Do Mergers and Acquisitions Create Value for Turkish Target Firms? An Event Study Analysis

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3rd Economics & Finance Conference, Rome, Italy, April 14-17, 2015 and 4th Economics & Finance Conference, London, UK, August 25-28, 2015

Do mergers and acquisitions create value for Turkish target firms? An event study analysis Elif Akben-Selcuka,* a

Kadir Has University, Department of Business Administration, Cibali, 34083, Istanbul, Turkey

Abstract The objective of this study is to investigate shareholder wealth effects of mergers and acquisitions for an emerging market, namely Turkey. Specifically, we assess the impact of the M&A announcements on the stock price performance of Turkish target firms involved by using a dataset comprising 67 deals announced between 2000 and 2014. Stock price reaction is analyzed over a period of 21 days around the announcement by using standard event study methodology. Results indicate that shareholders of Turkish target firms involved in M&A activities enjoy positive and significant cumulative abnormal returns ranging from 5.25 percent to 8.53 percent depending on the event window analyzed. This finding is consistent with previous studies which show that most of the benefits from M&As accrue to target companies and that acquirers pay a premium to control the rights in these targets. © 2015 2015 The TheAuthors. Authors.Published Publishedby byElsevier ElsevierB.V. B.V.This is an open access article under the CC BY-NC-ND license © Peer-review under responsibility of IISES-International Institute for Social and Economics Sciences. (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of IISES-International Institute for Social and Economics Sciences. Keywords: Acquisitions; wealth effect; stock price performance; target company shareholders; Turkey.

1. Introduction Mergers and acquisitions (M&As) play a major role for businesses around the world. While M&A activities were primarily seen in US, they started to take place in several countries including emerging markets. In the past decade, Turkey experienced a significant increase in its attractiveness as a location for transactions, thanks to improvements in regulatory environment, corporate governance and technological infrastructure. These trends made the country an

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2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of IISES-International Institute for Social and Economics Sciences. doi:10.1016/S2212-5671(15)01250-2

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Elif Akben-Selcuk / Procedia Economics and Finance 30 (2015) 15 – 21

important M&A player among the other rapidly growing emerging markets and the country has experienced a significant increase in M&A activity both in terms of deal numbers and transaction values. Despite these trends, academic literature on the wealth effects of these transactions on the shareholders of M&Ainvolved Turkish companies remains scarce, especially compared to the large amount of US based studies. The present study attempts to fill this gap by investigating the wealth effects of acquisition announcements for Turkish target firms, which are listed on Borsa Istanbul (BIST, formerly Istanbul Stock Exchange). The sample consists of 67 deals announced in the period from January 2000 to December 2014. To accomplish the research objective, abnormal returns to target firm shareholders around acquisition announcements are analyzed using standard event study methodology. Since studies analyzing shareholder wealth effects for target companies in emerging economies are limited in number and yielded inconsistent results, the findings of the present study are expected to make a significant contribution to the literature by offering a different replication of prior studies using data from an emerging market and to complement the literature on Turkish M&As by analyzing a more recent and longer time period. The remainder of the paper is organized as follows. The next section provides a review of the literature. Then, we describe our dataset and methodology. The empirical findings are reported in the following section. The final section summarizes the main findings of the study and concludes. 2. Literature Review In finance literature, several theories have been formulated to explain the motives for M&As. Berkovitch and Narayanan (1993) summarized these in three groups: The first explanation for M&A activity is efficiency and/or synergy. According to neoclassical theory, acquirers would engage in an acquisition only if the added value is greater than the cost of the acquisition. Similarly, target firm managers would accept an acquisition offer only if it results in positive returns to the shareholders. Hence, if an acquisition is made based on synergy motives, we would expect positive returns for both acquirers and targets. The second explanation, the hubris theory, suggests that managers are overoptimistic in evaluating M&A opportunities due to excessive self-confidence, resulting in paying more than true market value of the targets (Roll, 1986). Thus, based on hubris theory, we would expect positive returns to targets but negative returns to acquirers. The final explanation, the agency theory formulated by Jensen and Meckling (1976), postulates that in undertaking M&A activity, acquiring firm managers might act in their own interest rather trying to maximize shareholder wealth. For instance, the reason managers engage in acquisitions might be in an attempt to reduce their employment risk (Black, 1989) or to increase the size of the firm as well as their bonuses, salary, or social status (Mueller, 1969). The agency motive would again result in positive returns to targets but negative returns to acquirers. As is clear from the preceding discussion, all three theories of M&A activity predict positive abnormal returns for target firm shareholders although the expected result for acquirers are mixed. Empirically, a number of studies examined stock-market reactions of M&A announcements for target firm shareholders using event study methods. The majority of these have been conducted for developed countries and found that M&As are value creating events for target company shareholders. This finding has been demonstrated for several time periods both in the United States (Andrade, Mitchell, & Stafford, 2001; Bargeron, Schlingemann, Stulz, & Zutter, 2008; Jensen & Ruback, 1983; Kuipers, Miller, & Patel, 2009; Mulherin & Boone, 2000; Singh & Montgomery, 1987) and in European countries (Campa & Hernando, 2004, 2006; Franks & Harris, 1989; Goergen & Renneboog, 2004; Martynova & Renneboog, 2011). On the other hand, evidence from emerging economies is much more limited and is less conclusive. In a study of shareholder wealth effects for M&A-involved companies from nine emerging markets over the period 1988-2002, Chari, Ouimet, and Thesar (2004) found that announcement period returns for target firms were 6.9 percent. However, in a single country study, Pop (2006) found that abnormal returns to target shareholders from Romania are not statistically significant. In a study of Indian firms, Rachappa and Satyanarayana (2007) analyzed the share price performance of the acquiring and the target companies using the Capital Asset Pricing Model. The authors concluded that shareholders of target firms experienced negative abnormal returns around acquisition announcements. On the contrary, a more recent study from India by Mallikarjunappa and Nayak (2013) concluded that target firm shareholders enjoy positive abnormal returns ranging from 27 percent to 37 percent by analyzing a sample of 227 companies, which received takeover bids during 1998-2007.

