M&A Activity in Europe During the Crisis:

Moneymaker or Breaker?

MJ Roodenburg, 1395009
Vrije Universiteit Amsterdam
Thesis: MSc. Business Administration

Under Supervision of: Dr. R. Calcagno

 Preface

The Platonic fold is the explosive boundary where the Platonic mindset enters in contact with the messy
reality, where the gap between what you know and what you think you know becomes dangerously wide.
- Black Swan

I would like to take this opportunity to thank Dr. Riccardo Calcagno for his help, commitment and
patience. His help has significantly increased the validity and relevance of this thesis. Furthermore I
would like to thank both Gert-Jan van Holten and Tom Peters for their advice about mergers and
acquisitions, info over the current market and for their overall recommendations. As last, I would like to
thank my parents for their support during my entire studies and this thesis is dedicated to them.

Amsterdam, July 21, 2010

Michiel J. Roodenburg
 Executive Summary

The mind of the gods can not be read by just watching their deeds
- Black Swan

The main goal of this thesis is to find out whether M&A during the financial crisis as of medio 2007 till
now in Europe is value creating on the short-term for acquirers and to find an understanding of the
influence of the main variables reported in existing literature on M&A performance during the crisis. The
contribution to the current body of literature lies in the focus on M&A performance during the crisis,
therefore linking it to the current distressed market. Another contribution is that it generalizes a broad
range of variables reported in existing literature and tests their influence on- and relation with M&A
performance.

The results from a sample of 312 deal announcements of companies listed in London, Paris, Frankfurt and
Amsterdam show a CAR of almost 1,5% during a 21 day period, measured as of 1 week prior till 10 days
after the public announcement of the acquisition. During this period, the CAR before the announcement is
higher than the CAR after the announcement.

In relation to the CAR the influence of 7 variables is analyzed. These variables have all been claimed as
influential in existing literature, and its influence during the crisis has been tested. Previous studies found
a negative relation in target size compared to the size of the acquirer [Ramaswamy & Waegelein, 2003;
Frank, Harris & Titman, 1991]. This thesis concurs this statement and finds a significant relation,
however its influence is close to zero. The ratio‟s involving cash did not lead to significant returns. Next
to cash related variables, all variables relating to total assets of the acquirer report significant results. The
amount of leverage is negatively related to CAR at a 7,2% significance level and a beta of -6,5%. These
results were alongside the expectations based upon existing literature [T. Kruse, H. Park, K. Park, & K.
Suzuki, 2007]. A negative relation was found between the ROA and CAR, with a beta of -4,9% on a 1,9%
significance level. These results are contradictionary to existing literature [Parrino & Harris, 1999;
Parrino & Harris 2001; Healy, Palepu & Ruback, 1992; Dickerson, Gibson & Tsakalatos, 1997]. The last
variable related to total assets is the amount of tangible assets to the total assets, this variable of risk has a
positive relation but is not highly significant.

Keywords: M&A, Post Takeover Performance, European Market, Short-Term, Crisis Management
JEL classifications: G3
 Table of Contents
Preface .................................................................................................................................................... 2
Ex ecut ive Su mmar y ........................................................................................................................... 3
Table of Contents .................................................................................................................................... 4
1. Introduction: European M&A in crisis ............................................................................................. 7
1.1 Goal............................................................................................................................................... 9

1.2 Theoretical and Practical Relevance ............................................................................................... 9

2. Literature Review .......................................................................................................................... 11

2.1 The Outcome of Existing Literature ............................................................................................. 11

2.2 The Discussion on Measuring the Performance of M&A .............................................................. 13

2.3 The Results of Existing Literature ................................................................................................ 17

2.4 Implications of other influential factors in M&A performance ...................................................... 19

3. Conceptual Framework and Hypotheses ......................................................................................... 25

3.1 Research Question ....................................................................................................................... 25

3.2 Research Framework ................................................................................................................... 26

3.2.1 Size ....................................................................................................................................... 26

3.2.2. Industry................................................................................................................................ 27
3.2.3. Domestic vs Cross-Border Deals .......................................................................................... 27
3.2.4. Liquidity / Financing Methods ............................................................................................. 28
3.2.5 Leverage ............................................................................................................................... 29
3.2.6 Return on Assets ................................................................................................................... 29
3.2.7 Risk / Tangible Assets ........................................................................................................... 30
3.3 Conceptual Model ........................................................................................................................ 31

4. Research Design ............................................................................................................................ 32

4.1 Research Strategy and Sample Selection ...................................................................................... 32

4.2 Variables ..................................................................................................................................... 34

4.3 Regression Analysis ..................................................................................................................... 37

5. Empirical Findings and Analysis .................................................................................................... 38

5.1 Sample Statistics .................................................................................................................... 38
 5.2 Post-Acquisition Returns ........................................................................................................ 40

5.3 Regression Analysis ............................................................................................................... 41

5.4 Evaluation of Hypotheses ....................................................................................................... 43

6. Conclusion, Limitations and Recommendations ............................................................................ 48

6.1 Conclusion ............................................................................................................................. 48

6.2 Implications and Recommendations ....................................................................................... 49

6.3 Limitations ............................................................................................................................. 51

Literature Review .................................................................................................................................. 53

 Economies in Crisis:
I am a firm believer in the people. If given the truth, they can be
depended upon to meet any national crisis. The great point is to
bring them the real facts.
Abraham Lincoln, 16th President of the United States of America

(February 12, 1809 – April 15, 1865)

 1. Introduction: European M&A in crisis

Don’t ask a barber whether you need a haircut… and don’t ask an academic if what he does is relevant
- Black Swan quote

Mergers and acquisitions are one of the most researched topics in the financial world. In the last 20 years
M&A activity has increased at a high pace, and is one of the foremost tools for companies to grow and
expand. Research and media continue to debate whether a merger or acquisition is necessary, and if
growth via an acquisition or merger is always in the best interest of the company and stakeholders. In
recent pre-crisis years, critics of M&A were silenced by positive earnings development resulting from the
continuous economic growth in the world. As of 2008 the number of mergers and acquisitions decreased
dramatically. According to Reuters global M&A volume declined from $ 4,4 trillion, of which $ 1,78
trillion in Europe in 2007, to $ 2,9 trillion in 2008 globally. M&A volume in Europe also declined with
34% in that period, whereas the remark must be made that 3 of the largest deals were state bailouts; RBS,
Lloyds TSB / HBOS, and Fortis.

Most research has focused on the performance of companies engaged in M&A activities. The main theme
of performance is centralized on stock returns around announcement dates. The paper of Zollo and Meier
in 2008 is entirely focused on the topic M&A performance. Consensus seems that still there is no
agreement on the best way to evaluate M&A. Even though, two approaches are most commonly used.
There is a scope focused on the abnormal returns and the appreciation of M&A by the market, and a
different angle which uses the accounting information of the firm in order to make an evaluation [Zollo &
Meier, 2008]. Although the question on how to evaluate M&A is interesting and relevant for this
research, the focus is not on the methods available to measure M&A performance.

Another point of focus within the discussion around M&A performance is whether the performance is
positive or negative after a merger or takeover has been completed. Virtually all researchers have reported
large positive abnormal returns to target firms, which is not so surprising given the fact that premiums are
typically paid to target firms in a takeover. Conversely, the returns on the acquiring side around the
announcement date are surprisingly small [Andrade, Mitchell & Stafford, 2001; Asquith, Bruner &
Mullins, 1983; Thompson & Schipper, 1983 Healy et al, 1992]. In fact, while some papers have reported
significant positive performance, others have found zero or negative performance [Loderer & Martin,
1992; Agrawal & Jaffe, 2000; Gregory, 1997]. The question whether M&A provide positive or negative
returns is relevant and will also be touched upon in this paper. The methods used in measuring a firm‟s
performance, and different factors such as industry or geographical related factors can all influence the
outcome related to both dilemma‟s. These outcomes can also be more impacted by the change in
economic climate in recent years. The recent economic climate provides an excellent opportunity to add
on existing research on whether the crisis affects the performance of companies engaging in mergers and
acquisitions. The crisis referred to in this thesis is the current crisis as of medio 2007 till now. This paper
will help explaining what variables influence M&A performance during a period of economic downturn,
and test whether those variables also impact the differences in measurement and outcome of previous
studies. One of the key questions in the case of abnormal returns is how these returns are compared to
returns in stable markets, and will it be the case that in distressed markets they are more focused on the
current state of the company? On the other hand, it may shed a light for the market whether investing in
M&A during the crisis is beneficial for the company. Should companies invest, and what sort of
investments should they make?

To capture all above, this research is two folded. On the one hand it describes via a comparison in
abnormal returns the situation during the crisis in the European M&A market on the side of the acquirer.
On the other, this research explains why these outcomes are different than previous research and why this
is the case.

This chapter continues with a brief description of the goal and relevance of this research. The next part
will focus on previous literature, followed by the central research question and the framework of this
research. These two chapters capture the focus and scope of this thesis. Chapter 3 explains the choices
made in this research, such as the methods used to measure the performance and influential factors and
the research framework, the next chapter elaborates the usage and restrictions of the data set.

As of Chapter 5 the research focuses on the results. Chapter 5 is at first a descriptive chapter about the
M&A Market in Europe during the crisis. In a later stage it focuses on the hypothesis and the variables
used and their influence. Afterwards the conclusion of this thesis is given with the implications,
limitations and recommendations for further research.
1.1 Goal

The goal of this research is first to describe the performance of the European M&A market during the
financial crisis. This crisis started medio 2007 and still continues in most of Europe. Although most
countries have shown some economic growth in the last few quarters, many big firms have fallen, or
would have fallen without state intervention. The first part of the thesis tries to capture the crisis period,
and measures whether M&A activities in Europe were beneficial for firms measured by abnormal returns.
In this measuring part I try to make distinctions in size, country industry, liquidity, leverage, ROA and
risk.

The second part of this thesis concentrates on explaining the differences between the outcomes of the first
part and previous literature. Is the way of measuring during this period maybe heavily influenced or are
there major differences between the variables? I try to clarify the situation of the European M&A market
during the current financial crisis and find what factors are responsible for the differences.

1.2 Theoretical and Practical Relevance

As discussed in the introduction there is no uniform way concerning the measurement of post-
performance of M&A activities, although 2 forms can be distinguished based upon accounting
information and market information. Next to this distinction, the outcome of previous studies also does
not show a uniform conclusion on whether positive returns are found on the acquirer‟s side. Many factors
influence this outcome, for example size, industry, differences in target firms, forms of financing, way of
measuring etc.

