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2020 | Book

Strategic Deals in Emerging Capital Markets

Are There Efficiency Gains for Firms in BRIC Countries?

Editors: Prof. Dr. Irina Ivashkovskaya, Prof. Svetlana Grigorieva, Prof. Dr. Eugene Nivorozhkin

Publisher: Springer International Publishing

Book Series : Advanced Studies in Emerging Markets Finance


About this book

The industrial development of emerging markets has been a powerful driver for mergers and acquisitions. The contributions collected in this book assess major M&A deals in the largest emerging capital markets (Brazil, Russia, India, China) and their role in shareholder value creation in the markets’ specific business environments. In addition, the book explores various dimensions of M&A deals in order to summarize the main trends in corporate control markets in the largest emerging countries, and how they differ from those in developed countries; to identify deal-performance relationships and the determinants of success or failure; to reveal the drivers for the premium in M&A deals; and to capture market responses to different M&A strategies. By doing so, the book makes a significant contribution to the literature, which has to date largely focused on developed markets.

Table of Contents


Strategic Deals and Value Creation: The Lessons from Previous Research

M&As Trends in Emerging Capital Markets
To explore the trends in buying and selling the firms in emerging markets, this chapter introduces the key features in the strategic deals in the largest markets within BRIC group. The upward and downward trends in purchasing corporate control that constitute the waves in the M&As activities in these countries are shown. The authors underline the role of government regulations and enhancement of competition in these countries in structuring the M&As waves. The changes in the industrial profiles, as well as the dollar volume and the quantity of deals in BRIC are presented. Both domestic and cross-border deals made by Chinese, Indian, Brazilian, and Russian firms are summarized.
Deng Junzhi, Rajesh Chakrabarti, Karla Motta Kiffer de Moraes, Luiz F. Autran M. Gomes, Irina Skvortsova
How M&A Deals Influence Corporate Performance in Developed and Emerging Capital Markets: A Review of Empirical Results in the Literature
This chapter surveys the recent trends in the literature on the performance of M&A deals in developed and emerging capital markets. This literature is voluminous, diverse and challenging. We focus on the transactions within one country—domestic M&As—in particular focusing on the methods that the researchers use to estimate whether M&A deals promote efficiency gains or not. We discuss the research instruments which allow an assessment of the effects of M&As on firm operating performance and on firm value. Analysing the results of latest empirical studies, we reveal that target shareholders gain significantly in M&A deals. The evidence suggests that in most cases, acquiring shareholders receive negative or insignificant returns in the short run in developed capital markets, while in emerging economies, acquiring shareholders mostly gain in M&A deals. Operating performance analysis reveals mixed results in developed and emerging capital markets, while the analysis of papers which use value performance indicators shows the destruction of company value due to M&As in developed and emerging capital markets. The review also analyses studies that examine the relationship between different methods.
Svetlana Grigorieva
Determinants of Cross-Border M&As and Shareholder Wealth Effects in a Globalized World
We analyze theoretical insights and empirical regularities related to factors determining the cross-border mergers and acquisitions (M&As) and impact of M&As on shareholder value of acquires and targets. The analysis of cross-border M&As is a relatively new subject and only recently received rigorous attention in academic research. Within this nascent literature, the survey pays particular attention to the emerging markets, which, in line with their growing role of in the global economy, became an increasingly important arena for cross-border M&As. The existing evidence point out to prevailing challenges in studying cross-border M&As by emerging markets firms. The results are often contradictory and tend to focus on a single country falling short of formally testing existing theories or developing comprehensive theories for emerging economies. We show that the type of factors increasing the value enhancing effects of M&As tends to be similar to the factors affecting the likelihood of M&As transactions. The remaining methodological challenges for the existing studies are related to strong evidence with respect to nonrandom selection of acquisition targets, which, among other “selection issues,” has important implications for choosing counterfactual evidence in order to appropriately compare pre- and postacquisition performance of firms.
Eugene Nivorozhkin
Meta-analysis of M&As Studies in Emerging Markets
Mergers and acquisitions (M&As) are a specific type of investment and many such transactions are made each year. Recently, the role of emerging capital markets has significantly increased in the M&As market. The growing number of transactions and increasing volumes has generated a lot of research devoted to the effectiveness of M&As. Unfortunately, the conclusions are substantially different. A meta-analysis summarizes the results of previous research and gives an estimation of the explanatory power of one or another determinant included in empirical models considering the diversity among the research. This study determines how different variables affect the performance of M&As deals on average in emerging capital markets. This research is one of the first in this area for emerging capital markets, although there are several studies of developed capital markets, mainly the US market. The study was conducted on a sample of 26 articles about M&AS performance in emerging capital markets. The sample covers articles published from 2003 to 2014. Countries in the selected articles include China, India, Brazil, Russia, Malaysia, South Africa, Argentina, Chile, Slovenia, and Poland. For the analysis, we have chosen the most popular among research determinants of the M&As effectiveness: the method of payment, the size of the acquirer, the deal size, cross-border deals, private target company, ROE, industry relatedness, SOE target (state ownership in the target company), ROA, and the financial leverage of the acquirer. This analysis allows conclusions to be drawn about differences in the explanatory power of different determinants, which has practical application for further research. The strongest drivers of performance for emerging capital markets are method of payment, acquirer size, ROA, and industry relatedness.
Anna Baranovskaya, Margarita Stemasova

