Location Strategies and Value Creation of International Mergers and Acquisitions E-Book
Ludivine Chalencon
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- Herausgeber: John Wiley & Sons
- Kategorie: Bildung
- Sprache: Englisch
- Veröffentlichungsjahr: 2017
This title enriches both areas of research, finance and international management to analyze the choice of location and value creation in mergers and acquisitions. Our research answers the following question: What are the determinants of the location and value creation in mergers and acquisitions?
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Table of Contents
Cover
Title
Copyright
Acknowledgments
General Introduction
I.1. General issue and research questions
I.2. Research methodology
I.3. Book structure
Part 1: Location and Performance of Mergers and Acquisitions
Introduction to Part 1
1 Characteristics and Location of Mergers and Acquisitions
1.1. Modes of conduct of mergers and acquisitions
1.2. International development by means of mergers and acquisitions
1.3. Conclusion
2 Analysis of the Performance of Mergers and Acquisitions
2.1. Theoretical perspectives
2.2. Performance of mergers and acquisitions
2.3. Conclusion
Conclusion to Part 1
Part 2: Methodology of the Empirical Study
Introduction to Part 2
3 Research Methodology
3.1. Methodological choices
3.2. Statistical analysis
3.3. Conclusion
4 Presentation of the Empirical Study
4.1. The constitution of the sample
4.2. Descriptive analysis of the sample
4.3. Conclusion
Conclusion to Part 2
Part 3: Location and Value Creation of Mergers and Acquisitions by French Acquirers
Introduction to Part 3
5 Determinants of Location of Mergers and Acquisitions
5.1. Geographic distance and economic growth
5.2. The quality of institutions and cultural differences
5.3. Conclusion
6 Determinants of Value Creation of Mergers and Acquisitions
6.1. Value creation and acquirer focus
6.2. Target focus and operation
6.3. Conclusion
Conclusion to Part 3
General Conclusion
Appendices
Appendix 1: Distribution of Acquirers by Business Sector (NAF Code Rev.2, INSEE)
Appendix 2: Parametric and Non-parametric Statistical Tests of Average Cumulative Abnormal Returns
Appendix 3: Parametric and Non-parametric Statistical Tests of Average Cumulative Abnormal Returns for Domestic Mergers and Acquisitions
Appendix 4: Parametric and Non-parametric Statistical Tests of Average Cumulative Abnormal Returns for International Mergers and Acquisitions
Appendix 5: Daily Average Cumulative Abnormal Returns (CAR) and the Location of the Target (Mature Countries Versus Emerging Countries)
Appendix 6: Parametric and Non-parametric Statistical Tests of Average Cumulative Abnormal Returns for Mergers and Acquisitions in Mature Countries
Appendix 7: Parametric and Non-parametric Statistical Tests of Average Cumulative Abnormal Returns for Mergers and Acquisitions in Emerging Countries
Appendix 8: Summary of the Research Model on the Days [–3; +3] Window
Bibliography
Index
End User License Agreement
List of Tables
1 Characteristics and Location of Mergers and Acquisitions
Table 1.1.
Twenty most active countries in terms of mergers and acquisitions
Table 1.2.
Geographic distribution of the number of international mergers and acquisitions (2003–2013)
Table 1.3.
Geographic distribution of the number of ex nihilo created subsidiaries (2003–2013)
Table 1.4.
Overview of the hypothesis on the determining factors of the location of mergers and acquisitions
2 Analysis of the Performance of Mergers and Acquisitions
Table 2.1.
Characteristics of the acquirer and value creation upon announcement of mergers and acquisitions. NS, non-significant; S, significant (at least 10%)
Table 2.2.
Target characteristics and value creation upon announcement of mergers and acquisitions. NS, non-significant; S, significant (at least 10%)
Table 2.3.
Characteristics of the operation and value creation upon announcement of the operation. NS, non-significant; S, significant (at least 10%)
Table 2.4.
Control variables and value creation of mergers and acquisitions upon announcement. NS, non-significant; S, significant (at least 10%)
Table 2.5.
Summary of the hypotheses about the determining factors of the value creation of the acquirer upon announcement of a merger and acquisition
3 Research Methodology
Table 3.1.
The research process
Table 3.2.
The errors and risks of a hypothesis test
4 Presentation of the Empirical Study
Table 4.1.
Synthetic overview of the sample selection process
Table 4.2.
Operations pertaining to the banking and insurance sector
Table 4.3.
Description of the variables quantifying the acquirer’s characteristics
Table 4.4.
Description of the variables quantifying the target’s characteristics
Table 4.5.
Description of the variables associated with the country of the target
Table 4.6.
Description of variables quantifying the characteristics of the operation
Table 4.7.
The correlation matrix
Table 4.8.
List of acquirers with the numbers of mergers and acquisitions they conducted between 2010 and 2012
Table 4.9.
Distribution of acquirers in the various business sectors
Table 4.10.
Indicators of the sizes of acquirers
Table 4.11.
Performance indicators of acquirers
Table 4.12.
Financial structure indicators
Table 4.13.
Year-by-year distribution of the number of domestic and international mergers and acquisitions
Table 4.14.
Country location of the targets
Table 4.15.
Sector distribution according to target location
Table 4.16.
Year-by-year distribution of the number of mergers and acquisitions in mature and emerging countries
Table 4.17.
Sector distribution of the number of mergers and acquisitions (mature vs. emerging countries)
Table 4.18.
Twenty most important mergers and acquisitions in terms of value
Table 4.19.
Value and percentage of acquisition of mergers and acquisitions
Table 4.20.
Distribution of the values of mergers and acquisitions according to the business sector
Table 4.21.
Characteristics of operations according to the location of targets
Table 4.22.
Geographic distance, economic growth, quality of institutions and cultural differences
Table 4.23.
