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ESSAYS ON CORPORATE ACQUISITIONS

PhD Thesis submitted by

Marc Rustige

at the Frankfurt School of Finance & Management

2011

Essays on corporate acquisitions

TABLE OF CONTENT

Acknowledgement.............................................................................................. 2 Introduction ........................................................................................................ 3 Why do foreign acquirers pay more?................................................................ 12 Differences between takeover premiums across countries ............................... 50 The conglomerate discount revisited ................................................................ 82 Curiculum Vitae.............................................................................................. 121 Declaration of authorship ............................................................................... 122

Essays on corporate acquisitions

ACKNOWLEDGEMENT
Foremost, I would like to thank my advisor Prof. Michael H. Grote for the enthusiastic supervision of my thesis. I gratefully appreciate all his contributions of time, ideas and funding to make my PhD experience as great as it was! Working with him has been an extraordinary pleasure and I am grateful for many insightful discussions not only about research. I also wish to thank the members of my PhD committee, Prof. Christina Bannier and Prof. Reinhard H. Schmidt, for their interest in my work, their time and their insightful comments and suggestions for the further development of the articles. Throughout not only the time of this thesis but of all my education my parents' support has been beyond measure! They have always been there with endless patience, encouragement and confidence and have served as an invaluable source of stability for me I want to thank them. Finally, to Cristina: Thank you so much for your love, understanding and for your companionship through all the ups and downs of writing this thesis!

Essays on corporate acquisitions

INTRODUCTION
Over the past decades, European mergers and acquisitions (M&A) have become a substantial fraction of global M&A business. With a total transaction value of more than 514bn in 2010, the European market for corporate control has emerged to almost the same size as the market in the United States (US 2010: 581bn ). 1 In terms of deal volume, Europe even surpassed the US in 2010 with 15,761 announced deals in Europe versus 8,228 announcements in the US. The quantity of research on the European market for corporate control, however, does not yet reflect this increased importance. Most scholarly studies still focus on transactions of US companies (Martynova and Renneboog (2006)). At least in parts, this is due to the unsatisfying data coverage on European acquisition in the relevant databases. However, as the data-availability on acquisitions outside the North Americas has been steadily improving over the last decade, research on M&A in Europe gains increasing attention. This development opens up new opportunities since the structural conditions in Europe, with its multiple borders, legal systems and domestic markets, provide a fundamentally different setting for research on mergers and acquisition than the US. Financial scholars have started to advance research on the European market for corporate control at two ends. On the one hand, effects that are well documented in the context of US acquisitions are tested for their validity on other markets and interesting new evidence is brought to light. Alexandridis et al. (2010), for instance, show that the well known negative wealth effects incurring to the shareholders of acquiring firms upon acquisition announcements in the US are not universally valid. Instead, acquisitions in countries other than the US, the UK and Canada are, on average, not associated with a decline in shareholder value. In continental Europe the mean abnormal returns of the acquirers are even significantly positive. These results foster the notion that acquisitions in Europe are fundamentally different and underscore the importance of investigating markets outside the United States. On the other hand, research has leveraged the unique structural conditions in Europe. The high density and increasing integration of the domestic markets in Europe offer the opportunity to shed light on questions that cannot be answered in the US context. Among others, the dynamics of cross-border acquisitions can better be

Data as reported by the Deal Analysis module in Thomson One Banker.

Essays on corporate acquisitions

examined using European data. Almost half of the transactions in Europe are crossborder (Martynova and Renneboog (2006)), whereas only a small number of deals in the US involve acquirers and targets from different countries (Rossi and Volpin (2004)). This cumulative dissertation adds to the growing research on the market for corporate control with a special emphasis on Europe. All three chapters empirically investigate takeover premiums and stock returns in the contest of corporate acquisitions. In doing so, we challenge common beliefs that have manifested as almost axiomatic attitudes among the market participants, financial scholars and practitioners alike. In the first contribution, we scrutinize the common notion that higher takeover premiums in cross-border transactions are a pure reflection of higher market access synergies. Although we find that premiums are indeed significantly higher in crossborder deals, we provide evidence that private benefits of management play a vital role in the amount offered. The second contribution investigates the differences in takeover premiums between the US and Europe with respect to the influence of investor protection. Our findings suggest that higher levels of shareholder protection neither directly nor indirectly explain the heterogeneity in bid premiums. Instead, we argue that the target shareholder composition, i.e., the proportion of inside versus outside shareholders, drives the difference and we find support for this hypothesis. In the third article, we challenge the view that corporate diversification reduces firm value. Our results from an event study analysis of announcement returns suggest that, on average, diversifying acquisitions endow as much value as focusing deals. However, the extent to which the acquirer is already diversified constitutes an important parameter to be taken into account. We argue that the marginal costs of diversification outweigh the marginal benefits with increasing number of business segments the acquirer is already active in. Our empirical results support that moderate diversification is indeed beneficial for acquiring shareholders. In the following section we will portray each article giving special emphasis to the motivation and the main findings.

Essays on corporate acquisitions Article 1: Why do foreign acquirers pay more? Evidence from European acquisition premiums

The first article, which is co-authored with Michael H. Grote, picks up on the structural research conditions in Europe. We address the question of why average takeover premiums offered for target firms in cross-border acquisitions are systematically higher than premiums offered in domestic transactions. Financial scholars have documented this effect before (Rossi and Volpin (2004)) and the common notion among the market participants that this is a reflection of higher market synergies, has manifested. However, empirical evidence on the wealth effects of cross-border acquisitions from event studies suggests that international acquisitions do not enhance shareholder value. In fact, cross-border transactions are frequently associated with negative announcement returns (Moeller and Schlingemann (2005)). This is a sharp contradiction to the argument that higher premiums in cross-border are an exclusive reflection of higher synergies. In a large pan-European sample of acquisitions, which is sufficiently balanced between cross-border and domestic deals, we document that premiums offered by the acquirers in domestic transactions are significantly lower than those offered in cross-border acquisitions. The average premium for domestic targets amounts to 24.4%, whereas the mean premium in cross-border transactions is 34.8% - a significant 10.4 percentage points difference. This cross-border premium is robust also if we control for common deal and firm characteristics in a multiple regression model. We investigate three possible explanations for this result. First, information asymmetries between the target shareholders and the acquirer may be higher if both firms are not located in the same country. Cultural, language and organizational barriers may result in a reduced transparency for the target shareholders when assessing the growth prospectives and the motives of the acquirer. Hence, when the acquisition is finance with equity, the target shareholders will demand a risk compensation in form of a higher premium. Second, synergies may be higher in cross-border acquisitions due to market-access such that the bidder is willing to offer higher premiums in order to consummate the deal. Last, private benefits of management may be a reason for the higher prices paid in acquisitions of foreign firms. These private benefits may stem from different sources. On the one hand, managers can diversify the risk of their income from employment by acquiring a firm with uncorrelated cash-flows (Amihud and Lev (1981)). On the

Essays on corporate acquisitions

other hand, by transforming their company to a multinational and complex organization, managers make themselves indispensable for the firm and reduce the likelihood of being replaced by the board (Shleifer and Vishny (1989)). Finally, to the extent that cross-border acquisitions are a better means of growth in size than domestic transactions, managers will benefit from a higher compensation (Jensen and Murphy (1990); Bebchuk and Grinstein (2007)) and from more power and prestige associated with working in large firms (Jensen (1986); Stulz (1990)). We show that information asymmetries do not explain the cross-border premium since premiums are equally high in cash and share deals. With respect to the differentiation between synergies and private benefits, we face the limitation that the synergetic value of a transaction for the acquirer cannot be directly observed. However, we can indirectly assess the relevance of synergies versus private benefits. We assume that managers of firms with highly powered incentive schemes and strong monitoring instances have fewer opportunities to pursue private benefits and to overpay in transactions. Hence, the premium offered by those firms will be a good reflection of the expected synergies. In contrast, firms with a less elaborated governance system and a higher degree in managerial discretion are more prone to suffer from managerialism, i.e., managers overpaying in acquisitions to maximize their own utility on the expense of the shareholders. We use the organizational form of the acquirer to approximate the degree to which managers can pursue private benefits. Jensen (1989) argues that due to a separation of ownership and control, agency problems will be more pronounced in public corporations. Private firms, on the contrary, are usually closely held, strongly monitored and management will have less discretion. Comparing the offer premiums by acquirer type we find that private bidders do not pay more in cross-border acquisitions than in domestic deals, whereas public firms pay a significant markup of 12.5 percentage points in cross-border acquisitions. These results provide strong support for the private benefit hypothesis. Our analysis of the subsample of public companies further confirms this notion: The premium paid in cross-border acquisitions varies with proxies for governance and managerial discretion. Public firms that are closely held, have few cash or a high leverage pay lower cross-border premiums. We conclude that private benefits of management are an important driver of the observed bid premiums in cross-border deals.

Essays on corporate acquisitions

The results of this study have been presented at the annual meetings of the Midwest Finance Association in Chicago (MFA 2011) and the Southwest Finance Association in Houston (SWFA 2011) where it was recognized with the best paper award in international finance. Furthermore, it has been accepted for presentation at the meetings of the Eastern Finance Association in Savannah (EFA 2011) and will be presented at the annual meeting of the Financial Management Association in Denver (FMA 2011).

Article 2: Differences in takeover premiums across countries Investor protection matters less than you think The second article, which is also co-authored with Michael H. Grote, investigates the heterogeneity in takeover premiums across countries. Rossi and Volpin (2004) find that prices paid in acquisitions depend on the location of the target: premiums for firms in the US and the UK are substantially higher than elsewhere. They argue that the better investor protection regime in these countries enhances competition on the market for corporate control and ultimately increases the bid premiums. Using the shareholder protection index that was originally developed by LaPorta et al. (1998), Rossi and Volpin (2004) show an empirical relationship between investor protection and takeover premiums. We revisit the analysis of Rossi and Volpin (2004) for two reasons: On the one hand, the authors find that the significance of their investor protection proxy is not robust to the inclusion of country fixed effects. When dummies for US and UK targets are added to the model, the investor protection proxy becomes insignificant and Rossi and Volpin (2004) already note that their results are driven by US and British targets. This gives room to the question of whether it is really investor protection that drives the takeover premiums or whether some other unobserved characteristics can explain the variations. On the other hand, the underlying investor protection index of LaPorta et al. (1998) has been frequently criticized in recent years for incorrect coding and ambiguities (Djankov et al. (2008); Spamann (2010)). It remains unclear whether the relationship between investor protection and premiums put forward by Rossi and Volpin (2004) is an artifact of this miscoding. Hence, we test a set of revised measures of investor protection for their influence on the takeover premiums.

