ARE CROSS-BORDER MERGERS AND ACQUISITIONS BETTER OR WORSE THAN DOMESTIC MERGERS AND ACQUISITIONS? THE UK EVIDENCE by Maha Diab Ayoush A Thesis Submitted to The University of Birmingham For the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Finance Birmingham Business School The University of Birmingham November 2011 I University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder. ABSTRACT Mergers and acquisitions (M&As) are important corporate strategy actions that are vital for the companies in order to survive in this competitive global world. The popularity of those actions has increased over the years, especially in the international domain. In the UK, both the number and value of cross-border M&As has increased significantly over the years. Despite this increase, there haven’t been enough studies or clear evidence about whether venturing abroad to acquire foreign targets leads the companies to better performance compared to staying domestically. Therefore, the purpose of this thesis is to investigate the M&A phenomenon deeply and compare between cross-border and domestic M&As made by UK public acquirer firms. More specifically, the thesis concentrates on three main issues which are: (1) the difference between the returns to shareholders of acquirer firms involved in cross-border and domestic M&As; (2) the difference between the operating performance of acquirer firms involved in cross- border and domestic M&As; and (3) the difference between the impacts of cross-border and domestic M&As on the operating performance of acquirer and target firms combined. Market-based and accounting-based approaches are used to investigate a sample of UK acquirer firms engaged in cross-border and domestic M&As both in the short-term and in the long-term periods. In general, the results reveal insignificant differences between the shareholders’ returns and operating performances of acquirer firms involved in cross-border and domestic M&As over the short- and long-term periods. On the other hand, the results for acquirer and target combined firms show that cross-border M&As have lower operating performances than domestic M&As. Recommendations are provided in order to help the decision and policy makers in the companies to decide whether cross-border M&As should be actively encouraged or discouraged in comparison with domestic M&As. I DEDICATION To my family: Parents, husband, son and daughter With all my love and gratitude II ACKNOWLEDGEMENTS This research could not have been possible without the support and contributions of many people who have provided the mental energy for the development of this thesis. I start by thanking my supervisor Dr. Abimbola Adedeji for giving me the opportunity to pursue a doctoral degree at the University of Birmingham and for providing enthusiastic support and thorough feedback on my work. With his patience, understanding, knowledge and experience, Dr. Abimbola Adedeji provides great guidance and support with valuable feedback and ideas. I thank academics and colleagues in the Birmingham Business School, especially those who provided feedback on my research. Special thanks go to my second supervisor Dr. Chien-Hui Liao, Professor Ranko Jelic, Professor Victor Murinde, Professor John Child, Dr. Joanne Locke and Dr. Steve Bull. I am also sincerely grateful to the staff in Birmingham Central Library who have been supportive and provided the required resources and suitable atmosphere during my fieldwork. My sincere thanks also goes to Professor Andy Mullineux the Chairperson of the examining board and my examiners, Professor Christine Mallin and Dr. Arif Khurshed, for their time reading my thesis and giving me valuable suggestions and comments. My deep gratitude should also go to Al-Zaytoonah University of Jordan for their sponsorship. My ambition would never have been realised without their support. Last but not least is an appreciation to my parents. This work could not have been achieved without their endless love and unending support and encouragement. I am also grateful to my parents-in-law for their moral and financial support. I would also express my deep gratitude to my husband and children for their patience and support during the period of my study. III TABLE OF CONTENTS ABSTRACT ................................................................................................................................ I DEDICATION .......................................................................................................................... II ACKNOWLEDGEMENTS ..................................................................................................... III TABLE OF CONTENTS ......................................................................................................... IV TABLE OF FIGURES ............................................................................................................. XI TABLE OF TABLES ............................................................................................................. XII Chapter One ......................................................................................................... 1 INTRODUCTION ...................................................................................................................... 1 1.1 Background ........................................................................................................... 1 1.2 Aims and Objectives ............................................................................................. 7 1.3 Contribution of the Thesis ..................................................................................... 8 1.4 Structure of the Thesis ......................................................................................... 10 Chapter Two ...................................................................................................... 