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EMI Research Portal Blog

Nov 13

Written by: EMI Portal Blogger
11/13/2013 4:11 PM  RssIcon

Cross-border M&A (CBM&A) from emerging markets increased rapidly from $29 billion in 2002 to $125 billion in 2008 and stood at $121 billion last year (Table 1). While $125 billion worth of M&A transactions may not seem like much – particularly when compared to the multi trillion market capitalization of major emerging market equity exchanges - it represents fully 39% of the world’s CBM&A activity in 2012. In fact, emerging markets have accounted for 25% of world CBM&A activity during the last five years.

Table 1. Cross-border M&A by Country of Origin

(Millions of dollars)

 

 

 

 

 

 

 

Region/economy

2002

2008

2009

2010

2011

2012

Argentina

- 5

274

- 77

499

102

2 799

Brazil

- 466

5 243

2 501

8 465

5 541

7 427

Chile

139

- 88

55

642

628

9 764

China

1 194

37 941

21 490

29 578

36 554

37 111

Colombia

157

16

211

3 210

5 094

3 007

Czech Republic

6

34

1 608

14

26

474

Egypt

- 114

4 613

76

1 092

-

- 16

Hong Kong

17605

-1 048

7 461

14 806

12 952

8 016

India

175

13 482

291

26 698

6 137

2 650

Korea, S.

- 363

3 882

6 951

9 949

4 520

5 508

Malaysia

3 335

9 751

3 277

2 432

4 138

9 292

Mauritius

- 1

206

191

- 50

- 173

- 432

Mexico

110

- 463

3 247

2 892

4 274

5 830

Poland

-

432

117

292

511

3 399

Qatar

-

6 029

10266

590

- 790

4 614

Russian Federation

464

16 634

7 599

3 866

3 260

7 807

Saudi Arabia

2 020

1 442

121

706

107

201

Singapore

2 418

6 992

2 762

8 233

8 163

770

South Africa

947

2 817

1 491

1 600

4 276

821

Taiwan

62

- 993

552

- 506

247

2 189

Thailand

- 1

1 416

872

2 731

4 996

5 460

Turkey

28

1 313

-

- 38

908

2 012

United Arab Emirates

193

5 983

14831

-1 803

5 944

-373

Total EMI Universe (rounded):

29000

125 000

85000

102 000

108 000

121 000

Total EMI Universe excluding divestitures:

30000

128 000

88000

119 000

112 000

121 000

World Total:

248000

706 000

249000

347 000

555 000

308 000

Emerging Markets Total as % of World Total

12%

18%

35%

34%

20%

39%

 

 

 

 

The growing share of CBM&A from emerging markets and the high profile of some of the deals involved - Arcelor, Corus, Jaguar Land Rover, Miller, and IBM’s PC business to name a few – raise a number of interesting and important questions:

  • Have emerging market multinationals created shareholder value through CBM&A? If so, what approaches or target/acquirer characteristics are most strongly associated with success?
  • Has participation by emerging market multinationals affected the competitive dynamics of CBM&A (or that of market segments affected)?

A review the EMI database from 2007-2012 suggests that only the first set of questions has received much research attention. Moreover, the body of research seems dated, with very few articles since 2011 (and especially considering that the time span between the most recent part of the data set employed and the date of publication can be two years or more).

1. Has CBM&A by emerging market multinationals created value?

It is well documented that in the majority of cases M&A fail to create value for shareholders of the acquiring firms. Three research articles (1,2,3) published from 2008 to 2011 suggest that this may not be the case when it comes to CBM&A by emerging market multinationals. Using well accepted “event study” methods - measuring stock price reactions to merger announcements during a short window of time around a transaction announcement (+/- 10 days) - two of the three studies suggest that on average emerging market multinationals have generated positive returns from their CBM&A activities. The research seems to consistently link success in CBM&A to the acquisition of new capabilities by large companies adept at managing multi-business enterprises. A fourth paper further suggests that M&A by Indian firms with ownership profiles believed to reduce agency conflicts (owner controlled or minority foreign shareholding) also tend to have better results (4).

Taken together, the studies suggest that large acquisitions in developed markets by family controlled family conglomerates or businesses with minority foreign participation are most likely to create value through CBM&A.

  • In Emerging country cross-border acquisitions: Characteristics, acquirer returns and cross-sectional determinants (1), Bhagat, Malhotra and Zhu examined nearly 700 transactions by multinationals from eight emerging markets during 1991 - 2008 and found a strong positive correlation between returns and higher target company corporate governance standards. These findings are consistent with the “bootstrapping” hypothesis (first posed by Khanna and Palepu in 2004) whereby emerging market firms seek to upgrade their corporate governance standards via acquisition. This study found that smaller acquisitions were more likely to create value (contradicting the next two studies cited).
  • In Do international acquisitions by emerging-economy firms create value? The case of Indian Firms (2), Gubbi, Aulakh, Ray, Sankar, and Chittoor examined 425 transactions from 2000-2007 and found that acquisitions in advanced economies create more value than those in other developing economies. They attribute these findings broadly to the acquisition of “complementary resources and capabilities”. The study also found that larger acquisitions led on average to larger positive returns.
  • In Cross-border acquisitions and firm value: An analysis of emerging market multinationals (3), Aybar and Ficici examined 433 transactions between 1991 and 2004 and found that, on average, these transactions did not create value. The work did find that larger transactions, and transactions involving conglomerate acquirers showed positive returns.
  • In the 2012 paper Does ownership concentration improve M&A outcomes in emerging markets? Evidence from India (5), Bhaumik and Selarka examined the link between (domestic and international) M&A outcomes (for data from 1995-2004) and firm ownership and found that acquisitions by companies with:
    • High ownership concentration in the hands of directors tend to perform better on average, perhaps due to reduction in Type I agency conflicts (where managers interests are not aligned with that of shareholders)
    • High ownership concentration in the hands of “domestic promoters and persons acting in concert” showed no such tendency toward positive results perhaps due to Type II agency problem (whereby majority shareholders gain disproportionately versus minority holders)
    • Minority foreign ownership (beyond the 25% threshold) has a positive effect on performance regardless of the profile of domestic ownership.

