Beruflich Dokumente
Kultur Dokumente
Yhlas Sovbetov
20 August 2013
1. INTRODUCTION
1.1. The Rationale of Mergers & Acquisitions
Companies set various of strategies to enlarge and expand their business to the different
markets in both domestic and global scope. According to Santos et al (2012) and Akgobek
(2012), these strategies generally based on an internally growing which is expressed as raw
organic growth of the firm, or externally expansion that is building strategic corporation
bridges such as mergers and acquisitions (hereinafter referred as M&A). Moreover, according
to Khan (2011), the recent economic difficulties, besides a cut throat competition in the
financial markets, bereave the chance of week structured firms to survive, and forcing them
either to death or M&A. On other hand, as Kyei-Mensah (2011) states, the most recent
business expansions at international level are made through M&A, due to its less cost of
market entrance than other methods, and it is a phenomenon that the corporate investment is
the quickest way to increase shareholders wealth. Plus, according to Kumar and Bansal
(2008), Malucha (2009), and Akgobek (2012) another rationale of preference of M&A
strategy too often is establishing greater market power, and getting a competitive advantage
over rivals. They believe that M&A and other strategic alliances are reforming the structure
of the corporation by empowering its competitive relations in the market.
Furthermore, as rationale of M&A, Roberts et al (2003) opine that besides gaining access to
new markets, seizing access to source of raw materials can be aimed as aftermath of the
strategy for new opportunities. Moreover, as Malucha (2009), Khan (2011), and Akgobek
(2012) state, merge of two entities sometimes creates more new value than sum of each
separate, which is know as synergy effect, and this can entice the firms at tough periods.
Also, the author believes that, one another motive behind M&A is that it helps to increase the
market share and cost efficiency of the firm. Moreover, according to Motis (2007) and
Akgobek (2012), the M&A strategy can be aimed as feasible method of growing in particular
markets by diversifying the risk associated assets, and thus increasing the efficiency.
1.2. Recent M&A Activities in UK
According to Tzonis (2008), since the last three decades, the literature has witnessed
noteworthy increase in the numbers of M&A in the UK. As author states, only during the
period of 1980-1990, two hundred and sixty three (263) public listed firms, and hundred and
thirty seven (137) non financial firms, in total three hundred and ninety three (393) firms
were acquired. The cost of these acquisitions were nearly 32bn by the end of the 1995. On
other hand, in recent years, the M&A activities in UK tend to decline. According to Heera
(2013), the volume of deals in the last quarter of 2009 were 1176, whereas in the last quarter
of 2010 it declined to 989. Likewise, the value of deals in the same period of 2009 and 2010,
were 65.5bn and 55.6bn respectively. Moreover, the author states that most of these UK
deals (%15) were made with U.S, (%5) Australia, and (%3) Germany.
Table 1: Recent M&A Activities in UK
flow-based approach as, the value that derived from future cash flows of the firm by
discounting it to the present day values. As well as, Malucha (2009) and Sovbetov (2012), in
their researches, analyzed this method by breaking into two parts: firstly, assuming that
enterprise has infinitive life and fixed future cash flows, and secondly, enterprise with
infinitive life, but annual growth rate was associated to the future cash flows. Here,
Chaplinsky and Schill (2000) underline that, %100 of profit after tax (PAT) are considered as
net free cash flow disregarding the dividend payments and retentions. They firstly, scheduled
annual cash flows of the firm assuming it has infinitive life, and afterwards, they discounted
the cash flows with weighted average cost of capital (WACC) to the present day values. This
WACC can be determined through CAPM calculations. On other hand, Franceschi (2008)
and Sovbetov (2012) state that this method funded on many assumptions and future
estimations. For instance, annual growth percentage g is calculated through past years
figures, to be applied for future cash flow stream. As well as, in case of annual growth (g)
penetrated, when the WACC (Cost of capital, shareholders return) is smaller than g then this
method fails to be valid.