List of acquirers who have communicated “clustered” announcements according to target location
Table 4.24.
Sector distribution of mergers and acquisitions announced in “clusters”
5 Determinants of Location of Mergers and Acquisitions
Table 5.1.
The influence of the control variables on the choice of forming mergers and acquisitions in emerging countries rather than in mature countries
Table 5.2.
The confusion matrix of the model (0): the control variables
Table 5.3.
The influence of geographic distance on the choice of forming mergers and acquisitions in emerging countries rather than in mature countries
Table 5.4.
The confusion matrix of the model (1): the geographic distance
Table 5.5.
The influence of economic growth on the choice of forming mergers and acquisitions in emerging countries rather than in mature countries
Table 5.6.
The confusion matrix of the model (2): economic growth
Table 5.7.
The influence of the quality of institutions on choosing to form mergers and acquisitions in emerging countries rather than in mature countries
Table 5.8.
The confusion matrix of the model (3): the quality of institutions
Table 5.9.
The influence of cultural differences on the choice of forming mergers and acquisitions in emerging countries rather than in mature countries
Table 5.10.
The confusion matrix of the model (4): cultural differences
Table 5.11.
Summary of the research model of the choice of conducting mergers and acquisitions in emerging countries rather than in mature countries
Table 5.12.
Results pertaining to the choice of conducting mergers and acquisitions in emerging countries rather than in mature countries
6 Determinants of Value Creation of Mergers and Acquisitions
Table 6.1.
The daily average cumulative abnormal returns (CAR)
Table 6.2.
The average cumulative abnormal returns (CAR) per business sector
Table 6.3.
Control variables and abnormal returns
Table 6.4.
Control variables: domestic versus international mergers and acquisitions
Table 6.5.
Control variables: mergers and acquisitions in mature countries versus emerging countries
Table 6.6.
Multiple regressions and control variables
Table 6.7.
Characteristics of acquirer and abnormal returns
Table 6.8.
Characteristics of acquirer: domestic versus international mergers and acquisitions
Table 6.9.
Characteristics of acquirer: mergers and acquisitions in mature countries versus emerging countries
Table 6.10.
Multiple regressions and characteristics of acquirers
Table 6.11.
Characteristics of the target and abnormal returns
Table 6.12.
Characteristics of the target: domestic versus international mergers and acquisitions
Table 6.13.
Characteristics of the target: mergers and acquisitions in mature countries versus emerging countries
Table 6.14.
Multiple regressions and characteristics of targets
Table 6.15.
The daily average cumulative abnormal returns (CAR) and the location of the target (domestic versus international)
Table 6.16.
The daily average cumulative abnormal returns (CAR) and the location of the target (mature countries versus emerging countries)
Table 6.17.
The average cumulative abnormal returns (CAR) by business sector: domestic versus international mergers and acquisitions ([–1;+3] days window)
Table 6.19.
Characteristics of the operation and abnormal returns
Table 6.20.
Characteristics of the operation: domestic versus international mergers and acquisitions
Table 6.21.
Characteristics of the operation: mergers and acquisitions in mature countries versus emerging countries
Table 6.22.
Multiple regressions and characteristics of the operation
Table 6.23.
The summary of the research model on the [–1;+3] days window
Table 6.24.
Synthesis of the hypotheses validation
List of Illustrations
General Introduction
Figure I.1.
Synthetic outline of research model
1 Characteristics and Location of Mergers and Acquisitions
Figure 1.1.
The motivations for mergers and acquisitions
Figure 1.2.
Global activity of mergers and acquisitions (1990–2013)
Figure 1.3.
The activity of mergers and acquisitions in the United States, United Kingdom and France (1990–2013)
Figure 1.4.
International mergers and acquisitions activity (1990–2013); (1) Turnover achieved by the acquired firm
Figure 1.5.
Mergers and acquisitions activity in mature and emerging countries (1990–2013). (1) Turnover achieved by the acquired firm.
Figure 1.6.
Classification of modes of entry into foreign markets
Figure 1.7.
Choice of mode of entry according to advantages owned by the company
Figure 1.8.
The dynamic configuration of OLI advantages
Figure 1.9.
Research model for the determining factors of mergers and acquisitions location
2 Analysis of the Performance of Mergers and Acquisitions
Figure 2.1.
The disclosure of information about listed firms
Figure 2.2.
The research model about the determining factors of value creation upon announcement of mergers and acquisitions
3 Research Methodology
Figure 3.1.
Elaborating the research object in a positivist approach
Figure 3.2.
Modes of reasoning and scientific knowledge
Figure 3.3.
Negative abnormal returns computation
4 Presentation of the Empirical Study
Figure 4.1.
Locations of mergers and acquisitions
Figure 4.2.
Number of mergers and acquisitions conducted each quarter in France and internationally
Figure 4.3.
Geographical distribution of the number of mergers and acquisitions
Figure 4.4.
Quarterly number of mergers and acquisitions conducted in mature and emerging countries
Figure 4.5.
Motivations expressed by acquirers upon announcement of mergers and acquisition according to their locations
Figure 4.6.
Distribution over geographical areas of the mergers and acquisitions of the subsample
5 Determinants of Location of Mergers and Acquisitions
Figure 5.1.
Summary of the research model pertaining to the determinants of location of mergers and acquisitions
6 Determinants of Value Creation of Mergers and Acquisitions
Figure 6.1.
The average cumulative abnormal returns (CAR)
Figure 6.2.
The average abnormal returns (CAR)
Figure 6.3.
The average cumulative abnormal returns (CAR): domestic versus international mergers and acquisitions
Figure 6.4.
The average cumulative abnormal returns (CAR): mergers and acquisitions in mature countries versus emerging countries
Figure 6.5.
The average abnormal returns (CAR): domestic versus international mergers and acquisitions
Figure 6.6.