Essays on corporate acquisitions

We use a sample of acquisition premiums for targets in the US, the UK and continental Europe. In line with previous literature, we find that takeover premiums are considerably higher in the US and the UK than in continental Europe. Average premiums amount to 37.8% in the US, 32.0% in the UK and only 25.9% in continental Europe. Variations in deal and target characteristics can explain only the difference between the premiums in the UK and continental Europe. The substantially higher prices in the US remain robust in a multiple regression model. We use the new investor protection indices developed by Djankov et al. (2008) and Spamann (2010) to test whether they explain the remaining variation in takeover premiums. We find that the higher prices for US targets remain robust when we control for these investor protection proxies. Aside from a direct influence, investor protection may also have an indirect effect on the takeover premiums. Specifically, the level of competition and the degree of shareholder concentration may be affected by the investor protection regime in a country. We control for both influences and again find the higher takeover premiums for US targets to remain unaffected. We conclude that investor protection neither directly nor indirectly explains the heterogeneity in acquisition prices. The theoretical models of Shleifer and Vishny (1986) and Stulz (1988) offer an alternative explanation for the difference in premiums. Both models suggest that the shareholder composition, i.e., the proportion of inside versus outside shareholders, influences the takeover premium. A high proportion of inside owners, such as managers and board members, is associated with higher takeover premiums. A high proportion of outside ownership, in turn, reduces takeover premiums. Bauguess et al. (2009) find empirical support for this relationship in the US. Due to a paucity of data on the identity of shareholders for European corporations, we cannot directly control for this influence. However, when we test the influence of the shareholder concentration on the premiums separately for the US, the UK and continental Europe, we find that takeover premiums decrease with rising ownership concentration in the UK and continental Europe whereas they increase in the US. A higher relative proportion of inside ownership in US firms versus European firms may explain this effect. Furthermore, we find that the premiums for targets with a disperse ownership structure (i.e., less then 10% closely held shares) do not differ between the regions. This is in line with the hypothesis that differences in shareholder composition drive the heterogeneity in bid premium: targets that do not

Essays on corporate acquisitions

differ with respect to their shareholder concentration or composition, receive similar takeover premiums. This article has been accepted for presentation at the Global Conference on Economic Geography 2011 in Seoul.

Article 3: The conglomerate discount revisited The third and single-authored article The conglomerate discount revisited investigates the wealth effects of corporate diversification. Ever since the seminal papers of Lang and Stulz (1994) and Berger and Ofek (1995), who find that conglomerates trade at a discount relative to the implied value of their individual segments, the notion of a conglomerate discount has manifested. The conventional justification for this discount among financial scholars and practitioners alike is that corporate diversification is driven by inferior motives of management, results in inefficient capital allocation within the conglomerates and facilitates empire building. However, recent research questions this dogmatic view on diversification. The existence of the diversification discount is challenged with respect to methodical issues as well as causal interferences (Campa and Kedia (2002); Graham et al. (2002); Villalonga (2004a); Villalonga (2004b)). We shed light on the relationship between diversification and firm value from a different perspective. Using an event study, we investigate the abnormal returns of the acquirer upon the announcement of acquisitions. We find that diversifying and focusing transactions yield small but significantly positive announcement returns. Similarly, we document that the combined abnormal returns of the acquirer and target, which represent an estimation of the overall wealth created by the deal, are not significantly different. These findings cast doubt on the common notion that diversification reduces firm value. We examine the costs and benefits associated with diversification more closely and hypothesize that the extent to which the acquirer is already diversified prior to the deal has a significant influence on the wealth effects. Specifically, we argue that the benefits associated with diversification, such as the increased debt capacity and the internal market for corporate control, show declining marginal returns. The more diversified the acquirer already is, the lower are the additional benefits from a further expansion into unrelated businesses. In contrast, the marginal costs of

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diversification, such as internal and external agency conflicts, increase with the degree of acquirer diversification. Rent seeking by divisional managers and the inefficiencies in the fund allocation on the internal capital market are more severe in highly diversified conglomerates. Taken together, we argue that the marginal net effects from balancing benefits and costs of diversification are decreasing the more diversified the acquirer already is. The results from our empirical analysis back these hypotheses. If the acquirer is yet undiversified, an expansion into unrelated industries is associated with significantly higher announcement returns than a comparable transaction into a related industry. However, the more business lines the acquirer already oversees prior to the acquisition, the lower the marginal effect of diversification. We find that for bidders with four or more unrelated business lines, diversifying acquisitions yield significantly lower announcement returns than comparable focusing deals. These results are robust to different event windows and to different definitions of diversification. Our findings suggest that a moderate diversification is consistent with shareholder value maximization.

References
Alexandridis, G., D. Petmezas, and N.G. Travlos (2010), "Gains from Mergers and Acquisitions Around the World: New Evidence", Financial Management (39), 16711695. Amihud, Yakov, and Baruch Lev (1981), "Risk reduction as a managerial motive for conglomerate mergers", The Bell Journal of Economics (12), 605617. Bauguess, Scott W., Sara B. Moeller, Frederik P. Schlingemann, and Chad J. Zutter (2009), "Ownership structure and target returns", The Journal of Corporate Finance (15), 4865. Bebchuk, Lucian A., and Yaniv Grinstein (2007), "Firm Expansion and CEO Pay", SSRN eLibrary. Berger, Philip G., and Eli Ofek (1995), "Diversification's effect on firm value", Journal of Financial Economics (37), 3965. Campa, Jose M., and Simi Kedia (2002), "Explaining the diversification discount", The Journal of Finance (57), 17311762. Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (2008), "The law and economics of self-dealing", Journal of Financial Economics (88), 430465. Graham, John R., Michael L. Lemmon, and Jack G. Wolf (2002), "Does corporate diversification destroy value?", The Journal of Finance (57), 695720.

Essays on corporate acquisitions Jensen, Michael (1989), "Eclipse of the Public Corporation", Harvard Business Review (67), 6175.

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Jensen, Michael C. (1986), "Agency costs of free cash flow, corporate finance, and takeovers", American Economic Review (76), 323329. Jensen, Michael C., and Kevin J. Murphy (1990), "Performance pay and topmanagement incentives", The Journal of Political Economy (98), 225264. Lang, Larry H., and Rene M. Stulz (1994), "Tobin's "q", Corporate Diversification, and Firm Performance", The Journal of Political Economy (102), 12481280. LaPorta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny (1998), "Law and finance", The Journal of Political Economy (106), 11131155. Martynova, Marina, and Luc Renneboog (2006), "Mergers and acquisitions in Europe", Advances in Corporate Finance and Asset Pricing), 1575. Moeller, Sara B., and Frederik P. Schlingemann (2005), "Global diversification and bidder gains", Journal of Banking and Finance (29), 533564. Rossi, Stefano, and Paolo F. Volpin (2004), "Cross country determinants of mergers and acquisitions", Journal of Financial Economics (74), 277304. Shleifer, Andrej, and Robert W. Vishny (1986), "Large shareholders and corporate control", The Journal of Political Economy (94), 461488. Shleifer, Andrej, and Robert W. Vishny (1989), "Management entrenchment", Journal of Financial Economics (25), 123139. Spamann, Holger (2010), "The "Antidirector rights index" revisited", The Review of Financial Studies (23), 467486. Stulz, Ren M. (1988), "Managerial control of voting rights", Journal of Financial Economics (20), 2554. Stulz, Ren M. (1990), "Managerial discretion and optimal financing policies", Journal of Financial Economics (26), 327. Villalonga, Beln (2004a), "Does Diversification Cause the "Diversification Discount"?", Financial Management (33), 527. Villalonga, Beln (2004b), "Diversification Discount or Premium? New Evidence from the Business Information Tracking Series", The Journal of Finance (59), 479506.

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WHY DO FOREIGN ACQUIRERS PAY MORE?


Evidence from European cross-border acquisition premiums

May 2011

Marc Rustige
Frankfurt School of Finance & Management, Sonnemannstrae 9-11, 60314 Frankfurt am Main, Germany E-mail: m.rustige@fs.de, Phone: +49 69 154008 389

Michael H. Grote
Frankfurt School of Finance & Management, Sonnemannstrae 9-11, 60314 Frankfurt am Main, Germany E-mail: m.grote@fs.de, Phone: +49 069 154008 326

Abstract: Acquirers offer on average 10.4 percentage points higher takeover premiums in cross-border acquisitions than in domestic deals. This crossborder premium remains robust in multiple regression models and is partly driven by private benefits for the acquirers management. We find that public acquirers with high degrees of managerial discretion offer the highest crossborder premiums, whereas takeover premiums of private acquirers do not significantly differ between domestic and cross-border transactions.

JEL-Classification: G34, F21 Key words: Corporate control, cross-border acquisition, bid premium, corporate governance

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1 Introduction
The global growth in cross-border acquisition volume has significantly surpassed the growth of domestic transactions in recent decades ((Mantecon (2009)). On average, close to half of all worldwide mergers and acquisitions are cross-border transactions (Rossi and Volpin (2004)). In such a context, target shareholders should be indifferent towards their firm being acquired by domestic or foreign firms. However, we find considerably higher premiums offered in crossborder acquisitions. Indeed, foreigners pay the most is a well-established saying among mergers and acquisitions professionals. This phenomenon has not received much attention in the academic literature and theoretical reasoning on why such differences may be justified is scarce. We show that the pursuit of private benefits by management plays a vital role in explaining the difference. Information asymmetries and higher market access synergies, on the contrary, explain the higher bid premiums only to some extent. Europe, with its multiple countries and borders, serves well as a research setting to investigate cross-border acquisitions. We use the Thomson One Banker database to compile a sample of European target acquisitions with transaction values of more than 10 million Euros that were announced between 1985 and 2009. In order to be included in the sample we require that the offer price is available on a per share basis and that the payment is either all cash, all shares, or a combination of both. Using these criteria, a final sample consisting of 1,931 deals is established. We measure the bid premium relative to the targets share price between -30 and -10 days prior to the announcement date. While the mean premium in domestic deals amounts to 24.4% (median 21.3%), the average cross-border bid premium is considerably higher, at 34.8% (median 29.2%). The observed difference of 10.4 percentage points (median 7.9 percentage points) represents a statistically significant and economically highly relevant cross-border premium. A

straightforward explanation for this observation would be that companies acquired in domestic transactions differ systematically from firms that are acquired in crossborder acquisitions. When we control for deal and firm characteristics as well as industry-, country-, and time-fixed effects, the cross-border premium reduces to an average of 8.9 percentage points but remains highly significant. Likewise, the crossborder premium is neither driven by financial investors nor by differences in targets

