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The effect of mergers and acquisitions on companies’ fundamental
The effect of mergers and acquisitions on companies’ fundamental
Motivation
Motivation
Mergers and acquisitions at emerging capital markets
Mergers and acquisitions at emerging capital markets
Research objectives
Research objectives
Findings from literature
Findings from literature
The Residual Income Model
The Residual Income Model
RIV adjustment to analysis of M&As effect on fundamental value of
RIV adjustment to analysis of M&As effect on fundamental value of
Hypotheses
Hypotheses
Data Sampling
Data Sampling
Deals effect on acquirers’ fundamental value
Deals effect on acquirers’ fundamental value
Factor analysis of deals’ effect on fundamental value
Factor analysis of deals’ effect on fundamental value
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Regression model: OLS
Regression model: OLS
Binary choice model
Binary choice model
General results of modeling
General results of modeling
Model-based conclusion
Model-based conclusion
Model-based conclusion
Model-based conclusion
General conclusions
General conclusions
Elena Rogova, erogova@hse
Elena Rogova, erogova@hse
Calculation details and assumptions
Calculation details and assumptions

Презентация на тему: «The effect of mergers and acquisitions on companies fundamental values in emerging capital markets (the case of BRICS)». Автор: vkremlev. Файл: «The effect of mergers and acquisitions on companies fundamental values in emerging capital markets (the case of BRICS).ppt». Размер zip-архива: 1050 КБ.

The effect of mergers and acquisitions on companies fundamental values in emerging capital markets (the case of BRICS)

содержание презентации «The effect of mergers and acquisitions on companies fundamental values in emerging capital markets (the case of BRICS).ppt»
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1 The effect of mergers and acquisitions on companies’ fundamental

The effect of mergers and acquisitions on companies’ fundamental

values in emerging capital markets (the case of BRICS)

Daria luzina, national research university higher school of economics at st.-Petersburg, darialuzina@hotmail.Com еlena rogova, national research university higher school of economics at st.-Petersburg, erogova@hse.Ru

2 Motivation

Motivation

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Высшая школа экономики, Санкт-Петербург, 2015

3 Mergers and acquisitions at emerging capital markets

Mergers and acquisitions at emerging capital markets

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The reasons of BRICS leading role in M&As

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Thomson Reuters. (2014). Preliminary Mergers & Acquisitions Review. First Quarter 2014.

Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, Санкт-Петербург, 2015

4 Research objectives

Research objectives

The aim - to analyze the effect of mergers and acquisitions on the fundamental value of acquiring companies in emerging capital markets. The task was to investigate, whether M&A deals create or destroy the fundamental value of acquirers; which factors has the strongest impact at the effect of M&As on the fundamental value

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5 Findings from literature

Findings from literature

Market reaction analysis (event studies) - Wong et. al (2009), Chi et al. (2011), Ivashkovskaya, Shamraeva, Grigoriadi (2009), Rani et. al (2014) – the information on M&As results in a positive cumulative abnormal returns at the market, i.e., creates value Grigorieva, Grinchenko (2013) – for companies in Russia the effect was negative. Financial reporting analysis - Mantravadi , Reddy (2008), Kumar (2009), Grigorieva, Troickiy (2012), Grigorieva, Petrunina (2013) – controversial results, depending on industry, period and methods

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6 The Residual Income Model

The Residual Income Model

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Proposed by Ohlson (1985)

The high explanatory power of the RIV model was confirmed by numerous empirical studies (Feltham, Ohlson, 1995; Frankel, Lee, 1998; Hand, Landsman, 1998; Dechow et al., 1999; Volkov, Berezinets, 2006; Buhvalov and Akulaeva, 2014. But there is no studies of M&As at emerging markets, based on RIV

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Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, 2015

7 RIV adjustment to analysis of M&As effect on fundamental value of

RIV adjustment to analysis of M&As effect on fundamental value of

acquiring companies

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Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, 2015

8 Hypotheses

Hypotheses

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Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, Санкт-Петербург, 2015

Высшая школа экономики, 2015

9 Data Sampling

Data Sampling

Databases Zephyr and Ruslana by Bureau Van Dijk Information from Bloomberg, Thompson Reuters Financial reporting in public access

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10 Deals effect on acquirers’ fundamental value

Deals effect on acquirers’ fundamental value

Country

Total number of deals

Positive effect (?V>0)

Negative effect (?V<0)

Brazil

76

57

19

Russia

97

76

21

India

46

38

8

China

128

106

22

South Africa

19

18

1

Total

366

295

71

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Student’s t for Vpre and Vpost = 2,337 at 5-% significance level Hypotheses 1 cannot be rejected

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Высшая школа экономики, Санкт-Петербург, 2015

11 Factor analysis of deals’ effect on fundamental value

Factor analysis of deals’ effect on fundamental value

To assess the influence of various characteristics of the deal at its effect expressed by ?V , the following regression equation was estimated by OLS:

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where difinvalue is the dependent variable, calculated difference between the fundamental value per share of the acquirer before and after the deal i, ? denotes the vector of parameters; Xi is the vector of independent variables, characterizing the deal i; ?i is the model error.