13 THE DIFFERENCE BETWEEN THE RETURNS TO SHAREHOLDERS OF UK ACQUIRER FIRMS INVOLVED IN CROSS-BORDER AND DOMESTIC ACQUISITIONS ...................................................................................................................... 13 2.1 Introduction ......................................................................................................... 13 2.2 Literature Review ................................................................................................ 19 2.2.1 Motives for Mergers and Acquisitions ...................................................... 19 2.2.1.1 The Synergy Hypothesis ............................................................... 20 2.2.1.2 The Hubris Hypothesis ................................................................. 23 2.2.1.3 The Agency Hypothesis (Managerialism) .................................... 24 IV 2.2.2 Cross-border Mergers and Acquisitions Motives ..................................... 24 2.2.3 Theory of Cross-border Mergers and Acquisitions .................................. 27 2.2.3.1 The Ownership Decision .............................................................. 27 2.2.3.2 The Location Decision.................................................................. 28 2.2.3.3 The Internalization Decision ........................................................ 28 2.2.4 Review of the Empirical Studies ............................................................... 30 2.2.4.1 Domestic Mergers and Acquisitions............................................. 32 2.2.4.1.1 US Domestic Acquirers ........................................................ 33 2.2.4.1.2 European Domestic Acquirers ............................................. 34 2.2.4.1.3 UK Domestic Acquirers ....................................................... 34 2.2.4.2 Cross-border Mergers and Acquisitions ...................................... 36 2.2.4.2.1 US Cross-border Acquirers ................................................. 36 2.2.4.2.2 European Cross-border Acquirers ...................................... 37 2.2.4.2.3 Cross-border Mergers and Acquisitions in Other Countries .............................................................................................................. 38 2.2.4.2.4 UK Cross-border Acquirers ................................................ 39 2.2.4.3 Cross-border vs. Domestic M&A ................................................. 40 2.2.5 Impact of Acquirer and Deal Characteristics on Shareholders’ Returns 41 2.2.5.1 Method of Payment in Mergers and Acquisitions ........................ 42 2.2.5.2 Public vs. Private Targets ............................................................ 44 2.2.5.3 Relative Size of Target and Bidder ............................................... 47 2.3 The Regulation of Takeover Bids in the UK....................................................... 49 2.3.1 The Panel on Takeovers and Mergers (the Panel) ................................... 50 2.3.2 Nature and Purpose of the City Code on Takeovers and Mergers (the Code) .................................................................................................................. 51 2.3.3 Antitrust Regulation .................................................................................. 53 2.3.4 The UK Antitrust Regime .......................................................................... 54 2.4 Data Sample and Methodology ........................................................................... 57 V 2.4.1 Sample Selection and Data Sources ......................................................... 57 2.4.2 Sample Description ................................................................................... 58 2.4.3 Event Study Methodology ......................................................................... 61 2.4.3.1 The Mean Adjusted Return Method .............................................. 66 2.4.3.2 The Market Model Method ........................................................... 67 2.4.3.3 The Market- Adjusted Return Method (MAR) .............................. 69 2.5 Empirical Results ................................................................................................ 70 2.5.1 Short-term Returns and Significance Test ................................................ 71 2.5.2 Equality Test ............................................................................................. 75 2.5.3 Regression Analysis .................................................................................. 77 2.6 Summary of the Results and Conclusions ........................................................... 93 Chapter Three ................................................................................................... 96 THE DIFFERENCE BETWEEN THE OPERATING PERFORMANCES OF THE UK ACQUIRERS INVOLVED IN CROSS-BORDER AND DOMESTIC MERGERS AND ACQUISITIONS ...................................................................................................................... 96 3.1. Introduction ............................................................................................................ 96 3.2. Literature Review ................................................................................................ 100 3.2.1 Review of Some of the Methodological Issues ........................................ 100 3.2.1.1 Performance Measures............................................................... 101 3.2.1.2 Deflator Choice .......................................................................... 101 3.2.1.3 Performance Benchmark ............................................................ 102 3.2.2 Review of the Previous Empirical Studies .............................................. 103 3.3 Data Sample and Methodology ............................................................................ 109 3.3.1 Sample and Data Sources ....................................................................... 109 3.3.2 Sample Selection and Description .......................................................... 