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share-price run-ups before the announcement date. The results remain also robust if we restrict the sample to only cash offers. Seth et al. (2000) argue that managerialism, i.e. management pursuing private benefits at the expense of the shareholders, may be an important explanation for higher premiums in international transactions. Managers profit from buying abroad in two ways: risk diversification and empire building. The agency-related costs associated with an international diversification are similar to the drawbacks of an industrial diversification, which are extensively discussed in the literature (Lang and Stulz (1994); Berger and Ofek (1995)). Amihud and Lev (1981) argue that the reduction in cash-flow risk that results from a diversification is, in the first place, beneficial to management. The remuneration from employment in the company constitutes a major source of income for the firms executives, whose personal portfolio is undiversified with a disproportionately high stake in the company they work for. Any diversification that reduces the firms risk of distress reduces managements personal risk at the same time. This is not necessarily in the best interest of the shareholders, who can diversify their investments more efficiently at the portfolio level. Furthermore, to the extent that acquisitions of foreign targets are a means of growth in size and complexity, management also profits from an international expansion. Managers of complex and large corporations have more power and prestige (Jensen (1986); Stulz (1990)), earn more (Jensen and Murphy (1990); Bebchuk and Grinstein (2007)) and are at the same time less likely to be replaced by the board (Shleifer and Vishny (1989)) because their knowledge and skills have become indispensable to the company. Therefore, higher bid premiums in cross-border acquisitions may reflect overpayment of management in pursue of private benefits. Aside from managerial motives, two alternative explanations may justify a crossborder premium. First, due to asymmetric information about the acquirers motives and growth perspectives, target shareholders may demand a higher premium to accept an offer from a foreign acquirer. In this case, higher bid prices reflect a risk compensation. Second, an expansion beyond the current geographic scope may generate synergies that are idiosyncratic to foreign bidders. Access to foreign markets can, inter alia, lead to higher sales growth by leveraging the targets sales network to distribute the acquirers products, and vice-versa. Likewise, synergies, such as tax advantages or natural hedges against currency fluctuations, constitute a value to foreign acquirers. Because target shareholders are aware of their firms

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value to foreign bidder, they will only tender if the acquirer increases the bid premium. Hence, the higher bid premiums in cross-border deals may also be a reflection of higher synergies. The three explanations are not mutually exclusive. Nevertheless, we employ a set of tests in order to differentiate between the hypotheses and estimate the impact that each has on the observed cross-border premium. With respect to the influence of information asymmetries, we argue that target shareholders demand risk compensation only if the payment structure includes an equity portion. Only in these deals will target shareholders participate in the risk of the combined entity. When we consider only cash deals, the cross-border effect reduces by almost one percentage point. The reduction, however, is not significant and the cross-border dummy remains highly significant. We conclude that information asymmetries do not explain higher cross-border premiums. With respect to the argument of market access synergies, we cannot directly observe the synergy value of a deal to an acquirer. Nevertheless, we are able to indirectly assess the influence of higher synergies on the cross-border premium by differentiating along the quality of the acquirers governance system. Firms with strongly aligned governance systems and high-powered managerial incentive schemes are less likely to overpay in pursuit of private benefits. Premiums offered by these firms are a reflection of the value of the target, including any synergies. Firms with less-developed governance systems are, in turn, characterized by a higher degree of managerial discretion: management has more opportunities to pursue private benefits and the premium is likely to will reflect more than just synergies. In a first step, we approximate the acquirers governance quality and distinguish between private and public firms. Jensen (1989) postulates that agency problems will be stronger in public firms due to the separation of ownership and control, that is, shareholders will have low incentives and abilities to monitor the management. In contrast, agency problems are typically less severe in private firms because of family and/or managerial ownership and stronger monitoring incentives. In line with these predictions, Bargeron et al. (2008) document for US domestic transactions that private acquirers pay a significantly smaller premium than their public peers. We extend these results and find that private acquirers also do not pay any significant cross-border premium. Public acquirers, in contrast, pay 12.5 percentage points more in cross-border transactions than in domestic ones (a total average premium of 38.3% versus 25.8%). Given that public and private acquirers

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should be able to extract similar synergies from a foreign target, the results are a contraction to the synergy argument. Instead, the finding strongly supports the hypothesis that agency problems drive cross-border premiums. An analysis of the subsample of public acquirers, for which we can calculate wealth effects for the acquiring shareholders, unveils further insights: Our event study shows that cross-border acquisitions are associated with approximately onepercentage point lower short-term wealth effects for the acquirer. These results are in line with previous studies (Eckbo and Thorburn (2000); Moeller and Schlingemann (2005); Martynova and Renneboog (2006)) and contradict the assertion that higher premiums in cross-border acquisitions exclusively reflect higher synergies. In line with out hypothesis that private benefits for the acquirers managements drive the results, we find that the cross-border premium offered by public bidders varies with common indicators for monitoring quality and managerial discretion. The difference between premiums that are paid in domestic and crossborder transactions is highest for acquirers with low percentages of closely held shares. The more concentrated the acquirers shareholder structure, i.e., the better the monitoring, the lower the cross-border premium. Likewise, the higher the ratio of total liabilities to total assets, which is a frequently used measure of management discretion, the lower the premium offered. Additionally, cash-rich acquirers tend to pay higher premiums in cross-border acquisitions. We test the robustness of our findings with respect to alternative arguments that may explain why private firms pay less than public firms in cross-border transactions. First, foreign targets that are acquired by private firms may systematically differ from those that are acquired by public firms with respect to the targets ownership structure. Specifically, private acquirers may be inclined to bid for target firms with similar firm characteristics, i.e., a similar corporate governance and a concentrated ownership structure. Following the free-rider problem (Grossman and Hart (1980)), these closely held targets may receive smaller premiums than firms with atomistic shareholder structures. Each individual shareholder of a target with an atomistic ownership concentration will perceive her decision to accept or reject an offer as non-decisive for the outcome of the bid. Hence, the rational strategy is not accept the offer but to free-ride on the efforts of the acquirer and to participate in the subsequent share-price appreciations. To consummate the deal, the acquirer will have to increase the bid premium such that all of the expected synergies are incorporated. The existence of large shareholders attenuates this

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free-rider problem. Large blokholders cannot free-ride on the decisions of the other shareholders, but are decisive for the outcome of the offer and will accept an offer at a lower premium (Holmstrm and Nalebuff (1992)). We include a control variable for the targets shareholder concentration. Our finding that private firms pay less in cross-border transactions remains robust. The results hold also when we use the differentiation between tender offers and privately negotiated deals as a proxy for the relevance of the free-rider problem. A second influence that may alternatively explain the results, are different levels of investor protection in the target countries. Rossi and Volpin (2004) suggest that bid premiums are positively related to investor protection regimes. Among others, a better shareholder protection induces (potential) competition on the market for corporate control, which in turn increases average takeover premiums. We control for this influence and use the most recent measures for investor protection. Our results remain unaffected. Our study contributes to the discussion on cross-border mergers and acquisitions in a threefold way. First, we use a European setting that offers a balanced sample between domestic versus cross-border deals and show that offer prices are systematically higher for cross-border targets. Second, we challenge conventional wisdom that this cross-border premium reflects higher synergies by documenting that the cross-border premium is associated with the acquirers degree of managerial discretion. In this aspect our paper extends the research of Bargeron et al. (2008). We show that the more prudent bidding behavior of private acquirers is also reflected in European cross-border transactions. Third, we explicitly relate agency indicators, i.e., ownership structure and the disciplining effect of debt and cash holdings, to the higher premiums paid in cross-border transactions by public acquirers. The results suggest that the private benefits of management play a vital role in offering higher bid premiums when buying abroad. The remainder of the paper is organized as follows. In Section 2, we describe our sample of acquisitions and the methods used. In Section 3, we compare the bid premiums offered in domestic and cross-border deals in univariate analysis and multiple regression models. In Section 4, we develop our hypotheses and discriminate between information asymmetries, synergistic and agency-related reasons for higher premiums. In Section 5, we test the robustness of our results, and in Section 6, we analyze the subsample of public acquirers by calculating the announcement returns and estimating the marginal effects of the cross-border premium. Section 7 concludes.

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2 Sample composition and methods


We use the Deal Analysis module of Thomson One Banker to compile a set of all completed and uncompleted acquisitions between 1985 and 2009 in which the target is publicly listed and located in Europe. The acquirer may be domiciled in any country. Rossi and Volpin (2004) find that the proportion of cross-border deals in the US accounts for only 9.07% of all deals. Hence, the European market with its many different countries and higher proportion of cross-country transactions provides a more suitable research setting to investigate the characteristics of cross-border transactions. We only consider deals in which the acquirer holds less than 50% of the target companys stock prior to the announcement and seeks to own more than 50% of the stock after completion. Additionally, we require information about the deal value, excluding assumed liabilities, to be available in Thomson One Banker. This yields a total of 6,510 deals. We exclude all deals with missing Datastream codes (1,295), all announcements that have been flagged as Acquisition (which denotes spin-offs in the database), Exchange Offer, Recapitalization or Buyback (88) and all transactions with a deal value of less than 10 million Euros (622). For the remaining 4,505 deals, we screen the consideration structure information that is provided by Thomson One Banker in the CONSID text field and individually extract the initial per-share price that was offered by the acquirer. We include only deals that involve payments in cash, in shares or in a combination of both and exclude transactions that involve a choice between cash and share payments. Furthermore, we exclude deals in which the consideration is not available on a per-share basis and deals in which the acquiring entity is flagged as government, joint venture or individual. For the remaining 3,185 deals, we calculate the bid premiums following the methodology applied by Jindra and Walkling (2004) as the percent difference between the first per-share offer that was announced and the targets average share price in the period of -30 to -10 days prior to the announcement date. In the case of share offers, the acquirers shares are valued at the closing stock price on the day prior to the initial announcement. Likewise, any currency translations are based on the exchange rate one day before the announcement. All price time series are taken from Thomson Datastream. With few exceptions, previous studies in the academic literature that have examined premiums paid in acquisitions have either used the bid premium

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information that is provided by Thomson One Banker (e.g., Rossi and Volpin (2004)) or have calculated target announcement returns as a proxy for the price offered by the acquirer (e.g., Bargeron et al. (2008)). We do not use the information that is provided by Thomson One Banker for two reasons. First, the bid premium in the database is calculated relative to the targets share price on the trading day four weeks prior to the announcement. This may be problematic as fluctuations in the daily share price may skew our analysis. Second, we find that Thomson assigns an erroneous time series for nearly 5.5% of the observations in our sample. We also do not use target announcement returns. Target abnormal stock returns represent a noisy estimation of the bid premiums, as they reflect not only the price offered by the bidder but also the probability of deal completion and offer amendment. Furthermore, they need to be estimated over long pre-announcement event windows (Betton et al. (2008)). Bidding contests, i.e., multiple bidders bidding for one target, are likely to have a distorting effect, as the targets share price will jump upon the announcement of the first bid. Any subsequent offer by a second bidder will typically trigger smaller price increases in the targets stock. Hence, the bid premium for this second bid may not be calculated in relation to the already appraised share price. In order to avoid this bias, we group bid announcements for a specific target that occurred within a time span of 60 days into one contest and relate all of the offers that are related to one contest to the announcement date of the first bid. This results in adjustments of the announcement date for 149 transactions. We check the announcement dates and time series identifiers that are provided by Thomson for all transactions with implausible bid premiums and adjust the announcement date of 162 observations after further verification. In order to avoid any bias due to thinly traded stocks, in which case the daily share price may not adequately reflect the firms value, we exclude all transactions in which the target does not show any share price movement within the time span of -30 to -10 days prior to announcement. To eliminate any distorting effects of outliers, we truncate the sample at the top and bottom percentiles. The target firms are matched to Worldscope data, which provide information on the year-end market capitalization, total assets, return on assets and total liabilities. We again truncate these accounting data in order to eliminate outliers. Deals are categorized as domestic if the targets nation matches the relevant nation of the acquirer. The relevant nation of the acquirer is defined as the acquirers

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nation if the acquiring entity is flagged as a public or private entity. In the 668 cases in which the acquiring entity is a subsidiary, we refer to the acquirers immediate parents status and nation. This prevents the misclassification of acquisitions in which foreign acquirers execute the transaction through a local subsidiary. Such deals would incorrectly be classified as a domestic transaction when, in fact, the acquisition is cross-border. In 175 cases, the immediate parent itself is a subsidiary as well, and the deal cannot be correctly classified. This procedure yields our final sample of 1,931 acquisitions: 1,110 are domestic transactions and 821 are crossborder deals. Table 1 depicts the distribution of the deals by announcement year, target and acquirer country.
Table 1: Sample distribution by announcement year, target and acquirer country The table lists the distribution of observations by year and by target and acquirer country in our sample of 1,931 acquisitions. Deals are classified as domestic if the acquirer or acquirer immediate parents nation equals the targets nation and as cross-border otherwise. %CB represents the proportion of cross-border acquisitions. Information regarding the nation and the announcement year are obtained from Thomson One Banker.