Strategic Deals and Value Effects: New Empirical Evidence

Post-acquisition Value Effects of M&A Deals: A Comparative Analysis in Developed and Emerging Capital Markets
This chapter contributes to the literature on M&A performance by examining the impact of M&A deals on company value over the long run in developed and emerging economies. Examining a sample of 153 and 125 deals from Western European and emerging capital markets respectively, 2002–2013, and employing economic profit as a performance measure, we find that transactions in developed markets create more value for shareholders than M&As in emerging economies over the 2-year period surrounding the deals. After adjustments for industry trends, economic profit significantly decreases for firms in emerging capital markets, taking negative values, while for companies in developed markets, we observe insignificant improvements in economic profit values following acquisitions. These results indicate that companies in emerging capital markets cannot achieve the planned synergies, integrate successfully, and improve the performance of the combined firms. We find that industry and geographical diversifications influence the performance of M&A deals in emerging and developed countries, respectively. We also find that the effects on company value differ for stock and cash deals and for high- and low-tech transactions in both markets. By testing the impact of economic crisis of 2007–2008 on the performance of M&A deals, we reveal that the adjusted economic profit does not differ significantly between pre- and post-crisis M&As.
Svetlana Grigorieva, Svetlana Kuzmina
What Drives the Control Premium? Evidence from BRIC Countries
The literature on M&As provides ample evidence for the variability of premiums paid in M&A deals over time and in different types of deals. Most work has been done on the data from developed markets. Using a sample of M&A deals in the largest emerging markets (BRIC) for 2000–2015, we examine three types of factors (acquirer characteristics, target characteristics, deal characteristics). To measure the premium, the event study method is used; therefore the data on cumulative average abnormal returns (CAAR) is adjusted to the market movements in each respective country. We focus on three levels of acquired stakes (>25%, >50%, and 100%). The study contributes to a deeper understanding of the differences in the size of premiums among the countries and the interaction of the main determinants which influence the magnitude of the premium. The regression results document positive drivers of the size of the premium including the percentage of the stake and industry relatedness. Besides these stylized determinants, the premium increases if the deal is made in a crisis year and by a domestic bidder. The negative determinants include the target size, its financial leverage, and the pre-bid stake of the acquirer (toehold).
Irina Ivashkovskaya, Elena Chvyrova
Success Factors in M&As of Knowledge-Intensive Firms in Brazil: Evidence from Consulting Engineering Companies
We present the critical success factors (CSFs) in mergers and acquisitions (M&A) integration processes based on the practices of consulting engineering companies in Brazil in the last 10 years. The relevance of this issue is inherent to the M&A processes, especially at the integration phase of the companies involved. In this phase, several actions should be taken to quickly define an integration approach that must effectively achieve operational synergies and value creation. A practical application using 2 classical ordinal ranking methods was held, and a group of 23 executives active in consulting engineering in Brazil in the last decades with experience in leadership, management, integration, and/or M&A processes was interviewed. The research included seven consulting engineering companies that developed M&A operations, with focus on the success factors, challenges, and risks. Eight critical success factors were ordered in the first ten positions according to both methods. Given the results, these critical success factors should be strongly considered and prioritized in the process of integration of knowledge-intensive companies to achieve their objectives and reach full success in M&A transaction.
Karla Motta Kiffer de Moraes, Luiz F. Autran M. Gomes
Domestic M&As in Russia: Performance and Success Factors
This research develops an approach to synergy analysis in domestic Russian mergers and acquisitions (M&As), tests potential success factors, and evaluates two types of operating and three types of financial synergies. This chapter makes two primary contributions to the literature. First, this chapter is related to the recent research that investigates M&As in emerging markets. Our chapter is unique in that we study domestic Russian M&As based on long-term firm accounting data. This approach captures private companies and small deals that make up the majority of the Russian M&A market. The second contribution is to estimate the structure of operating and financial synergies for every deal and test the significance of potential success factors. The scope is limited to domestic Russian M&As closed between January 2006 and September 2015. The sample is based on the Mergermarket database and includes 171 deals. Our analysis shows that after M&As, firms achieve −0.1% capital expenditure efficiency and −0.2% operating margin compared to the industry benchmark. Deals lead to 11.7% abnormal reduction of capital expenditures and cause 3.1% cost of debt growth. Deals create small tax benefits: the median for the whole sample is 87.5 million rubles, or 1.4% of the median deal value.
Ivan Rodionov, Vitaly Mikhalchuk