This thesis has another factor, namely the crisis which can have a major influence in whether the M&A
activities from a market based perspective are positive or maybe negative compared to previous research.
Therefore this thesis provides a deeper theoretical insight in the relation of the crisis with measuring
performance of M&A activities in Europe based upon empirical evidence. In addition, due to the crisis,
this thesis may shed a better light on the relation of the different variables influencing M&A performance,
and how these different factors can influence the difference in outcome of existing literature.
In relation to the above described theoretical relevance, there is also a more straight forward practical
relevance. This thesis will focus on whether M&A activities in Europe create more value during a crisis
than in more stable times. Many studies have been done during relative stable times; many of them show
no real significant positive returns on the acquiring side over time compared to firms who do not get
involved in mergers or acquisitions, which raises the question for the need of M&A activities for firms.
On the other hand, this crisis is a unique period in which possible trends can be found whether firms
which acquire a target firm during this period can signal a positive sign to the market. There are many
reasons why this could be the case; the company can signal to the market that it has still sufficient
funding, or has the trust of the monetary market in order to get the funds needed to acquire a target
company. In this situation, its financial position sends a positive signal to the market. On the other hand,
since it is a distressed market, the market may evaluate it as very risky and may punish the acquiring
company. In both cases, if there is a significant difference this information can be very interesting for the
commercial and financial market. The commercial market can benefit by this information, because they
can now influence the signal they wish to send to the financial market in order to strengthen its stock or to
acquire a company. The financial market can use this information, whether to support companies in
distressed markets in funding them in order for the acquiring firms to engage in M&A activities, or invest
in other ways in that particular company in order to increase financial gains, or vice versa, depending on
the outcome.
 2. Literature Review

The problem with experts is that they do not know what they do not know
- Black Swan quote

Existing research has focused on the returns for firms previous of, during and after a merger or
acquisition. Not only was the time period in existing research differentiated but also the way of measuring
the returns, firm size (both target and acquirer), industry and for example geographical location. The
difference in outcome of previous research could probably be attributed to those variables. Parallel to the
research focusing mainly on the announcement dates of M&A activities, a smaller body of work has
focused on long term returns for acquiring companies. All above topics of previous studies, focusing on
the performance of acquiring companies are the underlying basis of this thesis. In order to find out
whether there is a change in M&A performance prior to the crisis and during the crisis, the main findings
and key aspects of studies done before the crisis will provide an understanding of M&A performance
which can be compared to the findings presented in this thesis of M&A performance during the crisis.

This chapter is wrapped around a few key studies on measuring M&A performance, added with
conclusions of other researchers. The first part concerns the discussion of previous literature about the
most appropriate way in measuring performance, focused on M&A performance. The second part is
focused on the outcome of previous studies on M&A performance. The third and last part is about the
variables influencing performance and the conclusion of existing literature on those variables.

2.1 The Outcome of Existing Literature

The world is since the start of this millennium given the growing complexity and technological changes
together with a growth in globalization in today‟s business environment heavily dependent on mergers
and acquisitions. Until the start of the crisis there was a continues increase of M&A investments in all
parts of the world, leading to a huge market not only influencing the commercial but also the financial
market. As of this last decade M&A turnover took a flight, but the start was at the end of the 19 th century,
whereas the introduction of large scale production possibilities and the quicker adaption of technological
innovations were the building stones of the focus on M&A.
At the start of this focus the academic interest was mainly on the theoretical sight on how to measure
performance, as can be seen during the 20th century with the introduction of the ROI by DuPont company,
the variance analysis, return over lifecycle theories before the World War. After the world war the DCF
analysis and the residual income added to the ROI were the new focuses in M&A [Kaplan, 1984].

During the 60‟s and 70‟s there was a change in M&A instruments, and the focus shifted to more
quantitative models, such as the regression analysis, capital asset pricing models, linear and non-linear
programming and probability theories [Kaplan, 1984]. After the 70‟s many of the introduced theories
were slightly changed, but most of the academic papers were more empirical based in the discussion of
M&A performance. These papers, were less focused on the principal idea of measuring performance, and
therefore do not shed a whole new light on how the measure M&A performance, but they give a deeper
understanding on the theories introduced in the 20 th century. In the discussion about the misalignment in
measuring new ideas such as empire building, entrenchment strategies, risk avoidance, asset substitutions,
and the relation of internal control mechanisms (managers, management control) and external control
mechanisms (equity and debt holders) saw the light. Next to this phenomena the view upon M&A was not
only related to those two companies involved, but has been perceived as an external mechanism of the
market to govern the market, therefore making the subject more complex and variable [Zingales, 1998;
Bech, Bolton & Roell, 2002].

Paradoxal to the positive view of banks and other financial institutions as monitoring systems of the
market, there is vicious circle where positive information on the firm‟s prospects due to its investments
(such as M&A), those prospects induce traders to buy shares in that company. As a result the price
increase and the cost of equity decreases, whereas the firm raises more capital. That capital is then used
for investments [Allen, 1993]. This circle raises the discussion on the notion whether investments will
lead to a positive reaction of the market possibly resulting in a lack of depth and research of the
monitoring mechanisms.

Although the empirical research during the 20th century is using the same basics for quite some time, the
scope of the existing theories is now much broader and more in depth. Due this depth and scope there is
still much debate on the subject of financial performance of mergers and acquisitions.
2.2 The Discussion on Measuring the Performance of M&A

Despite the great amount of research done on the topic of M&A performance, there is little agreement
within the disciplines of corporate finance on how M&A performance should be measured. Measurement
approaches vary from objective measurement methods e.g. accounting figures, abnormal returns, to
subjective measurement methods like qualitative assessments of degrees of synergy, integration process
efficiency and of strategic gap reduction, and from short-term (days before and after the announcement
date), to long term (up to years after closing time), from a organizational level of analysis such as
increasing the competitive position to a transaction level e.g. quality of post acquisition plans, magnitude
of premium paid. Next to the diversity in the methodological spectrum the use of subjective performance
measures is visible in this field of study. In this perspective most research has been done on overall
performance while a smaller part explains the variance of integration performance measures [Zollo &
Meier, 2008].

Most of the existing research on the financial performance of M&A has focused on stock returns
surrounding the announcement dates. The outcome of studies using these methods reported both
significant positive and negative returns, while other claimed to have no significant results. One of the
main differences in those studies is the length of the study, while the majority has investigated the short
term market response; a smaller body of work has focused on the long term post acquisition returns. One
of the reasons for this, according to Zollo and Meier, could be that there is a strong belief by professionals
in market efficiency indicating what the results should be [Zollo & Meier, 2008].

In this field there is a major distinction qua research, one is aimed at the target the other on the acquirer.
This research focuses entirely on the acquirer. In the case of a takeover or acquisition one party assumes
all the assets and all liabilities of the other, whereas the notion of a merger is a form of an acquisition.
According to Zollo and Meier, the main body of literature in measuring M&A performance uses the
short-term window using stock returns 41%, while the long term window using accounting figures, and
long term performance using stock returns are falling a bit behind, covering 28% and 19% of the existing
literature. The research field using subjective performance measurements also deserves to be worth
mentioning since it covers around the 14% of total literature about M&A performance. In this perspective
there is a broad range of topics and variables found, such as innovation [Ahuja & Katila, 2001; Kapoor &
Lim, 2007], the knowledge-transfer process [Bresman, Nobel & Birkinshaw, 1999], employee and top
management turnover [Hambrick & Cannella, 1993; Walsh, 1988], and project survival or divestitures
[Pennings, Barkema & Douma, 1994; Zollo & Meier, 2008].
The different approaches in measuring acquisition performance all have a certain truth in them, as the
they all shed a light in the complexity of the M&A process. The theoretical discussion between
researchers as well as the discussion on the empirical validation is representing a limiting factor on testing
the relationship of the different variables involved in measuring M&A performance. The variables used in
the different techniques in measuring M&A performance are not entirely bound to a certain technique and
the difference in impact of the same variables in the different techniques are not uniform. It is important
to find the variables used in the concepts developed in existing literature and their empirical validation.

In the above stated problem Zollo and Meier have stated 3 different levels of which the performance can
be measured, whereas there is one of major importance. In their level called the firm level, the focus is on
the actual value creation eventually generated by the acquisition. It is defined in their research as: the
variation in firm performance that occurred during the period of relevance for the execution of the
business plan connected to the acquisition. In the study of Zollo and Meier the level of performance also
takes in account the objectives as they have been envisioned at the start of the transaction process. While
using this notion, Jensen & Ruback state in their research that the value created will have a positive
impact on firm performance. If the cost and revenue improvements are clearly stated, and best are visible
in the account statements, it will be reflected in stock price movements, in abnormal returns. If the two
above mentioned notions are representative notions to capture the focus on measuring M&A performance,
than the expected cost reductions and firm improvements due to the acquisition should be visible in terms
of market reaction and therefore stock price returns. In many situations this is not visible in using
accounting data only, especially when intangible assets are included. Although the above mentioned
construct is very broad, it can be used in the sense that the reaction of the market is representative in order
to measure the performance of an acquisition. The construct based upon market returns is also a forward
looking method, since in theory stock prices represent the present value of expected future cash flows.
The methods using accounting data use historic data and are backward looking. In the case of looking at
the acquisition performance during the current crisis this can be problematic. Another possible problem is
the fact that when using historic costs the influence of inflation and deflation can be heavy. The study of
Datta and Puia strengthens this idea since they state that the event study method is the most commonly
used method in measuring the effect of an acquisition [Zollo & Meier, 2008; Jensen & Ruback, 1983;
Datta & Puia, 1995]. This method is therefore a direct measure of value created for shareholders. The
following figure summarizes the main strengths and weakness of both commonly used constructs.
 Comparison of Research Approaches

Market Based Returns Accounting Data

Strengths • Measurement of direct value created for • Credible data used, all data has been
shareholders verified and audited
• Forward looking metiod • Often used by investors, and used as an
indirect measurement of economic value
Weakness • Vulnerable to events, especially in long- • Possibly non-comparable data for different
term period years
• Requires assumptions of stock market • Possible inadequate disclosure by
efficiency companies
• Backward looking
• Ignores value of intangible assets
• Differences in accounting principles
creates noise
• Very sensitive to inflation and deflation

Figure 1: Comparison of Research Approaches

In relation to the methods and techniques of measuring performance the time horizon is of major
significance, this dimension can be categorized in a short-, medium- and long-term period. In the concept
of time horizon there a few stages of importance, such as the date the acquisition is announced, the first
stages of the integration process, from the closing date towards the initial impact of the integration, and to
the period whereas the integration is successful but the cost reduction and other beneficiaries are still
noticeable. The short-term, focuses mostly on the returns within a year, the medium-term from within a
year towards a maximum of 3 years, while the long-term focus stretches as long as to cover the entire
value creation (or destruction) due to the acquisition. This long-term focus is virtually impossible to
define. The boundaries between the time dimensions is already hard to define, but the clear-cut boundary
between variables related to the acquisition or not which could have both an impact on the overall
performance of the acquirer is hardly possible, and when it is possible it is often impossible to validate
[Zollo & Meier, 2008].
In relation to the difficulties qua boundaries the long-term period also allows other (both external and
internal) factors to influence the performance of the acquisition, while the short-term allows the event
study to capture the variance in performance during a small period of time, where it is more likely that
there is only one major event, the acquisition has taken place. The influence of the acquisition is therefore
more accurate to measure and attributable to the acquisition, since other events are excluded from that
period. There is also another problem mentioned in relation to the long-term period (and the medium-term
to lesser extent), which is the difference between industries. For example, acquisitions within the high-
tech industry are often executed much faster than acquisition within the electric utility or chemical
industry. An advantage of the long-term performance is that from a modeling perspective the outcome
would be more positive in a long-term horizon. This is attributable to the higher costs in the beginning of
an acquisition arising due to implications of IT and control systems, production efficiency, the start of the
knowledge transfer etc. Those costs will decrease and the benefits should increase on the long run,
however stock exchanges are often forward looking, therefore it is no explanation of the market reaction
on an acquisition on the short-term [Zollo & Meier, 2008].