Panel A: Distribution by year Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total Total 2 3 12 13 10 12 15 19 14 23 43 42 83 121 222 202 91 83 123 94 142 166 177 130 89 1,931 % CB 50% 0% 25% 46% 50% 33% 47% 58% 64% 39% 28% 31% 43% 42% 41% 38% 38% 42% 39% 45% 36% 38% 53% 58% 47%

Panel B: Distribution by target country Target Country UK France Italy Norway Sweden Germany Spain Netherlands Denmark Portugal Greece Switzerland Ireland-Rep Austria Finland Belgium Czech Rep. Poland Hungary Isle of Man Liechtenstein Guernsey Jersey Monaco Total 888 192 85 119 111 109 66 87 47 19 25 39 31 17 27 35 8 11 5 3 1 2 3 1 % CB 39% 36% 20% 49% 51% 53% 27% 54% 47% 16% 40% 62% 55% 65% 59% 71% 50% 73% 60% 67% 0% 100% 100% 100%

Panel C: Distribution by acquirer country Acquirer country UK France Italy Norway Sweden Germany Spain Netherlands Denmark Portugal Greece Switzerland Ireland-Rep Austria Finland Belgium Czech Rep. Other Non-Europe thereof USA Total 624 191 99 91 81 74 65 63 55 40 27 24 23 19 17 12 12 26 388 250 % CB 13% 36% 48% 25% 33% 17% 38% 23% 73% 38% 48% 54% 52% 16% 12% 50% 100% 58%

43% Total

1,931

43% Total

1,931

43%

The distribution of the annual deal volume documents the increase in the merger and acquisition (M&A) activity during the millennium change as well as the rise during the period prior to the recent financial crisis. The active market for

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corporate control in the United Kingdom is reflected in the sample distribution: approximately 45% of the deals involve UK targets. The strong dominance of the UK in European acquisition samples has been previously documented in studies using similar data sets (Rossi and Volpin (2004); Martynova and Renneboog (2006)). Almost 80% of the deals are intra-European transactions.

3 Bid premiums in domestic and cross-border acquisitions


Bid premiums have received little attention in the academic literature with respect to the differences between cross-border and domestic acquisitions. Danbolt (2004) shows that for UK target acquisitions, any differences in takeover premiums disappear once bid characteristics are controlled for. Nevertheless, the common view among M&A practitioners prevails: foreign bidders pay more than domestic firms. In a first step, we compare the premiums that are offered in domestic and cross-border transactions in Europe. Univariate results Table 2 compares the average and median bid premiums in domestic and cross-border deals. Our univariate analysis depicts a statistically and economically significant cross-border premium. On average, bid premiums are 10.44 percentage points higher in cross-border acquisitions than in domestic transactions. The difference is highly significant with an error probability of less than 1%. A comparison of the median shows the same pattern. Although the medians are lower than the means for both domestic and cross-border acquisitions, the difference is highly significant as well.
Table 2: Bid premiums in domestic and cross-border deals This table shows the average and medium bid premiums offered for European targets between 1985 and 2009. The bid premiums are calculated by relating the first price offered to the targets average share price between -30 to -10 days prior to the announcement. Deals are classified as domestic if the acquirer or acquirers immediate parents nation equals the targets nation and as cross-border otherwise. The information regarding the acquirers nation is taken from Thomson One Banker. Tests for differences are based on an ordinary t-test (mean) and the Wilcoxon rank-sum test (median).

Domestic acquisition Mean Median N 24.40% 21.18% 1,110

Cross-border acquisition 34.84% 29.22% 821

Difference 10.44% *** 8.05% ***

P-Value of Difference 0.000 0.000

*** significant at 1%, ** significant at 5%, * significant at 10%

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Domestic and cross-border deals can differ along other dimensions aside from the location of the target relative to the acquirer. For each deal, we collect information on target and deal characteristics and test for significant differences between the group of cross-border acquisitions and the group of domestic deals. The results are displayed in Table 3.
Table 3: Summary statistics on domestic and cross-border deals The table reports the summary statistics for our sample of 1,931 acquisitions, which were announced between 1985 and 2009. Deals are classified as domestic (DO) if the acquirer or acquirers immediate parents nation equals the targets nation and as cross-border (CB) otherwise. Stock return refers to the targets buy-and-hold return within the time span from -150 days to -30 days prior to the deal announcement. Accounting data of the target companies are extracted from Thomson Worldscope. Tobins Q is calculated as the total assets less total common equity plus the year-end market capitalization, divided by the total assets. Information regarding the deal characteristics and indicators are obtained from Thomson One Banker. Percent sought and Percent held before represent the percentage that the acquirer is seeking to acquire or is holding before the announcement, respectively. Challenged deal is a dummy variable that is equal to 1 if more than one bidder is reported by Thomson One Banker. Diversifying deal is a dummy that is equal to 1 if the first two digits of the target and acquirers primary SIC codes do not match. Amended offer is a dummy variable that is equal to 1 if the initial offer is increased. Tender offer is a dummy that is equal to 1 if the acquirer launches a tender offer for the target, and Cash payment is a dummy that is equal to 1 if the consideration exclusively consists of cash. Hostile acquisition is equal to 1 if the transactions attitude is described as hostile in Thomson One Banker. Financial acquirer and Completed deal are dummy variables that equal 1 if the acquirer is flagged as a financial sponsor or the deal is flagged as completed. Test-statistics are based on the ordinary t-test (means), the Wilcoxon rank-sum test (median) and the Fisher exact test (proportions).

Panel A: Deal and target characteristics Mean DO Target characteristics Target stock return Return on Assets Tobin's Q Deal characteristics Deal Value [m] Percent sought [%] Percent held before [%] 533.93 87.12 7.59 831.90 87.64 6.38 297.96 *** 0.51 -1.21 * 0.000 0.576 0.053 123.95 100.00 0.00 189.81 100.00 0.00 65.86 *** 0.00 0.00 0.000 0.486 0.118 8.01% 4.37% 1.42 6.47% 3.71% 1.58 -1.53% -0.66% 0.17 *** 0.335 0.152 0.000 6.69% 5.16% 1.17 4.55% -2.14% 5.63% 1.31 0.47% 0.14 *** 0.128 0.183 0.000 CB Diff. P-Value DO CB Median Diff P-Value

Panel B: Indicators Proportion DO Challenged Deal Diversifying Amended Offer Tender Offer Cash consideration Hostile acquisition Financial acquirer Completed Deal 0.14 0.63 0.15 0.68 0.76 0.07 0.15 0.72 CB 0.17 0.55 0.15 0.71 0.91 0.08 0.12 0.76 Diff 0.03 ** -0.09 *** 0.01 0.02 0.15 *** 0.01 -0.03 ** 0.04 * P-Value 0.049 0.000 0.699 0.250 0.000 0.341 0.044 0.077

*** significant at 1%, ** significant at 5%, * significant at 10%

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In Panel A of Table 3, we compare the means and medians of target and deal characteristics. The targets pre-announcement stock return is calculated as the buy-and-hold return over the time span from -150 days to -30 days prior to the announcement. We find that these returns do not significantly differ between domestic and cross-border acquisitions, neither with respect to the mean nor to the median. Likewise, we compare the targets profitability, as measured by the return on assets in the fiscal year preceding the acquisition announcement. Again, we do not observe any significant difference. We also approximate the targets growth opportunities as the ratio of the total assets less total common equity plus the yearend market capitalization, divided by the total assets (Tobins Q). We find that targets that are acquired in cross-border deals have significantly higher growth opportunities. Furthermore, we compare deal characteristics and find cross-border acquisition deals to be significantly larger, as measured by the deal value excluding assumed liabilities. The Percent sought by the acquirer does not differ. However, we find evidence that toeholds, which are measured by the Percent held before the acquisition, are marginally higher in domestic deals. Panel B shows that when buying abroad, deals are significantly more often challenged and less often of a diversifying nature. Further, cross-border deals are more often settled in cash, and the proportion of completed deals is marginally higher. Additionally, financial acquirers are more frequent in domestic deals. 2 We do not find any differences between both groups with respect to the frequency of bid amendments, tender offers or hostile bids. Regression results The systematic differences between the cross-border and domestic acquisitions that are documented in Table 3 may explain the higher bid premiums in crossborder deals. In order to control for the influence of these differences, we estimate a multiple regression model and include the deal and target characteristics shown above. We additionally control for whether the acquirer and target are both located in Euro countries to capture any influences of the common currency. All models include dummies for the announcement year, target country and target industry (1 digit SIC code). The results are shown in Model (1) of Table 4.

We classify all firms as financial acquirers that are flagged as financial sponsors by Thomson One Banker. Following the definition of Thomson, a financial sponsor is a company that engages in private equity or venture capital non-strategic acquisitions using capital that has been raised by investors.