The average abnormal returns (CAR): mergers and acquisitions in mature countries versus emerging countries
Figure 6.7.
The summary of the research model pertaining to the determinants of value creation upon announcement of mergers and acquisitions
Guide
Cover
Table of Contents
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Series Editor
Paul-Jacques Lehmann
Location Strategies and Value Creation of International Mergers and Acquisitions
Ludivine Chalençon
First published 2017 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc.
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address:
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© ISTE Ltd 2017
The rights of Ludivine Chalençon to be identified as the author of this work have been asserted by her in accordance with the Copyright, Designs and Patents Act 1988.
Library of Congress Control Number: 2016961402
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A CIP record for this book is available from the British Library
ISBN 978-1-78630-049-2
Acknowledgments
I wish to express my most sincere gratitude to, first and foremost, my PhD supervisors Professors Alain Marion and Ulrike Mayrhofer. They have been great guides, helping me progress along this doctoral process, which finds its accomplishment in this book. Their support, availability and goodwill have been fundamental for me to achieve this work.
I also wish to thank Professors Isabelle Martinez, Patrick Sentis and Philippe Very for their comments and advice during this research. I feel honored by the interest they have shown in my work.
My gratitude also goes to Professor Tao-Hsien Dolly King from the University of Charlotte (USA) as well as to Professors Diane-Gabrielle Tremblay, Jean-Yves Filbien and Diego Amaya from the University of Quebec (Canada) for welcoming me at their work place and advising me in the progress of my research.
I warmly thank all the professors and doctorate students of the Magellan Research Center of the IAE Lyon (France). Their comments and remarks guided me throughout the various stages of this work, from the onset of the research project to the successive choices that resulted in the publication of this work.
Last but not least, I heartfully thank my spouse, parents, family and friends who listened, probably more often than reasonable, to me telling them about my research. I wish to especially thank Anne-Joëlle, Caroline and Aurélien who spent long hours proofreading my chapters. Many thanks to you all.
General Introduction
“One needs two legs to walk. Globalization encourages us to search beyond our borders, but one also needs to strengthen one’s capacity at home, on one’s historical market sectors”.
Paul HERMELIN, Chief Executive Officer, Capgemini(Les Echos, April 5, 2011)
“Acquisitions constitute an essential axis of the profitability growth plan of Rexel and we will keep investing in emerging markets as well as in mature markets”.
Rudy PROVOOST, Chairman of the Board of Rexel(Activity Report, 2012, p. 16)
“Today, our ambition is to become a global leader, balancing emerging economies and mature economies, innovation potential and growth potential”.
Bruno LAFONT, Chief executive Officer of Lafarge(Les Echos, May 7, 2014)
These quotes from economic and finance journals highlight how important it is for the performance of companies to develop internationally, especially via means of mergers and acquisitions.
Mergers and acquisitions activity is characterized, timewise, by waves of increased activity. The last of such waves peaked in 2007 to recede with the economic crisis of 2008. To date, 2007 is the year during which the largest number of operations occurred, for a total sum of 4,130 billion dollars [THO 14]. Although the economic context can explain the relative slowdown of external growth operations of companies, their activity remains high and the public announcements of 2014 suggest a new wave may be forming. French companies are particularly active as they account for 4% of the total number and value of operations completed globally. They, therefore, reach the third rank, just after the American and British companies (ranking established on the basis of the information available in the databases of Securities Data Company (SDC) Platinium on Line, from 1990 to June 2014). During the first 6 months of 2014, the French market displayed a strong growth, registering operations that sum up to a value of 107.7 billion euros. This sum is four times greater than that of the first semester of 2013 (an article in Thomson Reuters, published on July 1, 2014).
Moreover, the study of merger and acquisition dynamics shows an increase in the number of operations involving different nationalities. For example, such operations haves increased by 53% in 2011 [CNU 14]. Furthermore, companies from emerging countries account for an increasing part in merger and acquisition activity. The fraction of operations completed in these countries shows a clear growth in volume, contrary to these in mature countries: from only 6% in 1990, they rose to 24% in 2011 and even to 26% in 2013 [CUN 14].
This significant recourse to external growth strategies can be explained by the fact that such strategies enable a company to meet various objectives in a limited amount of time [SLA 08]. The literature, however, often highlights the risks carried by such operations. Since they have multiple characteristics and motivations, they are very complex in a financial, strategic, as well as a human perspective. Most studies about the relevance of such acquisitions report a lowering of the performance of company or, at best, a stagnation after the merger and acquisition operation [AGR 92, DEV 09]. In the same vein, authors estimate that the rate of failure of such acquisitions can reach above 50% [VAZ 12]. However, these works also showed that, although the profitability of abnormal acquisitions is effectively low, null or even negative for the buyer, they are strongly positive for the target when the acquisition is announced [MOE 05].
Globalization created new opportunities as well as new constraints regarding the expansion of companies, as their location can be a source of competitive advantage [GOE 10]. Indeed, companies must adjust their investments with regard to the operation and be especially careful about the location of their activity [COL 11]. This can be explained by the evolution of the law, which makes international trade easier, as well as by the growing importance of emerging countries in the global economy. These mutations of the international economical context offer new perspectives for external growth strategies. For example, gaining access to foreign markets seems to be the most commonly expressed cause for merger and acquisition operations [GRA 11]. They indeed constitute an efficient mode of entry into foreign markets.
This novel economic context raises many questions about the merger–acquisition activity: Which are the criteria according to which a company chooses to complete a merger–acquisition operation abroad and especially in emerging countries? How good is the performance of national and international mergers and acquisitions? How do we evaluate it? International management researchers have been interested primarily in the strategical choices of modes of entry into foreign markets and in the location of investments of companies. Finance researchers, for their part, have mainly been interested in the motivation and value creation of such operations.