In case of earnings-based valuation approach, Franceschi (2008) and Sovbetov (2012) state
that for public listed firms, the PE ratio should be multiplied with firm's earnings to calculate
the fundamental value of the firm. In case of private companies, the PE ratio should be
borrowed with similar type of company in same industry among listed ones. Also, a dilution
percentage should be considered according to borrowing conditions, restriction of shares and
information of private companies. The authors believe that it is the major limitation of this
valuation method.
In case of assets-based valuation approach, it is one of the mostly used methods where the PE
preserves its uncertainty, it lessens the future assumptions and estimations. However,
according to Sovbetov (2012), it is very dependent to the book values on balance sheet, and
may belie the acquirers or investors in assessing its fair value. As the author and Franceschi
(2008) underlined, another limitation of this method is that, it ignores the intangible assets.
Despite that the effects of these limitations were improved with International Financial
Accounting Standards (IFRS), it still has lacks and difficulties in representing the
fundamental value of the enterprises. In addition, in his report Franceschi (2008) claim that,
the book value (henceforth referred as BV) dependency of this method can be mitigated by
the formula that he mentioned in his study as following.
of 1995-2004. They utilized the descriptive, multivariate, and regression analyses to assess
the impact. The authors found out that the bidder banks are more cost efficient than target
ones. But on other hand, in case of credit risk profile, the authors found that the targets have a
better view than the bidder ones. In addition, they also stated that the efficiency and deposit
strategies of mergers are improving their performance in both case of domestic and crossborder M&As, but the dissimilarities in capital structures could be conducive to lower
performance.
Cocris et al (2011) investigated the impact of M&As on banking performance in Europe
through the 18 bank acquisitions over the period of 2001-2009 via utilizing the descriptive,
regression, and correlation analyses. As an aftermath, they found that the M&A helps to
improve the technical efficiency of target banks. More interestingly, the authors conclude that
the M&A activities do not have significant impact on market value of the bidders shares.
Renneboog and Szilagyi (2007) studied the impact of M&A activities on bond performance
in Europe through the 225 M&A events over the period of 1995-2004 by utilizing the
multivariate and regression analyses. As a result, they observed that the bonds underperform
in cross-border M&As comparing to domestic ones. They also stated that the European
bidders are less sensitive to the asset and financial risk effects of M&As.
Liargovas and Repousis (2011) investigated the impact of M&As on performance of Greek
banking sector through the sample of 26 bank acquisitions over the period of 1996-2009 by
utilizing regression analysis. As a conclusion, they found the similar result as the Cocris et al
(2011) found in their study, that the M&A activities do not create a wealth on both bidder
and target banks. However, they got conflicted in results with Cocris et al (2011), in case of
impact on share values that they observed positive abnormal returns on both bidder and target
share values before ten days of announcement.
Maditinos et al (2009) studied the same subject with Liargovas and Repousis (2011), exactly
in the same region. But the authors focused only on two bank acquisitions in 1999: IonikiLaiki bank and Pisteos bank. They exercised covariance, regression, and correlation analyses,
and found that the M&A announcements have temporary impact on both bidder and target
shares. This result showed the similarity with Liargovas and Repousis (2011) ones.
Franceschi (2008) studied the valuation techniques in M&A activities over the period of
2002-2007 in Italy through 19 consultant reports by utilizing regression analysis. As a result,
he found that Italian consultant firms have used several valuation methods with wide range of
exchange ratios, but the dividend discount model (excess capital) was the most preferred one
among others.
Dutescu et al (2013) investigated the impact of M&As on performance of target firms in
Romania through the sample observation of 10 M&A events over the period of 2007-2009.
They examined the transaction analysis of these M&As with the data of 2007, and compared
it with three-years post-acquisition profitability data of 2009. As a result, they found that %80
of related activities in Romania were not profitable for the target firms.
On the contrary to Dutescu et al (2013), Akben-Selcuk and Altiok-Yilmaz (2011) studied the
impact of M&As on performance of acquirer firms in Turkey through the sample of 63 M&A
events over the period of 2003-2007 by utilizing regression analysis. As an aftermath, they
found that the returns of the stocks who involved in M&A activities are higher than average
return of the industry. Moreover, they found that the profitability of acquirers tends to decline
after conclusion of acquisition processes.