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Table 4: Cross-border premium in a multiple regression model The table reports the results of a regression model with the takeover premium as dependent variable. Cross-Border is a dummy variable that is equal to 0 if the acquirer or acquirer immediate parents nation equals the targets nation and is 1 otherwise. Target stock return is the buy-and-hold return within the time span from -150 days to -30 days prior to the deal announcement (-180 days to -30 days in Model 2). Target RoA is the targets return on assets, as reported by Worldscope. LN Target Q represents the targets Tobins Q and is calculated as the total assets less the total common equity, plus the year end market capitalization divided by the total assets. LN Deal value is the logarithm of the deal value excluding assumed liabilities, as reported by Thomson One Banker. Percent sought and Percent held before represent the percentage that the acquirer is seeking to acquire or is holding before the announcement, respectively. Challenged deal is a dummy variable that is equal to 1 if more than one bidder is reported by Thomson One Banker. Diversifying deal is a dummy that is equal to 1 if the first two digits of the target and acquirers primary SIC codes do not match. Subsequently amended is a dummy variable that is equal to 1 if the initial offer is increased. Tender offer is a dummy that is equal to 1 if the acquirer launches a tender offer for the target, and Hostile acquisition is a dummy that is equal to 1 if the deal is flagged as hostile by Thomson. Completed deal is a dummy that is equal to 1 if the deal is flagged as completed. Euro deal is a dummy that is equal to 1 if the acquirer and the target are both located in countries that have introduced the Euro. Cash payment is a dummy that is equal to 1 if the consideration exclusively consists of cash. Financial acquirer is a dummy that is equal to 1 if the acquirer is flagged as a financial sponsor. All models include dummies for the announcement year, the targets industry as classified by the primary SIC codes first digit and the targets country. T-values are reported in brackets and are based on the Huber/White/sandwich estimator for standard errors.
(1) Premium calculation period Cross-Border Target stock return Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently amended Tender offer Hostile acquisition Completed deal Euro deal Cash payment Financial acquirer [-30;-10] 8.344 *** [6.7] -14.04 *** [-7.18] -0.226 *** [-2.8] -4.014 ** [-2.36] 0.461 [1.18] 0.078 [1.52] -0.177 *** [-2.83] 7.798 *** [4.43] -2.135 * [-1.76] -4.17 ** [-2.53] 3.746 *** [2.61] -4.89 ** [-2.32] 3.701 ** [2.52] 4.892 ** [2.39] 3.139 [1.27] -7.484 *** [-5.13] 1,931 23.5% 20.9% 8.10 *** (2) [-60;-40] 10.091 *** [5.07] -15.292 *** [-5.39] -0.287 ** [-2.57] -6.31 *** [-2.78] 0.716 [1.23] -0.01 [-0.12] -0.247 * [-1.86] 7.287 *** [3.31] -0.781 [-0.46] 0.516 [0.13] 5.366 *** [2.77] -8.242 *** [-2.94] 6.391 *** [3.48] 4.525 [1.51] 0.864 [0.24] -7.425 *** [-3.96] 1,929 17.1% 14.3% 6.85 *** -7.334 *** [-4.83] 1,596 26.3% 23.3% 7.99 *** 1,665 23.0% 20.0% 7.07 *** (3) [-30;-10] 7.442 *** [5.66] -17.244 *** [-7.4] -0.284 *** [-3.2] -3.867 ** [-2.16] 0.363 [0.85] 0.06 [1.07] -0.2 *** [-2.98] 8.904 *** [4.6] -3.228 ** [-2.39] -4.727 *** [-2.67] 4.003 ** [2.52] -5.622 ** [-2.48] 4.178 *** [2.62] 4.528 ** [2.04] (4) [-30;-10] 8.613 *** [6.24] -13.103 *** [-6.33] -0.249 *** [-2.87] -4.005 ** [-2.17] 0.543 [1.29] 0.062 [1.09] -0.215 *** [-3.17] 8.228 *** [4.29] -1.774 [-1.41] -5.559 *** [-2.92] 4.036 ** [2.5] -4.651 ** [-2.06] 4.14 *** [2.58] 5.545 ** [2.4] 3.261 [1.24]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

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The cross-border dummy remains highly significant. Even after controlling for target and deal characteristics, acquirers pay, on average, more than eight percentage points more when buying abroad. The control variables indicate that the bid premiums significantly decrease with the targets pre-announcement stock returns, the return on assets and the targets growth opportunities. Consistent with the hypothesis that toeholds reduce offer premiums, we find that bid premiums tend to be lower when the acquirer already owns shares of the target company at the time of the announcement. Consistent with Bargeron et al. (2008), we find that financial acquirer pay less. Significantly higher prices are offered if the deal is challenged, if the acquirer launches a tender offer, if the acquirer and target have a common currency and in subsequently completed deals. For deals that are subsequently amended, diversifying deals and hostile offers, takeover premiums are lower. We check the robustness of these results and test whether the significance of the cross-border dummy is an artifact. Previous research has documented a significant price run-up in a targets stock prior to the announcement of an acquisition. Schwert (1996) documents that targets show a stock price movement as early as 42 days prior to the announcement. If the market anticipates domestic transactions more frequently than cross-border deals, the target share price will start to rise earlier, and the bid premium will be calculated relative to an already appraised share price. We re-calculate the bid premiums based on the average target share price in the period from -60 to -40 days and re-run the multiple regression model. Our control variable for the stock return is adjusted to the time span from -180 days to -60 days to avoid an overlap with the calculation period of the bid premiums. The results are shown in Model (2) of Table 4. While some of the control coefficients slightly change, the significant cross-border premium even increases to more than ten percentage points. Furthermore, it might be possible that the cross-border premium is driven by systematic differences in the payment structure. In order to test the impact on our results, we follow the argument of Kohers and Kohers (2001) and exclude all deals that are partially or fully financed by equity. The results do not qualitatively change: Model (3) of Table 4 shows that the coefficient of the cross-border variable decreases to 7.4 percentage points but remains significant. Last, financial investors might be causing the cross-border premium. If we assume the synergistic gains to be lowest for financial investors (Bargeron et al. (2008)) and if we further assume that most acquisitions by financial investors are domestic deals, then this systematic bias might be causing the

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observed cross-border premium. We test this hypothesis and exclude all financial acquirers. This reduces the testable sample size to 1,665 observations. The results are shown in Model (4) of Table 4. Again, the cross-border premium remains unaffected. In an unreported analysis, we further test whether the cross-border effect is different for neighboring countries. We include a dummy that indicated whether the acquirer and target countries share a common border and re-run the regression model. The coefficient of the cross-border dummy remains unaffected, whereas the coefficient of the common-border dummy is negative and marginally significant. Our robustness tests confirm that acquirers pay a statistically significant and economically relevant higher price in cross-border acquisitions. This finding remains robust if the dependent variable is measured over different base periods. Further, the result holds irrespective of the payment method, is robust to the exclusion of financial buyers and not affected by a common border between the acquirers and targets countries.

4 Drivers of the cross-border premium


Higher premiums in cross-border acquisitions can be rationalized by three hypotheses that are not mutually exclusive. Acquirers may offer more due to information asymmetries, higher market access synergies and/or in the pursuit of private benefits. We first focus on the role of information asymmetries as an explanation for higher premiums in cross-border acquisitions. Because information on the acquirers motives and growth perspectives is associated with higher uncertainty, target shareholders may demand higher premiums as risk compensation in cross-border acquisitions. This is, however, only relevant in deals that include an equity component in the consideration structure. In all-cash deals, the target shareholders will not participate in the future of the combined entity. Thus, if the higher premiums are driven by information asymmetries, the cross-border effect should be insignificant in all cash offers. Model (3) in Table 4 demonstrates that, if deals with equity components as are excluded, the coefficient of the cross-border dummy reduces by 0.9 percentage points but remains highly significant. We test whether the reduction in the cross-border coefficient is significant and include an interaction variable between the cross-border dummy and the cash-dummy. The coefficient of

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the interaction variable is negative but not significant (the results are reported in Appendix I). Cross-border acquisitions that offer all-cash compensation are not associated with significantly different premiums than those deals that include equity components in the payment scheme. We conclude that the cross-border effect is not caused by information asymmetries. Synergistic and agency motives remain as plausible explanations for the higher bid premiums. Unfortunately, the degree to which higher synergies motivate higher premiums cannot be directly observed. We can, however, make an indirect judgment regarding the role of synergies. If the corporate governance structure in a firm is well elaborated such that the management is highly incentivized and monitored, we expect these companies to act prudently when determining the takeover premium. The low managerial discretion in these firms gives little room for the pursuit of private benefits and the price offered for a target will be a reflection of the expected synergy value. In the absence of higher synergies in cross-border deals, well run firms will not pay more for foreign targets than for domestic ones. If the monitoring instances are weak, however, the managerial discretion will be higher and the premium may reflect more than just higher synergies. We differentiate the acquirers in our sample and assume that the governance and monitoring systems in privately held firms are, on average, superior to those that are listed (Jensen (1989)). The fact that public companies typically have a larger, less concentrated shareholder structures in comparison to private acquirers fuels the agency problem for two reasons. First, individual shareholders stakes in the company are insufficient to exercise control over management, and, second, the incentives to monitor management are too small. This separation of ownership and control leads to a higher degree of managerial discretion in public firms and increases managements opportunity to pursue private benefits. Thus, if the higher premiums in cross-border acquisitions are motivated by private benefits of management, we expect the cross-border premium to be more pronounced for public acquirers than for private buyers. If, in turn, synergies are the dominating motive for higher premiums in international acquisitions, we expect private and public acquirers to pay equally higher premiums in cross-border deals, since both should be able to extract the same synergies from an acquisition. We divide the sample into 702 private acquirers and 1,229 public bidders. Table 5 depicts the univariate differences in takeover premiums between the two groups.

Why do foreign acquirers pay more?


Table 5: Bid premiums by acquirer type This table shows the average bid premiums that are offered by private and public acquirers in domestic and crossborder acquisitions. The bid premiums are measured relative to the targets average share price -30 to -10 days prior to the deal announcement. Deals are classified as domestic if the acquirer or acquirers immediate parents nation equals the targets nation and as cross-border otherwise. Information regarding the nation and the acquirer type are obtained from Thomson One Banker. The test for differences is based on an ordinary t-test.

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Acquirer type All Domestic Cross-Border Mean N Mean N Diff. P-Value 24.40% 1,110 34.84% 821 10.44% 0.000 *** Private 22.59% 481 25.38% 221 2.80% 0.132 Public 25.79% 629 38.32% 600 12.53% 0.000 *** Diff 3.20% 12.93% P-Value 0.025 ** 0.000 ***

*** significant at 1%, ** significant at 5%, * significant at 10%

On average, private acquirers offer an insignificant 2.8 percentage points more in cross-border acquisitions than in domestic transactions (see the second column in Table 5). For public acquirers (third column), however, the difference of 12.53 percentage points between domestic and international transactions is economically and statistically significant: listed firms pay an average premium of 25.8% in domestic deals and 38.3% in international transactions. Similar to what Bargeron et al. (2008) document for the US, we find that in Europe, public firms pay more than private firms in domestic acquisitions and much more so in cross-border transactions. This strong difference supports the hypothesis that the cross-border premium is associated with agency problems. We again use a multiple regression analysis in order to test whether this difference is driven by firm or deal characteristics. The results are shown in Table 6. Model (1) in Table 6 tests the full sample and includes a dummy variable Private acquirer that is equal to 1 if the acquirer is private and is 0 otherwise. We also include an interaction term of the private acquirer dummy and the cross-border dummy (Private acquirer __ Cross-border) in order to capture the impact that the acquirers status may have on the bid premium in cross-border transactions. This changes the interpretation of the coefficients. The cross-border dummy now measures the difference between the premiums in cross-border and domestic acquisitions if the acquirer is public. If the acquirer is private, the marginal crossborder premium calculates as the sum of the coefficients of the cross-border dummy and the interaction term.