In the last step in this logical progression of the time frame is that firm performance is commonly
operationalized by cumulative abnormal returns of the stock of the acquirer over time. In the period
surrounding the announcement date, the effect of the acquisition on stock performance, and therefore firm
performance is due to the ex-ante expectations of the acquisition of the market. In the long run, whereas
the ex post facto realization of the transaction gives at least some knowledge about the actual performance
of the acquisition. Distinguishing the long- and short-term performance, is therefore also (partially at
least) splitting expectational and actual performance. In the short run, the ex-ante expectations are a form
of logical antecedent to the whole idea of performance, that is, the market gives a collective judgment in
the time of the announcement of the acquisition [Zollo & Meier, 2008; Fama, 1991; Jensen & Ruback,
1983].
2.3 The Results of Existing Literature

In contrast to the previous part of this chapter, this part is not focused on the concepts and notions of
measuring M&A performance and the time frame wherein the performance is measured but about the
outcome of previous studies. This section summarizes the most evident academic papers about M&A
performance and time frame.

While studies concerned about M&A performance are quite popular, in paradox to its popularity the
outcome of acquisition performance is mixed at best. Shareholders of target firms generally enjoy positive
short-term results but acquiring firms frequently enjoy a negative share price performance in the months
following the acquisition. Schoenberg even states that managers of the acquiring firms note that only 56%
of their acquisitions can be considered successful [Cartwright & Schoenberg, 2006]. In the review of
M&A performance literature Other papers relating to this subject claim that abnormal returns for
acquiring firms are negative or at best not significantly different from zero [Agrawal & Jaffe, 2000].

Although it is argued that at firm level there is a wide variation of acquisition performance, with a
standard deviation of 10%, whereas 35-45% of the acquiring firms do achieve positive returns in a
maximum of 3 years following the acquisition [Conn, Cosh, Guest & Hughes, 2001]. The outcomes of
these fairly recent studies do not differ so much from early work on European acquisitions. Kitching
reported in 1974 a failure rate of M&A transactions of 46-50 %, Schoenberg and Norburn reporting in
1994 equally failure rates of 44-45% of total M&A transactions, while using the same measuring methods
[Kitching, 1974; Schoenberg & Norburn, 1994]. An examination of reviewing work of M&A
performance shows a continuous production of negative returns for acquiring companies [Agrawal &
Jaffe, 2000; Gregory, 1997]. On the other hand, in the same research of Gregory and others, it is reported
that when a firm announces a series of acquisitions in order to fulfill strategic objectives their share price
rises significantly. This raises the suspicion of the fact that acquisition announcements raises the share
price, and thus increases the value of the acquiring firm [Asquith, Bruner & Mullins, 1983; Gregory,
1997; Thompson & Schipper, 1983]. The study of Andrade, Mitchell and Stafford combines both
outcomes, whereas the returns following the acquisition are in 3-5 years negative while abnormal returns
on the short-term are positive [Andrade, Mitchell & Stafford, 2001]. In contrast of these results, other
papers report negative abnormal returns in the 500 trading days following the announcement of an
acquisition [Loderer & Martin, 1992].
In this section many more articles about M&A performance can be mentioned, but the paper of Bruner of
2001 summarizes the most important ones. Bruner reviewed 44 studies with different time periods about
M&A performance, whereas 20 studies report negative returns, of which 13 are significant. 24 studies
report positive returns, whereas 17 studies are significant. He also states that 13 of them show value
destruction, 14 show value conservation and 17 studies show value creation. As this is all close to one
third, Bruner concludes that acquiring firms essentially break even, whereas the abnormal return is close
to zero. In this conclusion he also mentions that size is very important and could influence the outcome
significantly .[Bruner, 2001].

In relation to the discussion performance the time frame is also important; many studies report that the
returns on a short-term period do not differ from the returns on a long-term period [Campa & Hernando,
2005]. This way of reasoning will only hold if the market efficiency hypothesis holds, and the market is
effectively judging the expected future performance of the acquisition [Jensen & Ruback, 1983; Fama,
1991]. Whether the market hypothesis stands is still an ongoing discussion, and therefore the discussion
about short- versus long-term is inconclusive, although Healy found a positive relation between the short-
term and long-term window [Healy et al, 1992]. In other corporate finance literature the use of the long-
term window is often not valid due to evidence of complex events influencing the market and acquiring
firm. In many cases, this is still preferable above the use of the more diffused short-term window [Barber
& Lyon, 1997; Loughran & Vijh, 1997]. In the long-term window the published accounting figures of the
acquisition, the actual strategic gap reduction and other more subjective performance measures about
M&A performance can more easily be used, since those variables are more visible. This is easily
explainable, since in the short window the actual benefits or costs have not occurred yet, or are not yet
reported. On the other hand, Donker states that an evaluation on an event study on M&A performance,
with an event window of 11 days around the announcement date to measure cumulative abnormal returns
is academically valid, and this is used in multiple other studies [Donker, 2008]. The main reason for
taking the performance prior to the takeover announcement is to take the pre-performance of the company
into account. [Powell & Stark, 2005].
2.4 Implications of other influential factors in M&A performance

The previous two parts of this chapter are wrapped around 2 important notions, the first one is about the
methods of measuring M&A performance and the outcome of previous studies about M&A performance,
while the second part is focused on the time frame of these measurements. Those two notions are of great
importance, but there are more factors influencing the measurements on M&A performance. The
following part captures the main other factors.

Size: In many studies the factor size of the target and the acquiring firm is a variable that statistically
influences the performance of an acquisition. This influence is based upon the assumption that there are
several sizerelated costs associated when acquiring a firm. These costs can be explained by several
explanations, but the general notions are that when a target is bigger, less bidders will be active, since the
bigger the acquisition, less firms can acquire it. Also, larger targets often cost relatively more to absorb by
the acquirer, and have often more means to defend themselves against possible takeovers. As of the
targets point of view, the study of Ambrose and Megginson found that the probability of receiving a
takeover bid is positively related to tangible assets and negatively related to firm size [Ambrose &
Megginson, 1992].

As for the acquiring side, Asquith, Bruner and Mullins reported results that when the target‟s market
value was 10% or more compared to the market value of the acquirer the return for the acquirer was
4,1%, while when the market value of the target was less than 10% the return for the acquirer was only
1,7% [Asquith, Bruner & Mullins, 1983]. In contrast to these findings, the majority of research on this
topic has reported a negative relation between relative target size and the post-acquisition performance
[Ramaswamy & Waegelein, 2003; Frank, Harris & Titman, 1991]. One of the primary event studies by
Moeller, Schilngemann and Stulz on target size reported a higher return of roughly 2 percentage points
around the announcement date for small acquisition, compared to large acquisitions, irrespective of the
form of financing and whether the firm is publicly held or private. Although the researchers mention that
size effect is dependent of firm and deal characteristics and it is not reversed over time [Moeller,
Schlingemann & Stulz, 2004].

Industry: In contradiction to size, less is written on the differences between influence of industry
diversity on M&A performance within one data set, and even within this section most of the research has
been done on the effect of knowledge transfer between industries or within a single industry. Within the
field of M&A it is assumed that it is more beneficial to acquire a firm within the same industry, this
because firms can induce standard procedures more easily [Hawley, 1968]. When the target firm is from a
different industry, the integration costs are higher and knowledge transfer potential is less, and the effects
on the acquisition tend to be more negative [Finkelstein & Haleblian, 2002].

When the notion „industry‟ is approached from a different angle, and the focus is not on acquisition
between or within industries, but more on the comparison of M&A performance between industries as a
whole there is not much empirical data. One of the reasons could be that M&A deals are often occurring
in waves and within a wave cluster by industry. To compare different industries different periods in time
must be taken, which reduces the validity of a sample taken in a short time framce [Andrade, Mitchell &
Stafford, 2001]. These waves are frequently triggered by certain industry shocks, e.g. deregulation of a
certain industry [Schleifer & Vishny, 1997]. Another explanation is given by Gugler et al, and a study by
Rhodes-Kropf and Viswanathan, both studies show evidence that a wave of acquisitions is accompanied
by the overvaluation of the company. They argue that those waves can only be triggered when there is
sufficient capital at hand, and that is when there is an increasing supply of capital, making it cheaper for
the acquiring company to invest [Gugler & Götz, 2006; Rhodes-Kropf & Viswanathan, 2004]. While
researchers have reached a general consensus on the fact that there are acquisition waves related to
industry, it makes it harder to compare different industries within one time frame.

Domestic vs Cross-Border Deals: Another aspect which has been investigated is the impact of national
differences on post-acquisition performance. In this area there is an ongoing discussion whether what
factors determine national differences and how can those be measured. One of the concepts is about
national cultural differences; this concept can be defined as the difference between the national cultural
characteristics of the acquiring and of the target nation [Hennart & Larimo, 1998]. In much of the existing
literature it is argued that cultural distance hinders acquisition performance due to increasing costs of
integration, this notion is strengthened by the study of Datta and Puia where acquisitions characterized by
high cultural distance are accompanied with negative returns for the acquiring firm [Datta & Puia, 1995].
In paradox to these results, other studies report a positive association between national cultural distance
and acquisition performance [Morosini, Shane & Singh, 1998]. One of the major tools to measure cultural
differences among countries in a quantitative way are the five dimensions created by Hofstede. This tool
uses a numerical scale to valuate each dimension of cultural distance; power distance, individuality,
uncertainty avoidance, masculinity and time orientation [Hofstede, 1980]. The model of Hofstede is used
in some event studies about acquisition performance although it is criticized heavenly. The main
limitations are that the company uses data of a single firm, whereas large multinational enterprises often
have a strong corporate culture. The results are also time dependant, which are an artifact of the time of
data collection and analysis. Another point of criticism is that his model is originated upon the business
culture of IBM, and not on the national culture of the countries IBM operates in [Shenkar & Luo, 2008].
In order to remove the statistical errors of cultural limitations, national boundaries are often used. Using
these boundaries there are differences found between regions, for example in the study of post-acquisition
performance of UK acquirers of domestic, US and Continental European targets between 1991 and 1996.
The results showed a negative CAR significantly different from zero in a period 2 years after the
takeover. Furthermore, domestic deals performed better than US acquisitions, while on their turn they
performed better than European Continental takeovers [Aw & Chatterjee, 2004]. While other studies
examined short- and long-term acquisition performance in the UK over the same period. The research of
Gregory et al. found that short-term results are significantly different from zero irrespective of the
location of the acquisition. Long-term returns were not significantly different from zero [Gregory &
McCorriston, 2003]. The last research concerned about cross-border deal performance examined the
announcement and post-acquisition returns of 4,000 acquisitions by UK public firms from 1984-1998.
The research included acquisitions of domestic and cross-border targets and of both publicly quoted and
privately owned targets. In the case of a private target both domestic and cross-border deals showed
positive short-term returns while the returns for the long-term were close to zero. Publicly traded targets
within the same nation reported negative short- and long-term returns for the acquirer, while cross-border
public targets resulted in zero abnormal returns around the announcement date, while the long-term
results were negative [Con, Cosh, Gues & Hughes, 2003]. Paradoxal to these results the majority of
studies show a negative relation between performance and a cross-border deal, while a domestic deal is in
most cases positive or less negative [Ravenscraft & Long, 1984; Finkelstein, 1999].