In the context of a global environment undergoing multiple transformations, the study of the internationalization of companies has generated the development of several new concepts. A research field has thus been created, which investigates the modes of entry that companies use for their international development. Mergers and acquisitions are one of the means they can use to penetrate foreign markets. It is the most committing as it usually bears irreversible characteristics. International mergers and acquisitions, therefore, signal a long-term strategy of location in territories foreign to the company. This high level of commitment in a foreign country involves high risks, but these risks are compensated by privileged access to local resources. Therefore, the risks and performance of internationalization strategies depend on the chosen mode of entry. This is why such decisions are considered as some of the most crucial for the international development of a company.
Location strategies are, therefore, considered together with the choice of the mode of entry [DUN 08a]. Company location is one of the three pillars of the eclectic development paradigm developed by Dunning [DUN 98]. His theoretical framework explains the choices of modes of entry into foreign markets along three advantages, the OLI: advantages specific to the company (0 – ownership advantages), location (L – location advantages) and internalization (I – internalization advantages). It, therefore, draws attention to the elements that must be taken into account in the process of internationalization of a company. The eclectic paradigm therefore not only considers the specifics of companies; it also encompasses the local characteristics of countries. On this basis, the mergers and acquisitions should combine the three advantages. Furthermore, in the revised version of the eclectic paradigm, Dunning and Lundan [DUN 08a] also integrate local institutions because they inevitably influence the activities of companies.
These developments led researchers to investigate the consequences of the variations between the country of the acquirer and that of the target, along all their dimensions: geographic distance, economic growth, quality of institutions and cultural differences [GOE 10, MAL 14].
The appetite of companies for international markets and especially for emerging countries seems to indicate that there are strong incentives for companies to take long-term positions in foreign countries by means of mergers and acquisitions. There is ample literature about the choices of modes of entries and internationalization of companies. But, as far as we know, little research has investigated internationalization while simultaneously considering the effects of the various dimensions of opportunities and constraints opened by foreign markets on the decision to accomplish a merger or acquisition in a mature or emerging country. This is the reason why this work first studies how the specifics of the target country influence the decision to conduct a merger and acquisition in a mature country or in an emerging one.
Since the question of the performance of mergers and acquisitions plays an essential role in the choice of an internationalization strategy, we chose to develop our research by studying this theme [AKD 11, MOE 05]. There is a review of the literature of works concerning mergers and acquisitions in the finance domain that highlights two main general issues: the internal as well as external reasons that lead the company to develop such operations, on the one hand, and the performance of such operations, on the other hand. Of course, these two issues are mutually dependent, as research works have shown that the performance of an operation depends on the intentions of the acquirer [HAS 91, HOB 10].
In order to explain these motivations, some research works start from the industrial economy [BAI 56, MAN 39]. They study the financial and economic environment to more precisely understand the determining factors of the decisions regarding the strategies of external growth. Mergers and acquisitions would, in that theory, develop more significantly when changes occur in the international environment. Companies would be encouraged to conduct mergers and acquisitions by technological innovations, the stock exchange context or regulatory changes [SUD 10]. The main motivations for mergers and acquisitions thus seem to arise from the will to increase market power or to build synergies [HOB 10]. Such strategies indeed base their rationale on the idea that the combined value of the companies is greater than the sum of the values of each individual company involved [ERE 12]. In parallel, the theory of agency and its extensions highlight the influence of managerial behavior on this process [JEN 76]. In this framework, recourse to mergers and acquisitions can be explained by opportunist behaviors of managers who attempt to take personal advantages from these operations [FUL 02] and by hubris issues, when managers overestimate their ability to create value out of a merger and acquisition [AKT 09, ROL 86]. Furthermore, the theory of free cash flows [JEN 86] points out that mergers and acquisitions can only be performed when the acquiring company owns a significant amount of liquid assets and plans very little investments. In such a situation, they allocate the cash flow to buying overestimated or strategically irrelevant companies [OUI 13].
A significant part of the literature focuses on the performance of mergers and acquisitions. This concept of evaluation refers to several notions; it has several different meanings. As soon as they are announced, these operations can be evaluated in terms of their future performance. They can also be evaluated on a longer time period, starting from their effective completion. The most commonly used criteria are the stock exchange performance measures and the measures of economical and organizational performance on a short or long period [HEA 92]. Later in this work, in the review of the literature, we will justify our choice to measure stock market performance on the basis of abnormal returns of acquirers, evaluated at the time of the announcement of the merger and acquisition operation. Although these measures are affected by several biases, many authors consider that abnormal profitabilities, measured with the methodology of event studies, are the most statistically reliable [AKT 09, AND 01]. This measure therefore is inescapable, both for researchers [SUD 10] and for the managers of listed companies [ALB 06]. Here, we must point out that this indicator is limited by its dependency on issues related to the prediction and anticipation of events [CAI 11]. Although many research works attempted to evaluate the value creation of the acquirer at the time of announcement of a merger and acquisition operation, very few authors focused on operations that do not involve English-speaking companies. These would seem to report less volatile performance. Similarly, international mergers and acquisitions are little studied and those that usually involve American companies [SUD 10].
Ultimately, the literature review shows that there is a lack of research on French companies conducting international merger and acquisition operations, despite France being the third country in the world by number and volume of companies proceeding to external growth strategies, in a context of global environment changes that favor the conduct of operations abroad. So, our research project focuses on the value creation of mergers and acquisitions performed by French acquirers during the latest, short time period.
I.1. General issue and research questions
This doctorate work draws on two domains of research: finance and international management. On the basis of these two fields, we analyze the location choices and value creation associated with mergers and acquisitions. Therefore, the main issue we investigate in this research is the following:
–
General research issue
: Which are the determining factors of location choices and value creation of mergers and acquisitions?