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Table 6: Private versus public acquirers This table depicts the results of the multiple regression. Cross-border is a dummy variable that is equal to 1 if the acquirers or acquirer immediate parents nation does not equal the targets nation. Private acquirer is a dummy that is equal to 1 if the acquirer is flagged as a private company. Private acquirer__Cross-border is an interaction variable of Cross-border and Private acquirer. Target stock return is the buy-and-hold return from -150 days to -30 days prior to the deal announcement (-180 days to -30 days in Model 2). Target RoA is the targets return on assets. LN Target Q represents the targets Tobins Q and is calculated as total assets less total common equity, plus year end market capitalization divided by total assets. LN Deal value is the logarithm of the deal value excluding assumed liabilities. Percent sought and Percent held before represent the percentage that the acquirer seeks to acquire or holds at announcement, respectively. Challenged deal is a dummy variable that is equal to 1 if more than one bidder is reported. Diversifying deal is a dummy that is equal to 1 if the first two digits of the target and acquirers primary SIC codes do not match. Subsequently amended is a dummy variable that is equal to 1 if the initial offer is increased. Tender offer is a dummy that is equal to 1 if the acquirer launches a tender offer for the target, and Hostile acquisition is a dummy that is equal to 1 if the deal is flagged as hostile. Completed deal is a dummy that is equal to 1 if the deal is flagged as completed. Euro deal is a dummy that is equal to 1 if the acquirers and the targets countries have introduced the Euro. Cash payment is a dummy that is equal to 1 if the payment is exclusively cash. Financial acquirer is a dummy that is equal to 1 if the acquirer is flagged as a financial sponsor. All models include dummies for the announcement year, the targets industry as classified by the primary SIC codes first digit and the targets country. T-values are reported in brackets and are based on the Huber/White/sandwich estimator for standard errors.
All (1) Cross-border Private acquirer Private acquirer _x_ Cross-border Target stock return [-150;-30] Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently amended Tender offer Hostile acquisition Completed deal Euro deal Financial acquirer Cash payment 9.235 *** [5.75] -5.00 *** [-3.05] -5.861 ** [-2.46] -14.026 *** [-7.25] -0.22 *** [-2.72] -4.729 *** [-2.79] 0.215 [0.55] 0.083 * [1.65] -0.159 *** [-2.58] 7.562 *** [4.33] -1.345 [-1.1] -3.938 ** [-2.41] 3.458 ** [2.43] -5.513 *** [-2.63] 3.091 ** [2.12] 4.471 ** [2.19] -4.149 *** [-2.69] 7.454 *** [4.1] 1,931 24.8% 22.2% 8.466 *** 702 19.6% 13.3% 3.106 *** -15.114 *** [-4.69] -0.294 ** [-2.26] -1.189 [-0.44] 1.184 * [1.8] 0.089 [1.1] -0.109 [-1.1] 7.119 ** [2.44] -2.823 [-1.17] -4.015 [-1.58] 3.762 * [1.73] -6.092 * [-1.7] 3.584 [1.61] 2.995 [0.87] -4.175 ** [-2.04] -13.529 *** [-5.8] -0.194 * [-1.87] -6.851 *** [-3.24] -0.232 [-0.47] 0.099 [1.5] -0.192 ** [-2.36] 7.349 *** [3.25] -0.515 [-0.35] -3.862 * [-1.73] 3.492 * [1.81] -6.848 *** [-2.62] 2.739 [1.35] 5.156 * [1.91] -3.634 [-1.22] 7.927 *** [4.15] 1,229 27.1% 23.3% 6.763 *** Private (2) 2.451 [1.24] Public (3) 9.005 *** [5.48]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

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The results in Model (1) show that the cross-border premium for public companies remains economically and statistically significant. Public acquirers pay about 9.23 percentage points more in cross-border transactions after controlling for the usual deal characteristics. The coefficient of the interaction term is -5.86 and significantly negative, i.e., the cross-border premium is considerably lower for private acquirers. We also check for the influence of the cross-border interaction variable in split samples. Models (2) and (3) separately replicate the model for private and public firms. The findings support the initial results: the cross-border coefficient of 9.00 is statistically and economically significant only for the subsample of public acquirers in Model (3). Public firms pay 9.00 percentage points more in international transactions than in domestic ones, even after controlling for target and deal characteristics. The cross-border coefficient in the sample of private acquirers (Model 2) amounts to only 2.45 percentage points and is not significantly different from 0 (t-value of 1.24). The results of the multiple regression analysis confirm the findings of the univariate examination. We find that public acquirers pay significantly higher prices in international transactions in comparison to private acquirers. We interpret this as support for the hypothesis that the cross-border premium is caused, at least in part, by systematic differences in the degree of managerial discretion between public and private companies.

5 Robustness checks
We test the robustness of our findings that only public acquirers offer higher premiums in cross-border acquisitions by addressing a set of potential explanations that may jointly explain why higher premiums are paid in cross-border acquisitions and why public firms offer significantly higher prices. Size effects between private and public acquirers We test whether the effect is driven by differences in size of public and private acquirers. Private firms are usually smaller than public firms. If smaller firms tend to pay lower premiums, then our private dummy may capture this size effect and not solely reflect the acquirers organizational status. Due to limited data on the size of private companies, we cannot directly control for the acquirers size. We use deal value instead, based on the assumption that the acquirer size is highly correlated with the deal value. We interact the deal value with the cross-border dummy to

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capture the marginal impact that the cross-border status may have on the price premium depending on the size (results are shown in Appendix II). The documented cross-border premium remains unaffected by the inclusion of both variables. In fact, the coefficient of the interacted deal value term is significantly negative, indicating that especially small firms tend to pay more in cross-border acquisitions. We conclude that the documented cross-border premium for private acquirers is not caused by systematic differences in acquirer size. Target shareholder structure and cross-border premiums Variations in bid premiums between private and public acquirers may also be due to systematic differences in the targets shareholder structure. Private firms, which, by definition, are closely held and often family or owner controlled, may be prone to acquire firms with similar characteristics (i.e., firms that are also closely held). In this case, offer price negotiations take place between a limited number of shareholders, which may impact the bid premiums (Grossman and Hart (1980)). Target shareholders cannot free-ride, and bid premiums will be lower. In order to compare bid premiums that are offered by private and public firms, we need to explicitly consider the degree to which the free-rider problem applies. We use Worldscope to retrieve information on the targets closely held shares at the end of the fiscal year preceding the transaction. 3 This information is available for only 1,595 observations (82.5% of the total sample). We include the target closely held shares in a multiple regression model and test whether the cross-border effect for public firms remains robust (the results are reported in Appendix III). The coefficient of our target closely held shares variable is negative but insignificant. The interaction variable of Private acquirer and Cross-border remains unchanged. Private acquirers pay less in cross-border acquisitions even if the target shareholder concentration is taken into account. We apply a second test towards investing the relevance of the free-rider problem and differentiate between tender offers and privately negotiated deals. If the acquisition is conducted through a tender offer, we can expect a fragmented structure of negotiation partners. Hence, acquirers will have to share the expected synergies with the target shareholders in order to consummate the deal. The offered

3 The item acquirer closely held shares in Worldscope represents shares that are held by insiders and includes, officers, directors and their immediate families, shares that are held in trust, shares that are held by any other corporation, including pension plans, and shares held by individuals who hold 5% or more of the outstanding shares.

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premium will be a good reflection of the expected synergies. Our sample includes 1,337 tender offers and 594 non-tender offers. For both groups, we compare average bid premiums for private and public acquirers in cross-border and domestic deals. Table 7 displays the results.
Table 7: Cross-border premium and acquisition method
This table shows the average bid premium that is offered by private and public acquirers in domestic (DO) and cross-border (CB) acquisitions as well as in tender and non-tender transactions. The bid premiums are measured relative to the targets average share price -30 to -10 days prior to the deal announcement. Deals are classified as domestic if the acquirer or acquirers immediate parents nation equals the targets nation and as cross-border otherwise. The test for differences is based on an ordinary t-test.

Private acquirer DO Tender Mean N Non Tender Mean N Diff. P-Value 24.15% 327 19.27% 154 4.88% ** 0.024 CB 29.49% 136 18.82% 85 10.67% *** 0.001 -0.45% 0.884 Diff. 5.34% ** P-Value 0.020 DO 28.15% 430 20.68% 199 7.47% *** 0.000

Public acquirer CB 41.45% 444 29.40% 156 12.05% *** 0.000 8.72% *** 0.002 Diff. 13.30% *** P-Value 0.000

*** significant at 1%, ** significant at 5%, * significant at 10%

Our results indicate that tender offers are associated with a higher premium, irrespective of whether the acquirer is private vs. public or whether the deal is domestic vs. cross border (last row of Table 7). This finding is not surprising and can be interpreted in support of the free-rider problem. Most notably, however, is that private acquirers pay a cross-border premium of 5.34 percentage points only in case of tender offers, i.e. when the disperse target shareholder structure requires the acquirer to incorporate the expected synergies into the premium. Public acquirers, on the contrary, do not only pay a cross-border premium in tender offers (13.30 percentage points), but as well in non-tender offers (8.72 percentage points) where we expect less free-riding behavior and thus less need to share synergies. Investor protection and bid premiums The results of Rossi and Volpin (2004) suggest that the level of investor protection in the target country may influence the bid premiums: the more developed the shareholder protection regime, the higher the bid premiums. If private firms are more prone to acquire targets in countries with a low investor protection, then this bias may result in private firms paying lower average premiums than public firms. We test for this influence and include a proxy for the level of shareholder protection in the target country. Rossi and Volpin (2004) use the anti-director rights

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index of LaPorta et al. (1998), which represents regulations that were applicable as of 1993, and multiply this score with the law and order index that has been published by the International Country Risk Group. However, the validity of the underlying index of LaPorta et al. (1998) has frequently been criticized in recent research for inconsistent coding and conceptual ambiguities (Djankov et al. (2008)). Instead, alternative and more precise measures of investor protection have been suggested in the literature (Djankov et al. (2008); Spamann (2010)). We follow the latest developments and use the revised anti-director rights index, as developed by Djankov et al. (2008). Using the same underlying laws and regulations, this index reflects the regulations that were applicable in May 2003 instead of those in 1993, as in LaPorta et al. (1998), and defines them with more precision. We multiply this anti-director rights index with the law and order index that is published by the International Country Risk Group as of January 2010. As a second measure for investor protection, we apply the revision of the anti-director rights index developed by Spamann (2010). This index revision reflects the status as of 2005. Lastly, we use the anti-self-dealing index that was introduced by Djankov et al. (2008). We recalculate the regression model of Table 6 and include the three aforementioned investor protection measures in separate models (the results are shown in Appendix IVac). Only the shareholder protection index as revised by Spamann (2010) shows a significantly positive influence. The anti-self-dealing index as well as the revised index by Djankov et al. (2008) are insignificant. The interpretation of the interaction variable of the private dummy with the cross-border dummy remains highly significant. Hence, our previous interpretation of the results is robust to the inclusion of the shareholder protection proxies.