Liquidity: The variable liquidity can also influence the post-acquisition performance, whereas sometimes
this variable is related to leverage. In general, firms with excess cash have 4 options to distribute the cash,
or by dividends to its shareholders, or reduce its debt, or buy back shares or investing it (for example by
means of an acquisition). In the last option it is generally conceived that acquiring firms with excess cash
have more stable cash flows and lower debt ratios than nonacquirers. The return to the buyers‟
shareholders increases with the change in buyer‟s debt ratio due to the acquisition [Bruner, 1988].
Acquiring firms with excess cash, should therefore have less difficulty with financing an acquisition by
means of cash (and possibly shares).
Eckbo, Giammarino and Heinker found in a sample of 182 firms between 1964 and 1882 that the
abnormal returns for acquiring companies was 5,7% in this period when the deal was financed with cash
and stocks. In the case where it was financed with stock alone, the return was only 2,7%. In the case of
deals financed by cash only, there were no significant returns [Eckbo, Giammarino & Heinkel, 1990;
Eckbo, 1986]. Numerous other studies have (partly) consistent findings where equity acquirers
underperform [Betton & Williams, 2001; Loughran & Vijh, 1997, L‟Her 2004]. In relation to these
findings, there is also academic evidence stating that paying with stock is costly, while paying with cash
is cost neutral. In these studies results show that stock based deals are associated with significantly
negative returns at deal announcements, whereas cash deals are close to zero or slightly positive [Aquith,
Bruner & Mullins, 1987; Huang & Walkling, 1989; Travlos, 1987; Yook, 2000].

Leverage: Another financial ratio of importance is leverage. The amount of leverage can be classified as
the amount of total debt compared to total assets. A firm can attract debt in order to finance an acquisition
when it cannot or chooses not to use excess cash or stock means. In many cases if a firm can issue debt in
order to finance an acquisition, it often will. Although in this case the firm could increase leverage
because of an increase in debt capacity or because of unused debt capacity in the period prior to the
merger or acquisition. Empirical evidence show that acquirers increase the amount of financial leverage
following mergers and acquisition due to an increased debt capacity, for the second casus there is no
academic foundation. In reverse, firms who cannot issue debt in order to gain funds to acquire, are often
using their debt capacity at a maximum. The research shows that the change in leverage surrounding the
announcement period is positively related to the market-adjusted returns of a firm, therefore clearly
showing that firms increase the amount of leverage following an announcement of an M&A event [Ghosh
& Jain, 2000]. Prior to the announcement event studies resulted higher post-acquisition performance of
low leveraged acquirers compared to high leveraged acquirers [T. Kruse, H. Park, K. Park, & K. Suzuki,
2007].„

Return on Assets: One frequently used ratio in measuring how profitable a firm‟s assets are in generating
revenue is by measuring the return on assets. The ROA is also often used as a benchmark in order to
compare firms, and it gives an indication of the capital intensity of the firm, which is often related to the
type of industry. In general it is often claimed that firms with large initial investments often have relative
lower returns. In a study of 233 mergers in the UK between 1964 and 1977 the ROA for acquiring firms
consistently declined in the long-term post-merger period [Meeks, 1977]. A similar study in the US
during the same period also found out by means of ROA and ROE that companies that were engaged in
M&A activities performed less than their counterparts who were not involved in those activities, although
not significantly so.
Similar results have been found in European studies [Mueller, 1980]. On the other hand, in more recent
studies acquirers experienced a significant +2,1 % operating cash flow after an acquisition. The return
was measured by dividing the operating cash flow by the market value of assets, whereas the acquirers
post-acquisition performance increased compared to the industry benchmark [Parrino & Harris, 1999;
Parrino & Harris 2001; Healy, Palepu & Ruback, 1992; Dickerson, Gibson & Tsakalatos, 1997].

Risk / Tangible assets: In the previous section it became clear that acquisition performance is often
judged in terms of higher and lower returns, or other financial measurements. Another important variable
is risk, however untangling the factors that affect risk after an acquisition is complex. This section is
devoted to the analysis of market response to acquisition especially as it affects a company´s market risk.
A major variable used in assessing market risk is beta. Beta is also referring to financial elasticity or
correlated relative volatility and is a measurement of the sensitivity of asset´s returns to market returns.
The beta coefficient explains the volatility of shares of a single company, or industry in comparison to the
market. A stocks that swings more than the market has a beta higher than 1, and when it is less beta will
be below 1. Stocks with a beta coefficient are supposed to be riskier but provides a potential for higher
returns and vice versa.

One of the main point of criticism is that it can only be used on publicly traded companies, which are
more likely to differ from private companies in terms of capital structure and access to credit markets.
Next to this, beta is not incorporating new information, when the market changes the historic beta is not
reliable anymore. This can especially be problematic in fast changing markets. The historic price
movements of stock are poor predictors in distressed markets, whereas beta´s are merely rear view
mirrors. Lastly, beta measurements on a single stock tend to flip over time, which makes a beta more
unreliable [McClure & Wit, 2004; Vasicek, 1973]. Other studies showed in the case of a low r-squared,
beta estimates are to low or to high than they should have been, often occurring due to inaccurate
measurements and lack of precise data. In the same study it is also found that low estimates of beta have a
high probability of understating the true risk of stock, and high estimates are likely to overstate the true
risk of stock [Gray, 2008].
Another way to assess the amount of risk of a firm is to analyze the assets of a firm. These methods rely
on measurements by using accounting data and the use of risk adjusted discount rates. One of the main
findings is that long-lived tangible assets have a lower risk than short-lived intangible assets
[Schmalensee, 1981]. The rationale behind this, is that tangible assets can be sold more easily, and are
therefore less risky investments. The longer an asset last, the more the amount of risk for the investor is
decreased. European empirical evidence reported that tangible assets are significantly related to
performance measured by operating income, and to annual returns. Although this positive relation is less
during volatile economic time periods [Aboody, Barth & Kasznik, 1999].
 3. Conceptual Framework and Hypotheses

Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious and the
predicted
- Black Swan quote

This section will elaborate the theoretical framework that will be used in this paper. The central theme
will be connected with an appropriate central research question in order to give more direction to this
paper. In Addition to the central research question the second part of this section will communicate the
testable hypotheses that will yield the answer to the central research question. The purpose of this
theoretical framework is to organize the variables related to the research question in a workable and
testable way and to communicate the usefulness of those variables. Therefore this chapter will be wrapped
about the concept about what exactly will be tested, and less on methods and techniques used in order to
test the hypotheses and main research question, the methods and techniques will be explained after this
chapter.

3.1 Research Question

The central theme of this thesis is whether an acquisition is creating value or destroying value during a
distressed market. During relatively stable periods acquisition performance is mixed at best and heavily
related to the way it is measured, the time frame in which it is measured and the variables used in the
measurement. The current financial crisis, as of medio 2007 gives us an opportunity to see whether
acquisitions are creating value during a financial crisis, and to see what variables influences the
performance outcome during this crisis. In other words, do the variables influencing M&A performance
and their impact change during a crisis, and does the crisis give investors an excellent opportunity to
invest.

As this thesis is written medio 2010, the crisis has been going on for about 3 years, whereas the influence
of the crisis can also differ per industry and country. The general assumption is that first the financial
institutions has been struck, whereas the commercial firms followed later. This gives me a few
complications, whether is the influence of the crisis noticeable in the accounting figures of the firm or are
they not yet reported. Relating to this implication is the fact that the impact of the crisis on a long-term, 3-
5 years cannot be measured since the crisis has been going on for 3 years.
This leads us to the following central research question:

Do acquisitions during times of crisis create value for the acquiring company and how are the variables;
size, industry, domestic or cross-border, liquidity, leverage, ROA and risk influencing the CAR in a short-
term time period?

3.2 Research Framework

In order to create a structure for the research question and to define the variables this section elaborates
hypotheses that need to be assessed in order to gain a broader scope of the concept of acquisition
performance. These variables are discussed in the previous chapter, and are likely to influence the
outcome of acquisition performance. The measurement of acquisition performance can therefore be
controlled by these variables, and these variables are therefore being tested. The outcome of testing the
following hypotheses allows me to answer the research question more validly and more concrete.

3.2.1 Size

The results in existing literature show that the relative size of the target compared to the acquiring firm is
significantly related to the performance of an acquisition. Ambrose and Megginson found that the
probability of receiving a takeover bid is negatively related to firm size [Ambrose& Megginson, 1992].
From the perspective of the acquirer the majority of research reported a negative relation between relative
target size and the post-acquisition performance [Ramaswamy & Waegelein, 2003; Frank, Harris &
Titman, 1991].

An explanation for this phenomenon can possibly attributed to the fact that relative higher costs are
associated with integrating a large target into the firm, than when a small target is integrated. On the other
side, from the target‟s perspective, a reason can be that larger targets have more means to defend
themselves and therefore the costs associated with an acquisition will increase. Although during this crisis
many large firms have been sold for relative low prices, Saab, Porsche, Fortis Belgium, the European
Lehmann Brothers branch, which are often stimulated by the government in order to preserve
employment ratios and possible other factors that stimulated the acquisition. This crisis might therefore
present a different outcome.
The following hypothesis will be used to test whether relative target size influences the acquisition
performance.

H1: Relative small targets compared to acquirers create a more positive return than relatively large
targets compared to acquirers.

3.2.2. Industry

While the variable size is heavily studied in academic literature concerning acquisition performance, the
influence of industry is much less studied. The general consensus is that M&A activity is performed in
waves, and within waves clustered by industry [Gugler et al, 2006; Rhodes-Kropf & Viswanathan, 2004].
These studies have not been done in distressed markets. During the current crisis different industries have
been hit hard, and acquisitions, although less than in 2007 have been continued, and in many occasions
were forced to happen. The automobile, construction, aviation and financial industry seemed to be hit
harder than the consumer goods industry, while even there a distinction can be made between luxury
goods and necessary goods.

Furthermore, it is assumed that acquisitions within the same industry are more beneficial than acquisitions
across industries. Some explanations entail that the implementation of standardized procedures is more
efficient or that the amount of knowledge transfer is more fruitful within a single industry [Hawley, 1968;
Finkelstein & Haleblian, 2002]. Aside from these arguments, the crisis might present companies the
opportunity to diversify across industries, or offer firms within the same industry „cheap‟ target firms in
which they can invest. The next hypothesis will be used to test whether acquisitions within the same
industry are more value creating than acquisitions of firms across industries.

H2: Acquiring firms of the same industries provide more positive returns than firms who acquire firms of
a different industry.

