Discussion on

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Discussion on Acquirer Gains in Emerging
Markets by Chari, Ouimet, and Tesar (COT)
Winter Research Conference December 21 - 22 ISB
campus
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Outline

• General observations
• Comments on main results
• Comments on factors driving main results
• Comments on a few methodological issues
• Some suggestions for future work

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General observations

• Interesting results
• Careful and meticulous analysis
• Excellent presentation very well-written
• Overall, a significant contribution to the
  literature on cross-border mergers

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Main results

• In a sample of acquisitions involving
  developed-market acquirers and emerging market
  targets in Latin America and East Asia, both
  acquirers and targets gain, based on
  announcement-period abnormal returns.
• The division of gains shifts in favor of
  acquiring firms, compared to transactions where
  the same acquirers make acquisitions in developed
  markets.
• Further, the findings are in striking contrast
  to the previous literature that uses US data.

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Comments on main results

• Previous literature on bank mergers in the USA
  has documented positive bidder returns in intra-
  as well as inter-state bank mergers.
• Intrastate bank mergers
• James and Wier (JPE 1983) 60 mergers during
  1972-82
• Desai and Stover (JFR 1985) 18 mergers during
  1976-82
• Interstate bank mergers under Douglas Amendment
  to the Bank Holding Company Act
• Cornett and De (JBF, 1991) 196 mergers during
  1982-86
• Cornett and De (JMCB, 1991)
• Significantly, 21 of emerging market targets and
  19 of developed-market acquirers are in
  financial services sector in COT study (Table 1)
• Why did interstate bank mergers favor acquirers?

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Search for factors driving main results

• Property rights hypothesis
• Majority Control (MC) appears to significantly
  increase acquirer returns in emerging market
  acquisitions in many model specifications in COT
  study (Tables 6, 8 10)
• However, its no longer significant when
  regression specification includes an
  institutional quality variable, except jointly
  with Expropriation Risk (ER) (tables 7C, 7D)

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Search for factors driving main results

• Institutional quality hypothesis
• Only ER seems to matter. Acquirer returns
  increase in ER in emerging market country.
  Further, they increase even more if control is
  acquired conditional on ER being high (Tables 7C,
  7D)
• How to make sense of this result?

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Search for factors driving main results

• Even when significant, property rights and
  institutional quality variables may not explain
  shift in division of synergy gains in favor of
  acquirers, as opposed to the level of synergy
  gains.
• Need to examine bargaining power of acquirers
  vis-à-vis targets in emerging economies.

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Search for factors driving main results

• COT conduct some indirect tests on bargaining
  power. The tests do not offer any resolution.
• Access to capital in emerging market hypothesis
  Cost of capital (as measured by EMBI spread does
  not matter when MC is included in regression
  specification (Table 6)
• Difference in size and industrial classification
  between acquirers and targets, acquirer cash etc.
  do not matter (Table 10)

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An alternative hypothesis

• Bidder competition hypothesis
• Using a non-cooperative bargaining model, De and
  Knez (JEMS, 1994) show that a target can
  effectively use the threat of potential
  (implicit) competition to raise its share of
  gains, and lower the acquirers share. This
  works even when the potential bidder is known to
  have a strictly lower reservation price for the
  target.
• Conversely, target premium will be lower, and
  acquirers gain higher, if potential competition
  for the target is limited or non- existent.

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Bidder competition hypothesis

• Many empirical findings are consistent with this
  hypothesis.
• Inter-state bank mergers (Cornett De 1991a
  1991b) happened under a regime that strictly
  limited potential bidder competition.

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Support for bidder competition hypothesis in COT

• Some findings in COT indicate that potential
  bidder competition is limited in emerging
  markets.
• Very few (miniscule) competing bids are
  observed for targets in their samples. Observed
  competition is likely to be correlated with
  potential competition.
• Acquirers returns increase in majority control.
  Such control would limit potential competition.
• Acquirers returns increase in expropriation
  risk. Such risk would limit potential
  competition.

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Testing bidder competition hypothesis

• Some possible factors limiting potential bidder
  competition in emerging markets
• Gradualism in relaxation of controls on foreign
  entry
• High costs of information collection on targets
• How to test for relationship between gradualism
  and acquirer returns?
• First market entry in the sector
• How to test for relationship between information
  collection costs and acquirer returns?
• Acquirer (first bidder) return should be
  decreasing in country rating on accounting
  standards (LLSV, 98)?

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A few methodological issues

• COT samples include only completed transactions.
  This sample selection procedure may inflate
  acquirer returns.
• Why a three-week event window for targets? Is
  noise in daily prices in emerging markets
  negatively correlated with each other?

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Suggestions for future work

• Analyze acquisitions in financial sector and
  non-financial sector separately.
• Investigate implications of potential bidder
  competition.
• Compare findings with acquirer returns when both
  parties are based in emerging markets, if such
  studies are available.
• Address the methodological issues, particularly
  why only completed transactions are included.

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References

• De, S. and M. Cornett, Common stock returns in
  corporate takeover bids Evidence from
  interstate bank mergers, Journal of Banking and
  Finance, 1991
• De S. and M. Cornett, Medium of payments in
  corporate acquisitions Evidence from interstate
  bank mergers, Journal of Money, Credit, and
  Banking
• De S. and P. Knez, Managerial Reaction to
  takeover bids A theory of strategic resistance,
  Journal of Economics and Management Strategy,
  1994
• Desai A. and R. Stover, Bank holding company
  acquisitions, stockholder returns and regulatory
  uncertainty, Journal of Financial Research, 1985
• James C. and P. Wier, The returns to acquirers
  and competition in the acquisitions market The
  case of banking, Journal of Political Economy,
  1983

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• QA

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• Thank You