Diversification Strategies via M&As: New Evidence from BRIC

Corporate Diversification-Performance Puzzle in BRIC
Researchers have long tried to define the impact of corporate diversification on firm value. Academic papers mainly concentrate on the effects of corporate diversification in mature markets, while its consequences in emerging capital markets are less explored. This article presents the results of an empirical analysis of corporate diversification strategies of a sample of companies from BRIC countries that expanded via acquisitions during 2000–2013. We contribute to the existing literature by examining the effects of corporate diversification on firm value during the pre- and post-crisis periods. In line with other studies, we distinguish between related and unrelated diversification, and in contrast to them, we single out and separately analyze horizontal, conglomerate, and vertical acquisitions. Based on a sample of 319 deals initiated by companies from BRIC countries, we found positive (3.32% and 9.01%) and statistically significant cumulative abnormal returns for conglomerate acquisitions during the pre- and post-crisis periods, correspondingly. We also found that the market reacts positively and statistically significantly to the announcements of horizontal and vertical integration only during the pre-crisis period.
Svetlana Grigorieva
Corporate International Diversification and Performance: An Economic Profit Viewpoint—Evidence from BRIC Companies
In recent years, corporate international diversification has become a widely used growth strategy for companies from both developed and emerging markets. Nevertheless, academic papers provide contradictory results on whether the influence of international diversification on firm performance is positive or negative. This chapter presents the results of an empirical analysis of corporate international diversification—performance relationship on a sample of companies from BRIC countries, which expanded geographically in 2005–2015. We contribute to the existing literature by applying a new methodology to identify the performance effects of corporate international diversification based on an economic profit measure. The results indicate that there is a nonlinear relationship between the degree of international diversification and economic profit spread. Additionally, for BRIC companies, international diversification on average does not have a significant impact on expected long-term performance, measured by Tobin’s Q.
Irina Ivashkovskaya, Dmitry Shcherbakov, Pavel Yakovenko
Conclusion: M&As in Emerging Markets—The Lessons Learned
This book compares M&A performance for companies in developed and emerging economies over short-run and long-run periods.
Eugene Nivorozhkin, Irina Ivashkovskaya
Strategic Deals in Emerging Capital Markets
Prof. Dr. Irina Ivashkovskaya
Prof. Svetlana Grigorieva
Prof. Dr. Eugene Nivorozhkin
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