Guest (2007) in his study researched the impact of M&As on executive compensation in UK
through 4528 M&A events over the period of 1984-2001, and found significant pay increase
in the year following acquisition. But afterwards he observed a decline in following two years
that offset the initial increase. He opines that, the reason of initial increase could be the bonus
payments besides permanent salaries. Moreover, he found no evidence of compensation is
related to the acquisition performance, whether it is good or bad strategic decision, effects the
compensation increase.
Sudarsanam et al (2001) in their study of glamour acquirers and value acquirers postacquisition performance in UK by analyzing 543 acquisitions during 1982-1995, have found
that shareholders of value acquirers (low market-book value) experienced higher returns than
glamour acquirers (high market-book value) in the first three years of post-acquisition period.
Similarly, they found that the acquirers with low PE ratio have outperformed the acquirers
with higher PE ratio over the first three years of post-acquisition period.
Tzonis (2008) investigated the influences and reasons of M&As in UK through the sample of
470 M&A events over the period of 1986-2005 by observing the t-statistic test. As a result, he
concluded his research by stating that no evidence of M&A impact on stock market and
business cycle at industrial level, but there is a strong one in aggregate level.
Origin
Sample
Period
Model
Result
Europe
225
Banks
19952004
Descriptive Analysis
Multivariate
Regression
Europe
18
Bank
M&As
20012009
Descriptive Analysis
Regression Analysis
Pearson Correlation
Europe
225
M&As
19952004
Multivariate
Regression
Greece
26
Bank
M&As
19962009
Regression Analysis
Greece
2 Bank
M&As
1999
Descriptive Analysis
Autocorrelation
Autocovariance
Autoregressive
Italy
19
Reports
2002
2007
Regression Analysis
Dutescu et al
(2013)
Romania
10
M&As
20072009
Transaction Analysis
Akben-Selcuk
& AltiokYilmaz (2011)
Turkey
63
M&As
20032007
Regression Analysis
Regression Analysis
t-test
Altunbas &
Ibanez (2004)
Cocris et al
(2011)
Renneboog &
Szilagyi (2007)
Liargovas &
Repousis (2011)
Maditinos et al
(2009)
Franceschi
(2008)
UK
4528
M&As
19842001
Sudarsanam et
al (2001)
UK
543
M&As
19821995
t-test
Tzonis (2008)
UK
470
M&As
19862005
t-test
Guest (2007)
Origin
Sample
Period
Model
Result
Gersdorff &
Bacon (2009)
US
20
M&As
2007
Regression Analysis
Burns &
Liebenberg
(2010)
US
1967
M&As
20082009
Multivariate
Regression
US
401
M&As
19882008
Descriptive Analysis
Regression Analysis
Correlation Analysis
Wilcoxon-signed rank
t-test
Zhou et al
(2011)
Asia &
Latin
America
132
M&As
19982009
Multivariate
Regression
Simoes et al
(2012)
Latin
America
53
M&As
19952008
Regression
Kyei-Mensah
(2011)
Omah et al (2013) pursued an investigation in the same region and industry with Akinbuli
and Kelilume (2013). As a difference, the authors here, sampled 20 banks M&A events over
the period of 2001-2010 by aiming to measure the M&A effects on shareholders value. As a
aftermath of regression analysis, they observed a marginal increase in shareholders value
creation.
Wilson (2013) in his study in South Africa, investigated the trends and determinants of
M&A activities targeting the country firms, by observing 1072 M&A events through the
period of 1991-2011 via regional, Poisson distribution, negative binomial regression, and
variance analyses tools. As a result, she found that UK and US are the main acquirers of
South Africa firms. Moreover, as determinants of M&A, she found the share price, market
size, and macroeconomic stability are main factors in the country in M&A activities.
