Spillover Effect On Firm Valuation By Merger And Acquisition

Since the first wave of merger and acquisition (M&A) happened in US in the 19th century, there have been five large-scale waves of M&A all over the world, which has greatly influenced on the development of global economy. After then M&A is being regarded as an important way of expanding enterprise scale and optimizing resource allocation of the cooperation. Among Fortune 500 companies in the world, most of them grow up though a series of M&A, such as Wal-Mart, Procter & Gamble and Exxon Mobil Oil, etc. The financial crisis erupted in 2008 changed the pattern of global finance and economic situation. Many leading companies in their industry went the edge of bankrupt, such as Bear Stearns, Lehman Brothers and General Motors and so on. Under the guidance of the US government, many countries have tried to improve the economy by adopting the method of asset restructuring or merger and acquisition.Like waves of M&A in western countries, M&A as an efficient method of social resources redistribution, adjustment of economic structure and enterprise deep reform, has been widely adopted in Chinese market economy from 1990s. The number of M&A issues in China has a continually growing trend, at a rate of 70% during these years. Since 2000, the number of public listed companies through M&A has exceeded over the number of listed companies through IPO in China security market. Chinese company has really integrated into the world's fifth wave of M&A. The other points that we should not neglect are as below: On one hand, China as the major component of global economy has seriously been impacted by the financial crisis and many private exporting companies went collapse. On the other hand, because China is a developing country, the policy and rule for the market economy are not perfect; especially the stock market does not achieve total marketization and economization, which defects result in false M&A in China's capital market, such as"government-led M&A","backdoor listing M&A"and"misappropriating M&A". Imperfect rules and investors'misunderstanding lead that there is a faith in Chinese stock market, which is"if the performance was not good, it should have mergers and acquisitions". This kind of M&A impacts interests of investors and impair the credibility and stability of China's stock market.Therefore it is particularly important for adjusting the industrial structure, optimizing the resource allocation and improving the economic efficiency through M&A, which can enhance the Chinese enterprises'ability of surviving and developing. In addition, since China is still at the initial stage of the market economy, it is necessary for us to go further researching on the theory and practice of M&A. Therefore, this paper about the theory of M&A is very significant theoretically and practically. The specific perspective of this research is divided into the following areas: Whether corporate M&A activities create added value as theory hoped? If M&A activity does not create added value for the enterprise, what is the real motivation of M&A in China's stock market? What factors will influence company's acquisition performance? What kinds of companies are willing to acquire the others and what kinds are considered as the aims to be acquired by others? What features do these companies have? In this paper, we will solve these problems in detail.Firstly, this paper introduces the previous studies about the relationship between M&A motivation, M&A method and corporate value. Then the paper select A-share listed companies which have M&A activities during the period 2004-2008 as the sample data. It makes research on the relationship between M&A and corporate market value by the method of event study. The result shows that acquiring company's market value was increased after M&A, for which the CAR of these company is up about 3% in the time window [-30,30]. But the market value of target company fluctuates during the time window [-30,30]. This result reflects China's securities market is still not perfect. There is insider trading in corporate merger and acquisition. Some people speculate the stock prices in the use of the information of M&A. Especially when the acquirer and the target have business relationship, the phenomena is more evident. So we should improve the market trading rules in order to prevent the insider trading in the stock market.Then this paper does an empirical study on how the factors such as ownership structure, the nature of the ultimate controller, industry characteristics, method of payment and cash flow, affect acquirer's performance from the aspects of market value and accounting value. On the basis of market value, this paper selects four researching time window, (-30,30), (-10,10), (-5,5) and (-2,2). The statistical results show that: there is positive correlation between manager's achievement in last year and CAR. One reason for that may be that the investors think the information of M&A is always good news and buys stocks when it announced owing to China's capital market imperfections, which leads the increasing of corporate value in short-term. Another reason may be that the good manager's achievement in last year give confidence to the investors and investors believe manager's ability of operating and decision, so they think the M&A activities can increase the value of company; The acquirer with related transactions does not give its shareholders positive CAR. Related transactions of M&A do not increase market value of company; the shareholders of company in growth industry get significant positive abnormal returns. This shows that with their different life cycle of the industry and the performance of corporate M&A will be affected. The companies in growth industry are always facing greater competitive pressures than the other companies, so they can take effective M&A method to expand market share, achieve scale economy and management and financial synergies in order to increase corporate value; Shareholders of state-owned enterprises gain less CAR than the shareholders of non-state enterprises. This indicates that investors have identified the low efficient behavior and policy intervention in state-owned enterprises; the M&A activities using cash as means of payment can convey favorable information to the securities market, so the shareholders can get more CAR; corporate free cash flow and CAR have weak positive correlation. This may be due to the market's delayed response to the business executives'wrong decisions. On the basis of accounting value, this paper uses method of principal component analysis (PCA) to construct seven scoring model about profitability, shareholder profitability, operating ability, risk level, liquidity, cash flow capacity and development capacity. The result shows that these 7 indicators have different changing trend in 3-year time: (1) Manager's operating performance before the merger has