6 The cross-border effect in public firms


An ideal check for whether different cross-border premiums of private and public acquirers are justified by higher synergies in international transactions would be to analyze the abnormal returns that are triggered by acquisition announcements for both groups. Unfortunately, no stock market reactions can be observed for private firms. Moreover, there is a paucity of available information about other firm characteristics, such as governance, balance sheet information or income statements. Nevertheless, we can make use of the information that is available for public acquirers, which is a subgroup of our sample, and see whether our previous findings hold as well.

Why do foreign acquirers pay more? Announcement returns to cross-border acquisitions

34

We run an event study on the announcement returns of transactions for the subsample of public firms (excluding listed financial investors). If the higher bid premiums that are paid in cross-border transactions are not exclusively motivated by higher synergies, we expect the capital market to anticipate these motives and the announcement returns of domestic and cross-border acquisitions to differ significantly. Prior empirical studies have investigated the short-term stock returns of international expansions and document a significant negative wealth impact of cross-border acquisitions. Moeller and Schlingemann (2005), for the US market, find that transactions involving foreign targets experience significantly lower

announcement returns of approximately one percentage point in comparison to domestic target acquisitions. Likewise, Martynova and Renneboog (2006) document the effect for the European market and find lower announcement returns for crossborder acquisitions. We calculate abnormal returns around the acquisition announcement as the difference between the actual logarithmic return of the acquirers stock Ri,t and the expected or normal return E(Ri). The expected return is estimated based on a market model approach over a 250-day estimation period beginning 300 days prior to the announcement. We use the Datastream World Index as the relevant market index. The quotes are adjusted for dividend payments and stock splits. Some of the public acquirers are subject to infrequent trading, which may lead to biased market model parameters. Hence, we run the model estimation using trade-to-trade returns. Maynes and Rumsey (1993), for the Canadian market, as well as Bartholdy et al. (2007), for the Danish market, show that the trade-to-trade approach is most suited to cope with thinly traded stocks. In order to ensure an unbiased estimation of the trade-to-trade beta, a minimum of at least 100 observations of trade-to-trade returns during the estimation period is required. To remove heteroscedasticity, the trade-to-trade stock and market returns in the estimation are subsequently divided by the square root of the number of days over which the trade-to-trade return is calculated so as to obtain unbiased and efficient estimates for the and parameters. We calculate the cumulative abnormal returns in the three-day event window [-1;1] around the acquisition announcement. In order to eliminate any distorting influences of outliers, we do not consider observations in which the threeday abnormal returns are below the 1st or above the 99th percentiles. We test for a significant difference in announcement returns between cross-border and domestic deals in a multiple regression model in Table 8.

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Table 8: Cross-sectional analysis of announcement returns This table shows the result of the cross-sectional models on the cumulative announcement returns in the event window [1;1]. The abnormal returns are calculated using a market model approach and trade-to-trade returns with an estimation period of up to 250 days beginning 300 days prior to the announcement. Cross-border is a dummy variable that is equal to 1 if the acquirer or acquirer immediate parents nation does not equal the targets nation. LN Acquirer market cap. is the logarithm of the acquirers market capitalization at the end of the fiscal year that precedes the acquisition. Target RoA is the targets return on assets, as reported by Worldscope. LN Target Q represents the targets Tobins Q and is calculated as total assets less total common equity, plus year end market capitalization divided by total assets. Target stock return is the buy-and-hold return within the time span from -150 days to -30 days prior to the deal announcement (-180 days to -30 days in Model 2). LN Deal value is the logarithm of the deal value excluding assumed liabilities. Percent sought and Percent held before represent the percentage that the acquirer is seeking to acquire or holds at announcement, respectively. Challenged deal is a dummy variable that is equal to 1 if more than one bidder is reported. Diversifying deal is a dummy that is equal to 1 if the first two digits of the target and acquirers primary SIC codes do not match. Subsequently amended is a dummy variable that is equal to 1 if the initial offer is increased. Tender offer is a dummy that is equal to 1 if the acquirer launches a tender offer for the target, and Hostile acquisition is a dummy that is equal to 1 if the deal is flagged as hostile by Thomson. Completed deal is a dummy that is equal to 1 if the deal is flagged as completed. Euro deal is a dummy that is equal to 1 if the acquirer and the target are both located in countries that have introduced the Euro. Cash payment is a dummy that is equal to 1 if the consideration exclusively consists of cash. All models include dummies for the announcement year, the targets industry as classified by the primary SIC codes first digit and the targets country. T-values are reported in brackets and are based on the Huber/White/sandwich estimator for standard errors.

(1) Cross-border LN Acquirer market cap. Target RoA LN Target Q Target stock return LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently amended Tender offer Hostile acquisition Completed deal Euro deal Cash payment -0.007 * [-1.73]

(2) -0.011 *** [-2.75]

(3) -0.009 ** [-2.17] -0.002 * [-1.81]

(4) -0.009 ** [-2.17] -0.002 * [-1.8] 0.000 [0.11] 0.001 [0.3] -0.001 [-0.28]

-0.001 [-0.62] 0.000 [-1.38] 0.000 [-0.75] 0.001 [0.27] -0.001 [-0.26] 0.007 [1.33] 0.003 [0.69] -0.011 ** [-2.08] -0.003 [-0.9] -0.007 [-1.11] 0.014 *** [3.18] 1,028 7.7% 1.8% 1.80 *** 1,028 10.1% 3.3% 1.99 ***

0.001 [0.52] 0.000 [-1.49] 0.000 [-0.95] 0.001 [0.23] -0.002 [-0.47] 0.004 [0.82] 0.002 [0.51] -0.012 ** [-2.17] -0.003 [-0.81] -0.004 [-0.68] 0.017 *** [3.51] 952 9.5% 2.2% 1.62 ***

0.001 [0.48] 0.000 [-1.48] 0.000 [-0.94] 0.001 [0.22] -0.002 [-0.48] 0.005 [0.85] 0.002 [0.5] -0.012 ** [-2.17] -0.003 [-0.82] -0.005 [-0.69] 0.017 *** [3.49] 952 9.5% 1.9% 1.57 ***

N R R adjusted F
*** significant at 1%, *** significant at 5%, * significant at 10%

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In Model (1) we only control for time, industry and county fixed effects. In Model (2) we extend the controls to the same deal and target characteristics as before. Finally, in Model (3), we additionally control for the acquirers size (Moeller et al. (2004)) and in Model (4) we include further target characteristics. Model (1) of Table 8 shows that the coefficient of the cross-border dummy is negative but only marginally significant if we only control for the time, industry and country dummies. The coefficient and significance substantially increase when we include further deal controls (Model (2)). Cross-border deals yield approximately 1.1 percentage point-lower announcement returns in comparison to domestic transactions. If we further control for the acquirers size, our sample reduces to 952 observations (Model (3)). The cross-border coefficient slightly decreases in absolute size but nevertheless remains significantly negative. The inclusion of target characteristics (Model (4)) does not change the interpretation. These findings confirm previous empirical studies on announcement returns for cross-border transactions. The negative market reactions to non-domestic acquisition

announcements are consistent with the hypothesis that higher premiums in crossborder transactions that are paid by public firms are not fully justified by larger synergies. Public firms heterogeneity and the cross-border premium Finally, we make use of the heterogeneity within the subsample of public acquirers and test the relationship between the degree of managerial discretion and the observed cross-border premium. If private acquirers offer lower premiums in cross-border acquisitions because of better-aligned incentive systems and close monitoring, we expect lower premiums to be offered by those public acquirers that have strong governance systems and a low degree of managerial discretion. To the best of our knowledge, there is no available governance rating for European companies that covers our sample period. Instead, we use indicators that are linked to governance and managerial discretion and that have been previously applied in the literature as proxy variables. We collect data on the percentage of the acquirers closely held shares, leverage and cash-holdings from Worldscope. The existence of large shareholders as a proxy for the degree of management discretion has been discussed by Shleifer and Vishny (1997), among others. The more concentrated the shareholder basis, the higher the monitoring incentives for the large shareholders. Likewise, the disciplining effect of debt has been argued by

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Jensen (1986). Liabilities reduce the amount of cash that is under the discretion of management and reduce the over-investment problem. Lastly, Harford (1999) finds that managers of cash-rich companies are more likely to undertake acquisitions and that those acquisitions are associated with a decrease in shareholder value. We estimate multiple regression models including interaction terms for each of our corporate governance proxies and again exclude financial buyers, as their accounting information may be misleading. Table 9 displays the results.
Table 9: Multiple regression model including corporate governance proxies This table shows the results of a cross-sectional regression model with the takeover-premium as dependent variable. Cross-border is a dummy variable that is equal to 1 if the acquirer or acquirer immediate parents nation does not equal the targets nation. % Acquirer closely held shares is the percentage of closely held shares at year-end, as reported by Worldscope, and % Acquirer closely held shares __ Cross-border is an interaction variable of the latter with the Crossborder dummy. % Liabilities is the percentage of total liabilities to total assets for the fiscal year that precedes the acquisition, as reported by Worldscope, and % Liabilities __ Cross-border is an interaction variable with the Cross-border dummy. % Cash to TA is the cash to total assets ratio, and % Cash to TA __ Cross-border is the interaction variable with the Cross-border dummy. Target stock return is the buy-and-hold return within the time span from -150 days to -30 days prior to the deal announcement (-180 days to -30 days in Model 2). Target RoA is the targets return on assets, as reported by Worldscope. LN Target Q represents the targets Tobins Q and is calculated as total assets less total common equity, plus year end market capitalization divided by total assets. LN Deal value is the logarithm of the deal value excluding assumed liabilities. Percent sought and Percent held before represent the percentage that the acquirer is seeking to acquire or holds at announcement, respectively. Challenged deal is a dummy variable that is equal to 1 if more than one bidder is reported. Diversifying deal is a dummy that is equal to 1 if the first two digits of the target and acquirers primary SIC codes do not match. Subsequently amended is a dummy variable that is equal to 1 if the initial offer is increased. Tender offer is a dummy that is equal to 1 if the acquirer launches a tender offer for the target, and Hostile acquisition is a dummy that is equal to 1 if the deal is flagged as hostile by Thomson. Completed deal is a dummy that is equal to 1 if the deal is flagged as completed. Euro deal is a dummy that is equal to 1 if the acquirer and the target are both located in countries that have introduced the Euro. Cash payment is a dummy that is equal to 1 if the consideration exclusively consists of cash. All models include dummies for the announcement year, the targets industry as classified by the primary SIC codes first digit and the targets country. T-values are reported in brackets and are based on the Huber/White/sandwich estimator for standard errors.