Elif Akben-Selcuk / Procedia Economics and Finance 30 (2015) 15 – 21

In Turkey, only a limited number of studies investigated the effects of M&As for Turkish target firms. In one such study, Mandacı (2005) analyzed 14 M&A deals completed in Turkey between 1998 and 2000 and showed that the liquidity ratios and asset turnover ratios for target firms deteriorated following these deals. In another study, AkbenSelçuk (2008) focused only on cross-border M&A deals and found that the effect of these transactions on the operating performance of target firms is insignificant. In a more recent study, Arslan and Şimşir (2014) found that the operating performance of target firms involved in M&As deteriorates after these transactions. The authors further investigated stock prices and found that buy-and-hold returns for target companies are mostly positive following M&As. There are also event studies on Turkish target firms, which more closely relate to the present study. Mandacı (2004) reported a cumulative abnormal return (CAR) of 9.6 percent for Turkish targets on the 11-day event window surrounding acquisitions that took place between 1999 and 2003. Similarly, Hekimoğlu and Tanyeri (2011) analyzed both partial and full acquisition announcements and reported CARs of 8.56 percent for full acquisitions and 2.25 percent for partial acquisitions. In a more recent study, Arslan and Şimşir (2015) focused on the period between 2005 and 2011 and compared the official announcement dates provided by Securities Data Company (SDC) database to the announcements or rumors in Turkish local media. The authors found that the majority of the announcement dates provided by SDC are preceded by other merger-related events and reported that CAR estimates for Turkish target firms are higher around these unofficial rumors compared to the CARs around official announcement dates. 3. Methodology 3.1. Data and sample selection The list of announcements of acquisitions of Turkish target firms listed on Borsa Istanbul during the period from January 2000 to December 2014 was obtained from Dealwatch database. In order to be included in the sample, the transaction had to be completed and the target firm had to be headquartered in Turkey. The sample was also screened to ensure that the target firm had daily stock prices available for at least 260 trading days prior and 10 trading days after the announcement date. If an event was contaminated, i.e. if there was another acquisition announcement of the shares of the same target within the 260 days preceding the event, it was removed from the sample. Acquisitions in different years of the shares of the same company were considered separate events as long as estimation and event windows did not overlap. Finally, target companies with missing stock price data were also removed from the sample. This sample selection procedure, summarized on Table 1, resulted in 67 deals concerning the acquisition of the shares of 52 target companies. Table 1. Sample selection procedure Number of deals Beginning sample

101

Less: contaminated events

16

Less: missing data

18

Final sample

67

The announcement dates usually relied on Dealwatch database. We also screened the official announcements provided by Borsa Istanbul and in case of inconsistencies, the earliest of the two announcement dates was considered as the event date. The daily adjusted returns for individual stocks of target companies and BIST-100 index, which will be used as a proxy for market returns, were obtained from the local database provided by İş Yatırım (İş Investment). The distribution of the deals by year is provided on Table 2 below. The highest number of deals were announced in years 2007, 2008, 2013 and 2014. Table 2. Distribution of deals by year Year