3.2.3. Domestic vs Cross-Border Deals

Since there is much criticism on the methods of measuring cultural differences a variable is in place to
measure whether a deal is domestic or cross-border. This variable can indicate whether the market
perceives domestic deals as less costly than cross-border deals, or in the other case, cross-border deals are
perceived to be more fruitful. Empirical data is indecisive, on the one side there is evidence of domestic
deals over performing cross-border deals [Aw & Chatterjee, 2004], while other major studies report that
cross-border deals create less positive significant short-term results [Con, Cosh, Gues & Hughes, 2003].
Still the majority of research report a more negative return in the case of a cross-border deal compared to
a domestic acquisition [Ravenscraft & Long, 1984; Finkelstein, 1999].Due to the effect that most of the
academic literature reports a more negative relation between a cross-border deal and performance the
following hypothesis will be tested:

H3: Cross-border acquisitions generate lower abnormal returns compared to domestic acquisitions.

3.2.4. Liquidity / Financing Methods

The following variable is related to the balance of the acquirer and the form of financing an acquisition.
In academic literature it is argued that firms with excess cash have lower debt ratios and the returns to
shareholders of the acquisitioning firm with excess cash enjoy a higher return [Bruner, 1988]. There is
also consistent evidence that equity acquirers underperform against acquirers who use cash and equity to
finance the acquisition [Betton & Williams, 2001; Loughran & Vijh, 1997, L‟Her 2004]. In a research of
Eckbo et al the abnormal returns for acquiring firms in a period of 1964 till 1982 was 5,7% when it was
financed with stocks and cash, while it was only 2,7% when the deal was financed with stock only
[Eckbo, Giammarino & Heinkel, 1990]. In this crisis there are signs that many commercial firms have
been stocking cash as a reserve, while in many cases the influence of the crisis was less severe than to be
expected. It might be the case that those relatively stable companies might perform better due to their
excess cash levels and a lesser impact of the crisis.

The general consensus might be that acquisitions financed by equity and cash is more beneficial for the
acquiring firm, but according to several leading studies deals financed with cash and stock still provide
zero or slightly positive returns around the announcement date. Deals financed with stocks only perform
even worse, whereas the abnormal returns are negative [Aquith, Bruner & Mullins, 1987; Huang &
Walkling, 1989; Travlos, 1987; Yook, 2000]. Based upon these findings the following hypotheses
concerning the influence of the methods of financing will be tested.

H4: Acquirers with higher cash to total assets ratios gain higher abnormal returns compared to acquirers
with lower cash to total assets ratios.

H5: Acquisitions financed with cash and stocks provide a higher return to shareholders than acquisitions
paid only with equity.
3.2.5 Leverage

The next variable related to the balance is the amount of leverage in the firm. An acquirer can increase its
debt in order to gain additional funds to finance an acquisition. In the other way around, firms who have
no debt capacity left cannot issue debt, which assumedly tells us that that the firm already is highly
leveraged compared to its peers. When a firm increases the amount of leverage, it can be the case that it
still has unused debt capacity or that a firm increases its current debt capacity. Empirical event studies
report that firms increase the amount of debt surrounding the announcement date of an acquisition. The
change of leverage is positively related to the market returns of the acquirer, therefore acquirers increase
their leverage following an M&A event [Ghosh & Jain, 2000]. In relation to these studies other event
studies reported that low leveraged acquirers gained higher post-acquisition returns then high leveraged
acquirers [T. Kruse, H. Park, K. Park, & K. Suzuki, 2007]. In this financial crisis, this can be of relevance
since the capital market dried up, and funds were less easily distributed. Many firms, who did have access
to additional debt before, could not access it during the crisis. In other words, acquirers with a lower
leverage would have got easier access to the capital market, and have lower debt ratios which would have
been perceived as more positive by the market. In relation to existing literature and the above stated
rationale the following hypothesis will be put to the test:

H6: A higher amount of leverage is negatively related to post-acquisition abnormal returns.

3.2.6 Return on Assets

The ROA of a firm is often used to measure the capital intensity of a firm, and the profitability of a firm‟s
assets. It is also frequently used to compare firms. In general, firms with relatively large initial
investments often have lower returns. An acquisition can be seen as a large initial investment which
requires years to earn back. Although, this crisis can present opportunities to acquirers in order to acquire
a relatively cheap target. It might be problematic to gain access to additional funds, but on the other hand
the prices of equity, and firm value of targets have decreased as well. Many studies reported a negative
performance of acquirers during the post-acquisition period measured by means of ROA [Meeks, 1977;
Mueller, 1980]. However, in more recent studies acquirers experienced a significant +2,1% operating
cash flow after an acquisition, whereas the acquirers over performed their industry peers.
The accounting data used is all measured prior to the announcement, whereas a higher ROA of the
acquirer is more positive [Parrino & Harris, 1999; Parrino & Harris 2001; Healy, Palepu & Ruback, 1992;
Dickerson, Gibson & Tsakalatos, 1997]. Especially during the financial crisis, this positive relation can
lead to higher abnormal stock returns, which will be tested in the following hypothesis:

H7: A higher ROA of the acquirer prior to the announcement will lead to higher short-term abnormal
stock returns surrounding the announcement date.

3.2.7 Risk / Tangible Assets

The last factor taken into account in this thesis is the influence of risk on the post-acquisition
performance. For an investor, the higher the amount of risk, the higher possible returns. In order to gain
the same returns in less risky investments, a larger investment must be made. An investor demands a
premium if he is investing in an investment which has a higher chance to fail than other less risky
investments. In many previous studies the historic beta is taken into account when measuring risk. In this
situation the historic beta might cause problems since it is backward looking using historic data, and since
it is not incorporating new data it can be unreliable in the fast changing and highly volatile markets during
the crisis.

In order to define risk for acquirers an analysis of the assets will be made. This analysis will also use
historic accounting data of the acquirer, but focuses on the differences between assets of the acquirers.
One of the key findings in existing literature is that tangible assets have a lower risk than intangible asset
[Schmalensee, 1981]. This phenomenon can be explained by the fact that the value of tangible assets can
more easily be assessed and those assets can be sold more rapidly if needed since they are also less bound
to the specific company characteristics. During times of crisis this might be more valuable to investors,
since if the firm is in distress it can access more easily funds by selling of tangible assets, or use them as a
security to gain a loan. A recent European study supports this rationale by a significant positive relation
between the relative size of tangible assets and annual returns [Aboody, Barth & Kasznik, 1999].
Therefore the last thesis will test whether this positive relation still holds on the short-term period
following an acquisition during the crisis:

H8: The more tangible assets the acquirer has prior to the acquisition the higher the abnormal returns
surrounding the announcement date are.
3.3 Conceptual Model

The first two parts of this chapter capture the main problem and the most important variables influencing
this problem. Figure 2, below, graphically depicts the relationships, main research question and
formulated hypothesis explained in this chapter. This picture provides an understandable overview of the
relationships within acquisition performance which will be tested. As can be made out from figure 2, the
main focus is whether acquisitions during the crisis create value. The 7 variables represent factors that can
have a moderating effect on the performance of an acquisition, which might hold interesting values on
whether the general outcome of acquisition performance is sincere.

Variables Tested in Influencing Acquisition Performance

Variable Influence References

1 Size Target size is negatively related to CAR Ramaswamy & Waegelein, 2003; Frank,
Harris & Titman, 1991
2 Industry Industry is positively related to CAR Hawley, 1968; Finkelstein & Haleblian,
2002
3 Domestic vs Domestic deals are more positively Ravenscraft & Long, 1984; Finkelstein,
Cross-Border related to CAR than cross-border deals 1999; Con, Cosh, Gues & Hughes, 2003
4 Form of Cash to total assets ratio is positively Bruner, 1988
Financing related to CAR
The relative amount of cash used in Aquith, Bruner & Mullins, 1987; Huang
financing the acquisition is positively & Walkling, 1989; Travlos, 1987; Yook,
related to CAR 2000
5 Leverage Leverage is negatively related to CAR T. Kruse, H. Park, K. Park, & K. Suzuki,
2007
6 ROA ROA is positively related to CAR Meeks, 1977; Mueller, 1980
7 Risk / Tangible Tangible assets are positively related to Schmalensee, 1981; Aboody, Barth &
Assets CAR Kasznik, 1999

Figure 2: Conceptual model

 4. Research Design

Categorizing always produces reduction in true complexity

- Black Swan

Chapter 4 is related to the previous chapter in the way, that it explains how the measurements of this
thesis have been performed. It captures the strategy chosen on measuring acquisition performance and
how the variables are being tested. This chapter starts with the focus on the main strategy and sample
selection in measuring acquisition performance, followed by the part concerned about testing the
hypotheses and therefore the research on the influencing variables.

4.1 Research Strategy and Sample Selection

The research strategy for this thesis is a cross-sectional desk research. The advantages are that this
strategy fits the needs in the broadest sense and the amount of quantitative data required. The drawback of
using this research method is when applying a broad approach that it imposes limits regarding the depth,
elaboration, complexity and sound foundation of the results [Verschuren & Doorewaard, 1999]. The input
information is secondary information, which is readily available by the SDC Platinum Database (“SDC”),
the Thomson Reuters Datastream (“Datastream”) and annual reports of the firms if needed.

SDC contains all the necessary information regarding M&A transactions. The database is chosen due to
its comprehensiveness, the ability to examine acquisition performance over time and because it is
frequently used by researches in the field. The Datastream database is selected since it has access to
several other databases, it contains the accounting data required and can be used to gather information
about the Cumulative Abnormal Returns. The annual reports were used in order to see specific
information regarding the way acquisitions were financed and to create a better look in specific cases. The
sample has been chosen on several criteria, if a firm fails on one of the points of criteria that firm is
removed from the data sample. These criteria decrease the amount of outside factors influencing the
performance of an acquisition. The criteria selection is given in the figure below.
Selection criteria

 Announcement date from 01-07-2007 till 01-03-2010

 Acquisitions are announced but not yet aborted
 The acquirer holds 0% ownership in the target firm before the announcement
 The acquirer goal is to acquire a 100% ownership in the target firm
 Minimal deal size is 10 million Euro
 The size of the acquirer is no less than 2, and no more than 100 times the size as the target
 Price of the acquisition is announced
 Number of acquirers for 1 acquisition is 1
 Only publicly owned acquirers
 At least one of the firms is listed on the LSE, FSE, EPA or AMX
 The accounting data required is accessible

Figure 3: Selection criteria

The figure above shows the selection criteria applied to the sample. The focus is on the crisis, which
started in 2006 with the housing bubble, but its influence on the stock market was only as of medio 2007
noticeable. The results in that time frame are as relevant as possible in regards with the crisis. Another
factor is that acquisitions must be announced and not yet aborted in order to remove unlikely errors by
firms who could not acquire the firm in a later stage. The market could possibly predict the failure
beforehand and since the acquisition failed there is practically no such thing as acquisition performance
on the short-term.