After reviewing the literature on the location and performance of mergers and acquisitions, we understand that this general research issue can be tackled with two specific questions:
–
Research question 1
: Which characteristics of the target country influence the location of mergers and acquisitions in mature and emergent countries?
–
Research question 2
: Which determining factors influence the value creation of national or international mergers and acquisitions located in mature or emergent countries?
Our research work follows two main goals: We first study how the specific characteristics of target countries influence the decision of the acquirer to initiate operations in mature or emergent countries. In the international management literature, mature and emergent countries are often differentiated into two groups in order to build samples of similar-characteristics countries. Our empirical study, therefore, investigates how geographical distance, economic growth, quality of institutions and cultural differences influence the decisions regarding the locations of mergers and acquisitions.
The second goal of this research is to discern the determining factors of value creation of mergers and acquisitions. To do so, we use indicators associated with characteristics of the acquirer, the target and the operation. We test the influence of these factors on the whole sample as well as on subsamples such as the French subsample, the foreign subsample, the mature country and the emergent country subsamples. We attempt to measure to what extent financial markets, when they estimate the performance of mergers and acquisitions upon their announcements, consider the determining factors of the choices of location of operations, choices which are linked to the target country’s characteristics.
Figure I.1 provides a description of the research model, which is made up of two sides that enable the elaboration of answers to the two above-mentioned questions.
Figure I.1.Synthetic outline of research model
I.2. Research methodology
Throughout this research project we keep true to a positivist stance and to a hypothethico-deductive approach. After having reviewed the literature on the subject, we formulate hypotheses. We test them on a sample of mergers and acquisitions performed by French acquirers during a recent period. These acquirers are listed in the SBF 120 index (Société des Bourses Françaises). This stock market index with the 120 most actively traded stocks listed in Paris includes the 40 companies of the CAC 40 index and a selection of 80 additional companies listed on the Premier Marché and Second Marché under Euronext Paris. In order to evaluate the value creation of mergers and acquisitions, an event study is realized and performed on the basis of a market model.
The selection of the sample was done in several steps. In a first step, we gathered the list of initiated operations with their main characterizing indicators from the SDC database. The DataStream databases then provided us with the financial and stock exchange data about the acquirer. Lastly, we reviewed the economic and financial journals, from the Factiva database, in order to clean our sample and to gather qualitative information. Our empirical study is thus based on a sample constituted of 395 operations announced between 2010 and 2012 by 90 French acquirers listed on the SBF 120, involving 55 countries.
I.3. Book structure
Our book has a three part structure: (1) a literature review, (2) a description of the research methodology and (3) the analysis and discussion of results.
The first part aims to draw a synthetic account of the literature on mergers–acquisitions and to use it to build the research model. Chapter 1 thus presents the main types of mergers and acquisitions and details their current dynamics. It highlights the great variety of strategies enabled by such operations, and then describes the general trends of their activity. The research findings on the internationalization of companies and on the modes of entry are also presented. This account leads us to the formulation of our hypotheses regarding the decisions of conducting mergers and acquisitions in mature or emerging countries. Chapter 2 analyzes the research about the performance of mergers and acquisitions. It begins with a summary of the main motivations of companies to conduct such operations. To do so, accounts of industrial economy, as well of accounts of informational efficiency and organizational finance, are presented. Once the context of the mergers and acquisitions is understood, reflections on their performance can be developed. A literature review of empirical studies is thus detailed in order to identify the classical measures and their associated results. The chapter concludes with the formulation and development of the hypotheses regarding value creation of mergers and acquisitions.
The second part presents the methodological choices and the database we built. Chapter 3 focuses on the epistemological paradigm we chose to base our work on and on the methodology we used. Specific attention is given to the choices made to carry out the study of events. This study enables us to estimate the abnormal returns, as an approach to measuring the value creation of operations. The end of the chapter consists of detailing the statistical tests performed to verify the research hypotheses. Chapter 4 discusses how the sample was elaborated and details the collected data. Databases were used, but we also searched economic and financial journals for information of a more qualitative nature. We then justify our choice to limit the study to the operations performed, between 2010 and 2012 by French acquirers listed in the SBF 120. Lastly, we present a descriptive analysis of the sample in order to provide an estimation of how representative it is and to identify its main specific features.
In the third part, the results of the empirical study are analyzed and discussed. Chapter 5 is devoted to the analysis of the factors that encourage companies to conduct mergers and acquisitions in emerging countries rather than in mature countries (first research question). Statistical tests are applied to the indicators that describe the target country in order to evaluate their role in the decision of the acquirer to conduct operations in mature or emerging countries. The results of the study are interpreted with regard to results of previous research carried out in this field. Chapter 6 is devoted to the analysis of the determining factors of value creation of mergers and acquisitions (second research question). It presents a detailed analysis of daily returns that are estimated upon announcement of the operation, and then proceeds with the statistical tests. Our empirical study evaluates how the characteristics of the acquirer, the operation and the target influence value creation, for the whole sample as well as in the national and international subsamples, and in the emerging or mature countries. Obtained results are analyzed and interpreted with regard to previous works on the performance of mergers and acquisitions.
Finally, the general conclusion looks back on the rationale and issues at stake in our research work, summarizes its main results and relates the findings presented in Chapters 5 and 6. It also details the contributions and limitations of the study presented here. We conclude by outlining the main directions of investigation that emerge from this doctorate work.
PART 1Location and Performance of Mergers and Acquisitions
Introduction to Part 1
We begin with a literature review of research on mergers and acquisitions. We then retrace the reflection that led us to elaborate the research model we used to investigate our research issue.
