The Returns to Developed-Market Acquirers in Emerging Markets

Abstract

In stark contrast to the findings based on domestic M&A transactions, we find that the developed-market acquirers experience positive and significant announcement returns in transactions that involve an emerging-market target. On average, over the 1988-2003 period, developed-market acquirer returns show a statistically significant increase of 1.18% over a three-week event window when M&A transactions in emerging markets are announced. Abnormal returns for target firms are also positive and on average equal 6.8%. The acquisition of majority control is a key feature of transactions that deliver positive acquirer returns - acquirer return increases range from 3.3% to 4.9% when majority control of an emerging-market target is acquired. The results are robust to the inclusion of controls for country, time, industrial diversification, method of payment effects, as well as acquirer- and target-firm characteristics such as size and liquidity. We find positive support for two hypotheses which can explain these unique findings. First, we find that developed-market acquirer returns increase as emerging-market bond spreads widen. This suggests the ability of developed-market acquirers to provide access to finance may be particularly valuable for targets located in capital-scarce emerging markets. Second, we find that developed-market acquirer returns increase significantly when they gain majority control of targets in countries with high risks of expropriation and contract repudiation and a weak rule of law. We find minority control acquisitions in these same countries do not produce the same results. We argue that in majority control acquisitions the boundaries of the firm are extended, thus bonding an emerging-market target firm to a developed-market acquirer from a country with better institutions.