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Author: Nadia Straton Thesis are submitted in partial fulfillment of the requirements for the degree of M.

Sc Finance and International Business Supervisor: Erik Strjer Madsen, PhD Department of Economics

Reasons Behind Merging Activity in Europe A Study of Cross Border Acquisitions: Why Companies from Western Europe choose to acquire Ukrainian Businesses?

Copyright 2009, Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Words of Wisdom from Warren Buffet on market and investments: Focusing on share prices, makes you a mere speculator, whereas a real investor looks to the asset itself to produce the return If a deal needs complicated calculations before you can decide if it is right, then it probably is not It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down Price is what you pay. Value is what you get Never invest in a business you cannot understand Only buy something that you'd be perfectly happy to hold if the market shut down for ten years Risk comes from not knowing what you're doing If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes If a business does well, the stock eventually follows http://news.bbc.co.uk/2/hi/business/8322921.stm

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Countries of the Acquirer (16 countries) and Target

Abstract The Study provides insights about the motives for mergers and acquisitions (M&As) both domestic and cross-border border and also practices used to evaluate targets. The survey evidence shows that primary motivation for M&A in Ukraine was to achieve synergies and growth. Results also show that in 40% of the cases diversification was considered to be a justifiable motive to merge, merg most as means of reducing risk of losses during economic downturns. DCF method dominates economic multiples to value privately held companies, since all of the targets from Ukrainian sample are privately held companies. In 30 % of the cases acquirer used used their weighted average cost of e equity capital to value a target, , which shows a bad practices in valuing M&As, M&As, since merger cash flow is the equity cash flow from the target and should be values with targets discount rate.

Key Words: Mergers and Acquisitions, Acquisi CIS (Commonwealth of Independent States), LBO (leveraged buyouts), , PER (price earnings ratio), CAPM (capital asset pricing model)

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Table of Contents Introduction .. page 6 1. Challenges and Opportunities of the Ukrainian economy page 7 1.1 Economy page 8 1.2 Tax system . page 10 1.2.1 Corporate Taxes page 11 1.2.2 Individual Taxation page 12 1.3 Accounting System page 12 1.4 Labor Regulations ..page 13 1.5 Regulatory Climate for Foreign Direct Investments page 13 1.6 Capital Markets ...page 14 1.7 Antimonopoly Policies and M&A in Ukraine ..page 14 Conclusion .page 14 2. Why culture might be an important factor in acquisition process? .page 17 Conclusion page 22 3. Merger and Acquisition motives page 23 3.1 Disturbance theory (Merger waves in different time periods. .page 29 What drives industry merger waves?) 3.2 Results Based Motives .page 31 3.2.1 Efficiency theory ..page 32 3.2.2 Valuation theory . .page 35 3.2.3 Monopoly theory .page 37 3.3 Personal Motives page 39 3.3.1 Empire Building theory page 39 3.4 Game theory (Psychological motives) page 40 3.4.1 Eat of Be Eaten page 44 3.4.2 Musical Chairs Theory ..page 44 3.5 Motives characteristic to the cross-border acquisitions page 47 (synergy hypothesis, hubris motives)

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Conclusion Page 50 4. Target Valuation Techniques .page 51 5. Performance of cross-border acquisitions. Empirical Evidence ..page 54 5.1 Short- term studies page 55 5.2 Long term studies page 56 Conclusion ..page 57 6. Study methodology . Page 58 6.1Questionnaire page 58 6.2 Limitations... page 58 8. Study Results page 59 Thesis Conclusion page 60

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Introduction The most popular way in invest in Ukraine is to acquire companies, despite even economic downturns acquisition rate is growing. Top executives use mergers and acquisitions as strategic maneuver to realize corporate objectives. Very often mergers that claim to be done to achieve synergies in reality are focused on achieving personal motives and interests. However some economist consider it to be paradoxical when everyone knows that we cannot argue much against is market efficiency hypothesis. Some mergers follow hubris, ego they truly believe that their knowledge will help both companies achieve synergies that they could not achieve with previous management. The aim of this paper is to investigate why companies merger. What are the motives to merge in general and what are the motives to merge cross-border. At the same time my aim is to receive direct evidence from the questionnaire on why companies from abroad decide to invest in Ukrainian Businesses.

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

1. Challenges and Opportunities of investment in the Ukrainian economy Be greedy when others are fearful and fearful when others are greedy Warren Buffet Ukraine population: 45,700,395 (July 2009 est.). World (27th rank). Area: 603,550 sq km. World (45th rank). GNI per capita: US $2,550 (World Bank, 2007). GDP (purchasing power parity) $339.8 billion (2008 est.). World (35th rank). GDP per capita (PPP) $7,400 (2008 est.). World(124th rank). Unemployment rate 3% (2008 est.) World (34th rank).1 Central bank discount rate 12% (31 December). World (53th rank). Commercial prime lending rate 11.68% (31 December 2008). World (71th rank). Source: CIA fact world book Since the time of its independence Ukraine has attracted very little foreign direct investments comparing with other Eastern European countries and former Soviet Union republics. This number is also quite low as percentage of GDP, or exports, or the amount of FDI per capita (Ishaq, 1998). Foreign direct investments can be done through incorporation of the foreign company, by acquiring shares in the enterprise, through participation in the equity joint venture with another enterprise or through merger and acquisition (derived from Wikipedia explanation). The latter is the type of FDI I will focus my most attention in this paper on. After collapse of Soviet Union the scarcity of resources in Ukraine were partly offset by capital coming from foreign investors. Presence of foreign investors
1

There is large number of unregistered and underemployed workers.

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

brings new managerial expertise and skills, gives access to the foreign markets and resources, it is also a way to improve its balance of payment without rising additional debt. Countries with regulatory legislation focused on attracting foreign direct investments, get better terms of trade through higher credit ratings. Amount of foreign direct investment per capita is one of the key performance indicators investors consider before making investment decisions. Ukraine can be seen as a potentially attractive country for foreign investments because of its market scope, high skilled labor next to low wage levels, favorable geographical location and high range of raw materials. (Ishaq, 1998). However despite of all the opportunities that capital inflows might create, foreign investors are more reluctant to invest in Ukrainian businesses in comparison to countries from Post Soviet Bloc like Kazakhstan, Russian Federation or Poland. Table 1
Country Ukraine Kazakhstan Poland Russian Federation South East Europe and the CIS (transition economies)
Self made table from

Foreign direct investment (FDI) (mil. of dollars) 1990-2000 2005 2006 2007 346 7808 5604 9891 851 1971 6278 11126 3705 10249 19591 22612 1941 12886 29701 55073 4632 30948 54548 90866
the source:
UNCTAD,

(percentages) 2008 1990-2000 2006 10693 3.7 21.1 14543 22.7 25.7 16533 14 29.2 70320 3.3 16.2 114361 5.1 18.9
Report 2009
;

2007 25.2 35.4 24.7 20.2 22

2008 21.8 40.2 14.4 19.5 21.4


or

World

Investment

www.unctad.org/wir

www.unctad.org/fdistatistics

In next section of the paper I will investigate reasons that might discourage investors form investing. In parallel it also might shed light on what motivates foreign companies to make capital inflows and buy companies in Ukraine. 1.1 Economy

Ukrainian economy started to recover if to look at the GDP rate per capita and grew at the annual rate exceeding 7% on average from 2000 until 2007. Next to the GDP

M.Sc. Thesis in Finance and International Business

Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

growth, inflation rate also faced increase from 12% in 2000 to 25% in 2008. Officially registered unemployment rate was 2.7% in 2006, according to PWC report. However according to the World Bank source figures for unemployment rate were higher, please see Table 2 below. Table 2
KPI, Ukraine 1996 1997 1998 GDP growth (annual %) -10 -3 -2 GDP per capita (current US$) 873 991 835 GDP per capita growth (annual %) -9 -2 -1 GDP per capita, PPP (current international $) 2940 2925 2928 Inflation, consumer prices (annual %) 80 16 11 Unemployment, total (% of total labor force) 8 9 11 External debt stocks (% of GNI) 22 22 32 External debt stocks, total (DOD, current US$, bil) 9,5 11,1 13 Foreign direct investment, net (BoP, current US$, bil) 0,5 0,6 0,75 Imports of goods and services (% of GDP) 48 44 44 Imports of goods and services (current US$, bil) 21,5 21,9 18,5 Exports of goods and services (% of GDP) 46 41 42 Exports of goods and services (current US$, bil) 20 20 17,5 Electric power consumption (kWh, bil) 161,8 150 139,2 Electricity production (kWh, bil) 183 177,8 172,6 Fuel imports (% of merchandise imports) 48 46 40 Fossil fuel energy consumption (% of total) 86 85 84 S&P Global Equity Indices (annual % change) .. .. -82 .. .. Ease of doing business index (1=most business-friendly .. regulations) 1999 -0 636 1 2992 23 12 45 13,9 0,49 48 15 54 16,9 138,7 172 44 85 20 .. 2000 6 636 7 3271 28 12 40 12 0,59 57 17,9 62 19,5 136,6 171 43 84 75 .. 2001 9 781 10 3695 12 11 55 20 0,77 54 20 55 21 135,8 173 40 84 -36 .. 2002 5 879 6 3994 1 10 52 21,7 0,69 51 21,5 55 23 137 173,5 39 84 27 .. 2003 9 1049 10 4499 5 9 48 23,9 1,4 55 27,6 58 28,9 143 180 34 85 40 .. 2004 12 1367 13 5228 9 9 47 30,2 1,7 54 34,8 61 39,7 149 182 34 84 170 .. 2005 3 1829 3 5583 14 7 39 33,3 7,5 51 43,6 51 44 152,9 186 30 83 53 .. 2006 7 2303 8 6222 9 7 47 49,9 5,7 49 53,3 47 50 159 193 28 82 49 .. 2007 8 3069 9 6933 13 .. 53 73,6 9,2 50 71,9 45 64 .. .. 26 .. 112 .. 2008 2 3899 3 7271 25 .. .. .. 9,7 48 86 42 75,3 .. .. .. .. -82 145

Self made table, Source: World Bank. http://ddp-ext.worldbank.org.www.baser.dk European Union and Russian Federation take up half of the Ukrainian trade. Even though next to the national currency the most used one is USD, the US is a relatively small trade partner. It accounted for only 3,2% of exports and 2,0% of imports for 2006. (PWC report. Doing Business and Investing in Ukraine, 2007) However according to (Barbara Peitsch, 1997), FDI coming from companies based in the Unites States accounted for 22,8% of the total amount invested. FDI coming from Germany were in the amount of 17.3%, Russian Federation (7,0%), United Kingdom (6,2%), Cyprus (5,1%) and Switzerland (4,7%). Most of the FDI was channeled into commerce and agriculture then followed by machine building, transportation and chemical sector. 40% of the Ukrainian export accounts are steel. Ukraine imports 90 % of its oil and gas. It does not diversify its sources, therefore most of natural gas imports is coming from
M.Sc. Thesis in Finance and International Business Nadia Straton

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Russia. This dependence has great impact on Ukrainian Economy and Foreign Policy. (PWC report. Doing Business and Investing in Ukraine, 2007). Still developing legal system and existing institutional frameworks make Ukraine a challenging place to do business with. According to World Bank figures in 2008, country was ranked on the 145th place, among the friendliest countries to do business with, the 1st place would be the best. Ukraine was also named as the second most difficult country to pay taxes in. From the fist point of view, both corporate and personal taxes appear quite low. 25% is the tax for companies, 15% is the individual tax and also 20 % VAT. However 25% may well rise to 30% if to include further restrictions and deductions. Social security system which takes its roots from communist times has both positive and negative side to it. Free medical care, free school education and university education is obviously on the positive side. However social contributions of employees to different finds can come up to the 36% rate for individuals earning less than 1,500 USD per month. VAT has also many constraints, which might be costly for business in the long run. (PWC report. Doing Business and Investing in Ukraine, 2007). 1.2 Tax System