Table 4: Summary of Empirical Research Results in Africa
Reference
Origin
Sample
10
Bank
M&As
Period
Model
Result
Badreldin &
Kalhoefer (2009)
Egypt
20022007
Comparative Analysis
Govender (2010)
South
Africa
797
M&As
20012009
Descriptive Analysis
T-test
Akinbuli &
Kelilume (2013)
Nigeria
10
Banks
20042008
Regression Analysis
Omah et al
(2013)
Nigeria
20
Banks
20012010
Regression Analysis
19912011
Descriptive Analysis
Regional Analysis
Poisson Distribution
Negative Binomial
Regression
Variance
Wilson (2013)
South
Africa
1072
M&As
Origin
Sample
Period
Model
America,
Asia,
Europe
2429
M&As
1985
1994
Regression Analysis
Kumar &
Bansal (2008)
India
74
M&As
20002003
Comparative Analysis
Khan (2011)
India
4 Banks
20052011
t-test
Sensarma &
Jayadev (2010)
India
27
Banks
19862003
Regression Analysis
Poornima &
Subhashini
(2013)
India
33
M&As
20092010
Paired t-test
Malaysia
6 Bank
M&As
20052010
Multiple Regression
Cloodt et al
(2006)
Salleh et al
(2013)
Result
Non-technological M&As have negative
impact on acquirer's performance due to its
extra resources to repair the disruptions.
Acquirers performance has been improved in
post-M&A period.
3. RESEARCH METHODOLOGY
3.1. Type of Research
Starting with theoretical bases, and following the empirical research results, this research will
make an observation as parallel with the characteristics of deductive reasoning approach. As
the impacts of M&A on key financial ratios in UK bank sector over the period of 2000-2013,
are aimed to be measured, the type of this research should be based on quantitative approach.
3.2. Data Description & Analysis
All banks which involved to the M&A activities in the period of 2000-2013 should be sorted
out, and their data should be gathered from annual reports that is the secondary data source.
As key financial indicators the profitability, efficiency, and structural ratios are involved to
the analysis. These ratios are described below.
a) Profitability Ratios: Net Profit (NP), ROE, ROA, ROCE
b) Efficiency Ratios: Current Ratio (CR), Liquidity Ratio (LIQ)
c) Structural Ratios: Debt-Equity (DE), Total Debt to Total Capital (DC)
At least 25 M&A events are aimed as observation number for this research, and taking into
consideration of twelve-years data, that will formulate a table with 350 rows of data. All the
related data are aimed to be sorted out, and penetrated through the regression and correlation
analysis to observe the impacts.
3.3. Research Framework
First concept of the research is based on pre and post M&A periods. Five-years pre M&A
period, and five-years post M&A period would be satisfactory to compare and assess the
M&A impacts on banks key financials. Second concept of the research is based on evaluating
the impacts with regression and correlation analysis without classifying as pre and post
periods. In addition, both of these concepts would involve the examination of the most
accurate valuation techniques in UK banking M&A activities.
3.4. Research Hypothesis
The following hypotheses are formulates as research questions.
H1: There is a significant impact of M&As on profitability of the banks.
H2: There is a significant impact of M&As on efficiency of the banks.
H3: There is a significant impact of M&As on capital structure of the banks.
H4: All valuation methods of banks in UK have similar results, therefore their preference are
irrelevant.
3.5. Research Difficulties
According to the Sovbetov (2013), the banks have different structure than other financial
institutions. The differences in regulatory regime, and the rules described in the Basel
Accords, distinct the banks from others. One another limitation is the lack of transparency of
the bank reports, as Sovbetov (2013) underlined. The reliability of this research would base
on annual published reports of the related banks. In addition, as a final limitation, the
metaphor of too big to fail gives to banks a privilege effigy with government backing
supports and tolerance. Therefore, investigate these firms become more difficult than other
financial institutions.
4. TIMESCALE
In order to manage the time efficiently, the following grant chart was formulated by the
author of this research proposal.
Figure 1: Time Schedule of this Research Proposal
Literature Review
Market Observation
Empirical Results
Methodology
Data Collection
Data Analysis
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