict sampling procedure, resulting in a final sample of 627 acquisition announcements from 1995 to the beginning of 2018. The sample is analysed using two methods. Firstly, we use an event study as our primary method. In the event study, we observe and make corrections in the data to address problems related to e.g. thin trading and clustering. Namely, we employ trade-to-trade returns and introduce multiple test statistics. Secondly, we use regression analysis to check robustness and further analyse the aforementioned drivers. Conclusively, we present significant evidence that Nordic acquirers create short-term shareholder value of 1.54% (cumulative average abnormal return in our main event period of interest). In relation to the drivers, we use our most significant results to present an M&A guideline, relevant for the industry and related professionals. In short, our results and interpretations suggest: 1) companies with excess cash and few investment opportunities to cautiously engage in acquisitions; 2) to generally employ financial advisers, but be selective in choosing between top-tier and non-top-tier advisers; 3) avoid equity settlement if bidder is highly valued; and 4) be cautious when announcing cost rationales, as these are negatively perceived by the market, and to further pursue diversifying acquisitions. 2 Contents 1 Introduction ....................................................................................................................................4 1.1 Problem statement ..................................................................................................................7 1.2 Delimitations ..........................................................................................................................7 1.3 Theoretical framework and literature review .........................................................................9 1.3.1 Wealth measurement and value creation in firms ......................................................9 1.3.2 Cash flow and investment opportunities .................................................................13 1.3.3 Merger waves ..........................................................................................................15 1.3.4 Frequent acquirers and acquisition experience ........................................................17 1.3.5 Effects from choice of financial adviser ..................................................................19 1.3.6 Cross-border acquisitions ........................................................................................21 1.3.7 Consideration type ...................................................................................................23 1.3.8 Strategic rationales ..................................................................................................25 2 Method and data ...........................................................................................................................29 2.1 Data description and sampling .............................................................................................29 2.1.1 Data sampling ..........................................................................................................29 2.1.2 Data description .......................................................................................................35 2.2 Event study ...........................................................................................................................42 2.2.1 Event studies and the efficient market hypothesis ...................................................42 2.2.2 Estimation period and event windows .....................................................................43 2.2.3 Abnormal return estimation .....................................................................................47 2.2.4 Thin trading .............................................................................................................49 2.2.5 Return aggregation ..................................................................................................51 2.2.6 Clustering ................................................................................................................53 2.2.7 Tests of significance ................................................................................................55 2.3 Regression analysis ..............................................................................................................58 2.3.1 Control variables .....................................................................................................59 3 Results and analysis......................................................................................................................64 3.1 Overall event study results ...................................................................................................64 3.2 Cash flow and investment opportunities ..............................................................................68 3.3 Merger waves .......................................................................................................................70 3.4 Frequent acquirers and acquisition experience .....................................................................74 3.5 Effects from choice of financial adviser ...............................................................................79 3.6 Cross-border acquisitions .....................................................................................................83 3.7 Consideration type ................................................................................................................87 3.8 Strategic rationales ...............................................................................................................91 4 Discussion ......................................................................................................................................97 4.1 Further research ..................................................................................................................101 5 Conclusion ...................................................................................................................................102 References ...........................................................................................................................................104 Appendices ..........................................................................................................................................110 3 1 Introduction The global market for mergers and acquisitions (M&A)1 has recorded a high activity the last five years where Europe accounts for approximately 30% of the activity. However, the global M&A market has experienced a declining trend in 2017, compared to previous years where 2015 stands as the peak year in terms of deal value (Mergermarket, 2018). In contrast, the Nordic M&A market experienced its second most active year in 2017. The total deal value for the Nordic region in 2017 was almost doubled, compared to 2016 increasing from EUR 59 billion to EUR 103 billion. This development was mainly driven by transactions across Nordic countries representing 57% of total deal value. For that reason, the Nordic region accounted for 12.5% of the total European M&A activity, exceeding the activity in both France and Italy, underlining the region’s essential representation on the European M&A market (Mergermarket, 2017). The 20-year historical Nordic M&A trend, measured in deal value, is illustrated below. Figure 1. Quarterly deal activity in the Nordic region measured in deal value (EURbn) from 1998 to 2017. Source: Own creation 107.7 103.2 81.9 77.8 68.9 69.7 62.3 59.1 52.4 47.8 51.4 50.7 44.4 44.1 44.7 43.4 44.4 31.8 31.1 13.5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 Q2 Q3 Q4 As indicated above, mergers and acquisitions are an essential part of the growth strategy discussion among corporates whether the rationales are concerning e.g. sales, cost or resource aspects. Furthermore, M&A activity has proven to be correlated with the stock market resulting
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