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The effect of mergers and acquisitions on companies’ fundamental values in emerging capital markets (the case of BRICS). Daria Luzina, National Research University Higher School of Economics at St.-Petersburg, darialuzina@hotmail.com

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  1. The effect of mergers and acquisitions on companies’ fundamental values in emerging capital markets (the case of BRICS) Daria Luzina, National Research University Higher School of Economics at St.-Petersburg, darialuzina@hotmail.com Еlena Rogova, National Research University Higher School of Economics at St.-Petersburg, erogova@hse.ru

  2. Motivation фото photo фот фото photo фото фото Высшая школа экономики, Санкт-Петербург, 2015 photo фото GSOM Emerging Markets Conference 2015

  3. Mergers and acquisitions at emerging capital markets The reasons of BRICS leading role in M&As фото фото фот photo фото фото photo фото фото фото Высшая школа экономики, Санкт-Петербург, 2015 Высшая школа экономики, Санкт-Петербург, 2015 фото photo Thomson Reuters. (2014). Preliminary Mergers & Acquisitions Review. First Quarter 2014. GSOM Emerging Markets Conference 2015

  4. Research objectives • The aim - to analyze the effect of mergers and acquisitions on the fundamental value of acquiring companies in emerging capital markets. • The task was to investigate, • whether M&A deals create or destroy the fundamental value of acquirers; • which factors has the strongest impact at the effect of M&As on the fundamental value photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 Высшая школа экономики, 2015

  5. Findings from literature • Market reaction analysis (event studies) - Wong et. al (2009), Chietal. (2011), Ivashkovskaya, Shamraeva, Grigoriadi(2009), Raniet. al(2014) – the information on M&As results in a positive cumulative abnormal returns at the market, i.e., creates value • Grigorieva, Grinchenko (2013) – for companies in Russia the effect was negative. • Financial reporting analysis - Mantravadi,Reddy (2008), Kumar (2009), Grigorieva, Troickiy (2012), Grigorieva, Petrunina(2013) – controversial results, depending on industry, period and methods photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 5

  6. The Residual Income Model Proposed by Ohlson (1985) фото photo фот фот фото фото photo фото фото The high explanatory power of the RIV model was confirmed by numerous empirical studies (Feltham, Ohlson, 1995; Frankel, Lee, 1998; Hand, Landsman, 1998; Dechow et al., 1999; Volkov, Berezinets, 2006; Buhvalov and Akulaeva, 2014. But there is no studies of M&As at emerging markets, based on RIV Высшая школа экономики, Санкт-Петербург, 2015 фото photo фото GSOM Emerging Markets Conference 2015 Высшая школа экономики, 2015

  7. RIV adjustment to analysis of M&As effect on fundamental value of acquiring companies фото фото photo фот фот фото фото photo фото фото фото фото Высшая школа экономики, Санкт-Петербург, 2015 Высшая школа экономики, Санкт-Петербург, 2015 фото photo фото GSOM Emerging Markets Conference 2015 Высшая школа экономики, 2015

  8. Hypotheses фото фото фото photo фот фот фото фото фото фото photo фото фото фото фото Высшая школа экономики, Санкт-Петербург, 2015 Высшая школа экономики, Санкт-Петербург, 2015 Высшая школа экономики, Санкт-Петербург, 2015 фото photo фото GSOM Emerging Markets Conference 2015 Высшая школа экономики, 2015

  9. Data Sampling • Databases ZephyrandRuslanabyBureauVanDijk • Information from Bloomberg,ThompsonReuters • Financial reportingin public access photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 9

  10. Deals effect on acquirers’ fundamental value фото photo фот фот фото фото photo фото фото Student’s t forVpreandVpost = 2,337 at 5-% significance level Hypotheses 1 cannot be rejected 10 Высшая школа экономики, Санкт-Петербург, 2015 фото photo фото GSOM Emerging Markets Conference 2015 10

  11. Factor analysis of deals’ effect on fundamental value To assess the influence of various characteristics of the deal at its effect expressed by ΔV , the following regression equation was estimated by OLS: photo фот фот where difinvalue is the dependent variable, calculated difference between the fundamental value per share of the acquirer before and after the deal i, β denotes the vector of parameters; Xi is the vector of independent variables, characterizing the deal i; εi is the model error. photo фото фото GSOM Emerging Markets Conference 2015 11 Высшая школа экономики, 2015