Direction of the tax reform seem to progress over time and has brought some positive changes. However tax payment procedure is already over complicated and frequent amendments to the law make it look even more volatile. Parliament is the only body that can enact, amend or change taxation law and penalties. However, there is also STA (State tax authority), that sometimes issues interpretations not consistent with the law. According to PWC study: medium sized company makes 98 tax payment each year, that require 2185 hours to prepare. If the calculation for 252 business days a year is right, then 1 tax accountant has to work a bit more than 8 hours a year to prepare all the tax payments. Financial accounting and tax accounting are two separate fields; therefore company normally needs to hire both financial and tax accountants. There are 7 compulsory taxes to be paid in Ukraine: Corporate income, personal income tax, VAT, pension fund charge, excise tax (tax payable on cars, alcoholic beverages,
M.Sc. Thesis in Finance and International Business Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

tobacco, beer, petrol, diesel fuel), land tax, stamp duty; obligatory local taxes would be advertising tax, municipal tax and also charge if company uses local symbols. Overall there are 28 taxes that might be imposed on business. Ukraine has also tax treaties with some countries on reduced payment rates for dividends, interest and royalties. The Ukrainian-Cyprus treaty gives right to 0% withholding tax on earning form dividends, interests and royalties. The failure to deduct withholding tax by payer would be a result in 200% fine plus interest. Income on dividends, interests, royalties, lease payments, agency and brokerage fees coming from Ukrainian sources is subject to 15% tax if paid by non residents. Tax audits are scheduled and can be carried not more than once a year, for maximum up to 30 days. Understated tax liabilities of over 600000 UAH (120000 USD) result in penalties of 50%-100%. If mistakes are due to the methodological of arithmetic errors, then 5% will be imposed. 1.2.1 Corporate taxes Ukrainian and foreign entities as was mentioned before pay 25% of tax. Ukrainian entities would be those established under Ukrainian law and are liable on their worldwide taxes. Foreign taxes can be subject to reimbursement against Ukrainian tax liabilities, however might be difficult to obtain in practice. Inventories are valued for tax purposes are valued according following methods: Identified value of the appropriate inventory unit, weighted average value of inform unit, FIFO, target expenses, inventory sales price. (PWC report. Doing Business and Investing in Ukraine, 2007). Income from securities is calculated separately and is based on pulling method. Assets in excess amount of 1000 UAH (200 USD) with useful life acceding one year are subject to depreciation. There are no big depreciation rates on fixed assets in Ukraine. However there are restrictions on deductibility of interest if Ukrainian company is more
M.Sc. Thesis in Finance and International Business Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

than 50% owned or controlled by non- resident. Foreign currency gain and losses are tax deductable, while foreign currency credits and receivables are not. There are no special deductions for the operating losses. If losses are incurred in the land disposition for example they cannot be deducted. Unutilized looses in the past maybe be possible to offset if Parliament passes the law. 1.2.2 Individual taxation Foreign individuals are subject to Ukrainian tax if their income is received from activities performed that have Ukrainian source. Salary paid by non-resident employer is taxed at double the rate applicable to residents. Salary payments made for visits on short term assignments are exempt from Ukrainian taxes. Unified tax regime is a good incentive specially designed for private entrepreneurs, employing up to 10 people with income up to 500,000 UAH (approximately 100,000 USD). Unified tax ranges from 4 to 40, if expressed in USD terms and relieves entrepreneur from personal income tax, VAT, land tax and payment to social security funds with exception of Pension fund payments. 1.3 Accounting system

From the 1st of January 2000 the Law on Accounting and Financial Reporting became effective and by rules it should not contradict IFRS (International Financial Reporting Standards), however in reality there are differences between the two. According to the Ukrainian regulations Financial Statements are prepared in Ukrainian currency for a calendar year. The Financial Statement comprise of balance sheet, income statement, cash flow statement, statement of changes in equity and notes of financial statement. Tax accounting and financial accounting are separate from each other, therefore duplication of recordings might occur. Tax rules can be changed or new rules can be enacted by Parliament from time to time and it might twist National accounting rules form IAS16.

M.Sc. Thesis in Finance and International Business

Nadia Straton

12

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Auditing in Ukraine is regulated by Auditing Law that sets out framework of operations for the Chamber of Auditors. It has power to approve audit standards, training programs, register firms and auditors in the individual practice. International standards on auditing are established on the 1st of January 2004. Audits are mandatory for following enterprises: banks, insurance companies, JSCs, bond issuers, investment funds, brokers and traders and other companies which are required to publish their financial statement under Ukrainian law. (PWC report. Doing Business and Investing in Ukraine, 2007). 1.4 Labor Regulations

Employment regulations in Ukraine are governed by Labor Code, which dates back to the December the 10th, 1971. This code applies equal rules to both domestic and foreign enterprises irrespective of their area of activity, form or type of ownership. Employment guarantees and social security benefits are granted equally either it is foreign or national employee. Trade unions are easy to establish and they are popular among labor force in Ukraine. The largest trade union, Federation of Trade Unions in Ukraine unites more than ten million members. Minimum wages are regulated by Budget Law, minimum wage was established at 625 UAH (approximately 115 USD) from 01.04.2009. (Federation of European employers. http://www.fedee.com/minwage.html). In general working time is 40 hours per week, with a five-day working week. Overtime has to be paid at double rates and cannot exceed 2 hours per day or 120 hours per year. 1.5 Regulatory Climate for Foreign Direct Investments

Except restrictions on publishing and broadcasting and also manufacture of weapons there are no other major restrictions on foreign ownership. No special permits to invest are required, however investors still have to follow the necessary steps in order to register with government agencies. Difficulties might be experienced with the administration hurdles sometimes.

M.Sc. Thesis in Finance and International Business

Nadia Straton

13

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Foreign Direct investments according to World Bank figures stood at 0,59 billion USD in 2000 and there was no drastic increase with 0,69 billion USD in 2002, until this amount almost doubled and reached 1,4 billion USD in 2003. The increase could be explained by privatization program of 2000-2002, that as a result ended in favor of selling large government enterprises and their stakes to domestic and foreign investors. The law on privatization program continues to be applied until now and in 2008 FDIs reached 9,7 billion, see Table 2 for further reference. On February the 6th, 2008 Ukraine became member of WTO, after 14 years of negotiations. Membership reduces export trade barriers and also is forecasted to boost inflow of FDIs and agriculture development. (http://news.bbc.co.uk/2/hi/business/7230008.stm) Foreign direct investments are affected by several laws in Ukraine: Law on Procedure for Foreign Investments, The Civil Code, the Commercial Code, law On Securities and Stock market, Law on Protection of Economic Competition, Law on Protection from Unfair Competition, Law on Environmental Protection. Foreign exchange issue are regulated by the 1993 Cabinet of Ministers Decree, On the System of Currency Regulation and Currency Control and also ruled established by National Bank of Ukraine. (PWC report. Doing Business and Investing in Ukraine, 2007). 1.6 Capital Markets

Pareto Principle can easily be applied to capital market in Ukraine. Out of more than 250 traded companies, ten largest account for more than half of the market capitalization. Capital market is growing fast however it is still lucking transparency. Most of the Trading is done on the PFTS stock exchange that was established in the 1997. There are more than 200 members on the stock exchange and more than 800 securities listing. PFTS is the member of International Association of CIS Exchangers. (http://www.pfts.com/en/about-pfts/)

M.Sc. Thesis in Finance and International Business

Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

It went electronic in 2005 and was afforded stock exchange status in 2006. 1.7 Antimonopoly policies and M&A in Ukraine Law on Protection of the Competition sets main rules and restrictions on companies enlargement. Mergers and acquisitions are likely to receive preapproval from Antimonopoly commission, which aims to protect customers and businesses from unfair competition. Investors can choose to invest in variety of ways either by setting up joint ventures or through privatization of state owned assets or through making decision to acquire. Mergers and acquisitions grow in the popularity with increased size from USD 2.3 billion in 2005 to USD 3.4 billion in 2006, with an average deal value of USD 45 million. Average deal size in financial services was USD 114 million in 2005-2006, USD 14 million in manufacturing, USD 11 million in retail and wholesale. (PWC report. Doing Business and Investing in Ukraine, 2007). According to World investment Report CrossBorder Mergers and Acquisitions also increased in sales value from USD 8 million in 2000 up to 5,9 billion in 2008. Acquisitions made by the Ukrainian bidder also faced dramatic increase in value from 2 million in 2000 up to 972 million in 2008. Please see Table 3 below. If to compare percentage increase with other CIS (Commonwealth of Independent State) countries, Ukraine is taking a lead in amount of sales to foreign acquirers. Table 3. Amount in millions
Cross-border merger and acquisitions, 1990-2007 Sales (net) Purchases(net) 2006 2007 2008 1990-2000 2006 2007 261 1818 5933 2 23 260 -1751 727 -344 -9 1503 1833 886 728 966 12 194 126 5811 22753 13777 170 3507 18597 8497 30671 20505 104 2940 21728
UNCTAD,

Region/economy Ukraine Kazakhstan Poland Russian Federation South-East Europe and the CIS (transition economies)
Self made table from the

1990-2000 8 463 1611 331 1141


source:

2008 972 2047 511 17115 20648


or

World

Investment

Report

2009

www.unctad.org/wir

www.unctad.org/fdistatistics.

M.Sc. Thesis in Finance and International Business

Nadia Straton

15

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Conclusion Next to all the advantages of Ukrainian economy: favorable market scope, highly skilled labor, geographic location, high range of raw materials, membership in WTO, there are challenges investors have to face. Primarily legal and institutional frameworks are rather complicated and change frequently. Process of tax payment is too complicated and time consuming. Yet despite of all the challenges FDI inflows are growing every year with acquisitions being the most popular form of investment. It can be explained by relatively cheap cost to make acquisition in comparison to LLC, which require capital of 100 minimum monthly salaries and JSCs minimum capital requirement would be equivalent to 1250 monthly wages. Since amount of minimum monthly wage is growing every year, increased number of acquisitions in comparison to other form of FDIs can be a reasonable explanation.

M.Sc. Thesis in Finance and International Business

Nadia Straton

16

Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

2. Why culture might be an important factor in decisions to merge? Besides of all the challenges that foreign investors might face when acquiring Ukrainian enterprise there is culture difference challenge. One of the strategic decisions is to forecast the merge process of two business cultures or if the culture of the acquired company may keep its values. Modern Management theory warns against bringing the baggage of our national culture into our international communications, but little is said of the impact of our perceptions of the new culture on our communications, or how management can transcend personal cultural bias and develop a derivative corporate culture. (D.J. Mitry, T.Bradley, 1999). According to (Geert Hofstede, 1980): Culture, in this sense of collective mental programming, is often difficult to change; If it changes at all, it does so slowly. But what determines culture? Which dimensions can be used to distinct Ukrainian culture from other cultures in the EU. The research done by Geert Hofstede based on years of research done on MNC with subsidiaries in 40 countries around the globe defines four criteria to distinguish one culture from another: Power Distance, Uncertainty Avoidance, Individualism-Collectivism, Masculinity-Femininity. Each of the countries has an index score for each of the four dimensions, ranging from -150 to +230 (Hofstede, 1980). 1. Power Distance (PD) is an index of an extent to which power is accepted. Some societies tend to have larger power distance with big inequality dimensions and division on superiors and subordinates which are treated as two different kinds of groups. Smaller power distance cultures have almost equal relationships between subordinates and superiors. Subordinates prepared to trust each other and base their relationship on solidarity. 2. Uncertainty Avoidance (UA) is an index of an extent to which society feels threatened by ambiguous situations. To avoid these situations society is trying to create formal rules and does not tolerate deviant ideas. Cultures with UA according to (Hofstede, 1980) have higher levels of anxiety which pushes employees to work harder.
M.Sc. Thesis in Finance and International Business Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

3. Individualism (IND) is an a index of individualist behavior vior vs. collectivist behavior. Individualistic cultures tend to rely and therefore take care about themselves and people close to them while collectivist societies expect from group and owe full loyalty to the group. 4. Masculinity (M) is an index of the value placed on ambition and material goods goods. It measures the level of focus on acquisition of things and results in the society vs. quality of life and relationship between people. In some sources there is also Long Term Orientation index mentioned which s shows the extent of value placed on persistence and ordering of relationships. . (D. J. Mitry, T. Bradley, 1999). Please see the table and graph below showing Culture Dimensions of 14 quoted bidder countries from EU that acquired Ukrainian companies, c from 2000 until 2009. Geert Hofstede, 1980 explains a tendency for Small Power Distance countries to be associated with Individualism and Large Power Distance countries to be associated with collectivism. At the same time he argues that Small Power Distance/Ind Distance/Individualism go together with greater national wealth. Moreover Individualistic cultures are wealthier then Collectivistic. However if to look at the Ukrainian example in comparison to other Western European countries it has one of the lowest power distance indexes and at the same time one of the lowest individualism index then others, which are not likely to go together according to Hofstede findings. To test association between national wealth and Individualism Index some statistical test should be run. Table ble 4
Country France Poland Greece Italy Hungary Netherlands Germany United Kingdom Finland Norway Sweden Ireland Austria Ukraine
PDI (Power Distance Index) IDV (Individualism) MAS (Masculinity) UAI (Uncertainty) LTO (Long-Term Orientation)

Graph 1
68 68 60 50 46 38 35 35 33 31 31 28 11 23 71 60 35 76 55 80 67 89 63 69 71 70 55 51 43 64 57 70 88 14 66 66 26 8 5 68 79 13 86 93 112 75 82 53 65 35 59 50 29 35 70 57

44 31 25 20 33

56

M.Sc. Thesis in Finance and International Business

Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

National wealth can be described in GDP, purchasing power parity standards. In the table below there is GDP for all the countries from the sample of quoted companies that acquired Ukrainian firms. Table 5
Country Austria Cyprus Finland France Germany Greece Hungary Ireland Italy Lithuania Luxembourg Netherlands Norway Poland Sweden United Kingdom Ukraine 2002 30501 18812 27594 28712 27578 21732 14694 32990 26804 10567 57550 31940 37060 11563 29007 28354 3994 2003 31496 19287 27703 28270 28572 22557 15494 34405 27149 12033 60477 31712 38316 11987 30083 29293 4499 GDP, per capita, PPP $ 2004 2005 2006 33061 33616 35340 20780 22116 23329 29900 30690 32586 29205 30710 31988 29910 31397 32841 24092 25049 26798 16224 16955 18023 36309 38437 41122 27426 28122 29356 12977 14197 15752 64965 67755 75597 33210 34801 36733 42265 47305 52173 13019 13784 14838 32085 32319 34444 31292 32207 33663 5228 5583 6222 2007 37370 24789 34526 33674 34401 28517 18799 44613 30353 17830 79485 38694 53432 16089 36712 35130 6933 2008 38152 .. 35427 34,045 35613 29361 19330 44200 30756 18824 78599 40849 58138 17625 37383 35445 7271

Statistical test of the relationship, please see test results in Appendix 9, between two associations of Individualism and National Wealth of the acquirer countries shows R square value of 0,201. Therefore Linear regression model explains 20,1% of the variation in the Individualism Index with National Wealth as the explanatory variable. Scatter plot data, which was result of Pearson correlation test showed result of 0,449 r and indicated stronger positive linear association than R square. However P value of 0,108 showed small significance of findings. It might be due to the small sample of data associations. If sample with the same data variances would increase twice, then correlation would be significant at the 0,05 level with P=0,017. It proves that there is positive correlation between Individualism index and National wealth, however it is not perfectly linear.