Research on the importance of financial media in global markets (5) suggests that event studies in emerging markets that apply a 10 day event window may be understating the magnitude of market reaction to CBM&A. This research found that there are meaningful cross-country differences in stock price reactions to disclosure announcements (in general and specifically to M&A transactions) due to differences in the prevalence of insider trading and in the quality of news dissemination. As a result, emerging markets display substantially lower stock price movements from disclosure announcements, and much higher pre-announcement movement (days t-50 to t-7).

When taken together, the papers reviewed suggest that prior to 2008, CBM&A by emerging market multinationals did indeed create value for acquiring firms and outline the major factors associated with positive outcomes. Fresh work is needed to examine whether this remains to be the case.

2. Has participation by emerging market multinationals affected the competitive dynamics of CBM&A (or that of market segments affected)?

Two articles provide some interesting findings related to these questions:

  • The higher bid premiums paid by emerging market multinationals may be related to matters of “national pride”
  • CBM&A by Chinese firms tend to have a positive effect on the share price of rivals, possibly by signaling higher industry growth prospects

In the 2011 article The cost of pride: Why do firms from developing countries bid higher? Hope, Thomas and Vyas (6) find compelling evidence that “national pride” is an important factor determining the high premiums often paid by cross-border acquirers from emerging markets:

  • Firm’s from emerging markets tend to bid higher than their developed market counterparts when acquiring targets in developed countries
  • The premium of bids associated with “national pride” is double that of bids where national pride is not a factor.
  • The political connections of “national pride” bidders is not a factor nor is the degree of country-specific nationalism
  • There is a need for further work whether “national pride” bidders are rationally based on “additional benefits from national governments or the public”

The 2012 article Acquisition announcements and stock market valuations of acquiring firm’s rivals: A test of the growth probability hypothesis in China by Gaur, Malhotra and Zhu (7) analyzed 1074 domestic and CBM&A transactions from 1993 to 2008 and found that:

  • Rivals of acquiring firms experience positive abnormal returns from M&A announcements
  • Negative or positive returns by rivals mirrored negative or positive returns by the acquiring firm
  • Returns for both the acquirer and its rivals were higher in more concentrated industries

The authors speculate that their work, if extended, could shed some light as to how waves of acquisitions start and propagate.

The two papers presented make useful but narrow contributions toward the second question posed. A more thorough evaluation of the impact that CBM&A by emerging market multinationals is having on markets is needed to answer the second question posed.

* * *

Research to-date falls short of providing a holistic and authoritative view of the value and impact of CBM&A by emerging market multinationals. The data sets employed all date from before 2008 whereas CBM&A by emerging market firms has become even more important since the financial crisis. The impact that this continuing activity is having on CBM&A markets (and on equity markets) remains largely unexplored. These would seem to be fertile and worthwhile subjects for further research.

Reviewed and cited:

  • Bhagat, Sanjai; Malhotra, Shavin and Zhu, PengCheng, (2011). Emerging country cross-border acquisitions: Characteristics, acquirer returns and cross-sectional determinants. Emerging Markets Review 12, 250-271.
  • Gubbi, S.R.; Aulakh, P.S.; Ray S., Sarkar, M.B.; and Chittoor, R. (2010). Do international acquisitions by emerging-economy firms create shareholder value: The case of Indian firms. Journal of International Business Studies 41, 397-418.
  • Aybar, Buelent and Ficici, Aysun, (2010). Cross-border acquisitions and firm value: An analysis of emerging-market multinationals. Journal of International Business Studies 40, 1317-1338.
  • Bhaumik, Sumon Kumar and Selarka, Ekta, (2012). Does ownership concentration improve M&A outcomes in emerging markets?: Evidence from India. Journal of Corporate Finance 18, Issue 4, 717-726.
  • Griffin, John M., Hirschey, Nicholas H., and Kelly, Patrick J., (2011). How Important Is the Financial Media in Global Markets? Review of Financial Studies, Advance Access publication, October 25, 2011.
  • Hope, O.K., Thomas, W. & Vyas, D. (2010). The cost of pride: Why do firms from developing countries bid higher & quest. Journal of International Business Studies 42(1), 128-151.
  • Gaur, Al; Malhotra, S.; Zhu P., (2013). Acquisition Announcements and stock market valuations of acquiring firms’ rivals: A test of the growth probablility hypothesis in China. Strategic Management Journal 24 (2), 215-232.

Reviewed but not cited:

  • Harvard Business Review, April 2011
  • Harvard Business Review, December 2009
  • Harvard Business Review, May 2009
  • Morck, Randall; Yeung, Bernard, and Zhao, Minyuan, (2008). Perspectives on China’s outward foreign direct investment. Journal of International Business Studies 39, 337-350.
  • Filatotchev, Igor; Strange, Roger; Piesse, Jenifer; and Lien, Yung-Chih (2007). FDI by firms from newly industrialised economies in emerging markets: corporate governance, entry mode and location. Journal of International Business Studies 28, 556-572.

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