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Высшая школа экономики, 2015

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13 Regression model: OLS

Regression model: OLS

Variable

Coefficient

Std. error

t-statistics

P-value

const

-33.394

55.949

-0.5969

0.5510

dtypecapincr

1445.30

523.289

2.7620

0.0061***`

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dtypeminorstake

848.623

348.571

2.4346

0.0154**

dfinconvert

-815.814

300.239

-2.7172

0.0069***

dfinprivplac

-1411.760

494.767

-2.8534

0.0046***

indusbank

1445.240

523.829

2.7618

0.0061***

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induspow

-348.993

140.579

-2.4825

0.0135**

dmpaymconvdt

-1428.34

573.516

-2.4905

0/0132

Mean dependent var

290.855

290.855

S.D. dependent var

1615.318

Sum squared resid.

7.44e+08

7.44e+08

S.E. of regression

1494.659

R-squared

0.1614

0.1614

Adjusted R-squared

0.1438

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Log. likelihood

-2979.402

-2979.402

Akaike info criterion

5960.805

Schwarz criterion

5991.460

5991.460

Hannan-Quinn criterion

5973.018

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14 Binary choice model

Binary choice model

dependent variable is the qualitative effect of the deal, the creation or destruction of the fundamental value of the company per share

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where ? is the vector of parameters; Zi means the vector of independent variables, characterizing the deal i; ?i is the model error.

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15 General results of modeling

General results of modeling

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16 Model-based conclusion

Model-based conclusion

Deal type. According to the results of two models of binary choice (mode 1), deals related as acquisitions (dtypeacq), have a negative impact on the probability of creating a fundamental value for the acquiring company. The method of deal financing. All four models of binary choice report that the deal funded with the capital increase (dfincspincr) improves the probability of a positive effect on the company's fundamental value. Sector of economy. Models of binary choice have shown the negative impact for acquirers in the chemical industry (iduschem). A similar effect is observed for the oil and gas companies (indusoilgas) and to the steel-processing industry (indussteel). If an acquirer is operating in the coal industry (induscoal) and real estate (indusrealest), there is a greater likelihood of creating fundamental value as a result of M&A. So the hypothesis 10 is confirmed.

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17 Model-based conclusion

Model-based conclusion

Method of deal payment. As a result of a binary choice model (mode 2) deals paid through deferred payment (dmpaymdefpaym) and earn-out payment (dmpaymeout), have a greater chance of creating a fundamental value for the acquiring company. Thus, the hypothesis 4 cannot be rejected at the 1% level of significance. Quantitative factors. Models of binary choice (mode 2) shown that acquiring companies with greater market capitalization before the deal (predmarkcap) have a greater chance of creating a fundamental value. Thus, the hypothesis 3 is rejected at the 10% significance level. Deal country of origin turned out to be insignificant in all the models, which does not allow, in the framework of the research, to test the hypothesis 2. With regard to other significant covariates there are contradictions in different models that do not allow asserting their influence on the dependent variable.

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18 General conclusions

General conclusions

Mergers and acquisitions in BRICS countries lead to an increase in the fundamental value per share of the acquiring company. Factors that have a significant impact on the effect of mergers and acquisitions, resulting in a higher probability of value creation, include: transaction type, company size, industry affiliation, way of deal financing and the method of payment. These results have not only theoretical but also practical importance, since they allow the financial management of companies operating in emerging markets, including Russian, to design and implement mergers and acquisitions so as to create value for investors

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19 Elena Rogova, erogova@hse

Elena Rogova, erogova@hse

ru Daria Luzina, darialuzina@hotmail.com

20, Myasnitskaya str., Moscow, Russia, 101000 Tel.: +7 (495) 628-8829, Fax: +7 (495) 628-7931 www.hse.ru

20 Calculation details and assumptions

Calculation details and assumptions

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For valuation of the pre-acquisition value future earnings per share (EPS) were calculated by multiplying the forecast of ROE at the predicted value BPS at the beginning of the year for each future period. For a forecast of ROE an average ROE of the acquiring company in period from -3 to -1 were used (Frankel, Lee, 1998). The BPS for the period 0 is calculated as the book value of equity per share for the period -1, added to the predicted value of EPS and diminished at expected dividends of the period 0. Similar calculations are made for other periods. For calculation of future DPS the expected value of EPS is multiplied at the expected dividend payout ratio. Dividend payout ratio is calculated as the average of dividend payout ratios for periods from -3 to -1. The period where the income is negative is excluded from the calculations. If the company carries losses at all pre-acquisition periods or if the predicted value of EPS is negative, it is assumed that future dividends equal to dividends for period -1. As the cost of equity (re) we used a time-varying discount rate for every company calculated on the base of the CAPM. The country risk premium was calculated in accordance with the approach proposed by Damodaran (2009). As the risk-free rate of return the US Treasury bonds were applied. The cost of capital calculated for the period -1, is used to calculate the expected pre-acquisition fundamental value, whereas for the calculation of the post-acquisition fundamental value the average value re for periods 0-3 is considered. If the terminal value is negative, it is replaced by a null value. If acquirers cease their existence within four years after the transaction, then the year of "death" is taken for the final period of the analysis.

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