When doing a merger between company from the high individualistic and wealthy country like Great Britain or Netherlands and more collectivistic and poorer country like
M.Sc. Thesis in Finance and International Business Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Ukraine different management practices might be used to run the company. Culture can be challenged in the way human initiative is rewarded or the way company is doing its financial reporting, either focused on revenues or profits. Hofstede tried to explain with his four dimensions of national culture to what extent theories and practices developed in one country are likely to apply in another country. It can give good idea for managers from Western European countries which motivation practices can be used in Ukraine, when taking his four values into account. American theories by David McClelland (focused on achievement motive), Abraham Maslow (from psychological to self esteem and self actualization needs), Frederic Herzberg and Victor Vroom (result oriented motives) would apply better in Ireland, United Kingdom, Germany where they have much higher Individualism index, Masculinity index and Power distance index then in Ukraine. When considering the traditional approach to management problems we find that they do not apply to the FSU (Former Soviet Union) business environment. Interviews, observations and surveys revealed that throughout the business environment there were numerous factors operating that cannot be compared to any conditions of management in Western economies (D.J. Mitry, T.Bradley, 1999) Small Power Distance in Ukraine can be explained by the equality created by socialist system which stems back from communist times. Where rights of individuals were equaled and redistribution of power was normal. Cooperation and solidarity was one of the key performance indicators. People strived to build society of equals. However if to take a look at the other CIS (commonwealth of independent states), Russia has much higher Power Distance (43) and Belarus (44). In Ukraine it is more common for subordinates to take initiatives. Individualism in Ukraine is much lower than in other western European countries from the sample, except Greece. There is much higher emotional dependence of person on the company, then in more individualistic societies. Order, duty and security should be provided by the company in contrast to the autonomy and financial security values in other cultures from the sample.
M.Sc. Thesis in Finance and International Business Nadia Straton

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Reasons Behind Merging Activity in Europe. Why companies from Western Europe choose to acquire Ukrainian businesses?

Masculinity index in Ukraine is similar to Masculinity index in Scandinavian countries. It can also be explained by the unisex system, which sympathized unfortunate and placed high stress on equality between sexes. Values are placed more on people and environment then money and things, which can be reflected in the service oriented reward initiatives. As mentioned in (D.J. Mitry, T.Bradley, 1999) paper when describing Russian example which has even lower masculinity score than in Ukraine: The control function of incremental material rewards will not produce the desired response in this culture. Likewise, the personal accountability for action that is expected in the United States is the result of high Masculinity and Individualism. Uncertainty avoidance in Ukraine is stronger than in Ireland, Sweden and United Kingdom but lower than in south western countries, like Italy, Greece, France. In Ukrainian business culture there might be more urge to work hard, while in UK business culture hard work is not a virtue, you live in order to work attitude is more prevalent. In comparison to France, Hungary, Italy, Greece Ukrainian companies might be more willing to take risks, less nationalism can be pervasive. If rules cannot be kept, there is more tendency to change them. Accent is made on relativism and common sense than on experts and their knowledge. Finding of Geert Hofstede that resulted in much higher score values of Uncertainty Avoidance in Ukraine and much lower Masculinity scores than in the West, diametrically oppose the common Western preconceptions. (D.J. Mitry, T.Bradley, 1999). According to Hofstede theory it is much easier for managers to adapt to higher Power Distance environments and it is much easier to be autocratic in order to be effective then to collaborate with countries that have Industrial democracy. It might be much more challenging for managers from France, Poland and Greece to adapt to Ukrainian corporate culture than for managers with low Power Distance like Austria. Acquirers from United Kingdom and Netherlands with high Individualistic Scores can face conflicting situations through different perception of organization and individual. Organization and individual in Ukraine would have a link based on loyalty and feeling of belonging to the company. While in the United Kingdom and Netherlands this relationship is based on capitalistic principles of self interest. Job redundancy in Ukraine
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for example will be more ill perceived than in the United Kingdom. Identical policies for headquarter in Netherlands or UK and subsidiary in Ukraine can have different outcomes in the long run. 2 Traditional approached to leadership are too narrow to satisfy new era of many crosscultural transactions that stem from higher competition and need for strategic interdependencies and partnerships. With growth of transnational companies came the requirement for transnational managerial leadership (TML).3 According to (Mitry and Bradley, 1999) transnational managerial leadership can develop through training in crosscultural insight, relational tracking (capability of systematic thinking), relational skills, long-run optimization pathway (level of capability in applying strategic plans). Further they argue that third corporate culture is required in order to help people from two different cultures converge into one. The third culture is similar to children of immigrants that develop and take advantage of their parents and new culture in which they grew up. Conclusion The dilemma for companies that decide to make cross border merger with Ukrainian company is the decision of whether to adapt companies culture to local culture or try to change it. By changing culture I mean the principles company is operating on: financial reporting, incentives for employees, rewards etc. To make this strategic decision managers have to get cultural training and see the link between their home culture and Ukrainian culture to know which aspects are likely to be adapted and which are likely to be changed.

Geert Hofstede. Motivation Leadership and Organization: Do American Theories Apply Abroad? Organizational Dynamics, Summer 1980, pp.61-62. 3 D.J. Mitry, T. Bradley. Managerial Leadership and Cultural Differences of Eastern European Economies. National University School of Business and Technology. 1999.
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3. Merger and Acquisition motives There are different ways companies decide to invest cross border as was mentioned in previous sections, companies can set up limited liability companies or make joint ventures. However example of Ukraine especially in recent years shows growing interest for mergers and acquisitions. Most of the literature and evidence on mergers and acquisitions shows the consequences of mergers however not so much research has been done to investigate the motives behind mergers. There are several theories that try to explain rationale behind decision to merge. Very often several reasons can cause this decision. Depending on the type of acquisition either it is vertical or horizontal, related or unrelated, cross-border or local, strategies and motives can be different. Motives to merger can also differ depending on the time period they happen. The mergers for monopolies and oligopolies characterize first two American merger waves. These times were characterized by horizontal mergers, which aim to achieve market power, reduce competition via acquisition and set up the high margin prices. George Stigler in his Monopoly and Oligopoly by Merger, 1950 cited John Moodys study of ninety-two large mergers with seventy-eight industries controlling 50 per cent or more of the output, fifty seven controlled 60 per cent and twenty six controlled 80 per cent or more. 4 Market share of mergers studied by Industrial Commission constituted 71 per cent with following distribution: 1 company controlled 25-50 per cent of the market, 11 companies - 50-75 percent, 10 companies 75-100 per cent. 5

Stigler, Monopoly and Oligopoly by Merger, 40 Am. Econ. Rev (May 1950). (Citing John Moody, The Truth about the Trusts (New York, 1904), p.487) 5 Stigler, Monopoly and Oligopoly by Merger, 40 Am. Econ. Rev (May 1950). (Citing United States Industrial Commission, Report, Vol. XIII, passim)
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The era of mergers for monopoly gains according to Stigler, 1950 lasted for 17 years and ended in 1904. He argued that market power gained during these period benefited only merged companies and aconomies of scale can be gained in smaller sized companies. Northern Securities decision and further antitrust laws prevented mergers who aimed for monopoly, but created conditions for Oligopolies. After Clayton Act, 1914, firms aimed for vertical mergers that would enable them to control entire supply chain. Mergers were also caracterised by different types of industries, if in the first merger wave they were steel and tobacco industries in the second wave margers were undertaken by second class firms, as Stigler (1950) calls them: The industry was transformed form nearmonopoly to oligopoly. Cement, cans, petroleum, automobiles, agricultural implements, and glass are examples. (p. 31) When antitruat laws after 1950 challenges monoply and oligopoly mergers, they were replace by acquisitions in unrealted industry sectors. These mergers were focused on growth and diversification, named conglomerate mergers. They lasted 1960-1974 with pick in 1968 and were recognized as third merger wave in the US history of acquisitions. Evidence from Avery, Chevalier and Shaefer, 1980 suggests that managers can overdiversify and overemphasize growth of the company. They examined acquisitions for the period 1986-1988 and effect of the acquisitions on the career of the CEO and found that managers iscentives is based not on the compensation but more on the prestige. 6 The new type of the organization leads to new type of management. Muller( 1969) describes this manager with superior quality, which can run
7

big conglomerate

organization wtihout sepcific knowledge of the industry. Separation of ownership and control was done with the purpose, however it also brought some conflict of interest. As mentioned by (Avery, Chevalier and Shaefer, 1980) conflict can arise when manager takes decision to undertake acquisitions. Very often acquisition is focused on building

Avery, Chevalier and Schaefer, Why Do Managers Undertake Acquisitions? An Analyses of Internal and External Rewards for the Acquisitiveness, April, 1998. 7 Mueller Dennis C. (1969): A theory of Conglomerate Mergers, Quarterly Journal of Economics, 83, 643-659.
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empire and increasing size and scope well beyond what constitutes shareholder wealth maximization. Mueller argues further that synery motives often presented as a motive in a press seem to be implausible when companies invest in unrelated or loosely related industries, or when acuired firm is left to operate by the same management on its own. He doubts that all mergers reported as synergistic were really synergistic business opportunities during irrational conglomerate merger activity. Mueller proposes hypothesis that companies managers focus on growth in physical size of their corporation rather than shareholder welfare. Behavioral evidence on rewards of managers is closely tied to the growth rate of the firm. Bonuses, stock options and promotions of managers are all connected to the size but not the profits of the firm. Presitge is also realted directly to the size and growth of the firm but not to its profits. (Mueller, 1969) In works of Marris(1963), Monsen and Downs (1965) rationale of the managers is also focused on growth maximization of the company. (Marris, 1963) places link between managerial utility and size of the firm. Managers value salary and security, power and status. Since managers cannot be perfectly mobile and promote their salaries and growth through many organizations, in other words companies value people they know well, they are reinforces to identify their psychological ego with organization. Best method to satisfy personal needs is to increase power and prestige with the company growth.8 Monsen and Downs (1965), similarly to (Avery, Chevalier and Shaefer, 1980) argue that managers who are also not owners of the company might have divergent interest. These divergence can cause company to deviate from profit mazimization. Size and growth can restrict profit maximization through beurocratic, administrative problems. Conflict of interest can arise from differetn goals of interest between middle and lower management.

8 Marris Robin (1963): A Model of Managerial Enterprise, The Quarterly Journal of Economics, Volume 77, Issue 2, 185-2009.

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Additional goals coming from certain people in the company can inevitably lead to the deviation from shareholder wealth maximization.9 However there are slightly different evidence of Matsusaka, who investigates takeover motives during conglomerate era 1968-1974, implying that during these time market favoured transactions. Managers attemted to use internal capital through mergers, since external markets were not well developed. The main finding in his paper is that shareholders actually benefited form diversification acquisitions. Market responded positively to targets with retained management and negatively to the replaced management. Matsusaka present evidence on buyer and target price-earnings ratios which is inconsistent with conjecture that companies could mislead investors by earnings-per-share manipulation. Evidence suggests that market normally fabours sinergy driven aqcuisitions and since shareholders benefited from the diversification it could not have been driven only by managerial objectives of prestige and better bonus sceem.10 The forth marger wave started around 1980 by improvement in takeover technology, less strict anittrust regulations, industry contructiton due to excess capacity. The market for corporate control is creating large benefits for shareholders and for the economy as a whole by loosening control over vast amounts of resources and enabling them to move more quickly to their highest-valued use11 Mergers became an effetive mecanizm for corporate control, when managers cannot satisfy shareholders values they are taken over by other companies. As( Jensen, 1988) puts in his paper that some managers are very difficult to abandon strategies they have spent many years building. Even when these strategies no longer contribute to the value of the company thay hold on to them, until taken over by other companies. Very often new management implements what is required for business to survive: abandon major projects, relocate facilities, change managerial assignments, close or sale
9 Monsen Joseph R. and Downs Anthony Jr. (1965): A Theory of Large Managerial Firm, The Journal of Political Economy, Volume 73, Issue 3, 221-236. 10 Matsusaka, Takeover Motives During the Conglomerate Merger Wave. RAND Journal of Economics. 1993. 11 Jensen Michael C (1988): Takeovers: Their causes and Consequesnces, Journal of Economic Perspective, Volume 2, Number 1, pages 21-48.

