Norwegian School of Economics Bergen, Fall 2016 THE WEALTH EFFECTS OF M&A IN EMERGING MARKETS An empirical study of value creation and value distribition, and new evidence on the relationship between corruption and target pre-annoucement stock price runup AUTHORS: THESIS ADVISOR: EIRIK SKARPÅS PROFESSOR, KARIN S. THORBURN DAG STENSENG Master thesis in Master of Science in Economics and Business Administration – Major in Financial economics NORWEGIAN SCHOOL OF ECONOMICS This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work. I I ABSTRACT The takeover literature appears to lack comprehensive studies on the shareholder wealth effects of mergers and acquisitions (M&A) in emerging markets (EMs). In this thesis, using a sample consisting of 542 initial takeover bids originating from 21 emerging economies, we provide a unified analysis of the value creation in M&A and the distribution of value between target- and bidder firms. Further, we examine the differences in value creation and value distribution between EMs and the United States (US) by including a control sample consisting of 2 379 US initial takeover bids. To measure value creation, we calculate both the capitalization- weighted combined cumulative abnormal returns surrounding the bid announcement, and the combined dollar returns per dollar spent on takeovers. To measure the value distribution, we calculate the difference in dollar returns received by the target and bidder, normalized by their combined pre-merger market capitalization, as well as the fraction of combined dollar returns received by the target. When analyzing the differences between EMs and the US, we control for commonly accepted deal-, firm-, and country characteristics. We find that while premiums received by targets are significantly lower in EMs than in the US, there is no significant difference in value creation. Further, EM targets receive a significantly smaller share of the value creation than their US counterparts. Hence, our results suggest that bargaining power is lower for EM targets. In addition, we present evidence indicating a positive relationship between the degree of corruption and target pre-announcement stock price runup. II III FOREWORD This master thesis was written as part of our Master of Science degree in Economics and Business Administration at the Norwegian School of Economics (NHH). We have specialized in Financial Economics and have spent this fall investigating the shareholder wealth effects of mergers and acquisitions in emerging markets. When searching for a thesis topic in August, we discovered that the existing research on the wealth effects of mergers and acquisitions in emerging markets was scarce. We therefore set out to build on the existing research and conduct a comprehensive analysis to hopefully fill a gap in the literature. This process has allowed us to apply the knowledge we have acquired during our studies in order to solve complex problems. Overall, working with this thesis has been a rewarding experience and a suitable conclusion to our time at NHH. We would like to thank our thesis advisor, Professor Karin S. Thorburn, for her invaluable counseling. Her support and input throughout the process have been crucial and given us the motivation necessary to complete this thesis. The views, findings, and conclusions in this thesis are solely those of the authors. Bergen, December 2016 Eirik Skarpås Dag Stenseng IV TABLE OF CONTENTS 1 INTRODUCTION ........................................................................................................................................ 1 2 THEORETICAL ASPECTS ....................................................................................................................... 5 2.1 M&A: DEFINITIONS, MOTIVES, AND DETERMINANTS ............................................................................. 5 2.1.1 Definition of M&A ........................................................................................................................... 5 2.1.2 Motives for M&A ............................................................................................................................. 5 2.1.3 Determinants of the outcome and terms of M&A ............................................................................ 7 2.2 EVALUATING M&A PERFORMANCE ........................................................................................................ 9 2.3 THE SHAREHOLDER WEALTH EFFECTS OF M&A .................................................................................. 10 2.3.1 Evidence from the US .................................................................................................................... 10 2.3.2 Evidence from emerging markets .................................................................................................. 10 2.3.3 Justifying the differences ............................................................................................................... 11 2.4 SYNERGISTIC GAINS AND THEIR DIVISION ............................................................................................ 12 2.4.1 Value creation ............................................................................................................................... 12 2.4.2 Value distribution .......................................................................................................................... 13 2.4.3 Premium ........................................................................................................................................ 14 3 HYPOTHESIS ............................................................................................................................................ 15 H1: PREMIUM ............................................................................................................................................... 15 H2: VALUE CREATION .................................................................................................................................. 16 H3: VALUE DISTRIBUTION ........................................................................................................................... 18 4 DATA .......................................................................................................................................................... 19 4.1 DATA SOURCES ..................................................................................................................................... 19 4.2 COUNTRIES AND SAMPLE PERIOD .......................................................................................................... 19 4.3 SAMPLE SELECTION CRITERIA ............................................................................................................... 21 4.4 DATA RELIABILITY IN SDC ................................................................................................................... 23 4.5 SAMPLE VARIABLES .............................................................................................................................. 23 4.6 SUMMARY STATISTICS........................................................................................................................... 26 5 METHODOLOGY ..................................................................................................................................... 30 5.1 THE EVENT STUDY LITERATURE ........................................................................................................... 30 5.2 EVENT OF INTEREST, EVENT WINDOW AND ESTIMATION WINDOW ...................................................... 30 5.3 CHOICE OF MODEL FOR ESTIMATING NORMAL RETURNS ...................................................................... 32 5.4 CALCULATING ABNORMAL RETURNS .................................................................................................... 34 5.5 SIGNIFICANCE TESTS OF ABNORMAL RETURNS ..................................................................................... 36 V 6 MEASURES OF WEALTH EFFECTS ................................................................................................... 38 6.1 VARIABLE DESCRIPTIONS ...................................................................................................................... 38 6.2 DESCRIPTIVE ANALYSIS OF THE WEALTH EFFECT MEASURES .............................................................. 40 7 EMPIRICAL ANALYSIS AND RESULTS ............................................................................................. 45 7.1 PREMIUM ............................................................................................................................................... 45 7.2 VALUE CREATION.................................................................................................................................. 48 7.3 VALUE DISTRIBUTION ........................................................................................................................... 56 7.4 ROBUSTNESS ......................................................................................................................................... 57 8 CONCLUSION ..........................................................................................................................................