Prior to the acquisition announcement the acquirer holds 0% ownership in the target firm. The acquirer
must also be willing to acquire 100% of the equity of the target firm in order to make the comparison
between investments as valid as possible, the same counts for the criterion that only acquisitions were
there is only 1 acquirer. The price of the acquisition must be announced to reduce the errors in estimating
bids, although in almost all cases this is a necessity due to the nature of public firms. In order to measure
the CAR of the acquirers the firms must be listed. The listing on the LSE, FSE EPA or AMX enforces the
focus to be on a European economic area with many of the same characteristics. Another advantage is that
firms listed on those indices have similar requirements in announcing acquisitions and interpreting
information of the annual reports.
As can be concluded from the chosen time period, the period of medio 2007 till the first quarter of 2010
does not allow a long-term performance evaluation. Another disadvantage is that even when an
acquisition is announced the impact on the accounting figures has not yet been processed. Therefore
measuring the performance of an acquisition based on accounting figures is nor logical nor valid. The
alternative is measuring the performance by the judgement of the market. The CAR of the firms is for this
reason the form of measuring the performance. This method has been applied in most cases of academic
empirical research in event studies concerning acquisition performance

Next to the methods of measuring acquisition performance the time frame within those measurements is
of importance. Do to the recent nature of the crisis; this thesis can only be focused on the short-term.
Although the time frame can be extended, the heavy discussions on the variables and their impact on
short-term performance, especially due to the opportunity of a heavy volatile market during the crisis
makes a focus on the short term most logical. In many short-term studies, the time frame is set on 11, 10
or 7 days surrounding the announcement date, according to Donker this time frame is a representative
time frame to measure M&A performance [Donker, 2008].

The time period prior to the announcement date is set on 7 days prior to the announcement since that time
frame elapses all possible impact of rumours just before the announcement date, and to limit the influence
of other events. The 11 days period after the announcement date has been chosen according to Donker.

4.2 Variables

This quantitative desk research on short-term acquisition performance takes into account the influence on
7 important variables; size, industry, domestic vs cross-border, liquidity / form of financing, leverage,
ROA and risk. In order to perform a statistical analysis on the hypotheses, these variables need to be
translated into concrete, observable and measurable data. The following part explains the methods used in
translating the variables in such a way, that it is possible to perform a statistical analysis on them.

Size: In order to find the influence of relative target size on the short-term acquisition performance the
variable size needs to be quantified. The minimum value of the target is 10 million Euro, this limitation
excludes very small extraordinary data from my sample. In relation to reducing the noise affect of
deviating data, the minimum size of the target is 100 times smaller than the target, with a max of 2 times
smaller, therefore excluding insignificant transactions with close to zero influence. The relative size is
measured by dividing the total value of assets at the end of the year before the year of the announcement
by the deal value as announced at the announcement date.
Industry: The industry effects on short-term acquisition performance also need to be quantified; this will
be done using a different method. Firstly the firms are split on industry, where the usage of SIC codes to
determine a firms industry seems to fit best, and is used in other studies as well [Francis & Reiter, 1987;
Kim & Schroeder, 1990]. Guenthe and Rosman state: SIC codes are used to match firms by industry
(Hand et al., 1990, Ghicas, 1990), to control for industry-specific cross-sectional correlation of abnormal
returns (Biddle & Seow, 1991; Xiang, 1993), to identify homogeneous industries for study of intra-
industry information transfer (Baginski, 1987: Han et al., 1989; Freeman & Tse, 1992; Szewczyk, 1992),
and to include or exclude certain industries from samples (e.g., Mohrman, 1993; Thomas and Tung, 1992
[Guenthe & Rosman, 1994]. The SIC codes classify firms with a 4 digit code, if the first digits of two
firms match than the acquisition is done within a single industry, if they are different than it is an
acquisition of a target from a different industry. For the regression analysis, an acquisition across
industries is valued with a zero, while an acquisition within a single industry is valued with a one.

In testing the hypotheses, whether acquisitions are more beneficial within the same industry, the acquirers
are split in two groups. The first group represent acquisitions where the first digit of the SIC code of both
the acquirer and target are equal, while the second group represent the group whereas there is a difference
in the first digits between the acquirer and target. In the case of an industry is overly present in the
sample, a dummy variable is created. The group is than split between the dummy and the other industries,
in order to test the influence of the dummy variable on the whole sample.

Domestic vs Cross-Border: The variable whether a domestic acquisition is perceived different by the
market than a cross-border acquisition will be quantified on a similar way as industry. The sample is
again split in two, whereas one group represents domestic acquisitions, while the other represents cross-
border acquisitions. A domestic acquisition, is an acquisition where the acquirer and target both have their
headquarters registered in the same country. On the other hand, a cross-border acquisition represents two
different nations where in one nation the headquarters of the acquirer is registered, while in the other the
target is registered

Liquidity / way of financing: The next variable, the ratio of liquid assets of the acquirer, also need to be
tested in order to answer the research question. The hypothesis related to the liquidity of the acquirer is
calculated by using the amount of cash and cash equivalents and its total assets as stated in their annual
report at the end of the year previous to the year the announcement is made. The amount of cash and cash
equivalents is divided by the total assets giving a ratio of liquidity.
The other hypothesis regarding the way a merger or acquisition is financed is calculated by the ratio of
cash announced by the acquirer. In the case of a cash only deal announcement, the value is set to 1, and
with a equity only transaction announcement to 0. All in between is a ratio of the amount of cash in the
announcement.

Leverage: In order to quantify the amount of leverage two methods are used. The reason for this is
because the two measurements differed in such a way from each other that it could be of influence. In the
first way the variable is calculated by dividing the amount of total debt by total assets. Both debt and
assets are accounting figures given in their annual report of the year previous to the year of the
announcement. The second method is the ratio of total debt to common equity. Due to possible
discrepancies, both measurements have been taken in order to see whether there is also a difference of
influence on the dependent variable.

Return on Assets: The ROA is calculated by dividing the net income by total assets. Both net income
and total assets are given in the accounting figures of the acquirer in the year prior to the year of the
announcements.

Risk / Tangible Assets: The last variable concerning risk is calculated using a similar method as ROA.
The influence of risk is not measured by beta, but is calculated using the amount of tangible assets. The
amount of total tangible assets is divided by the amount of total assets. Both the tangible assets, as the
total assets are given in the accounting figures of the acquirer in the year prior to the year of the
announcements.
4.3 Regression Analysis

At this moment all the relevant variables are identified and described and the regression model can be
defined. In the regression analysis all the variables in this research will be tested simultaneously in order
to test their influence on the CAR. This model includes all defined variables and tests their explanatory
value on the acquisition performance. The following linear regression model is stated as follows:

CAR = α + βSZ + β2IND + β3INDdummy + β4DCB + β5LIQ

+ β6FF + β7LV1 + β8LV2 + β9ROA + β10RISK

CAR = Cumulative Abnormal Return

SZ = Relative size of the target
IND = Industry (acquisition within
The same industry or not)
INDdummy = Industry dummy
DCB = Domestic or cross-border deal
LIQ = Liquidity
FF = Form of financing
LV1 = Relation of debt to common equity
LV2 = Relation of debt to total assets
ROA = Return on Assets
RISK = Risk / tangible assets
 5. Empirical Findings and Analysis

In the last 50 years, the ten most extreme days in the financial markets represent half the returns
- Black Swan

The following chapter will elaborate on the empirical findings resulting from several tests and analysis. In
the first part, the sample statistics are given, followed by the key findings. After the key findings a
thorough analysis of the variables is presented, which will be used in order to answer the proposed
hypotheses. Afterwards the impact of those variables will be evaluated against the key findings in order to
create a basis to answer the main research question adequately. This chapter ends with relating the
analysis of the independent variables to the hypotheses. To start, the sample will be evaluated and the
next section will explain the main findings of the dependant variable, the post-acquisition performance of
European firms during the crisis.

5.1 Sample Statistics

As mentioned in the previous chapter the total number of deals announced between July 2007 and March
2010 in Europe, which also applies to the other criteria mentioned in that chapter is 427 acquisition
announcements. The deal size varies from 10 million EUR to 3,6 billion EUR, whereas Fresenios took
over APP Pharmaceuticals. The relative size of the acquirer ranges from 2 till 100 times total assets
compared to deal size. When looking at the distribution of industries, every industry is represented, and
there are 313 deal announcements of firms of the same industry against 114 of deal announcements
whereas the acquirer is of a different industry. Within these industries, the financial services and real
estate industry are heavily represented with 87 deal announcements. In order to control for this industry, a
dummy variable has been added to the variables. Of those 427 deals, the division between cross-border
deal announcements and domestic deal announcements is fairly equal with 204 domestic deals and 223
cross-border deals.
Another variable worth mentioned is the form of financing. In this sample by far the most deals have been
financed with cash only. There are only 5 deals financed with a stock swap, 19 deals have a combination
of cash and equity, all of the remaining deal announcements are solemnly financed with cash. The last
variables which require an extra explanation are the ones concerned with leverage; the percentage of total
debt of common equity and the total debt divided by the total assets. In the cases where the firm has no
debt, both those values are zero. I have taken both values since there were some discrepancies between
the relations of those 2 variables. Therefore both the percentage of total debt of common equity and the
total debt divided by total assets has been taken as the variables relating leverage to the dependent
variable. In the case whereas the amount of tangible assets is zero, a zero value has been taken in the
variable of tangible assets divided by total assets. A small overview is presented by figure 4 in order to
give a clear overview of the sample statistics.

Overview Sample Statistics

Total number of deal announcements 427

Variable
1 Total Assets Acquirer / Deal Value
2 SIC Industry Code
3 Financial and Real Estate Dummy
4 Domestic and Cross-Border Deals
5 Form of Financing
6 Acquirer Cash / Total Assets
7 Acquirer Total Debt % Common Equity
8 Leverage
9 Return on Assets
10 Risk: Tangible Assets / Total Assets
From 2 till 100
313 of same Industry, 114 of Different Industry
87 of the Financial and Real Estate Industry
204 Domestic Deals and 223 Cross-Border Deals
5 Stock Swaps, 19 Cash & Equity, 403 Cash Only
From 0,1 % till 88%, Average 17%
From 0% till 324%, Average 65%
From 0% till 72%, Average 22%
From 0% till 84%, Average 25%
From 0% till 96%, Average 44%

Figure 4 Sample Statistics

Although the results mentioned in Figure 4 provide a clear picture of the data used it is important to
remove the outliers. Some of the data, such as size has already been altered, next to cases where there was
a negative leverage for example, which is not possible, but other values that are outside the range of other
values need also be removed, since they can influence the results and making them less reliable [Van
Dalen & De Leede, 2000].
In order to remove the outliers, the Z-values are calculated using the following formula:

Xi  X
Zi 
S

Where:
Zi = Z-score
Zi = Observed Outcome
X = Sample Mean
S = Sample Standard Deviation

After applying the Z-scores, the most extreme values have been removed. In this sample, 115 deal
announcements were removed, leaving 312 deal announcements in the sample. Within all variables the
removed deal announcements were of both sides, with the exception of the way the deal has been
financed. After the removal of the outliers, only 2 stock swaps remained in the sample, of the 5 in first
instance.

5.2 Post-Acquisition Returns

After removing the outliers and smoothing the data sample, the CAR of the data in the sample can be
obtained. The CAR is measured on the short-term, starting one week before the announcement date till 10
days after. All CAR have been calculated using the index where the stock is listed.