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the facilities or divisions, which is required by technology change or change in market conditions. Normaly it is easier to do for managers with no previous history with the company. (Jensen, 1988) Holmstrom and Kaplan (2001) support argument made by Mueller (1969), Marris (1963), Monsen and Downs (1965) that corporations had little reason to maximize shareholder wealth before 1980. He defines corporate governance before 1980 as inactive. The external governance mechanisms were available to shareholders then, however rarely used. Threads of takeover were rare, merger activity was much lower. There were no internal incentives for managers to hold options and their performance was rarely tied to stock performance. Long-term performance plans were tied up to the accounting measures, which are much less directly related to the stock performance. Takeovers in 1980 were characterized by hostility. Firms purchased other firms with use of leverage. Other firms restructured themselves, borrowing to repurchase its own shares. Some companies were taken private in leverage buyouts. Investor group together with incumbent management would repurchase all of companies shares against money borrowed. Hostile pressure was so high in 1980 that almost half of the US companies received hostile bids at that time. 12 Therefore managers strived to increase shareholder value and restructure in response to hostile pressure. Merger activity in 1990 was also characterized by many takeovers, however they did not have hostile character. Holmstrom and Kaplan (2001) reports beneficial gains of takeovers in 1980. Mergers appeared to gain efficiency rather than redistribute wealth form stakeholders to share holders. One of the factors involved that can prove efficiency of Corporate Governance is productivity boost and started mildly in 1980 and developed in 1990. Leverage buyouts also increased value through change of the incentives in managers by providing them with substantial equity stake in the buyout company. If the deal was successful managers could have been rewarded with a big sum of money. Secondly, dept gave
12 Holmsrom, Bengt, and S.Kaplan, (2001): Corporate Governance and Merger Activity in the US: Making Sense of the 1980s and 1990, Journal of economic Perspectives 15, 121-144.

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managers an incentive to work hard and increase shareholder wealth, increased discipline in management. Failure to generate sufficient profit could result in default of funds borrowed. Management could not treat capital as costless any more. Another reason that disciplined management was sponsors and investors that closely monitored companies that they purchased. These practices were very different before 1980 and also in companies with small leverage. Since 1930 when corporations started to grow in size, management ownership had shrunk. There was different perception of capital at the time. Boards did not guard shareholder rights but mostly sided with management. Jensen (1988) notes that big drawback of the corporations at the time was their compensation tied to the size of the company. Managers might strive to maximize their own utility by investing free cash flows generated by the company in non- positive net present value projects. Another bad management practice was to subsidize poorly performing divisions using free cash flows generated by successful divisions instead of paying it out to the investors. Free cash flow theory of investors predicts that managers of firms with high free cash flows and unused borrowing capacity would like engage in non value destroying acquisitions (Jensen, 1986). Access capacity of corporations decreased in the early 1980 with introduction of new instruments: leverage buyouts, leveraged acquisitions, hostile takeovers and stock buy backs. Takeovers that happened within declining industry can create value, like tobacco and food industry. Merger will reduce excess capacity and will be beneficial in the long run.13 Takeovers can also decrease agency costs arising from conflicts between shareholders and management over the payment of free cash flows (Jensen, 1986). Shleifer and Vishny (1990), described reason of third merger wave in US as the disappointment with conglomerates in 1960-1970s. Therefore companies from diversifications which proved itself to be a failure returned to the specialization. Companies started to operate in the businesses they knew best and sell unrelated

13 Jensen, M., (1986): Agency costs of free cash flow, corporate finance, and takeovers. American economic Review, 76, 323-329.

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businesses. Shleifer and Vishny (1990) stated that returns to the bidding shareholders are lower when their firm diversifies or when it buys rapidly growth target. 14 (Jensen, 1986), also recognizes diversification mergers as value destroying mechanism. Forth Merger wave in 1990 had different stages of restructuring process. If 1980 was the beginning of the restructuring process very much involved hostility and focus on forcing corporate assets out of the managers that could not use them efficiently, 1990 appear to have more established process with reconfigures assets that could take advantage of growth opportunities in new technologies and markets. Managers of large corporations are trying hard to offer better incentives to its employees. External Capital markets have take on a larger share of reallocation of capital. Venture capital funding commitments increased in 1990 (Holmstrom and Kaplan (2001)). In the 1970s and 1908s many observers criticized U.S. capital markets and governance system quite strongly and looked to other systems, particularly German and Japanese, as being superior (Holmstrom and Kaplan (2001) cited, Porter, 1992). However corporate governance in US seemed to reinvent itself with spread use of stock options by executives. In countries like France, Germany and Japan were created policies to enable easier repurchase of shares. Continental Europe experienced rise in hostile takeovers form 1990 to 1998 with examples like Vodaphones bid for Mannesmann, TtalFinas bid for Elf Aquitane and Olivettis bid for Telecom Italia (Holmstrom and Kaplan (2001). 3.1 Disturbance theory of merger waves. Michael Gort (1969), explain mergers as process outcomes of the differences in expectations about future income streams. Discrepancies in valuation between buyer and seller and higher value placed by non- owners causes acquisition to happen. Lower value placed by owners can reflect only a small portion of owners. Depending on the charter of the company, some acquisitions can be permitted without stockholder vote.

R. Morck, A. Shleifer and R.Vishny. Do Managerial Objectives drive Bad Acquisitions? The Journal of Finance. Vol.XLV, No.1 M.Sc. Thesis in Finance and International Business Nadia Straton

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Systematic variation in the valuation of assets might be subject to asset holders budget constraint, which affects amount and composition of assets they hold. Therefore some non-owners may have higher estimate of the value of asset than asset holders. Gort, 1969 sets two conditions for merger to occur: 1) higher value of the asset to the investor than to owner; 2) Difference between his value of the asset and market value of the asset must be higher than any other surplus he can get from other transactions. Differences in valuation techniques might stem from economic shocks that alter structure of economic expectation, rapid changes in technology or security prices. New products and processes change frequently; future demand is hard to forecast basing on the past demand, similarly future costs are hard to forecast from the historical costs. Therefore, consequence of the rapid change in technology and stock price movements can influence differences in valuation and cause increase in merger activity (Gort, 1969). Since there are differences in valuation techniques companies that need to extend their capacity due to the growing demand can do so more profitably through merger. The greater the number of companies that would take this strategy the more valuation techniques will be. Gort, (1969) relaxes possibility of monopoly motive in the growing industry. Number of firms and output would rise and increase in monopoly power would diminish overtime. However if the trade barriers are high, companies can profit from reduced competition longer; and hence, the greater there is incentive to merge. Economies of scale according to Gort (1969) can happen in growth industries with larger increases in the number of firms that might induce merger activity. Some firms might enter at the inefficiently small sizes and the greater would be the number of the inefficient small firms the higher the frequency of mergers might occur. Another reason for merger can be a quality of the management skills: with increased number of firms there might be more than proportional rise in number of managers with diverse abilities to manage company. Dispersion in managerial skills can lead to acquisitions from

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companies that would try to introduce managerial efficiencies and therefore improve performance of target in the long run.15 Gorts theory of disturbances and explanation for merger wave consequence does not explain why oil crises in U.S. in 1973/1974 did not trigger the merger wave. Conglomerate merger wave in 1960 focused on diversification was not connected to any major disturbance and yet cause a wave. 16

3.2 Merger as rational choice that benefit bidder The theories of rational choice focus on shareholder interests, except one group, which is empire building theory and it is focused on benefiting managers or interests that deviate from shareholder value maximization. These theories also describe merger motives as focused on net gains either through synergies or private information or wealth transfer from target shareholders or form customers. According to (Kaplan, 1987) wealth transfers can happen through tax savings however they cannot explain the amount of premium paid by the bidder. 17 Friedrich Trautwein in his article on Merger Motives and Merger Prescriptions outlines three types of mergers: Merger as rational choice, Merger as Process Outcome, Merger as Macroeconomic phenomenon. From rational choice mergers he distinguishes: Mergers that benefit bidders shareholders and Mergers that benefit managers. Mergers that benefit bidders shareholders are: 1. Efficiency theory mergers
Gort Michael. An economic disturbance theory of mergers. Quarterly Journal of Economics. 83, 1969, pp.624-642 16 Trautwein Friedrich.Merger Motives and Merger Prescriptions. Strategic Management Journal, 1990. 17 Kaplan, Steven. Management buyouts: efficiency gains or value transfers, Harvard Business School Working Paper, 1987.
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2. Monopoly theory mergers 3. Raider theory mergers 4. Valuation theory mergers In my paper I will focus mostly on: Efficiency theory mergers that receive net gains through synergies; Monopoly theory mergers that benefit bidder though wealth transfer from customers and Valuation theory that benefit bidder through net gains from private information. I will skip raider theory that receives net gains through wealth transfers from targets shareholders (green mail or excessive compensation after successful take over), due to the unfavorable evidence by Holderness and Sheehan (1985) suggesting that target shareholders gain in most of the cases. In their article they give evidence of six investors that were called raiders at the time and claimed to extort value from the target shareholders. If these investors systematically reduced wealth of the stockholders in the target firms through transfer of corporate assets to the themselves it would give negative signal to the stock market and would result in the stock price decline on the first public announcement by any of the six raiders of the stockholding in the company. However evidence suggested that price changes of the stock were positive on average. Secondly raider hypothesis does to follow the logic of the payment process in acquisition. When bidder pays high premium to the target he becomes controlling stockholder of the new, combined company. If he would try to extract any money from the target it would hurt him on the first place, but not the target.18 3.2.1 Efficiency theory According to Trautwein, (1990) three types of synergies can result from efficiency hypothesis: 1. Financial synergies that result in lower cost of capital
Holderness, Clifford G. and Dennis P. Sheehan. Raiders or saviors? The evidence on six controversial investors. Journal of Financial Economics, 14, 1985,pp 555-579 M.Sc. Thesis in Finance and International Business Nadia Straton
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2. Operational synergies that can result from combination of business units that would decrease cost in case expenditure on the combination of the production units does not outweigh cost and enable company to provide products of higher quality. 3. Managerial synergies Financial synergies can be created by investing in unrelated businesses and this way diversifying investment portfolio and reducing risk. Financial synergies can also be achieved through increase in size and through access to a cheaper capital. However some authors argue that financial synergies cannot be achieved in the efficient capital markets. Montgomery and Singh (1984) explored six diversification categories: single business, dominant, related constrained, related linked, unrelated portfolio and found that betas (systematic risk) are higher in the unrelated diversifies than in other companies. Debt position and lower market power of unrelated diversifies might have contributed to the higher systematic risk in the unrelated diversifies. However there was no evidence on the lower systematic risk or a superior internal capital market.19 There is evidence on the size advantages of the financial synergies in the work of Scherer, 1975 (cited in Trautwein, 1990). Managerial synergies are realized when bidder management team has superior knowledge to the target management. Better planning skills and leadership abilities can favor target in the long run and create managerial synergies. Rewards created through making mangers the owners of highly leveraged equity had the effect of replacing promotion-based reward system with an important financial stake that makes large payoffs in case of exceptional performance. 20 As I mentioned earlier in the paper, during the fourth merger wave in the U.S. governance for corporate control benefited greatly shareholders. The gains to
19 Montgomery, Cynthia A. and Habir Singh. Diversification strategy and systematic risk. Strategic Management Journal, 5, 1984, pp.181-191 20 Baker G.P., Jensen M.C., Murphy K.J., Compensation and Incentives: Practice vs. Theory. The Journal of Finance. Vol. XLIII, No.3, July 1988.

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shareholders from these transactions have been huge. The gains to selling firm shareholders from merger and acquisition activity in the ten-year periods 1977-86 total $346billion (in 1986 dolars). The gains to buying firm shareholders are harder to estimate, and no one to my knowledge has done so as yet, but my guess is that they will add at least another $ 50 billion to the total. (Jensen, 1988) Managerial efficiency gains have also been described in the Jensens management competition model. Takeovers are described as disciplinary force in the capital markets. Managers of companies with free cash flows tend to invest capital here and there, very often in negative net present value projects, instead of paying these cash to shareholders. With growing number in hostile acquirers in 1980s , the latter provided control that over management team that was lacking it form the shareholders side. 21 Managerial and Operational synergies have been criticized in works of Kitching, (1967) in the way that managers normally would like to achieve them but they are not so easy to realize. Kitching interviewed executives of the 22 companies, who stated that synergy is a result of a superior management. The key to success as noted by one of the directors is to manage company better after the acquisition than it was managed before the acquisition. However senior vice president for operations of another company noted: Do not think it is hard to realize synergy; it is not, it is damn near impossible.22 Indirect evidence on the efficiency theory comes from three different types of studies: Event studies by Weston and Chung (1983), Jensen (1984), Dennis, McConnell (1986) and Revenscraft and Scherer (1987) show that stock market values mergers positively. However most of the gains accumulate at the target shareholders. 23 Porter, (1988) have been investigating corporate strategies of the companies and their success or failure and factors which caused that. His study included 33 companies many of which had reputation for good management. Each company entered an average of 80
Jensen, Michael C. The takeover controversy: analyses and evidence . Midland Corporate Finance Journal, 4(2), 1986, pp. 6-27. 22 Kitching John, Why do mergers miscarry?. Harvard Business Review, 45(6), 1967, pp.84101. 23 Trautwein Friedrich. Merger Motives and Merger Prescriptions. Strategic Management Journal, 1990.
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new industries and 27 new fields. Over 70 percent of these entries were acquisitions. He found that more than half of the acquisitions by major US companies failed. However related acquisitions turned out better then unrelated once, where three in four failed. He also noted that none of the concepts of corporate strategy would work when industry structure or implementation is bad. The corporate strategies of most companies have dissipated instead of created shareholder value.24 Revenscraft and Scherer (1987), also cast doubt on stock market results. Acquirers companies according to his paper have an above- average profitability ratio prior to the merger, and that acquiring companies were below average performers. On average efficiency theory evidence is unfavorable. If to take financial statements into account then efficiency theory has to be rejected. If to take into account only stock price data then efficiency theory can be kept, accept for the financial synergy. Also would be interesting to find out the missing link between stock price data information and public information incorporated into financial statements. (Trautwein, 1990) 3.2.2 Valuation theory Valuation theory assumes that mergers are planned and executed by managers who have better information about the target than the stock market. (Trautwein, 1990) Holderness and Sheehan, 1985 in their paper Raiders or Saviors? The evidence of six controversial investors find that these six raider investors improved management of the target firm and stock always rose after their bid was announced. These six investors were described as asset players, sharp shooters, those who consistently identify underpriced stocks and have nose for undervalues situations and guts to buy when many people are scared to do so.