Number of deals

Year

Number of deals

1998

1

2007

7

17

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Elif Akben-Selcuk / Procedia Economics and Finance 30 (2015) 15 – 21 1999

1

2008

7

2000

2

2009

2

2001

2

2010

4

2002

3

2011

2

2003

3

2012

5

2004

0

2013

7

2005

5

2014

7

2006

6

We also reported the distribution of the sample by industry affiliation on Table 3 that follows. The highest number of target companies belongs to finance/real estate industry followed by consumer durables, basic industry and food/tobacco industry. On the other hand, the lowest number of firms belongs to construction and services sectors. Table 3. Distribution of target firms by industry Number of firms Petroleum industry

3

Finance/real estate industry

17

Consumer durables industry

7

Basic industry

7

Food/tobacco industry

7

Construction industry

1

Capital goods industry

2

Textiles/trade industry

3

Services industry

1

Leisure industry

3

Total number of firms

52

3.2. Research design This study follows the event study methodology to measure the wealth effects of acquisition announcements on the stock prices of Turkish target firms. The event is the announcement of the acquisition of a Turkish company listed on Borsa Istanbul. In the study of stock price reactions, the determination of the event date is a critical factor. Following previous literature, we consider the first announcement date of the acquisition and not the effective date of the acquisition as the event date (or day 0). Since our objective is to determine whether these announcements create any excess returns for target firm shareholders, we first calculate the “normal returns” that would be expected in the absence of the event (i.e. the acquisition announcement). The idea is to isolate the effect of the event from the effect of the general market movements. To calculate expected or normal returns, we use the single parameter market model by Sharpe (1963) and run the following regression. (1) Rit = αi + βi Rmt + εit where, Rit denotes the actual return on stock i on day t, Rmt is the return on market portfolio on day t proxied by the returns on BIST-100 index, αi and βi are the parameter estimates obtained by regressing stock i's returns against the returns on the BIST-100 index and denotes εit the residuals. The parameters of the market model are estimated using an estimation period of 250 days (-260 to -11 days) preceding the announcement of the acquisition. This estimation period excludes the 10 days before the event since information leakage in that period might have affected stock prices. The parameters obtained from the regression are

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then used to derive abnormal returns (ARit) by the following equation: (2) ARit = Rit - (αi + βi Rmt) where, Rit denotes the actual return on stock i on day t, Rmt is the return on market portfolio on day t proxied by the returns on BIST-100 index, αi and βi are the market model parameters estimated above. ARs show the change in the price of a target company’s stock caused by the announcement of an acquisition. However, since the abnormal return on a given stock is usually hard to interpret, the ARs are averaged across all 67 events in the sample and the average abnormal return (AAR) in any day t is calculated. The event window covers the period from day (-10) to day (+10). Since a total stock price reaction to acquisition announcements might not be captured by the AARs on a single day, we also calculate cumulative average abnormal returns (CAARs) over several event windows around the announcement by summing up the AARs for each time period. The days preceding the announcement are taken into account in order to analyze the effect of any possible information leakage, while the post-event period is considered in order to estimate any delay in the dissemination of information (Peterson, 1989). If the announcement did not cause any significant change in the wealth of target firm shareholders, i.e. in the absence of abnormal performance both AARs and CAARs would be zero. The test for significance of AARs and CAARs is performed using Brown and Warner (1985) and is not illustrated here. 4. Results The wealth gains to target firms are calculated by using the market model as explained in the previous section. The behavior of abnormal returns to Turkish target firms around acquisition announcements is reported in Table 4 that follows. Table 4. Average abnormal returns (AARs) Day

AAR(%)

Day

AAR(%)

-10

0.04

+1

1.56**

-9

0.84

+2

-0.53

-8

-0.14

+3

0.84

-7

0.22

+4

0.64

-6

-0.23

+5

0.26

-5

-0.19

+6

0.61

-4

-0.77

+7

0.50

-3

-0.69

+8

0.83

-2

1.21*

+9

-0.23

-1

1.72***

+10

0.07

0

1.97***

***, **, and * denote significance at 1%, 5%, and 10% respectively.

As shown on Table 4, average abnormal returns (AARs) on the announcement date (day 0) are positive and statistically significant. AARs on days (-1) and (-2) are also significantly positive providing evidence for potential information leakage before the official announcement of the acquisition. We also observe a positive AAR on day (+1) which suggests post-event correction. Table 5 below reports cumulative average abnormal returns (CAARs) for target firms over several event windows. Table 5. Cumulative average abnormal returns (CAARs) Event window