In Chapter 1, we present the characteristics of mergers and acquisitions as well as the current dynamics of their location. To do so, we begin with detailing the modes in which mergers and acquisitions are performed, and then investigate the issues of international development via mergers and acquisitions. In a context of economies becoming increasingly global, mergers and acquisitions become a mode of entry of choice for companies wishing to establish themselves in foreign markets. However, despite the significant growth opportunities they offer, mergers and acquisitions also involve a significant level of risk. In this chapter, we base our thinking on the current stakes involved in mergers and acquisitions and formulate research hypotheses, aiming to identify the key factors that lead companies to conduct mergers and acquisitions in mature countries rather than in emerging countries.
Chapter 2 investigates the performance of mergers and acquisitions. It begins with an overview of the main theories that explain the underlying motives for such operations. Such motives are internal as well as external to the company. Research works from industrial economy, informational efficiency and organizational finance are thus detailed. The aim of this part is to discern the main leverages of performance of the current mergers and acquisitions. Our conclusion of this chapter consists of detailing the empirical studies that focus on estimating the performance of mergers and acquisitions. We present an overview of the state of the art of measures and results that can be found in the literature. Throughout the development of this chapter, we formulate our research hypotheses about the factors that explain the value creation of mergers and acquisitions.
1Characteristics and Location of Mergers and Acquisitions
That which is sought is found; the unheeded thing escapes. Oedipus the King, Sophocles
This chapter focuses on the characteristics of mergers and acquisitions, a mode of development frequently used by companies. This chapter recalls the many research works that have been carried out on the subject in order to better our understanding of the main modes of conduct of mergers and acquisitions. We present their typology and dynamics, which enables the reader to get a grasp of their specific features and to apprehend the diversity of form, nature, and characteristics that such operations can have. Our work then focuses more specifically on international mergers and acquisitions. The current trends of this mode of entry into foreign markets are thus presented. The theories about the internationalization of companies and especially the eclectic paradigm enable us to explain, at least partly, the strategic choice to internationally expand by means of mergers and acquisitions.
The second section highlights the stakes involved in international mergers and acquisitions in the current economic environment. Such operations are a mode of entry of choice for companies that wish to approach a new country or strengthen their position in a country where they are already established. The motivations must therefore be investigated in a broader perspective than that of the essential characteristics of the target company, as all the specifics of the whole country of location can prove to be determining factors. In other words, geographic distance, economic growth, the quality of institutions and cultural differences all influence the decision to endeavor an international merger and acquisition. These influence are investigated in this chapter, which results in us elaborating and formulating our research hypotheses.
1.1. Modes of conduct of mergers and acquisitions
Mergers and acquisitions have adapted to the changes in the global economic environment. Throughout the past few decades, they have evolved and differentiated so that they now invoke various characteristics and motivations. If we want to refine our understanding of the main characteristics of such external growth and development strategies, we need to elaborate a typology of mergers and acquisitions. Authors have developed several theoretical foundations to account for the goals and objectives of such operations. Their theoretical developments discern that, despite the attractive growth opportunities offered by a merger and acquisition, a company which commits to such a strategy must also face significant risks inherent to international mergers and acquisitions. Throughout the development of this section, we elaborate our research hypotheses about the modes of conduct of international mergers and acquisitions.
1.1.1.The characteristics of mergers and acquisitions
The term “mergers and acquisitions” in fact lumps together a variety of operations that have very heterogeneous forms, natures and characteristics. Their goals in terms of realizations as well as their legal, fiscal and accounting requirements can be specific to each merger and acquisition. Sudarsanam [SUD 10, pp. 2–3] defines them as follows: “In a merger, the corporations come together to combine and share their resources to achieve common objectives. The shareholders of the combining firms often remain as joint owners of the combined entity. An acquisition resembles more of an arm’s-length deal, with one firm purchasing the assets or shares of another, and with the acquired firm’s shareholder ceasing to be owners of that firm. In a merger a new entity may be formed subsuming the merging firms, whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer”. Even if mergers and acquisitions are two forms of external growth, the characteristics of which can diverge, their significant similarity led researchers to study them jointly [SUD 10]. Furthermore, mergers and acquisitions usually induce similar results, whereby one company takes over control of another [VAR 12].
1.1.1.1. The typology of mergers and acquisitions
Mergers and acquisitions encompass diverse strategies in terms of the motivations of the acquirer. The acquirer can put them to work in order to simply strengthen its competitive position or as a defensive or aggressive reaction to changes in the firm’s environment. The most common typology of mergers and acquisitions discerns four main modes of strategic development: the horizontal mode, vertical mode, concentric mode (also called linked diversification) and conglomerate mode (also called unlinked diversification).
1.1.1.1.1. The four modes of development
A horizontal merger and acquisition associates firms of a same business sector, which therefore compete with each other. It follows a specialization logic, the will of the firm being to increase the value its assets and skills by confirming its position within its domain(s) of activity. The mergers and acquisitions in the sector of large retailers, such as that of Carrefour and the Turkish group Ipek (which run the Alpark stores) in 2010, as well as that of Casino Guichard-Perrachon and Monoprix in 2012, are good representative examples. Such a horizontal strategy enables management practice to keep a relatively low level of complexity because of the homogeneity of the merged parties. It also enables the concentration of investments on a single activity and the creation of a specialized identity and image. Although it increases the vulnerability of the company to the fluctuation of its sector, specialization enables a better control of the specific economic risks. Profits are expected to rise upon a horizontal merger and acquisition because of economies of scale and range, experience effects, synergies and the increase in market power of the company. Horizontal mergers and acquisitions are the most common type of operation; in North America and Europe, they account for more than half of all mergers and acquisitions.