24 Porter, Michael E. From competitive advantage to corporate strategy. McKinsey Quarterly; Spring88, Issue 2, p.35-66, 32p.

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Management of the acquiring company have information about targets business or understanding about advantages that might be derived when their company and target would merge. However similarly to the argument of the financial synergy hypothesis of better information about the value of the target conflicts with efficient capital markets hypothesis. If the bidder would posses private information he would reflect it in his bid or premium paid, therefore the stock would go up and market participants would know that these stock is undervalued. Therefore acquirer would not be able to capitalize on the stock, valuation vise. Harris findings in 1984 are in favor of valuation theory, it gives evidence on the executive valuations of their company. 60 per cent thought their company was undervalues, 32 per cent agreed with a stock market price while only 2 percent considered stock to be overvalues. (cited in Trautwein, 1990) Revenscraft and Scherer note that premiums for tender offer targets of the 1960 and early 1970 were paid in anticipation of enhanced profitability, however post takeover returns were not as they were supposed to be, they deteriorated. 25 (Wensley,1982) notes that private information is ambiguous. In his article he refers to the Austrian School of Economists, who started from the assumption that world is full of incomplete and unequally distributed information. Beside ambiguous information Wensley recognizes ambiguity of the market response and that price mechanisms are unlikely to give clear and rapid signal.26 Prospective buyers have to plan all the stages of his and targets post acquisition state. Since market does not have a crystal ball to see clear strategy bidder has for target, it cannot incorporate bidders private information in the market price of stock. The stock price of the target might rise but it is not connected to future performance of the company.
Revenscraft, David J. and Frederic M. Sherer. Life after Takeover. The Journal of Industrial Economics. Volume XXXVI December 1987 No.2. 26 26 Wensley, Robin. PIMS and BCG: New horizons or false dawn? Strategic Management Journal, 3, 1982, pp.147-158
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Trautwein, 1990 highlights difference of valuation theory from all other theories that lies in the recognition of uncertainty of strategic decision of a manager. Market participants cannot forecast or calculate this information sometimes not even bidder himself. Some acquirers might place their bid basing on the private information they have about the target or basing on the bidder value placed on certain assets of the target. Bidders premium is often based on his private expectations from the merger. However many market participants might posses different pieces of information about the target and have their value reflected in the price of the bid, which does not necessary have to be small. Less easily matched information between the bidder and the target might involve smaller premium, however until competition from other market participants with their pieces of private information and target valuation comes into place. 3.2.3 Monopoly theory Very often mergers are made with aim to achieve a monopoly power at the same time claiming that merger was done in order to achieve synergy. However, combining different function in one company for example purchasing function can be seen both as a synergistic strategy and also as strategy to limit competiton. Monopolies can occur as a result of horizontal mergers, for example during first merger wave in the U.S. but also as the result of conglomerate acquisitions. Profits from the position in one market can be used to sustain or win share in another market, advantage of internal capital is seen in conglomerate mergers. Following the enforcement of anti merger legislations and different amendments to it, for example Clayton Act in the U.S., mergers activity attributed to the effort to secure market power are relatively rare. Acquisitions that had monopolistic character and occurred during 1980-1990 were only allowed with the permission from the U.S. antitrust agencies. However firms that aim to deter potential competition from its market can achieve this with performing concentric acquisitions by the market leader or by building a foothold in the competitors main market or by reciprocal dealing. (Trautwein, 1990)
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Firm usually refers to these types of advantages as to collusive synergies. In the paper of Chatterjee, 1986 Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms he refers to horizontal mergers as collusive synergies. However he also claims that horizontal merger which are related acquisitions by definition may involve economies of scale and scope both in the production and distribution, which leads to reduces cost operational synergies, apart from collusive gains. Financial synergies, in the same way can be a result of horizontal merger.27 Jensen, 1984 give some indirect evidence on monopoly consequences. In his paper on the Takeovers: Folklore and science he argues that shareholders or firm cannot profit from monopoly power. Takeover gains come not from the monopoly power but from the productive economies and synergy. Jensen argues that if gains came from the created monopolistic powers, industry competitors would benefit from higher prices and enjoy increase in profits and stock prices. If Antitrust Division would cancel the merger stock prices of the competitors would fall. Competitors gain when two other companies in the same industry merge, however these gains are not related to the concentration in the industry or creation of the monopolistic power. Jensen also raises doubts about the decisions made by anti merger comities regarding cancellation of the merger, since it does not bring any benefits to the stock price, which decreases after deal cancellation 28 Monopoly theory seem to have low evidence judging from the results presented by Michael Jensen and appear to have even lower evidence than efficiency theory. 3.3 Personal Motives Personal motives in the acquisition can arise when managers of the company do not have initiative to create efficiency for shareholders and the latter do not have proper monitoring over the managers. Personal motives can arise when there are agency problems between owner and the agent, who is hired to represent a manager and they have conflicting interests. Moreover, managerial compensation in this case is tight to the

Chatterjee, 1986 Types of Synergy and Economic Value: The Impact of Acquisition on Merging and Rival Firms. Strategic Managemetn Journal, 7, 1986, pp.119-139. 28 Jensen Michael C. Takeovers: Folklore and science. Harvard Business Review, 62(6), 1984, pp.109-121. M.Sc. Thesis in Finance and International Business Nadia Straton

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amount of assets company owns, and since owners are always interested in profits rather than growth in assets their conflict rises agency cost. The directors of such companies, however, being the managers rather of other peoples money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their masters honor, and very easily give themselves a dispensation from having it. Negligence and Profusion, therefore must always prevail, more or less in the management of the affairs of such a company. Adam Smith (cited in Jensen and Meckling, 1976) Jensen Michael C. and Meckling William H. in their paper Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure states that if company is operated by the owner he will make operating decisions to maximize utility. These maximized utility would come not only from the return but also from the utility generated by non-pecuniary activity: level of the employee discipline, attractiveness of the staff, amount of charitable contributions, personal relations. If manager would sell equity claims on the corporation proportional to his agency cost will be generated by the divergence of interest of outside shareholders and himself, since he will bear only a fraction of the costs. If the manager owns only 95 percent of the stock he will be interested to expend resources until he will reach marginal utility of an additional 95 percent but not more. Shareholders can realize that manager interest differs from their in the additional monitoring costs that will be incurred in the stock price29 Hubris Hypothesis can explain portion of bids which are made when tax reduction, operational, financial or managerial synergy are not forecasted. Roll explored sample of the randomly selected companies that paid too much for its targets. Normally bids are rendered when valuation exceeds the price of the target, however not all of them. Roll tried to explain in his paper why managers stick to the overvalued bids. Managers might make mistakes in valuing target without knowing that their valuation contain errors or they might overestimate their abilities in comparison to target management. Shareholders might be indifferent to the hubris inspired bids because according to Jensen if acquirer bid is too high stock price ex post acquisition for the bidder declines and for the target increases. Therefore well diversified shareholder would receive the aggregate gain which
Jensen Michael C. and Meckling William H. in their paper Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics. 1976, pp. 305-360 M.Sc. Thesis in Finance and International Business Nadia Straton
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is close to zero. Hubris hypothesis is based on market inefficiency as some authors claim assuming that any of the agents in this case manager of the acquiring company will act irrationally and instead of maximizing shareholder value would decrease it constantly. However it is worth another argument about what constitutes or defines efficient market.30 3.3.1 Empire Building theory Empire building theory has a much boarder range than monopoly theory. This theory was formulated well in the work of Mueller, 1969. He hypothesis that companies pursue maximization goals, growth in physical size of their corporation rather than its profits or stock holder welfare. All rewards that managers got: managerial salaries, bonuses, stock options, promotions were tied to the growth rate of their firm in 1960s. Similarly managers prestige and power which they get from their occupations are directly related to the size and growth of the company and not to its profitability.31 Empire Building argument might not be necessary the motive for growth maximization. Rhoades, in his book on Power. Empire Building and Mergers, links empire building motive to power motive and profit motive. At the same time in the Blacks, 1989 hypothesis, managers overpay for targets because they are very optimistic and their interest diverge form shareholders interests. (Trautwein, 1990) Unlike in Rolls hubris hypothesis, overpayment by the bidder does not result in drop in the stock price value in Blacks hypothesis, because investors anticipate overpayment. Walsh, 1988 reports higher management turnover rates in merging companies than in non merging companies. However the type of the merger or the size difference between the acquiring and acquired companies is not a factor of this variance. Walsh supports evidence that very senior executives are the first to turn over following an acquisition. Carl Icahn in his interview noted: AT TWA-to make it simple, we basically replaced all the top management. Thats one of the steps we took in the first few months. We really replaced the whole 42nd floor.32 According to Trautwein, 1990, high turnover rates in mergers and acquisitions support an explanation of mergers in terms of mergers quest for opportunities.
30

Richard Roll The Hubris Hypothesis of Corporate Takeovers. The Journal of Business, Vol. 59, No. 2, Part 1 (Apr., 1986), pp. 197-216 31 Mueller, Dennis C. A theory of conglomerate mergers. Quarterly Journal of Economics, 83, 1969, pp.643-659. 32 Walsh, James P. Top Management turnover following acquisitions Strategic Management Journal, 9, 1988, pp.173-183 M.Sc. Thesis in Finance and International Business Nadia Straton

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3.4 Game theory (Psychological motives) Game theory perspective on mergers has somewhat similar approach to mergers as behavioral finance. Harford in his article What drive merger waves describes two hypothesis of merger activity: neoclassical and behavioral. There is positive correlation between merger activity and stock valuations. Bull markets lead buyers of overvalued stock to buy assets of undervalued targets with their stock. Target managers with short time horizons are willing to accept overvalued stock from the bidder, creating a wavelike clustering in time. Sometimes targets would accept overvalued bids because of the imperfect information during the periods of valuation market picks. 33 I will describe two theories that might be supplementary to those already reviewed: 1. Eat of Be Eaten theory 2. The Theory of Musical Chairs 3.4.1 Eat of Be Eaten Theory Eat or Be Eaten theory is described in the paper of Gordon, Kahl and Rosen Eat or Be Eaten: A theory of Mergers and Merger Waves. Authors suggest following elements of the theory: 1) They assume that managers have personal motives in operating a private firm. It might induce them to keep their firms independent. Managers in the acquired firms may lose private benefits or loose their jobs. 2) Larger targets can be more attractive due to the economies of scale. Therefore firm size is an important determinant. There is a small ex ante probability that mergers do not create positive expected synergies. 3) Firms rarely acquire larger rivals because larger acquisition is more difficult to finance. It is more difficult to raise funds by issuing debt which might result in financial distress and loss of job. Acquiring larger company might also dilute the acquirers ownership of the combined company. Therefore larger companies have less probability of being taken over. 34

Harford Jarrad.What drives merger waves?. Journal of Financial Economics 77 (2005) pp. 529-560. 34 Gorton Gary, Mathhias Kahl and Richard Rosen, 2002, Eat or Be Eaten: A Theory of Mergers Waves and Firm Size M.Sc. Thesis in Finance and International Business Nadia Straton