Figure 5 shows the CAR in different periods, with and without removing outliers. In testing the
independent variables on the dependent variable the CAR has been used without outliers and in the
longest possible period. The reason for taking the longest period is that it shows both the period before
and period after directly related to the announcement date and represents a more reliable picture of the
whole acquisition event. According to figure 5 the CAR during this period is 1,449%, therefore the return
for acquirers announcing an acquisition during this time period is 1,4% more positive than the index.
Next to this positive return, the return in the period before and after the announcement is much more
positive than the performance only after the acquisition announcement, whereas the length after the
acquisition is of less influence. When the week prior to the announcement is taken into account, the CAR
during the whole period is in all cases above the 1,4%, whereas the period after the announcement has a
lower return, but also still positive from 0,7% till 0,9%.
 CAR of Post-Acquisition Performance

Without Outlier Analysis

1 week prior till 1 week prior till 1 day prior till

10 days after 1 week after 1 day after 1 day after 1 week after 10 days after
1,138% 1,253 1,222 0,540 0,503 0,409

With Outlier Analysis

1 week prior till 1 week prior till 1 day prior till

10 days after 1 week after 1 day after 1 day after 1 week after 10 days after
1,449% 1,502% 1,463% 0,914% 0,875% 0,754%

Figure 5 CAR of Data Sample

5.3 Regression Analysis

The next step is to analyze these positive returns more in depth in order to find out whether the variables
have an impact on the CAR of the data sample. As these outcomes can be merely a coincidence it is vital
to decrease the coincidence by relating the CAR to the most occurring influencing variables described in
existing literature given in the second chapter. To further evaluate and measure the relationships between
the variables of this research a linear regression on all variables has been done.

Below in figure 6 the results are posted of the linear regression model of the variables on CAR. In this
model CAR is the dependent variable. This regression model indicates whether the independent variables
are correlated to CAR and what their influence is. The model consists of an R square of 9,19%, which is
quite low and generally indicates that only a small proportion of the variation of the response is explained
by the regression model. According to the outcomes only a fraction of the variation of CAR in this data
sample can be explained by the variables, whereas the data cannot be correlating nor having a minor
influence on the CAR. In order to structurize the correlation of the variables figure 6 summarizes the
coefficients and the relating p-values of the variables of the regression model.
 Regression Analysis

Total number of deal announcements 312

Variables Beta Std. Error t Stat P-value

Intercept 0,004 0,028 0,142 0,887
1 Financial and Real Estate Dummy -0,032 0,010 -3,239 0,001*
2 SIC Industry Code 0,001 0,007 0,154 0,877
3 Domestic and Cross-Border Deals 0,004 0,008 0,511 0,610
4 Form of Financing 0,031 0,023 1,363 0,174
5 Total Assets Acquirer / Deal Value 0,000 0,000 -2,472 0,009*
6 Acquirer Cash / Total Assets -0,001 0,019 -0,078 0,938
7 Acquirer Total Debt % Common Equity 0,000 0,000 0,782 0,435
8 Leverage -0,065 0,044 -1,471 0,072***
9 Return on Assets -0,049 0,021 -2,344 0,019**
10 Risk 0,026 0,023 1,106 0,120
* significance level of 1% ** significance level of 5% *** significance level of 10%

Figure 6 Regression Analysis

Due to the low R square this model must be approached cautiously, on the other hand several variables
are statistically significant, and 2 variables are close in being significant. According to figure 6 the
industry variable is not significant, and beta is close to zero. When looked at the industry dummy, this
variable is highly significant (0,001) and has a negative beta of (-0,032). Therefore the more financial and
real estate firms are in the sample, the more negative the outcome for CAR. Next to industry, there is
relatively little statistical market response on whether a deal is domestic or is a cross-border deal. The
outcome is not significant (0,877) and the coefficient is also low (0,004).

The first financial variable, the form of financing is close to being significant at a 10% level (0,0174) and
has a significant coefficient of (0,031). It indicates that the higher the amount of cash involved in the deal,
the higher CAR, however significance is still very low. On the other hand, by far the majority of the deals
involved were cash only deals, therefore biasing the outcome possibly.

The relative size of the target is at a 10% significance level significant, although in this sample the
influence is minimal, close to zero. The level of liquidity is slightly negative, but not significant related to
CAR.
The 2 variables related to the amount of debt of firms differ substantially from each other. The ratio of
debt to common equity is not significant and has a beta of zero.The ratio of total debt to total assets has a
relatively high significance level (0,072) and negative beta of (-0,065). The higher the amount of relative
debt in the acquiring firm, the more negative the effect is on the CAR. Return on Assets is negatively (-
0,049) related to CAR and is highly significant (0,019). The ratio of tangible assets to total assets has
according to this sample is positively related (beta is 0,026) but is only significant on a 12% significance
level..

5.4 Evaluation of Hypotheses

The previous two sections capture the main findings of the regression analysis and results of the returns.
The following section relates the regression analysis to existing literature and captures the essence of
possible deviation to the outcome of existing literature on post-acquisition performance. This will help in
explaining the CAR of the firms in the sample and why it is possible deviating from the CAR and
influence of variables of previous literature. The hypotheses created will guide the explanation of the
regression analysis and its relation to existing literature step by step. The first hypothesis was:

H1: Relative small targets compared to acquirers create a more positive return than relatively large
targets compared to acquirers.

The regression analysis shows a highly significant relation on a 1% significance level between the relative
size of the target and CAR. The beta of close to zero reports on the other hand the low impact of the
independent variable on the dependent variable. In many of the previous event studies a negative relation
between relative target size and post-acquisition performance [Ramaswamy & Waegelein, 2003; Frank,
Harris & Titman, 1991]. The outcome of this regression analysis supports this negative relation in a way.
Since the higher the ratio of deal value of acquirer‟s assets the more positive CAR is, although the impact
is close to zero, whereas the impact of relative target size on CAR during the crisis in Europe is small.
Although these outcomes predict the impact of relative size on CAR according to previous literature,
since costs of integrating a relative large target can be higher, or that large targets have more means to
defend themselves it does not explain why the impact is so small. Another reason can be that large firms,
such as Saab have been sold at relatively low prices, often subsidized in a way by the government by
means of preventing them from collapsing that this variable is influenced by special crisis regulation
enforced by the government. Another reason can be that large firms were forced to diversify, therefore
selling assets at a discount, whereas the market reacted positively towards the acquirer since he bought
the asset for a discount. Therefore this hypothesis is not rejected, but its impact is low and could be
influenced by regulatory effects or other events.

H2: Acquiring firms of the same industries provide more positive returns than firms who acquire firms of
a different industry.

Existing literature indicated that it is more beneficial for firms to acquire firms of the same industry
[Hawley, 1968; Finkelstein & Haleblian, 2002]. The positive beta of (0,001) is, although of little impact,
in line with this reasoning. The extremely high p-value of (0,877) indicates that there is a high chance that
there is not a relationship between CAR and whether an acquisition is within a single industry or across
industries. The reason of this high p-value can be influenced by the fact that there is no distinction
between industries, only whether a firm acquired a firm within the same industry or not. On the other
hand, the values assigned to this variable, 1 and 0, makes the p-value less reliable since there are only two
values assigned. A reason could be that there is a distinction between industries, especially industries that
are more or less related but are separated by the SIC codes. In a further extent the first two numbers SIC
codes could be related, increased the scope and number of industries in the sample. The low number of
firms in the sample that passed this test prevented this however.

When looked at the industries, and the indication that takeovers occur in waves, and within waves
clustered by industry, the industry dummy presents a significant outcome [Gugler & Götz, 2006; Rhodes-
Kropf & Viswanathan, 2004]. Within a 1% significance level the relation of the industry dummy with the
dependent variable report a negative beta of (-0,032), which is influential. During the crisis most of the
acquisitions within the same industry were takeovers within the financial and real estate sector, this sector
was hit hard and many firms had to sell assets or be sold entirely. The regression analysis shows that the
market responded negatively on those acquisitions, and the returns on the short-term were negative for the
acquirer by 3,2%.
A reason could be that during the crisis assets of financial and real estate companies were valued lower
and lower and firms were obligated to sell assets, or acquirers were stimulated to acquire a competitor,
whereas the future cash flows and valuation of their current assets were viewed as insecure by the market.
Although the dummy variable reported interesting results the hypothesis is rejected.

H3: Cross-border acquisitions generate lower abnormal returns compared to domestic acquisitions.

Although results of previous event studies on the relation of domestic cross-border deals and performance
report a mixed conclusion, the majority of research reported that domestic deals generate higher returns
than domestic deals [Con, Cosh, Gues & Hughes, 2003; Ravenscraft & Long, 1984; Finkelstein, 1999].
The regression analysis also finds these results, but the beta is very low (0,004). and it is not significant,
with a p-value of (0,610), indicating that relation between this variable and the CAR is not fundamented
by the sample.

One of the reasons could be that the influence of a cross-border deal is not only influenced by
geographical boundaries, but that the market takes other factors into account as well, these factors are
related to the differences between nations. There can be more differences between one nation and another,
such as the power distance, regulation differences, political instability, which can be clustered under the
name cultural difference. The high p-value can also be the case, in this sample of Western European
acquirers, that in this sample there were are deals announced whereas the acquirer and target were
Western European, but they are valued in the same way as a deal announced between a European acquirer
and Asian target. The market can make a distinction between those deals, and that influences the p-value.
The last influence is the valuation of this variable, since it is valued by 1‟s and 0‟s, since the deal is
domestic or a across border one, it can increase the p-value even more, making the variable less reliable.
This hypothesis is therefore rejected.

H4: Acquirers with higher cash to total assets ratios gain higher abnormal returns compared to acquirers
with lower cash to total assets ratios.

The regression analysis reports a negative relation between the amount of cash relative to the amount of
total assets of the acquirer in the year before the announcement. This result is contra dictionary to the
results found by Bruner [Bruner, 1988], on the other hand the beta is close to zero with a value of (-
0,001). In relation to the beta, the p-value is (0,938), indicating a very low correlation between the amount
of cash relative to the amount of assets of the acquirer and CAR. The hypothesis is due to these results
rejected. Although the amount of cash of a firm was a hot debated topic during the crisis, investors could
value this ratio as not important for acquiring firms. Another possibility is that there are more distinctions
between the relative amount of cash of total assets, and is entangled with other variables such as relative
size of the target, or risk of a firm.

H5: Acquisitions financed with cash and stocks provide a higher return to shareholders than acquisitions
paid only with equity.

The p-value of this variable indicates a significance level of 17,4%, which is not very significant but also
not to be ignored, especially with a beta of 3,1%. This presumes that only in 17% of the cases there is no
relation between the level of cash involved in the payment of the deal, whereas the beta is influential with
a value of (0,031). Previous studies provide similar results [Eckbo, Giammarino & Heinkel, 1990].
However in this sample there are only 2 stock only deals, and only a fraction of the deals have been paid
with cash and stocks, due to the high absence of stock only deals, and stock & cash deals this variable is
not valid and this thesis has to be rejected.

H6: A higher amount of leverage is negatively related to post-acquisition abnormal returns.