CAAR(%)

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Elif Akben-Selcuk / Procedia Economics and Finance 30 (2015) 15 – 21 [-1,+1]

5.25***

[-2,+2]

5.93***

[-5,+5]

6.02**

[-10,+10]

8.53*

***, **, and * denote significance at 1%, 5%, and 10% respectively.

Table 5 shows that, over the three-day [-1,+1], five-day [-2,+2], eleven-day [-5,+5] and 21-day [-10,+10] event windows surrounding the acquisition announcement, the CAARs for target firms are positive and statistically significant. Overall, the evidence suggests that, at the time of the announcement, acquisitions are considered as a value creating strategy for shareholders of Turkish target companies. 5. Conclusion This study analyzed the stock price performance of Turkish target firms around the announcement of acquisitions for fifteen years from January 2000 to December 2014 using a dataset consisting of 67 deals. The abnormal returns (ARs) and cumulative abnormal returns (CARs) were estimated over several event windows and expected returns were calculated by using a single parameter market model. Estimation results showed that target firm shareholders enjoy positive CARs ranging from 5.25 percent for the 3day event window surrounding the acquisition to 8.53 percent for the 11-day event window. This result is consistent with prior studies on developed markets and show that wealth gains from acquisitions accrue to target firm shareholders. Acquirers seem to pay a premium to control the rights in the Turkish targets. However, the magnitude of the abnormal returns is smaller compared to US or European studies. This finding could be explained by the impact of possible leakage of information or rumors before the official acquisition announcement on the power of the event study methodology (Arslan & Şimşir, 2015) and the unique regulatory and competitive environment present in Turkey (Hekimoğlu & Tanyeri, 2011). Compared to emerging market studies, our results are consistent with those obtained by Mallikarjunappa and Nayak (2013) for India and Chari et al. (2004) for nine emerging markets. The results are also similar to those obtained by Mandacı (2004) and Hekimoğlu and Tanyeri (2011) for Turkish acquirers. This study is not without limitations. The first limitation is the small sample size, which could compromise the robustness of the results. Second, the dataset which comprised targets from a single country limits the generalizability of the findings. Hence, further studies could conduct a number of robustness checks and also use data from other countries to check whether the findings from this single country study apply to other emerging economies as well. References Akben-Selçuk, E., 2008. The Impact of Cross-Border M&As on Target Company Performance: Ev dence from Turkey. Econom cs Bullet n 13(5), 1-9. Andrade, G., M tchell, M., Stafford, E., 2001. New Ev dence and Perspect ves on Mergers. The Journal of Econom c Perspect ves 15(2), 103-120. Arslan, H. B., Ş mş r, S. A., 2015. Measur ng Takeover Prem ums n Cross-Border Mergers and Acqu s t ons: Ins ghts from Turkey. Emerg ng Markets F nance and Trade 44(3), 1-16. Arslan, H. B., Ş mş r, S. A., 2014. Satın Alım Önces ve Sonrası Türk Hedef Ş rketler n n F nansal Performansı [The F nanc al Performance of Turk sh Target F rms around Acqu s t ons]. İkt sat İşletme ve F nans 29(345), 9-40. Bargeron, L. L., Schl ngemann, F. P., Stulz, R. M., Zutter, C. J., 2008. Why Do Pr vate Acqu rers Pay So L ttle Compared to Publ c Acqu rers. Journal of F nanc al Econom cs 89(3), 375-390. Berkov tch, E., Narayanan, M. 1993., Mot ves for Takeovers: An Emp r cal Invest gat on. Journal of F nanc al and Quant tat ve Analys s 28(3), 347-362. Black,B., 1989. B dder Overpayment n Takeovers. Stanford Law Rev ew 41(3), 597-660. Brown, S. J., Warner, J. B., 1985. Us ng Da ly Stock Returns: The Case of Event Stud es. Journal of F nanc al Econom cs 3(31), 3-31. Campa, J. M., Hernando, I., 2004. Shareholder Value Creat on n European M&As. European F nanc al Management 10(1), 47-81. Campa, J. M., Hernando, I., 2006. M&As Performance n the European F nanc al Industry. Journal of Bank ng and F nance 30(12), 3367-3392. Char , A., Ou met, P. P., Tesar, L. L., 2004. Acqu r ng Control n Emerg ng Markets: Ev dence from the Stock Market. NBER Work ng Paper No. 10872 http://www.nber.org/papers/w10872

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