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With growth in size through acquisition firm is less likely to become a target. This selfdefensive motive is self-reinforcing and can create a wave. One firms acquisition would lead to more unprofitable defensive acquisitions creating eat or be eaten scenario. Gorton, Kahl and Rosen show distinction between industries. If industries have firms of similar size, defensive mergers are more likely to occur. If industries have one dominant firm, no merger can ensure that firm will become large enough not to be taken over. On the other hand if firms want to achieve economies of scale and become more attractive targets they can do so by merging and growing in size. Mergers might be interested in positioning themselves as more attractive target to receive takeover premium. In this case all acquisitions might be profitable in anticipation to the later wealth creating. Large firms engage only in defensive unprofitable acquisitions, and these only occur when private benefits are high. Medium sized firms engage in unprofitable defensive acquisitions when private benefits are high, but when private benefits are low, they engage profitable positioning acquisitions. Small firms typically engage in profitable acquisitions. (Gorton, Kahl and Rosen, 2002) Gordon, Kahl and Rosen came to the conclusion that defensive mergers come in waves. They came to the conclusion by testing their model by three different scenarios: 1) There are 3 firms are of about the same size and managers want to preserve their private benefits 2) There is one dominant firm 3) Multiple-firm scenario, in which some but not all firms are of similar size. The basic model with three-firm scenario can make one acquisition per offer period. Firm 1 is the largest and Firm 3 is the smallest. Smaller firms cannot acquire larger firms. If Firm 2 or Firm 3 is combined with Firm 1, it is worth more than its stand-alone value of C2 or C3 , respectively Authors assume that C2+C3> C1, after firm 2 acquires firm 3 it is larger than firm3. It give incentive for firm C2 to acquire C3 which would not generate any synergies but would eclipse C1 in size and would become invulnerable. At each date, a manager receives private benefits of w > 0 if his firm is not acquired and zero if it is acquired. Managers also own share of their company which creates overall
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utility. Additionally when C2 acquires C3 manager of C2 receives profit, a difference between the price paid for the target and the value of the combined companies. In the worst case state: p<0.5 Target firm shareholders will not accept the offer that does not give them at least z zero premium over the firms stand alone value. If acquisition firms shareholders made decision to acquire it is not in their interest to prevent the acquisition. Gort, applies Nash bargaining solution to the bargaining problem. The utility of the acquirer manager is u=w~+(~s-) , where w ~is the expected value of the private benefits the manager gets, s~ is the expected value of the increase in the acquiring firm value due to the acquisition, is the premium over the target firms stand alone value that the acquirers manager and the target shareholders agree on. If firm 1 acquires firm 2 in a good state, firms 1 managers obtain a utility of w if he does not make the acquisition. If he makes the acquisition at a zero premium he obtains w+C2. Hence, the premium is = (0.5/ )(w+C w) = 0.5C. Private benefits explicitly affect premium. Acquirers may pay a positive premium even though there are no synergies between acquirer and a target. The higher the premium paid the less the manager gets. If company C2 is worth 2C2 when combined with company 1, the firm 1 will pay C2+0,5((1/)C2)=1,5C2 for company 2 and receive a gain of 0,5 C2. An equilibrium pattern is later established by backwards induction, starting at date 1. If state of nature at date 1 is bad all acquisitions will be unprofitable. Firm 2 will not acquire firm 3, since it is worth zero. Firm 2 also does not need to defend itself against potential acquisition, because Firm 1 will not acquire it anymore, since acquisition will be unprofitable and there is no threat from two other companies to place a bid. However if the state is good, Firm 1 would like to acquire the largest remaining firm, because it might bring some gains from the merger. If there is unknown state in date 0, firm 2 would want to acquire firm 3 in spite of share holder wealth reduction, because it would ensure that managers of company 2 would still keep their benefits and jobs. The larger the wage and benefits of the managers the more likely they would perform acquisition with company 3 to keep them. (Gorton, Kahl and Rosen, 2002)

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Gorton, Kahl and Rosen extended basic model to five firms, to show that defensive mergers can come in waves. In five-firm model there are two defensive mergers. Firm 4 acquires firm 5 and Firm 2 acquires Firm 3. If other firms become larger through acquisition other firms become more vulnerable to being taken over and therefore have an incentive to become larger themselves. Race for firm size ensure the defensive merger waves. In the dominant - firm scenario, there is one firm which is much bigger than four other firms. In such an industry, the merger dynamics are quite different from the three or five- firm scenario. Merger synergies are as in the previous models and all mergers in the bad state at date 1 have negative synergies. C1>C2+C3; C3+C4>C2, Firm 1 moves first, firm 2 second and firm 3 last (since firm 4 cannot make an acquisition). The game is initially played between small companies that try to set themselves up for the big company and get higher premium. If some but not all firms are of similar size such industry has both defensive and positioning mergers. It is also the richest industry structure. At each date, Firm 4 moves first, Firm 3 second, Firm 2 third, and Firm 1 last. (Gorton, Kahl and Rosen, 2002)assume that C 2+ C 5> C1 , C 3+ C4 > C1 , C3 + C5 < C 1, and C4 + C5 > C2 . Hence, Firm 2 is large enough so that any acquisition makes it larger than Firm 1 and hence immune against any acquisition. These model like previous models assume that the higher the benefits to the managers the higher the defensive strategies. Managers have incentives to conduct defensive acquisition which do not bring value in order to keep their jobs and other r benefits that come with a job.

3.4.2 Musical Chairs Theory Flavio Toxvaerd in his paper on Strategic merger waves: A theory of musical chairs tried to explain reasons behind merger waves and interaction between the competitive pressure and decision to postpone merger in the uncertain environments. By postponing takeover attempt acquire can gain from much more favorable economic conditions later on. However in case of reduced number of target companies, acquirer runs the risk of being anticipated by other bidders. All acquirers rush simultaneously in merger waves.
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Toxvaerd extends his model to the global game that has a unique Markov perfect Bayesian equilibrium in monotone strategies and therefore timing of the merger wave could be predicted. The existence of the economy waves is the documented fact, however some authors argue that economy waves stem from the industry waves. There is evidence on industry vs. aggregate waves in works of Andrade, Stafford, Gort, Mitchel and Mulherin. Macroeconomic variables play important role in determining the timing of mergers. Toxvaerd cites authors like Jovanovich and Rousseau, that document positive relations between merger activity and Tobins q and also Gort, Mitchell and Mulherin who document relation between industrial production and merger activity. Toxvaerd tried to build a theory that can explain merger activity and its dependence on the aggregate activity and strategic interdependence between firms decisions. Strategic merger waves highlight the effects in which one merger is related to the other. Non-strategic theories emphasize the effects of such factors as deregulation, globalization or new technologies. However both strategic and non-strategic elements pay an important role in merger activity. Toxvaerd proposed a dynamic model of merger activity in which waves occur as an equilibrium phenomenon. A strategic merger wave in is interpreted as a situation in which the exogenous economic conditions that cause firm to merge would vary from the merger activity of other firms. Toxvaerd model is build on three ingredients: 1) the relative scarcity of the target or scarcity of target assets. Such assets can be restricted to the geographic markets, customer bases, patents business practices. 2) Mergers are investments and they are carried in the environment of uncertainty. There is an option value in waiting to acquire target. Decision of the manager to merge can be view as the decision of optimally exercising the option. Delaying merger may allow firms to look for the best fit due to the technological progress or returns that are realized far away in the future.

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3) Competition for target is based on the imperfect information in price mechanism due to private information or agency problems. Evidence that target management accepts offers that are not always the best can be a proof to the above stated point. All potential acquiring firms raid the target firm at the same time, which causes merger wave. Waiting might be good solution when other companies wait, however under competitive conditions other firms might take advantage of the situation and attempt preemptive takeover. (Toxvaerd, 2007) try to resolve the multiplicity to be able to predict timing of the mergers. He argues that these can be achieved when acquirers receive slightly imperfect private information about realization of the randomly evolving economic fundamentals. The analyses and result of the model explore the tradeoff between option to delay merger and option to acquire due to the preemptive bidders actions. Toxvaerd highlights two factors that might influence industry participants decision to acquire: strategic, competitive considerations and exogenous economic factors (non-strategic considerations). In every of the periods t=0,1,2 each acquirer faces the choice between raiding and waitng, with at = 0 denoting waiting and at = 1 denoting raiding. The expected payoff R(zt, xt , t ) from participating in the allocation game is called the raiding value and should be thought of as the expected value of obtaining, through some bidding process, an infinite flow of future profits. The current waiting value depends on the discounted expected future raiding and waiting values and can be expressed recursively as follows: W(zt, xt , t ) = Et max[R(zt+1, xt+1, t+1),W(zt+1, xt+1, t+1)]. Since an acquirer always has the option of waiting indefinitely, the waiting value in any period is non-negative. 35 If the acquirer decides to raid, he will either merge with a target and leave the game or he will be rationed, in which case the game is over. The higher the measure of the raiders

Toxvaerd Flavio. Strategic merger waves: A theory of musical chairs. Journal of Economic Theory 140 (2008), pp. 1-26 M.Sc. Thesis in Finance and International Business Nadia Straton

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in any given period, the more scarce targets become in the future periods, thereby eroding the options value of waiting. (Toxvaerd, 2008)

Source: (Toxvaerd, 2008) Toxvaerd named his article a theory of musical chairs after he read the article about strategic thinking of the law firms, which was compared to the lascivious game of musical chairs. If Australians are lucky, the music might last just enough for them to attract a merger partner. But if they delay, all the international merger candidates will be snapped up by the lucky few.

3.5 Motives characteristic to the cross-border acquisitions (synergy hypothesis, hubris motives) Looking back at the description of the motives in this paper so far little has been said about motives to invest cross border. Morosini gave positive evidence on the increase of merger and acquisition activity. From the 1980s number of cross border mergers and acquisitions occurring each year more than tripled. After the recession of global economy in 1990, the value of cross border mergers and acquisitions reached a record high of US $ 181.7 billion, the first nine months of 1996. (Economist, 1997, cited in Morosini, Scott and Singh, 1998) Thomson Reuters gives recent evidence on the volume of M&A: worldwide volume was totaling U.S. $ 2.5 trillion during first nine months of 2008, cross border deal activity
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totaled US$ 1 billion comprising 41 % of the world wide volume. Comparing to the 2007 cross border activity is lower 28% in 2008, which can be explained by the economic downturn. Unsolicited and hostile cross border takeovers in U.S. more than doubled in the first nine month of 2008, totaling US $202.5 billion. Chinese deal making activity reached record levels and totaled US $ 131 billion in 2008, the highest volume of all times. Chinese cross- border mergers and acquisitions announced volume reached US $ 68.8 billion compared to the US $ 26.4 billion last year, most of the investment was focused on Hong Kong. 36 Ukrainian cross border acquisitions also increased greatly if to compare to previous years or other types of investments. Table below includes acquisition data, coming from Orbis with foreign bidder and Ukrainian target

Table 6. Merger acquisition deals from my sample (238, per year during 1997-2009)
Number of deals selected : 238 (time) Time period (Deal latest date) 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total
36

No of deals 1 6 8 8 4 5 13 28 33 45 45 42 238

No of deals with known values 0 1 2 4 2 2 8 9 12 12 14 5 71

Total deal value (mil EUR) 0 1 0 183 318 24 189 5067 1191 1210 2722 16 10921

Mergers and Acquisitions Review. Third Quarter 2008 Financial Advisors Report. Thomson Reuters. http://banker.thomsonib.com M.Sc. Thesis in Finance and International Business Nadia Straton

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Source: Orbis, Self Made

Cross border acquisitions can bring additional cost for integration cross border, therefore might cause some companies to be more reluctant to invest cross border. However (Morosini, Scott and Singh, 1998) argue that alternative can be true. After examination of a sample of 52 cross border acquisitions that took place between 1987 and 1992, their culture distance had positive correlation with post acquisition performance, acquirers and target coming from different cultural backgrounds might take advantage through the different routines and norms embedded in the culture, for example Hofstede indexes (uncertainty avoidance index), innovation effectiveness, entrepreneurship, precision making practices, power and control structures. His finding show that acquisitions that tended to perform better were those in which the routines of the target country of origin were on average more distant than those of the acquirer. 37 The empirical evidence of the Morosini, Scott and Singh studies was also supported by interviews of top executive officers at these cross border companies.

Morosini studies contradict to the studies of Johanson and Vahlne, 1977, who argued that it is favorable for companies to enter countries which are culturally close to them. Morosini research result shows that cultural distance have positive significant affect on the post acquisition performance. Seth, Song and Pettit (2000) hypothesize that the motives might be different for cross border mergers and acquisitions. They found that synergy hypothesis dominate the explanation and coexist with hubris hypothesis in the sample of foreign firms that acquire U.S. targets. Hubris and synergy motive are characterized by positive total gains. They also show evidence for managerialism hypothesis that is associated with negative total gains.

Morosini, P., Scott S., Singh H., National Cultural Distance and Cross-Border Acquisition Performance, Journal of International Business Studies, Volume 29, Issue 1, 1998, pp.137-158. M.Sc. Thesis in Finance and International Business Nadia Straton

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Seth, Song and Petit also found positive relationship between target and total gains in cross border acquisitions. Targets, in their finding, realize majority of the gains, while acquirer appear to neither gain nor loose on average. Acquisitions which are characterized by multiple bidding contests relative to single bidder acquisitions have higher average gains. Successful acquirer in single bidder transaction retain around 40% of the total gains on average, whereas acquirers in multiple bidder transaction make smaller looses. 38 Seth, Song and Pettit (2002) confirm these argument in their later study too. In the later study they tried to investigate sources of losses and gains in the cross-border acquisitions in light of different motives for undertaking these transactions. They found multiple sources of value in the synergistic cross-border acquisitions: asset sharing, reverse internalization of valuable intangible assets, financial diversification. Similar to previous study they found that gains rarely accrue to bidder shareholders. Value destroying acquisitions that are driven by managerialism are consistent only with risk reduction. Relative size of the target to the bidder mitigates the negative effect of risk reduction.39 Cross border acquisitions can also be performed with aim to bypass high tariff and trade barriers. Another motive for cross border acquisition can be special tax rules and regulation through which they can reduce cost of their liabilities: amortization of goodwill, tax gains from leverage, acquiring tax losses. Conclusions Short research on merger motives suggest that positive cross border acquisitions are motivated by efficiency, synergy gains and hubris motive. Value destroying cross - border acquisitions are motivated mainly by personal, managerial motives.

