Drivers of mergers and acquisitions and firm value growth in emerging markets.

Abstract

This study investigates drivers of mergers and acquisitions (M&As) and firm value growth in emerging markets. It was targeted at acquirer firms from emerging markets since there is a continuous surge in acquisition transactions both locally and internationally by firms from the emerging markets. These acquirer firms have been using domestic and cross-border M&As as growth strategies to establish their presence and dominance in local and foreign markets. The study was executed with three distinct objectives. First, whether working capital positions of emerging market acquirer firms drive their M&A transactions and influence their decisions regarding the type of mergers they pursue using probit regression analysis. The free cash flow hypothesis was also tested to determine whether free cash flow available to these acquirer firms motivate them to undertake M&A deals. Second, whether managerial share ownership in firms drive M&A transactions by acquirers from the emerging markets and influences the sizes of target firms they acquire during acquisitions, again using a probit regression technique. The study under this objective further investigated the relationship between managerial discretion and the acquirers’ profitability levels. As a third objective, the study explored whether M&As transactions undertaken by emerging market acquirers are value-adding or value-destroying to shareholders of these firms by applying the Generalised Method of Moments (GMM) methodology. The study covered a period of 10 years from 2004 to 2013 for 160 acquirer firms from ten (10) selected emerging market countries. Data were gleaned from the Bloomberg Terminal and DataStream. Results of this study suggest that, working capital positions of acquirer firms from the emerging markets are less likely to motivate them to undertake acquisition deals. However, the study reveals the marginal effect coefficient for the firms’ total assets to be positive and statistically significant at 1%, suggesting that, their total assets rather are more likely to influence them to execute acquisition transactions, all other things being equal. There is no evidence of the firms’ level of financial leverage, returns on assets (ROAs) and Tobin’s Q having the potential to influence these acquirers to pursue M&As. The study further concludes that, the firms’ free cash flows (FCFs) motivate them to execute M&As compared to their working capital positions. Regarding whether the acquirer firms’ working capital positions influence the type of M&As they pursue, the results indicate that, it is less likely to encourage them to undertake either a horizontal or vertical type of merger. Further, our results revealed that, managerial share ownership of emerging market acquirers is also less likely to drive them into acquisition transactions and influence them to pursue smaller-sized targets during M&As deals. Results from the study further suggest that, managerial discretion has a negative relationship on profitability levels of acquirer firms from the emerging market as far as their acquisition pursuits are concerned. Finally, results of the study show that, emerging market acquirers do not experience value growth in terms of profitability and growth opportunities in the first three years after M&As deals. A number of policy prescriptions arising from this thesis are presented to guide managers, practitioners and shareholders of firms in the emerging markets to shape their thoughts on M&As executions. Highlights of these policy prescriptions this study proffers include the following; managers should not ignore the efficient management of working capital. They should institute proper working capital management practices in their companies, in order not to experience liquidity challenges of either excess or shortages as any of them could impact adversely on the efficient running of their business activities particularly in the short-term period. An acquisition or a merger should be seen as a two-edged sword. When finally, firms take a decision to pursue M&As as an investment strategy option, they must fully take into account the issue of resources availability too. The target firm should be evaluated before an acquisition or a merger is performed. After an acquisition or merger, firms should restructure and integrate their resources. Also, for managers to have absolute control over firms and be able to influence investments decisions such as M&As especially in the emerging markets, their ownership percentage should be above the suggested significant level of 20%. Policy makers should also take a second look at their firms’ financial leverage positions and growth in total assets if they desire to improve on their profits levels because results of this study indicate that they have a significant impact on the firm’s ability to engage in M&As. Further, when firms from the emerging markets are planning or considering M&As for immediate value growth, they should recognise that M&A may not provide immediate growth in the first three years after M&A. Rather, the effects of M&A on firms’ value growth may be expected in the long-term period of five years and beyond. However, apart from using M&As for growth purposes, they may be used to create other types of value, such as market power enhancement, risk minimisation through market or product diversification or cost efficiency. Furthermore, since uncertainties exist in M&As, advance preparation is needed before an acquisition or a merger is executed, including a development of planning strategies and improvement of firm governance structure. It is, therefore, important for institutions and government to cooperate to come up with stronger systems to monitor corporate governance practices to bring some sanity to the business community. Lastly, diversifying internationally appears to be an important strategy for reducing risk after a successful merger. It is more likely for investors, all other things being equal, to reduce the levels of risks associated with their investment portfolio if they invest in internationally diversified merged firm.