  12. photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 12

  13. Regression model: OLS photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 13

  14. Binary choice model dependent variable is the qualitative effect of the deal, the creation or destruction of the fundamental value of the company per share photo фот фот where γ is the vector of parameters; Zi means the vector of independent variables, characterizing the deal i; εi is the model error. photo фото фото photo фото фото 01.01.2020 GSOM Emerging Markets Conference 2015 14

  15. General results of modeling photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 15

  16. Model-based conclusion • Deal type. According to the results of two models of binary choice (mode 1), deals related as acquisitions (dtypeacq), have a negative impact on the probability of creating a fundamental value for the acquiring company. • The method of deal financing. All four models of binary choice report that the deal funded with the capital increase (dfincspincr) improves the probability of a positive effect on the company's fundamental value. • Sector of economy. Models of binary choice have shown the negative impact for acquirers in the chemical industry (iduschem). A similar effect is observed for the oil and gas companies (indusoilgas) and to the steel-processing industry (indussteel). If an acquirer is operating in the coal industry (induscoal) and real estate (indusrealest), there is a greater likelihood of creating fundamental value as a result of M&A. So the hypothesis 10 is confirmed. photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 16

  17. Model-based conclusion • Method of deal payment. As a result of a binary choice model (mode 2) deals paid through deferred payment (dmpaymdefpaym) and earn-out payment (dmpaymeout), have a greater chance of creating a fundamental value for the acquiring company. Thus, the hypothesis 4 cannot be rejected at the 1% level of significance. • Quantitative factors. Models of binary choice (mode 2) shown that acquiring companies with greater market capitalization before the deal (predmarkcap) have a greater chance of creating a fundamental value. Thus, the hypothesis 3 is rejected at the 10% significance level. • Deal country of origin turned out to be insignificant in all the models, which does not allow, in the framework of the research, to test the hypothesis 2. • With regard to other significant covariates there are contradictions in different models that do not allow asserting their influence on the dependent variable. photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 17

  18. General conclusions • Mergers and acquisitions in BRICS countries lead to an increase in the fundamental value per share of the acquiring company. • Factors that have a significant impact on the effect of mergers and acquisitions, resulting in a higher probability of value creation, include: transaction type, company size, industry affiliation, way of deal financing and the method of payment. • These results have not only theoretical but also practical importance, since they allow the financial management of companies operating in emerging markets, including Russian, to design and implement mergers and acquisitions so as to create value for investors photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 18

  19. 20, Myasnitskaya str., Moscow, Russia, 101000 Tel.: +7 (495) 628-8829, Fax: +7 (495) 628-7931 www.hse.ru Elena Rogova, erogova@hse.ru Daria Luzina, darialuzina@hotmail.com

  20. Calculation details and assumptions • For valuation of the pre-acquisition value future earnings per share (EPS) were calculated by multiplying the forecast of ROE at the predicted value BPS at the beginning of the year for each future period. For a forecast of ROE an average ROE of the acquiring company in period from -3 to -1 were used (Frankel, Lee, 1998). • The BPS for the period 0 is calculated as the book value of equity per share for the period -1, added to the predicted value of EPS and diminished at expected dividends of the period 0. Similar calculations are made for other periods. • For calculation of future DPS the expected value of EPS is multiplied at the expected dividend payout ratio. Dividend payout ratio is calculated as the average of dividend payout ratios for periods from -3 to -1. The period where the income is negative is excluded from the calculations. If the company carries losses at all pre-acquisition periods or if the predicted value of EPS is negative, it is assumed that future dividends equal to dividends for period -1. • As the cost of equity (re) we used a time-varying discount rate for every company calculated on the base of the CAPM. The country risk premium was calculated in accordance with the approach proposed by Damodaran (2009). As the risk-free rate of return the US Treasury bonds were applied. The cost of capital calculated for the period -1, is used to calculate the expected pre-acquisition fundamental value, whereas for the calculation of the post-acquisition fundamental value the average value re for periods 0-3 is considered. • If the terminal value is negative, it is replaced by a null value. If acquirers cease their existence within four years after the transaction, then the year of "death" is taken for the final period of the analysis. photo фот фот photo фото фото photo фото фото GSOM Emerging Markets Conference 2015 20

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