Anju Seth, Kean P. Song, Richardson Pettit. Synergy, Managerialism or Hubris? An Empirical Examination of Motives for Foreign Acquisitions of U.S. Firms Journal of International Business Studies, Vol. 31, No. 3 (3rd Qtr., 2000), pp. 387-405 Anju Seth, Kean P. Song, R. Richardson Pettit. Value Creation and Destruction in CrossBorder Acquisitions Strategic Management Journal, Vol. 23, No. 10 (Oct., 2002), pp. 921-940 M.Sc. Thesis in Finance and International Business Nadia Straton
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The most evidence exists for valuation and empire building motives. There is also evidence for monopoly and efficiency theories, however it is mainly unfavorable. Efficiency theory dominates research on corporate strategy and motives to merge. Raider and Disturbance theories are rather implausible. Roll (1986) and Black (1989) showed that very often agents of the capital market are not rational and can place irrational bids. Their hypothesis somewhat weakens efficient capital market assumption.

4. Target Valuation Techniques Following from the valuation theory of merger motives bidders cannot fully evaluate the information on which a bid is based. Valuation theory recognizes a role which genuine uncertainty plays in strategic decisions such as mergers. Valuation of the target is based on the bidder expectations that he will add to the targets assets and also on time of realization of the anticipated benefits. Valuation of the target requires valuation of the incremental cash flows and earnings. The incremental cash flows can arise from reduced corporation tax liability and pensions holiday. There are number of methods that company employs to evaluate target:

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1) earning and assets 2) cash flows Assets and earning are less information intensive than cash flow valuation. Earning and asset based valuation models include: Price/earnings ratio, which expressed relationship between a firms earnings for equity and its equity market capitalization. Price/Earnings Ratio= Market Value of equity/Earnings for equity; Price/Earnings Ratio=Share Price/Earnings per share (EPS) During takeover bids PER is calculated by both bidder and target. The historic value of PER relates current market value of equity to the earnings of the most recent accounting year. Prospective PER relates the current market value of equity to the earning expected to be reported at the end of the current account year. PER is based on four factors:

The level future equity earnings of the firm Investors expected return for equity investment in the firm The expected return on the investments made by the firm The length of time the firm can earn returns on its investments in excess of the investor-required return.

Growth of the company comes from the ability to invest in the projects that yield higher returns. However it is not possible for any of the firm to grow forever. Growth firm will be values higher than a firm with only level earnings and therefore will command higher PER. The higher the risk attached to the earnings of the firm the lower the level of PER will be. Value of firm=Level Earnings capitalized at the investor-required return + Value of Growth earnings. The benchmark for PER can be selected and adjusted in terms of risk and growth. It can be targets prospective PER, PER of firm comparable to the target, the targets sector

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average PER. Bidder evaluates the underlying growth expectations and riskiness of the target, its competitors and the average firm in the sector. This evaluation is done using traditional financial statement variables or stock market based historic returns and risk measures. PER Limitations PER model estimates post-acquisition earning basing on just one single period and assume that this level will be maintained. Model does not explicitly consider the investor perceived risk of the targets firm earnings. Asset-Based Valuation This model is based on the relationship between assets of the firm and its market value. Tobins Q is the ratio of the market value of a firm to the replacement cost of acquitting asset of identical characteristics. Tobins Q = Market Value of a firm/Replacement cost of its assets. If the market value of the firm is higher than its replacement cost, it means that the firm is in possession of certain intangible assets, for example future growth opportunities. The value of the firm would be calculated as: Firm Value=Replacement cost of assets + Value of Growth options. The close to Q ration widely employed in practice is the ratio of the market value of equity to the net asset value of the firm, also known as market to book value. Discounted Cash Flow model In preparation of the target cash flow forecasts under the bidders management the historic cash flow statements must be examined. Bidder needs to estimate targets value in the following steps:

Estimate future cash flows of the target based on the assumption for its post acquisition management by the bidder over the forecasted horizon Estimate terminal value of the target Estimate the cost of capital appropriate for the target Discount the estimated cash flows to give a value of the target Add other cash inflows such as business divestment

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Subtract debt and other expenses: acquisition costs, tax on gains from disposal and divestments Compare the estimated equity value for the target with its pre acquisition stand alone value Decide how much of this added value should be given away to target shareholders as control premium

The free cash flows have to be discounted to provide acquirer with the value of the target as a whole. The cost of capital is the weighted average cost of capital (WACC) estimated form the targets pre acquisition cost of equity and debt. If risk profile changed , cost of capital has to be adjusted to reflect that. WACC= K e E/V + (1-Tc) K d D/V +K p P/V K e is cost of equity K d cost of debt K p cost of preference shares E market value of equity D market value of debt P market value of preference shares T c corporate tax rate V = E+D+P, the value of the firm The CAPM, capital asset pricing model might be used to estimate the historic cost of targets equity. CAPM estimates the investor-required return as the sum of a risk free rate and a risk premium based on the overall market risk premium and the risk of the stock in relation to the market. The risk is known as systematic risk, sensitivity of stock

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return to market return. Beta is estimated by an econometric procedure using historic share price data40 Expected return on stock = risk free rate + market premium * Beta Market premium= Expected return on the market Risk free rate r r f = (r m r f) (Brealy , Myers, Allen. Corporate Finance. 8th edition.) (r m r f) market risk premium, since 1900 has averaged 7,6 per cent per year.41 From two models: PER and DCF, discount cash flow model is much more information intensive and richer in analyses. Conclusion There are three different techniques described in previous section to evaluate the target: the earnings-based, asset based and cash flow based model. All of them suffer from some degree of unreliability. Range of values from alternative models might be used at the same time.

5. Performance of cross-border acquisitions. Empirical Evidence There are some studies suggesting that cross border acquisitions perform worse than domestic acquisitions. Paper of Harris and Ravenscraft (1991) on The Role of Acquisitions in Foreign Direct Investment: Evidence from the U.S. Stock Market examined foreign direct investments by studying shareholder wealth gains for 1273 U.S. firms acquired in the period 1970-1987. Harris and Ravenscraft find that cross border take-overs are more frequent than domestic acquisitions; Buyer and seller are in related businesses in three forth of the cases. Targets of the foreign buyers have significantly
40

Sudarsanam, P.S.(1995). The Essence of Mergers and Acquisitions. Prentice Hall Europe. Pearson education Limited.
41

Brealey, R., Myers S., Allen F. (2006). Principles of Corporate Finance. McGraw-Hill, New York

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higher wealth gains than targets of the US firms. This wealth effect for target share holders in cross border transaction is partly stemming from the weakness of U.S. dollar and highlights significant role exchange rate plays in foreign direct investments. However Ravenscraft and Harris were arguing that residual difference in earning from domestic and foreign take-overs might be attributed to the more aggressive bidding by foreign buyers or due to the general expansion into the U.S., bigger market size, well developed capital market, more political stability or tariff and tax differences between U.S. and bidder home country42 5.1 Short- term studies Travlos and Doukas (1988) investigated the effect of international acquisitions on the stock prices of the U.S. bidding firms. Shareholders that do not operate in the target firms country experience significant positive abnormal returns at the announcement of the acquisition. Shareholders of U.S. firms also experience positive abnormal returns, even though insignificant. Shareholders of MNCs that are operating already in the targets country experience insignificant negative abnormal returns. If firm expands into new industry and new geographic market and this geographic market is less developed, their abnormal returns are even higher. It seems that expanding into less developed geographic areas than U.S. is viewed by investors as valuable options. Shareholders also receive great benefits from foreign acquisitions when their firms diversify across geographic and industry space. 43 Mathur et al. (1994) also investigated abnormal return to the foreign bidder shareholders from the sample of 77 firms from 10 countries and found that bidders earned significant negative abnormal returns with exception of Swiss acquirer shareholders. These abnormal returns become increasingly negative over the 15 day after the announcement of acquisition, suggesting that more information has been revealed to the investors.
Robert S. Harris and David Ravenscraft. The Role of Acquisitions in Foreign Direct Investments: evidence from the U.S. Stock Market. The Journal of Finance, Vol. 46, No. 3, John Doukas and Nickolaos G. Travlos. The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions. The Journal of Finance, Vol. 43, No. 5 (Dec., 1988), pp. 1161-1175 M.Sc. Thesis in Finance and International Business Nadia Straton
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There are forces of influence on abnormal return identified by Mathur et al.: changes in net wealth of the bidder associated with changes in exchange rates, possible value destroying behavior by bidders managers with access cash flow, comparative advantage for foreign bidders domiciled in relatively favorable tax jurisdictions, ownership status of the target (whether target involves divested assets). Mathur also reports that more cash rich foreign firms tend to enjoy higher abnormal returns when acquiring U.S. companies.44 5.2 Long term studies Black et al. (2001) made research on the cross border mergers and acquisitions and if such deals bring value for the shareholders of successful bidders. They have investigated long- term abnormal returns to the 361 successful U.S. bidders that acquired foreign targets form 1985 to 1995. The finding showed significant negative abnormal returns over both tree and five year window. The reason of high premiums paid and low abnormal returns can be attributed to the different reporting of financial and tax accounting. These might influence on the bidding firm accurateness in target evaluation. However authors found evidence that negative abnormal returns are smaller in such countries.45

Conclusion The evidence suggest that abnormal return in cross border mergers and acquisitions are positive after announcement, however long term abnormal returns show negative result as reported by Black et al. (2001). Domestic acquisitions on average report better tha

Ike Mathur, Nanda Rangan, Indudeep Chhachhi, Sridhar Sundaram. International Acquisitions in the United States: Evidence from Returns to Foreign Bidders. Managerial and Decision Economics, Vol. 15, No. 2 (Mar. - Apr., 1994), pp. 107-118 45 Black, E.L., Th. A. Carnes, and T. Jandik, The Long term success of Cross- Border Mergers and Acquisitions. Working Paper at the University of Arkanzas, http://www. ssrn.com, May 2001. M.Sc. Thesis in Finance and International Business Nadia Straton

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6. Study methodology Presented below are the tools I used in order to make my research on reasons why companies decide to acquire stock cross border, in Ukraine. 6.1 Empirical Evidence on Merger Motives I have investigated merger motives through previous empirical findings and made some findings on why companies decide to acquire instead of investing cash elsewhere. I have also found out that Cross border acquisitions have slightly different reasons to merge: Acquisitions that result in positive net gains: Synergy motives, hubris motive Acquisitions that result in negative net gains: Managerial, personal motives In the empirical study I use research mostly based on the research from U.S., either it is target that is based in U.S. or the acquirer. 6.2 Questionnaire I have conducted a survey via Stud Survey http://aln.asb.dk/studsurvey. From the total sample of the acquisitions done between 1997 and 2009 I have selected only those companies that were quoted (listed acquirer), almost all of the target companies were private. A reduced sample of 40 surveys was sent out through stud survey website. A total of 6 surveys were received back, representing a bit more than 10 % response rate. Appendix 9 shows the Survey Result. Limitations It is very important to be conscious about limited time frame given for the research. My study has several potential limitations. One limitation is non- response bias. Another limitation is the number of question I limited on purpose in order to increase the response rate. As the length and complexity of practitioners survey increase, the response rate generally declines, therefore I had to omit some interesting question form my survey.

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7 Study Results Most acquirers from the bidder sample choose to acquire companies in the related industries with only 4 companies out of 40 were investing in unrelated sector. It proves that companies prefer to invest in the business they know best. Majority of the investors were commercial, national banks and insurance companies. From the survey results, all of the companies were experienced acquirers with 4-7 but mostly 10 acquisition experiences in the role of bidder before the acquisition of the Ukrainian company. Acquirer also used mostly cash to finance acquisition.

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Thesis Conclusion I surveyed CFO of the Western European acquirer that engaged in merger and acquisition with Ukrainian target firm. Based on the survey evidence, I find that primary motivation to engage in merger with Ukrainian company was to achieve synergy. These result is consistent with the empirical evidence of Seth, Song and Pettit (2000, 2002), that positive gain mergers motive was synergy. In 40 % of the cases company believe that diversification is justifiable motive for acquisitions, most notable as means to reduce looses in case of economic downturn. I also found that DCF (discount cash flow model is the dominant method for valuing privately held company. The most surprising outcome of the survey was that managers use their own cost of equity capital to evaluate targets equity cash flows.