109 3.3.3 Measuring the Operating Performance of Firms ................................... 113 3.3.4 Benchmark Construction ........................................................................ 114 3.3.4.1 Adjustment for the Industry-median Operating Performance .... 115 VI 3.3.4.2 Matched Firms Based on Industry, Size and Pre-acquisition Performance ........................................................................................... 115 3.3.4.3 Adjusted Cash- flow Performance .............................................. 116 3.3.5 Models to Assess Changes in Performance ............................................ 118 3.3.5.1 Change Model ............................................................................ 118 3.3.5.2 Intercept Model .......................................................................... 119 3.4 Empirical Results .................................................................................................. 120 3.4.1 Change Model Results ............................................................................ 121 3.4.1.1 Full Sample................................................................................. 121 3.4.1.2 Cross-border Sample .................................................................. 125 3.4.1.3 Domestic Sample ........................................................................ 129 3.4.2 Intercept Model Results .......................................................................... 133 3.4.2.1 Full Sample................................................................................. 136 3.4.2.2 Cross-border Sample .................................................................. 137 3.4.2.3 Domestic Sample ........................................................................ 138 3.4.2.4 Cross-border Effect .................................................................... 139 3.4.2.5 The Relationship between Pre- and Post-acquisition Performance ................................................................................................................ 140 3.4.3 Change Model vs. Intercept Model Results ............................................ 141 3.4.4 Regression Analysis ................................................................................ 142 3.4.4.1 Full Sample................................................................................. 147 3.4.4.2 Cross-border Sample .................................................................. 148 3.4.4.3 Domestic Sample ........................................................................ 149 3.5 Summary of the Results and Conclusions ............................................................ 150 Chapter Four ................................................................................................... 154 THE DIFFERENCE BETWEEN THE IMPACTS OF CROSS-BORDER AND DOMESTIC MERGERS AND ACQUISITIONS ON THE OPERATING PERFORMANCE OF COMBINED FIRMS .............................................................................................................. 154 4.1. Introduction .......................................................................................................... 154 VII 4.2. Literature Review ................................................................................................ 158 4.2.1 Performance of US Mergers and Acquisitions ....................................... 160 4.2.2 Performance of European Mergers and Acquisitions ............................ 165 4.2.3 Performance of Mergers and Acquisitions in Other Countries .............. 166 4.2.4 Performance of UK Mergers and Acquisitions ....................................... 168 4.3 Data Sample and Methodology ............................................................................ 171 4.3.1 Sample and Data Sources ....................................................................... 171 4.3.2 Sample Selection and Description .......................................................... 171 4.3.3 Methodology ........................................................................................... 176 4.3.3.1 Benchmark Construction ............................................................ 176 4.3.3.2 Adjusted Cash-flow Performance ............................................... 177 4.4 Empirical Results .................................................................................................. 179 4.4.1 Results of Analysis (A) ............................................................................ 180 4.4.1.1 Change Model Results ................................................................ 180 4.4.1.1.1 Full Sample ........................................................................ 180 4.4.1.1.2 Cross-border Sample ......................................................... 184 4.4.1.1.3 Domestic Sample ................................................................ 188 4.4.1.2 Intercept Model Results .............................................................. 192 4.4.1.2.1 Full Sample ........................................................................ 195 4.4.1.2.2 Cross-border Sample ......................................................... 196 4.4.1.2.3 Domestic Sample ................................................................ 196 4.4.1.2.4 Cross-border Effect ............................................................ 197 4.4.1.2.5 The Relationship between Post- and Pre-acquisition Performance ...................................................................................... 197 4.4.1.3 Change Model vs. Intercept Model Results ................................ 198 4.4.1.4 Regression Analysis .................................................................... 200 4.4.1.4.1 Full Sample ........................................................................ 206 4.4.1.4.2 Cross-border Sample ......................................................... 207 VIII