In this sample there two variables related to leverage. The first one is the amount of total debt to common
equity. This variable has a beta of close to zero and is not significant. A reason can be that the other forms
of equity have a high impact and are valued highly by investors, therefore creating the low p-value of
(0,435). The second one is the amount of total debt to total assets, which has a significance level of 7,2%
and a beta of -6,5%. This relationship indicates that the higher the amount of debt, the lower the CAR
after a takeover announcement in the short-term, whereas the values are taken at the end of the year
previous to the announcement. These results are in line with previous studies reporting that acquirers who
are low leveraged acquire higher returns, than high leveraged acquirers [T. Kruse, H. Park, K. Park, & K.
Suzuki, 2007].

During this crisis, the monetary market has been dried up and is slowly recovering, which resulted in a
decreased bargaining position for firms requiring additional funds. Firms which are low leveraged will
have a better bargaining position, could acquire cheaper funds and the market could reward low leveraged
firms in this distressed market. This hypothesis still holds.

H7: A higher ROA of the acquirer prior to the announcement will lead to higher short-term abnormal
stock returns surrounding the announcement date.

The results of the regression analysis support the findings of Meeks and Mueller, indicating a negative
relation between ROA and post-acquisition returns [Meeks, 1977; Mueller, 1980]. The beta of the
regression analysis is (-0,049) which is fairly high, and is significant (0,019). This indicates that the
higher the net income compared to total assets of the acquirer in the year previous to the announcement
the more negative the CAR is. More recent studies showed contra dictionary results [Parrino & Harris,
1999; Parrino & Harris 2001; Healy, Palepu & Ruback, 1992; Dickerson, Gibson & Tsakalatos, 1997].
An explanation could be that the equity value of the acquiring firms decreased to such extent that
investors prioritize increasing stock value more than expansion and „punishes‟ the company after a
takeover announcement. The hypothesis however, is rejected.

H8: The more tangible assets the acquirer has prior to the acquisition the higher the abnormal returns
surrounding the announcement date are.

The amount of tangible assets has a positive relation with the CAR according to the regression analysis.
Although the p-value is a bit high (0,120), the beta is (0,026). These results underline the outcome of
previous event studies [Aboody, Barth & Kasznik, 1999]. The market values the presence of tangible
assets highly, and firms with relative many tangible assets acquire higher stock returns. One of the
reasons could be that the presence of tangible assets allows the firm in times of need the ability to sell off
assets in order to meet financial commitments. Firms who cannot do this, can be proposed to lower fund
ratios which are heavily negatively perceived by the market. This ratio can be perceived as a
measurement of risk, which is also stated in the research of Schmalensee [Schmalensee, 1981]. Although
the p-value is a bit high, this hypothesis holds.
 6. Conclusion, Limitations and Recommendations

Discoverers are sleepwalkers stumbling upon results and not realizing what they have in their hands
- Black Swan

The main goal of this thesis is increasing the understanding of the short-term post-acquisition
performance of acquirers during the crisis in Europe. This chapter communicates these findings, along
with the implications. In a later stage a reflection will be given by elaborating on the limitations and
recommendations for further research.

6.1 Conclusion

M&A is a topic much debated in the practical and academic world, whereas in the practical world the
essence of M&A is a need which is often questioned by academic papers. This thesis adds a new chapter
to this discussion by focusing on M&A performance during a distressed market, namely the current
financial crisis starting medio 2007 till March 2010. In relation to these findings it provides a framework
of factors influencing the post-acquisition performance on the short-term creating an overview more into
debt. These factors shed a light on the relations of post-acquisition performance, measured by CAR,
during the crisis. Existing literature has not yet focused on the performance of acquirers during a
distressed market, especially with 7 variables taken into account.

The CAR in this sample of 312 listed acquirers was almost 1,5% during a 21 day period, measured as of 1
week prior till 10 days after the public announcement of the acquisition. During this period, the CAR
before the announcement is higher than the CAR after the announcement.

In relation to the CAR the influence of 7 variables is analyzed. These variables have all been claimed as
influential by existing literature, and its influence during the crisis has been tested. Previous studies found
a negative relation in target size compared to the size of the acquirer [Ramaswamy & Waegelein, 2003;
Frank, Harris & Titman, 1991]. This thesis concurs this statement and found a significant relation,
however its influence is close to zero. The next variable measured the influence of industries, and found
that deals within the same industry reported not significant positive but close to zero abnormal returns. A
special remark must be made within the financial and real estate industry. Acquirers and targets both of
the financial and real estate industry reported highly significant negative returns of 3,2%. The results of
these industries were deviating significantly from the other industries, and further investigation is
necessary..
Another variable tested whether domestic deals acquired higher returns than cross-border deals. The
outcome of the regression analysis showed no significant relation with a very low influence of this
variable.

The ratio‟s involving cash did not lead to significant returns. The amount of cash and cash equivalents
before the announcement of the acquirer was not significant and its influence was close to zero. The
method payment announced for the transaction is a hot debated topic by researchers, unfortunately due to
the fact that only a fraction of the payments proposed in the announcement would have been done with
only stock, or a combination of stocks and cash, the influence of the methods of payment was high but not
significant.

Next to cash related variables, all variables relating to total assets of the acquirer in the year report
significant (one at high level, tangible assets to total assets has a significance level of 12%) results. The
amount of leverage is negatively related to CAR at a 7,2% significance level and a beta of -6,5%. These
results were alongside the expectations based upon existing literature [T. Kruse, H. Park, K. Park, & K.
Suzuki, 2007]. A negative relation was found between the ROA and CAR, with a beta of -4,9% on a 1,9%
significance level. These results are contra dictionary to existing literature [Parrino & Harris, 1999;
Parrino & Harris 2001; Healy, Palepu & Ruback, 1992; Dickerson, Gibson & Tsakalatos, 1997]. The last
variable related to total assets is the amount of tangible assets to the total assets. This variable can used to
measure risk of a company [Schmalensee, 1981]. The amount of tangible assets has a positive relation
with the CAR according to the regression analysis. Although the p-value is a bit high (0,120), the beta is
(0,026). The market values the presence of tangible assets highly, and firms with relative many tangible
assets acquire higher stock returns, which was expected and in line with previous studies [Aboody, Barth
& Kasznik, 1999].

6.2 Implications and Recommendations

The CAR and relating regression models presented in this thesis can be used by both the practical and
academic world. The model is a generalized model, which will be discussed in the next section. However,
it does provide some footholds for both parties.
According to the data used in this sample, firms who announced an acquisition during the crisis gained
almost 1,5% higher returns in a 21 day time frame than its corresponding stock market, this return is even
higher in the period before the announcement. Although existing literature discusses the fact that the post-
acquisition returns are positive on the side of the acquiring party [Asquith, Bruner & Mullins, 1983;
Gregory, 1997; Thompson & Schipper, 1983], these results in a short period are influential.

Next to these results investors can use the ratio of relative size, which is negatively related but not much
influential in order to assess the profitability of their investment. The fact that the financial and real estate
market reacted much differently than other industries should also be taken into account. Last, investors
should prioritize their focus on the asset ratio‟s since the amount of leverage, tangible assets and ROA all
have a major impact on the returns, whereas the negative relation of ROA is contra dictionary to previous
studies [Parrino & Harris, 1999; Parrino & Harris 2001; Healy, Palepu & Ruback, 1992; Dickerson,
Gibson & Tsakalatos, 1997]. The amount of leverage is also interesting for investors, since highly
leveraged firms provide relative lower returns. This might be accountable to their bargaining position in
the monetary market, as highly leveraged firms might encounter more trouble in receiving short term
funds from banks and other lenders. As an investor this position is of importance, because they can
perceive an investment in highly leveraged firms as less beneficial.

In the academic discussion the positive CAR in this sample is remarkable. Much of the existing event
studies on this topic contest whether acquisitions are positive for the acquirer. During a distressed market
such positive returns indicate generally that the market reward firms that invest. This contradicts the
general idea of firms that should be cautious with risky investments, such as acquisitions during a crisis.

This study confirms that relative target size has almost no influence on performance, while in many
studies size is an important variable [Ramaswamy & Waegelein, 2003; Frank, Harris & Titman, 1991]. A
reason can be that during the crisis many firms were forced to be sold, of which many large deals urged
by the government which could be influencing the outcome of this variable. Further research can focus on
the equity value of the target firm prior to the announcement, since in many cases equity value of the
target goes up, driven by speculation and defense mechanisms, but if the target is facing bankruptcy
equity value can be in decline prior to the announcement. The acquirer can buy the target relatively cheap,
and this might be rewarded by the market.

Geographical and industrial effects does not prove to be of significant effect in this research. This thesis
generalizes the variables, but the effect of national cultural differences and different industries, especially
when clustered can be of more influence. Further research should be done on the effect of these variables
in order to assess its impact properly.
Another major variable is the relation of ROA on CAR, previous literature mentions a positive relation
[Parrino & Harris, 1999; Parrino & Harris 2001; Healy, Palepu & Ruback, 1992; Dickerson, Gibson &
Tsakalatos, 1997] while this sample provides evidence of a negative significant relation with a beta of (-
0,049). A closer look on the mutations of acquirer stock price prior to the announcement could be of
influence, whereas the market possibly prioritizes other aspects above M&A activities.

The last variable on risk shows a positive relation, although with a low significance level of 12% but with
a beta of (0,026). This is in line with existing literature and shows that one risk measurement, with
tangible assets is of influence, more research can be done on whether risk is of a higher influence during
distressed markets.

6.3 Limitations

There are some limitations to the results and conclusions of this study. First, the set of independent
variables included in this model is not an exhaustive set of all possible variables. It is merely a selection
of variables reported and frequently stated in existing literature. Thus, the results of the hypotheses do not
enable a high degree of accuracy in the prediction of its influence, whereas the low R2 can be explained.
Although, while no attempt has been made to include all possible variables, the most important variables
used by others researchers have been included.

Secondly, a limitation of this thesis is that it is a cross-sectional desk research and that this broad
approach imposes limits regarding the depth, elaboration, complexity and foundation of the results. A few
of these limitations on depth were noticeable in the previous section. In order to eradicate this problem
more methods of measurements using accounting data or on individual level had to be done.

Thirdly the abnormal returns are also vulnerable to events affecting the stock market, and therefore these
outcomes. An event during this period was that firms were allowed to use a flexible workforce in times of
need, or that governments ensured the level of bad loans from banks to the market, these events could
have a significant impact on M&A announcements at the time of the announcement of those events.

Fourthly, relating to this kind of research is also the assumption based upon stock market efficiency. In
the case the theory of market efficiency is not applicable, because the market is for any reason not
efficient during the crisis, such as a lack of transparency or overheating. What if market efficiency is not
true, but wrong. What if the acquisition failed to generate the returns aimed for at the start of the
transaction? Or what, in the case of a successful acquisition, in terms of operating values failed to deliver
an adequate return for the shareholders? The solution to these questions is important, since it lies at the
centre to the discussion to which conditions an acquisition is measured.

Fifthly, many financial information used in the analyses is measured more than a month after the takeover
announcements. This reduces the reliability of this model, because much of the data could already be
interpreted much differently, or changed a lot due to changing markets and the position of the company in
the market. Many companies had to decrease their value of their assets for example during the financial
year.

Finally, there could still be influential differences between the four countries used in this research, next to
other variables such as the ROA where in some cases the interest expense has been added to net income.
These changes between reporting standards and regulation could be influential.
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