different impact on the accounting indicators. It has positive correlation with profitability, cash flow capacity and shareholder profitability, but has weak negative correlation with development capacity, operating ability and risk level. To some extent, the manager's conceit and blind investment lead to the low efficiency of investment. (2)Related transaction does not have significant influence on the corporate value. Generally speaking, however, related M&A have positive effect on corporate cash flow capacity, liquidity, development capacity and operating ability. This confirms that companies can get high-quality assets and optimize resources allocation to increase operating efficiency and management efficiency through related transaction. (3)The long-term profitability, short-term development capacity, short-term liquidity and long-term liquidity of the company in growth industry have been significantly improved after M&A. This confirms that there is close relationship between life cycle of industry and corporate value. The company in growth industry can grasp opportunities to take effective M&A method to increase management efficiency and operating efficiency. However, this study concludes that the operating ability of the company in growth industry decreased significantly after M&A. The reason may be that with expansion of the scale and the increasingly competitive environment, companies in growth-stage have poor circulation in cash, raw materials, inventory and fixed assets, etc. (4)The profitability, liquidity and development capacity of state-owned enterprises are lower than non-state enterprises. But its long-term cash flow capacity and short-term development capacity were significantly higher than non-state enterprises. This paper concludes that it was due to the government support. In general, government will give state-owned enterprises lots of funds and resources after M&A to maintain its performance, so the state-owned enterprises have higher cash flow capacity and development capacity. (5) The acquiring companies using money as means of payment have higher long-term profitability, cash flow capacity, liquidity and development capacity than the other companies using other means of payment. But they have lower short-term cash flow capacity, short-term development capacity, operating ability and shareholder profitability because companies pay a lot of cash, which leads cash shortage. Then companies take low-dividend policy, thereby affecting the shareholder profitability. (6)In most cases, free cash flow and corporate value have negative correlation, which further proves that manager's conceit and blind investment lead to the low efficiency of M&A. Although the empirical results show that free cash flow has positive correlation with the profitability two years after mergers, which is also understandable when considering the relationship between free cash flow and these variables. (7)The choice of M&A methods have different effect on the accounting indicators. With the same M&A methods, the same financial accounting indicators are also fluctuated during the three years. In general, the company's shareholder profitability and operating capacity under asset acquisition means are higher than the other means; With the share transfer means, the company's liquidity and development capacity are higher than the other means. So from the aspect of accounting performance, there is no obvious rule about the influence of M&A on company's performance.This paper also studied how the motivation of M&A activities influent on the efficiency of resource allocation. The empirical result shows that: The motivation of M&A for settling agent issues has positive impact on the corporate value. Corporate merger and acquisition for getting management synergy can enhance acquirer's value, but not significantly. The motivations for getting scale economy effect and financial synergy have negative impact on the acquirer's value. Overall the motivation of synergy does not increase corporate value and the motivation of agent issue has little effect on corporate value. The possible reason for getting these results is because the model and sample have some defects. This paper only studies the short-term performance and ignores the long-term influence of M&A. At the same time, the results also reflect China's listed companies have many problems in corporate merger and acquisition. Firstly, there are lots of government interventions in M&A and the autonomy is restricted. Many listed companies are state-owned enterprises in China. They have to carry many political targets, including developing economy, promoting employment and keeping social stability and so on. Therefore, the government has an incentive to interfere state-owned enterprises'decision of M&A. In this case, companies often neglect the strategic objectives of M&A. This mandatory "arbitrarily arranged" will bring a series of consequences, such as staffing, cultural integration, resource allocation, management efficiency, sector integration and other issues. Secondly, the company usually neglects integration after M&A. The M&A contract is not the end of the M&A activities and there are lots of work after signing the contract. Only the efficient resources integration after M&A can enhance the corporate value. The integration includes human resources integration, corporate culture integration, financial integration, business strategy integration, organizational systems integration and other aspects of integration. These problems have seriously affected the efficiency of resource allocation and corporate value of China's listed companies.This paper constructed 27 different variables to make research on the characteristics of acquirer and its target company, which uses of logistic model, showing what kinds of companies is willing to acquire the others and what kinds are considered as the aims to be acquired by others. The results show that the acquiring company usually have higher ROA, higher cash level and lower ownership concentration, while in statistics acquirer also has higher asset-liability ratio, weaker development ability and lower P/E. The acquired company usually has lower ROE, lower net assets per share, underestimated market value and relative dispersion of stock ownership. It should be noted that, from the two models'fitness and predictive accuracy, it could be found that the model constructed in this paper does not have good predictive ability. The model can only be used to describe the characteristics of acquirer and its target company.Finally, this paper finds that M&A in China's capital market is not fully anticipated by theory, so we propose some suggestions. M&A involve three entities, such as government, acquiring company and acquired company, all parties should strive together. Government should establish relevant legal system; Company should pay attention to the market behavior in M&A and emphasize the integration after M&A.