Taking Corporate Control Boosts M&A Returns on Emerging-Market Targets
Developed-market acquiring companies return greater shareholder value when they take majority control of target firms in emerging markets.
ANN ARBOR, Mich. Acquiring companies based in the United States, Europe, Japan and other developed markets can expect to generate greater shareholder value when they take majority control of target firms in emerging markets, according to a University of Michigan Business School study.
Using data that covers all transactions involving a developed-market acquirer and an emerging-market target from 1988 to 2002, the study analyzes the stock market's reaction to announcements of mergers and acquisitions in emerging markets. The sample covers nine countries in Latin America and East Asia.
"The evidence suggests the stock market anticipates significant value creation from cross-border transactions involving emerging-market targets," says Anusha Chari, assistant professor of finance at the Business School.
Chari and U-M colleagues Paige Ouimet and Linda Tesar say that the higher firm values are based on the positive responses of the stock prices of the targets and acquirers, which reflect the stock market's view about the present value of future cash flows.
The stock market's reaction to the information contained in the acquisition announcement reveals the market's view of the transaction. The results stand in stark contrast to the evidence from developed markets where the creation of value for shareholders of acquiring companies through M&A activity tends to be negligible or negative.
"The data also suggest that positive acquirer returns are specific to M&A transactions in emerging markets, and that gaining corporate control is the key feature of transactions that deliver positive returns," Chari says.
The researchers report that when cross-border M&A transactions are announced, the increase in monthly returns ranges from 5.05 percent to 6.68 percent for emerging-market target firms and from 1.65 percent to 3.05 percent for developed-market acquirers. The combined returns for acquirers and targets also improve under these conditionsresults show the increase in the market capitalization-weighted joint monthly returns is between 1.79 percent and 2.28 percent.
Furthermore, they say, the returns of the acquiring firms rise significantly higherincreasing by 3.1 percent to 4.8 percentwhen developed-market acquirers gain majority control of emerging-market targets.
"This finding suggests that value creation from M&A transactions in emerging markets is intimately linked to the acquisition of corporate control," Chari says.
Moreover, transferring corporate control from the emerging-market company to the developed-market firm is more significant when the acquirer is involved in an R&D-intensive industry such as pharmaceuticals.
One explanation, the researchers say, is that developed-market acquirers are more likely to transfer technology and other valuable assets to a subsidiary in an emerging market if they have majority control rather than a minority position in the affiliated firm. The transfer of skills and know-how between firms in turn generates significant value gains.
Overall, the results from the study suggest that the boom in M&A activity in emerging markets in the 1990s led to substantial gains for shareholders of both the acquiring and the target firms.
Their research paper, "Cross Border Mergers and Acquisitions in Emerging Markets: The Stock Market Valuation of Corporate Control," will be presented June 11-12 at the Business School's Mitsui Life Symposium on Global Financial Markets: Microanalysis and Emerging Markets.
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