A vertical merger and acquisition is characterized by the concentration of firms whose activities are different but pertain to the same business sector. Such an operation strengthens the solidity of the merging firms within the business sector. The resulting firm can be seen as diversifying its activity. For example in 2012, CGG Veritas acquired the GeoScience division of the dutch firm Furgo. This acquisition enabled CGG Veritas to become a fully integrated company in the GeoSciences domain. Another example is the merger and acquisition of Ingenico and the Belgian company Ogone. The objective there was to become able to offer the full range of services in the field of online payment. Classically, this strategy is used to attempt to increase control over sources of supply and outlets and leads to a reduction of the transaction costs [WIL 75]. It can therefore consist either of an upstream integration – with a provider – or in a downstream one, with a customer. Such a form of merger and acquisition increases flexibility and strengthens control over the whole chain of value production of a product. It furthermore increases the independence from other actors of the sectors, achieves economies of integration (the costs of production, organization and transfer of products, for example) and increases the market power of the company.
A concentric merger and acquisition, also called a linked diversification operation, integrates two firms that were considered complementary. However, since they did not operate on the same market segment, they could not be seen as competitors. It follows a strategy of concentric diversification, which means that it seeks to develop activities that, although they are different, use similar technologies. One example epitomizes this type of strategy: the acquisition of Gymnase Club by Club Méditerranée in 2001. Although the activities of the two entities are different, promotional offers can be proposed, which contribute to the development of both entities. Firms, thus, expect synergies to develop through their sharing of complementary industrial, organizational or distribution know-hows. They also expect major economies of scale because of the sharing of their resources and abilities; in such a framework, the development of one entity should favor the growth of its partner. This form is often used when the demand is changing – in order to make the range of products evolve quickly and to gain the necessary technological abilities – or when the competition pressures become so strong that companies need to intensify their marketing power.
A conglomerate merger and acquisition, also called an unlinked or diagonal diversification operation, seeks to combine two firms that operate in different business sectors and for which synergy effects are expected to be relatively insignificant. Such an operation often follows a logic of diversification of the panel of activity of a company. The objective can be the simultaneous development, on a new market, of new products that have little in common with the initial trade of the firm. Let us mention, for example, how the Vivendi group developed through acquisitions in various business sectors (construction industry, public work, real estate, energy, recycling, transports, telecommunications, television, cinema, publishing and press). In 2011, for instance, the group proceeded through a merger and acquisition with SFR. This form of operation mainly relies on the will to increase market power and on the expectation of financial synergies. The strategies consist of seeking to increase the profitability of resources by investing them in high potential business sectors even if they are relatively far from the core trade of the acquirer. At the end of the day, such companies seek to diversify the sources of risk within their organization and to balance their offer according to the lifecycles of their product panel.
This classical typology of mergers and acquisitions reveals how diverse the forms of such operations can be. Firms often have recourse to this form of development because it enables the implementation of multiple strategies within a limited timescale [SLA 08].
1.1.1.1.2. The nature (defensive versus offensive) and attitude (friendly versus hostile) of mergers and acquisitions
The nature and attitude of mergers and acquisitions are two other significant features. They must be taken into account in order to better understand their characteristics. The nature of these operations refers to the general motivations that presided over their implementation. In short, they have been initiated either in order to develop the competitiveness of the company or to maintain it in response to strategic moves of competitors or to changing environments. The attitude describes whether the operation results from a joint decision of the acquirer and target to join forces or is forced by the acquirer against the will of the target.
Offensive versus defensive mergers and acquisitions
Offensive mergers and acquisitions encompass the proactive strategies of strengthening and development of the competitive advantages of firms. They include bettering the product panel, resources, abilities and skills and markets on which the company is already positioned. Four main motives can be identified for an offensive logic: (1) to increase one’s dominating power and influence, (2) to grab specific resources, (3) to take position on a new market and (4) to develop skills and abilities.
Defensive mergers and acquisitions are implemented in order to respond to an event that might undermine the competitive advantages or alter the position of a company on its market. Such event can originate from changes in the regulatory environment, from the development of new technologies, from the strategic moves of competitors, etc. Five main motives for a defensive logic have been identified: (1) to strengthen a position in a mature sector, (2) to adapt to technological progress, (3) to reach a critical mass, (4) to hinder the moves of an interfering competitor and (5) to prevent new entries in the sector by raising the cost of entry into the market.
Friendly versus hostile mergers and acquisitions
Friendly mergers and acquisitions occur when the two firms mutually agree to commit to a merger and acquisition. This means that the two managerial teams wish to join forces. The agreement is reached during a negotiation phase. This stage is crucial, as this is the moment when the two firms state their understanding of the operation and the motives behind their will to undertake it. They are often supported by consultancy firms. The conditions in which the association is initiated and completed arise from this negotiation stage.
Hostile mergers and acquisitions, also called unfriendly operations, are completed without the agreement of the managing team of the target firm. The negotiation with the target having failed to reach a mutual agreement, the acquirer reaches over this recommendation and directly offers the acquisition to the shareholders. At the upstart of the negotiation phase, an operation considered to be friendly can then become so complex that it encourages one party to make the information public and propose to purchase. This involves the target being listed and the acquirer publicizing a tender offer. Therefore, drawing a clear line between friendly and hostile operations can somehow, sometimes be tricky.
The complexity of mergers and acquisitions quickly becomes obvious to anyone working on an overview of the various approaches to present the typologies that characterize mergers and acquisitions. In this work, we chose to focus on the elements that most frequently occur in the literature: their four main forms, their nature and their attitude. By developing only these main four elements, we catch a glimpse of the wide panel of strategies that can be involved in this type of company expansion. The first wave of mergers and acquisitions was observed in the United States at the beginning of the 20th Century. These operations aimed to increase the market share of the acquirer. The majority of them were national and friendly acquisitions involving firms of the industrial sector. In 2008, the sixth wave of mergers and acquisitions ended. Their specifics have drastically changed over the 20th century, as the economic and financial environment has undergone great transformations. Nowadays, mergers and acquisitions occur in all business sectors and can be offensive as well as defensive. This type of association of companies therefore involves novel dimensions and perspectives.