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List of Literature: Books

Berk, J., DeMarzo P. (2002). Corporate Finance. Pearson International Edition. Brealey, R., Myers S., Allen F. (2006). Principles of Corporate Finance. McGraw-Hill, New York Cassiman, B., Colombo M. (2006). Mergers and Acquisitions. Cheltenham, UK: Edwar Edgar Publishing Limited. Galpin ,T., Herndon, M.(2007). The complete guide to mergers and acquisitions. John Wiley and Sons, Inc. Gioie, Carmine. (2005). A Micro econometric Analysis of Mergers and Acquisition. Copenhagen Business School. The PhD School in Economics and Business Administration. PhD Series 29.2005 Juurmaa, R.(1991). Value Creation in Acquisitions in Finland and Sweden 1983-1988. Helsinki School of Economics. Artto-Project 1990-1991. Dept. of Accounting and Finance. Molin, J.(1996). Essays on Corporate Finance and Governance. Stockholm School of Economics: The Economic Research Institute. Risberg, A.(2006). Mergers and Acquisitions. A Critical Reader. USA and Canada: Routledge. Sudarsanam, P.S.(1995). The Essence of Mergers and Acquisitions. Prentice Hall Europe. Pearson education Limited. Weston, F., Chung K.S., Siu J.(1998). Takeovers, Restructurings and Corporate Governance. Upper Saddle River, NJ: Prentice Hall.

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Articles Mohammed Ishaq.1998. Foreign Direct Investments in Ukraine since transition. Communist and Post-Communist Studies, 32 (1999) 91-109. Barbara Peitsch. Investment in Ukraine. Organization for Economic Cooperation and Development. The OECD Observer: Feb/Mar 1997; 204; ABI/INFORM Global. Tarun K.Mukherjee, Halil Kiymaz, H. Kent Baker. Merger Motives and Target Valuation: A Survey of Evidence from CFOs. Journal of Applied Finance. Fall/Winter. 2004. Darryl J. Mitry and Thomas Bradley. Managerial Leadership and Cultural Differences of Eastern European Economies. National University School of Business and Technology. 1999. Hofstede, G. (1980) Motivation, Leadership, and Organization: Do American Theories Apply Abroad? Organizational Dynamics, Summer 1980. Friedrich Trautwein. Merger Motives and Merger Prescriptions. Strategic Management Journal (1990). Mergers and Acquisitions Review. Third Quarter 2008 Financial Advisors Report. Thomson Reuters. http://banker.thomsonib.com Paul A. Pautler. Evidence on Mergers and Acquisitions. The Antitrust Bulletin/Spring. Federal Legal Publications, Inc. 2003. PWC Report. Doing Business in Ukraine, 2007. http://www.pwc.com/ua/en/solutions/obg-vat.jhtml UNCTAD. World Investment Report 2009. www.unctad.org/wir
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CIA. World Fact Book, 2008. Advanced Corporate Finance Class Notes, 2008

Avery, Chevalier and Schaefer, Why Do Managers Undertake Acquisitions? An Analyses of Internal and External Rewards for the Acquisitiveness, April, 1998. Anju Seth, Kean P. Song, Richardson Pettit. Synergy, Managerialism or Hubris? An Empirical Examination of Motives for Foreign Acquisitions of U.S. Firms Journal of International Business Studies, Vol. 31, No. 3 (3rd Qtr., 2000), pp. 387-405 Anju Seth, Kean P. Song, R. Richardson Pettit. Value Creation and Destruction in Cross-Border Acquisitions Strategic Management Journal, Vol. 23, No. 10 (Oct., 2002), pp. 921-940 Anju Seth, Kean P. Song, Richardson Pettit. Synergy, Managerialism or Hubris? An Empirical Examination of Motives for Foreign Acquisitions of U.S. Firms Journal of International Business Studies, Vol. 31, No. 3 (3rd Qtr., 2000), pp. 387-405 Anju Seth, Kean P. Song, R. Richardson Pettit. Value Creation and Destruction in Cross-Border Acquisitions Strategic Management Journal, Vol. 23, No. 10 (Oct., 2002), pp. 921-940 Baker G.P., Jensen M.C., Murphy K.J., Compensation and Incentives: Practice vs. Theory. The Journal of Finance. Vol. XLIII, No.3, July 1988 Black, E.L., Th. A. Carnes, and T. Jandik, The Long term success of Cross- Border Mergers and Acquisitions. Working Paper at the University of Arkanzas, http://www. ssrn.com, May 2001. Chatterjee, 1986 Types of Synergy and Economic Value: The Impact of Acquisition on Merging and Rival Firms. Strategic Managemetn Journal, 7, 1986, pp.119-139. Geert Hofstede. Motivation Leadership and Organization: Do American Theories Apply Abroad? Organizational Dynamics, Summer 1980, pp.61-62. Gort Michael. An economic disturbance theory of mergers. Quarterly Journal of Economics. 83, 1969, pp.624-642

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Holderness, Clifford G. and Dennis P. Sheehan. Raiders or saviors? The evidence on six controversial investors. Journal of Financial Economics, 14, 1985,pp 555-579 Holmsrom, Bengt, and S.Kaplan, (2001): Corporate Governance and Merger Activity in the US: Making Sense of the 1980s and 1990, Journal of economic Perspectives 15, 121144. Holderness, Clifford G. and Dennis P. Sheehan. Raiders or saviors? The evidence on six controversial investors. Journal of Financial Economics, 14, 1985,pp 555-579 Harford Jarrad.What drives merger waves?. Journal of Financial Economics 77 (2005) pp. 529-560. Ike Mathur, Nanda Rangan, Indudeep Chhachhi, Sridhar Sundaram. International Acquisitions in the United States: Evidence from Returns to Foreign Bidders. Managerial and Decision Economics, Vol. 15, No. 2 (Mar. - Apr., 1994), pp. 107-118 Jensen, M., (1986): Agency costs of free cash flow, corporate finance, and takeovers. American economic Review, 76, 323-329. Jensen Michael C (1988): Takeovers: Their causes and Consequesnces, Journal of Economic Perspective, Volume 2, Number 1, pages 21-48. Jensen Michael C. Takeovers: Folklore and science. Harvard Business Review, 62(6), 1984, pp.109-121. Jensen Michael C. and Meckling William H. in their paper Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics. 1976, pp. Jensen, Michael C. The takeover controversy: analyses and evidence . Midland Corporate Finance Journal, 4(2), 1986, pp. 6-27. John Doukas and Nickolaos G. Travlos. The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions. The Journal of Finance, Vol. 43, No. 5 (Dec., 1988), pp. 1161-1175 John Doukas and Nickolaos G. Travlos. The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions. The Journal of Finance, Vol. 43, No. 5 (Dec., 1988), pp. 1161-1175 Jensen Michael C (1988): Takeovers: Their causes and Consequesnces, Journal of Economic Perspective, Volume 2, Number 1, pages 21-48.

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Jensen, M., (1986): Agency costs of free cash flow, corporate finance, and takeovers. American economic Review, 76, 323-329. Jensen Michael C. Takeovers: Folklore and science. Harvard Business Review, 62(6), 1984, pp.109-121. Jensen Michael C. and Meckling William H. in their paper Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics. 1976, pp. 305-360 John Doukas and Nickolaos G. Travlos. The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions. The Journal of Finance, Vol. 43, No. 5 (Dec., 1988), pp. 1161-1175 Jensen, Michael C. The takeover controversy: analyses and evidence . Midland Corporate Finance Journal, 4(2), 1986, pp. 6-27. Kitching John, Why do mergers miscarry?. Harvard Business Review, 45(6), 1967, pp.84-101. Kaplan, Steven. Management buyouts: efficiency gains or value transfers, Harvard Business School Working Paper, 1987. Kitching John, Why do mergers miscarry?. Harvard Business Review, 45(6), 1967, pp.84-101. 1 Trautwein Friedrich. Merger Motives and Merger Prescriptions. Strategic Management Journal, 1990. Marris Robin (1963): A Model of Managerial Enterprise, The Quarterly Journal of Economics, Volume 77, Issue 2, 185-2009. Monsen Joseph R. and Downs Anthony Jr. (1965): A Theory of Large Managerial Firm, The Journal of Political Economy, Volume 73, Issue 3, 221-236. Matsusaka, Takeover Motives During the Conglomerate Merger Wave. RAND Journal of Economics. 1993. Morck R., A. Shleifer and R.Vishny. Do Managerial Objectives drive Bad Acquisitions? The Journal of Finance. Vol.XLV, No.1

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Mergers and Acquisitions Review. Third Quarter 2008 Financial Advisors Report. Thomson Reuters. http://banker.thomsonib.com Morosini, P., Scott S., Singh H., National Cultural Distance and Cross-Border Acquisition Performance, Journal of International Business Studies, Volume 29, Issue 1, 1998, pp.137-158. Mueller Dennis C. (1969): A theory of Conglomerate Mergers, Quarterly Journal of Economics, 83, 643-659 Marris Robin (1963): A Model of Managerial Enterprise, The Quarterly Journal of Economics, Volume 77, Issue 2, 185-2009. Monsen Joseph R. and Downs Anthony Jr. (1965): A Theory of Large Managerial Firm, The Journal of Political Economy, Volume 73, Issue 3, 221-236. Matsusaka, Takeover Motives During the Conglomerate Merger Wave. RAND Journal of Economics. 1993. Montgomery, Cynthia A. and Habir Singh. Diversification strategy and systematic risk. Strategic Management Journal, 5, 1984, pp.181-191 Morck R., A. Shleifer and R.Vishny. Do Managerial Objectives drive Bad Acquisitions? The Journal of Finance. Vol.XLV, No.1 Mitry D.J., T. Bradley. Managerial Leadership and Cultural Differences of Eastern European Economies. National University School of Business and Technology. 1999. Mueller, Dennis C. A theory of conglomerate mergers. Quarterly Journal of Economics, 83, 1969, pp.643-659. Mueller Dennis C. (1969): A theory of Conglomerate Mergers, Quarterly Journal of Economics, 83, 643-659 Morosini, P., Scott S., Singh H., National Cultural Distance and Cross-Border Acquisition Performance, Journal of International Business Studies, Volume 29, Issue 1, 1998, pp.137-158. Montgomery, Cynthia A. and Habir Singh. Diversification strategy and systematic risk. Strategic Management Journal, 5, 1984, pp.181-191 Mueller, Dennis C. A theory of conglomerate mergers. Quarterly Journal of Economics, 83, 1969, pp.643-659.
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Porter, Michael E. From competitive advantage to corporate strategy. McKinsey Quarterly; Spring88, Issue 2, p.35-66, 32p. Revenscraft, David J. and Frederic M. Sherer. Life after Takeover. The Journal of Industrial Economics. Volume XXXVI December 1987 No.2. Richard Roll The Hubris Hypothesis of Corporate Takeovers. The Journal of Business, Vol. 59, No. 2, Part 1 (Apr., 1986), pp. 197-216 Robert S. Harris and David Ravenscraft. The Role of Acquisitions in Foreign Direct Investments: evidence from the U.S. Stock Market. The Journal of Finance, Vol. 46, No. 3, Richard Roll The Hubris Hypothesis of Corporate Takeovers. The Journal of Business, Vol. 59, No. 2, Part 1 (Apr., 1986), pp. 197-216 Stigler, Monopoly and Oligopoly by Merger, 40 Am. Econ. Rev (May 1950). (Citing John Moody, The Truth about the Trusts (New York, 1904), p.487) Stigler, Monopoly and Oligopoly by Merger, 40 Am. Econ. Rev (May 1950). (Citing United States Industrial Commission, Report, Vol. XIII, passim) Trautwein Friedrich. Merger Motives and Merger Prescriptions. Strategic Management Journal, 1990. Toxvaerd Flavio. Strategic merger waves: A theory of musical chairs. Journal of Economic Theory 140 (2008), pp. 1-26 Trautwein Friedrich.Merger Motives and Merger Prescriptions. Strategic Management Journal, Porter, Michael E. From competitive advantage to corporate strategy. McKinsey Quarterly; Spring88, Issue 2, p.35-66, 32p. 305-36 Walsh, James P. Top Management turnover following acquisitions Strategic Management Journal, 9, 1988, pp.173-183 Wensley, Robin. PIMS and BCG: New horizons or false dawn? Strategic Management Journal, 3, 1982, pp.147-158. 1990.

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Wensley, Robin. PIMS and BCG: New horizons or false dawn? Strategic Management Journal, 3, 1982, pp.147-158

Internet and Databases www.google.com www.Wkipedia.org http://www.bbc.co.uk/2/hi/business/7230008.stm. Ukraine sees WTO boost to the economy. http://www.bbc.co.uk/2/hi/business/8322921.stm. Warren Buffet Quotes http://www.pfts.com/en/about-pfts Ukraine stock exchange http://www.fedee.com/minwage.html Federation of European Employers http://ddp-ext.worldbank.org.www.baser.dk World Bank Statistics Elin: Database with electronic journals from ASB library Orbis: Database that provides financial data on 40 million companies worldwide Zephyr: Contains information on 200000+ M&A deals in Europe and also gives links to detailed financial company information. Mergerstat.com: Provides information on M&A activity and deals as they are announced. Deal Monitor www.dealmonitor.co.uk: Database provides information on M&A and takeover deals dating back to 2001. http://www.iso.org. International organization for Standardization. Country Codes
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SPSS Statistics Stud Survey http://aln.asb.dk/studsurvey

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