1.1.1.2. Current trends of mergers and acquisitions
The study of the mergers and acquisitions of the past few years shows that they are tightly linked to the economic context. We thus propose an inventory of the motivations for these operations, and then detail the main tendencies to be seen in the activity of mergers and acquisitions.
The motivations for mergers and acquisitions
The motivations for conducting such operation are valuable items of knowledge for one who wishes to understand them, because they influence the characteristics of their implementation and subsequent performance.
The classification proposed by Trautwein [TRA 90] identifies five mains motives: synergies, market power, wealth transfer (shareholders), opportunity gains (undervalued target, for example) and the will to build empires.
Nguyen et al. [NGU 12] note two types of motivations. According to them, motives either stem from value creation – market power, response to industrial shocks, economies of scale, financial synergies, fiscal matters and the exploitation of asymmetries of information between acquirer and target – or they are generated by other goals – agency issues, hubris or market timing issues (overevaluation on the part of the acquirer).
Figure 1.1 provides a summary of these motivations. The figure groups motivations according to their economic relevance or irrelevance. When such motivations do not fit in the general strategies of company development, the author identifies three types of situation. A merger and acquisition can be conducted from the perspective of developing an empire or in order to satisfy the interests of the managing team. It can also be a defense strategy to counter a public tender offer. The authors also draw our attention to the fact that some firms implement external growth strategies merely as a behavior that mimics the action of their competitors.
The operations that are indeed motivated by economic strategy can be classified into two types: those that seek to create value and those that seek to extract value. The first type of motivation seeks to develop synergies that increase the overall company’s performance, while the second type enables taking advantage of opportunities arising from undervalued assets, from the implementation of a better management system or from fiscal benefits.
Figure 1.1.The motivations for mergers and acquisitions
(source [LEH 13 p.447])
During the last decade of the 20th Century, the study of motivations for mergers and acquisitions generated an abundant literature. The authors often highlighted the specifics of operations aiming at diversification, as opposed to these seeking to refocus on the core trade of the company. However, there remain yet unknown motivations for mergers and acquisitions to discover, especially in the case of international operations.
In fact, according to a study carried out on 6,000 companies by the Grant Thornton consultancy firm, the primary motivations for conducting a merger and acquisition are access to a new geographic area and the achievement of economies of scale. Following these are the motivations pertaining to the acquisition of new technologies, and the access to targets at reduced costs [THO 11]. A study led by the Boston Consultancy Group (BCG) in 2010 on 179 European senior executives covering 23 business sectors identified 11 motivations for the conduct of a merger and acquisition in 2011:
– to extend the panel of offered services or products (59% of responding participants);
– to reach new consumers or new distribution channels (35%);
– to gain access to a new geographic area (32%);
– to achieve cost reduction (28%);
– to gain access to intellectual property rights, to research and development or to a brand (13%);
– to increase share profitability (13%);
– to respond to the changes of a consolidating sector (12%);
– to complete a restructuring or refocusing of activity (9%);
– to gain access to human resources (3%);
– to pre-empt ahead of predatory competitors (3%);
– to increase negotiating power (2%).
We see in that study that expanding the activity of the firm to novel geographic areas and achieving economies of scale seem to be the main motivations of nowadays’ leaders for mergers and acquisitions. The conduct of mergers and acquisitions, be they national or international, therefore responds to specific strategic issues and their characteristics reflect the motives that underlie their development. The fact that companies often have recourse to this mode of development can be partly explained by the number of objectives that can be quickly reached as well as by the variety of opportunities offered by the international dimension [SLA 08].
The activity of mergers and acquisitions
The literature has devolved a significant amount of energy to the study of the dynamics of the various waves of mergers and acquisitions. The last of these waves started in 2003 and ended with the economic crisis of 2008. Some signs of recovery can be discerned since.
The last two waves of mergers and acquisitions are shown in Figure 1.2. The highest ever peak of activity is reached in 2007, just before the number and volume of operation both plummet in 2008 because of the economic crisis. The year 2009 is a transitional year for mergers and acquisitions: the consequences of the economic crisis are still felt during the first semester, but the plummeting stabilizes during the second semester. In 2010, analysts anticipated the onset of a new wave of increase in mergers and acquisitions to the rate of about 19% in value [BCG 11]. The rate, however, despite a clear increase in the beginning of 2011, kept falling throughout the end of the year and the beginning of 2012 [BCG 12].
Figure 1.2.Global activity of mergers and acquisitions (1990–2013)
(source The number and value of mergers and acquisitions completed and announced from 1990 to 2013 on the basis of Securities Data company’s (SDC) Platinum on Line)
According to Thomson Reuters, the year 2013 deepened the drop, the number of operations reaching its lowest since 2005, and decreasing by 2% (Thomson Reuters, December 22, 2013). In 2014, however, the activity of mergers and acquisitions shows a revival that convinces analysts that a new wave of mergers and acquisitions is about to begin: the economic context seems to have emerged from the crisis at last, companies having regained significant financial means and giant operations being announced. According to Jean-François Sablier, associate manager of Ricol Lasteyrie & Associates, “The deleveraging phase is behind us. The momentum is nowadays more firmly set on risk taking. As evidence to support my opinion, we could mention the recently announced large maneuvers (Authors Note: Microsoft/Nokia, Publicis/Omnicom, etc.) stirred up by the major technological advances to come” [LES 13, p.6].
France seems to be on the forefront of this new wave of mergers and acquisitions. It is particularly active in the domain, being the third country by number and total value of operations, just after the United States and the United Kingdom (see Table 1.1). It also attracts numerous investors, being the fifth country by amount of firms acquired by foreign companies.
Figure 1.3