(1) Cross-border % Acquirer closely held shares % Acquirer closely held shares _x_ Cross-border % Liabilities % Liabilities _x_ Cross-border % Cash to TA % Cash to TA _x_ Cross-border Target stock return Target RoA LN Target Q LN Deal value -12.909 *** [-4.73] -0.139 [-1.25] -7.217 *** [-3.33] -0.681 [-1.28] 15.575 *** [6.01] 0.043 [0.96] -0.114 * [-1.76]

(2) 24.501 *** [4.42]

(3) 7.785 *** [3.49]

0.051 [1.05] -0.221 *** [-2.68] -0.067 [-0.84] 0.271 ** [1.98] -11.993 *** [-4.72] -0.102 [-0.96] -8.688 *** [-4.05] -0.142 [-0.28] -12.481 *** [-4.67] -0.168 [-1.52] -8.237 *** [-3.58] -0.316 [-0.58]

continued on next page

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Percent sought Percent held before Challenged deal Diversifying deal Subsequently amended Tender offer Hostile acquisition Completed deal Euro deal N R R adjusted F
*** significant at 1%, ** significant at 5%, significant at 10%

0.101 [1.35] -0.127 [-1.35] 8.334 *** [3.21] 0.075 [0.05] -2.574 [-1.06] 1.936 [0.96] -7.7 *** [-2.62] 4.475 ** [2.01] 6.285 ** [2.06] 974 27.9% 23.4% 6.05 ***

0.019 [0.27] -0.231 *** [-2.72] 9.004 *** [3.69] -0.098 [-0.06] -3.432 [-1.52] 5.018 ** [2.41] -6.44 ** [-2.36] 3.457 [1.61] 5.387 * [1.94] 1,090 25.9% 21.6% 6.20 ***

0.066 [0.87] -0.178 * [-1.87] 9.401 *** [3.54] 0.419 [0.26] -3.726 [-1.52] 4.197 * [1.89] -6.604 ** [-2.31] 1.785 [0.77] 7.397 ** [2.48] 985 26.5% 22.0% 6.00

***

The results of Model (1) show that the difference in bid premiums is negatively related to the percentage of the acquirers closely held shares. Acquirers with atomistic shareholder structures pay a cross-border premium of almost 16 percentage points in international acquisitions. The coefficient of the interaction variable is negative, which indicates that the cross-border premium decreases with increasing ownership concentration. Likewise, Model (2) shows a strong and significant influence of the acquirers leverage on the bid premiums. Companies that are debt-free and, thus, to a lesser extent subject to a disciplining effect of debt, pay higher bid premiums in cross-border deals. Again, this difference decreases substantially with increasing debt levels. Lastly, the results of Model (3) show that cash holdings are positively related to the cross-border premium. Cash-restrained companies pay, on average, a cross-border premium of 7.78 percentage points. The cross-border premium significantly increases for cash-rich acquirers. Exclusively focusing on the significance of individual model parameters in the interpretation of interaction variables is misleading, as Brambor et al. (2006) show. The standard error of the marginal effect of the cross-border variable is itself contingent upon the value of the interacted variable. We follow the method proposed by Brambor et al. (2006) and calculate the conditional standard errors for the different levels of the interacted variables % acquirer closely held shares, %

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liabilities and % cash to TA. We graphically illustrate the results of Table 9 in Figure (1), including the confidence interval of the marginal effect of our crossborder dummy.
Figure 1: Marginal effects of the cross-border The figures show the marginal effect of the cross-border dummy on the bid premium, depending on the (a) acquirers closely held shares, (b) % liabilities and (c) % Cash to total assets. The marginal effect is based on the estimations of the multiple regression models that are depicted in Table 9. The confidence interval is based on the conditional standard errors using the Huber/White/sandwich estimators for standard errors. Plotted below is the histogram.

(a) The marginal effect of the cross-border dummy over the percentage of the acquirers closely held shares.
5 10 15 20 25 30 35 40

Marginal Effect of cross border in %

-10 -5 0

20

40

60

80

100

Acquirer closely held shares (%)

Marginal Effect

95% Confidence Interval

(b) The marginal effect of the cross-border dummy over the ratio of the total liabilities to total assets.
5 10 15 20 25 30 35 40

Marginal Effect of cross border in %

0 -10 -5 0

50 100 150 200

20

40

60

80

100

Total liabilities to total assets (%)

Marginal Effect

95% Confidence Interval

50 100

Frequency

Frequency

Why do foreign acquirers pay more?


(c) The marginal effect of the cross-border dummy over the acquirers level of cash holdings.

40

Marginal Effect of cross border in %

5 10 15 20 25 30 35 40

-10 -5 0

20

40

60

80

Cash to total assets (%)

Marginal Effect

95% Confidence Interval

Figure (1a) plots the marginal effect of the cross-border dummy as a function of the acquirers closely held shares. The higher the percentage of the acquirers closely held shares, i.e., the better the monitoring, the lower the premium that is paid in cross-border acquisitions. The difference in premiums offered in cross-border and domestic acquisitions is highest for public acquirers with disperse shareholder structures and decreases as a function of the percentage of closely held shares. If more than 60% of the shares are closely held, the marginal effect of cross-border becomes insignificant. Similarly, Figure (1b) displays the negative relationship between the acquirers ratio of total liabilities to total assets and the cross-border premium. The more liabilities, i.e., the lower the managerial discretion, the lower the difference in the premiums offered in domestic and cross-border deals. Again, for ratios of more than 80% liabilities to total assets, the marginal effect of cross-border loses its significance. Lastly, Figure (1c) demonstrates that the marginal effect of the cross-border dummy increases with the percentage of cash to total assets, i.e., more funds that are at the discretion of management. The documented relationships between the marginal effect of the cross-border dummy and the proxies for managerial discretion lend further support to the hypothesis that higher bid premiums in cross-border acquisitions are caused by agency conflicts. The subset of public acquirers that show characteristics similar to those of private firms, pay less in international acquisitions. These results are subject to limitations similar to those of Bargeron et al. (2008), namely, to the question of why target shareholders sell to firms other than badly governed public foreign bidders. It is conceivable that unobserved target

50 100 150 200

Frequency

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characteristics attract the attention of a specific group of bidders. Further research on this is warranted.

7 Conclusion
We investigate the differences in takeover premiums between domestic and international acquisitions and find that the average takeover premium in European cross-border acquisitions is 10.4 percentage points higher than that in domestic deals. This cross-border premium is highly significant and remains robust in a multiple regression model that controls for firm and deal characteristics. The effect is not caused by differences in pre-announcement price run-ups, and it is robust to the exclusion of share deals as well as the exclusion of financial buyers. We argue that this cross-border premium is either due to information asymmetries, higher synergies that are idiosyncratic to foreign acquires or caused by agency conflicts. In support of the latter, we find that private acquirers, which we assume to be less exposed to agency conflicts, do not pay any cross-border premium. We test the robustness of the results with respect to the size of the acquirer, potential differences in the relevance of the free-rider problem in deals of public acquirers and those of private bidders and investor protection. The effect remains robust. While some cross-border synergies may exist, they do not explain the entire cross-border premium. Instead, we argue that part of the higher premiums that are paid in cross-border transactions are caused by agency conflicts. We find further support for this assertion when we analyze the abnormal returns for the subsample of public acquirers. Cross-border deals yield significantly lower abnormal returns of approximately 1% in comparison to domestic deals. Finally, we test the influence of proxies for managerial discretion, such as the percentage of closely held acquirer shares. Indeed, we find that the degree of managerial discretion significantly influences the premium in cross-border deals. On average, better-governed firms pay lower premiums in cross-border transactions.

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Appendix I:
This table represents a replication of Table 4, Model (1) and includes an interaction variable of the cross-border dummy and the cash dummy.

(1) Cross-border Cross-Border _x_ Cash paym ent Target stock return Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently am ended Tender offer Hostile acquisition Com pleted deal Euro deal Financial acquirer Cash paym ent -14.016 *** [-7.19] -0.222 *** [-2.75] -4.122 ** [-2.43] 0.485 [1.25] 0.072 [1.42] -0.184 *** [-2.97] 7.909 *** [4.49] -2.139 * [-1.76] -4.168 ** [-2.52] 3.937 *** [2.76] -4.854 ** [-2.3] 3.685 ** [2.51] 4.824 ** [2.36] -7.47 *** [-5.12] 5.495 *** [3.28] 1,931 23.4% 20.9% 8.14 *** 8.295 *** [6.65]

(2) 7.442 *** [5.66]

(3) 12.03 *** [3.15] -4.288 [-1.07]

-17.244 *** [-17.244] -0.284 [-0.284] -3.867 *** [-3.867] 0.363 [0.363] 0.06 [0.06] -0.2 [-0.2] 8.904 *** [8.904] -3.228 *** [-3.228] -4.727 *** [-4.727] 4.003 *** [4.003] -5.622 *** [-5.622] 4.178 *** [4.178] 4.528 *** [4.528] -7.334 *** [-7.334]

-14.028 *** [-7.22] -0.222 *** [-2.74] -4.131 ** [-2.42] 0.498 [1.28] 0.072 [1.43] -0.184 *** [-2.97] 7.949 *** [4.52] -2.161 * [-1.78] -4.208 ** [-2.55] 3.927 *** [2.75] -4.727 ** [-2.24] 3.614 ** [2.45] 4.825 ** [2.36] -7.528 *** [-5.16] 6.591 *** [3.68]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

1,596 26.3% 23.3% 7.99 ***

1,931 23.5% 20.9% 8.02 ***

Why do foreign acquirers pay more?

45

Appendix II:
This table represents a replication of Table 6 and includes an interaction variable of the deal value with the cross-border dummy.

(1) Cross-border Private acquirer Private acquirer _x_ Cross-border LN Deal value _x_ Cross-border LN Deal value Target Stock return Target RoA LN Target Q Percent sought Percent held before Challenged deal Diversifying deal Subsequently amended Tender offer Hostile acquisition Completed deal Euro deal Cash payment Financial acquirer 0.215 [0.55] -14.026 *** [-7.25] -0.22 *** [-2.72] -4.729 *** [-2.79] 0.083 * [1.65] -0.159 *** [-2.58] 7.562 *** [4.33] -1.345 [-1.1] -3.938 ** [-2.41] 3.458 ** [2.43] -5.513 *** [-2.63] 3.091 ** [2.12] 4.471 ** [2.19] 7.454 *** [4.1] -4.149 *** [-2.69] 1,931 24.8% 22.2% 8.466 *** 9.235 *** [5.75] -5 *** [-3.05] -5.861 ** [-2.46]

(2) 15.508 *** [3.93] -7.438 *** [-5.4]

(3) 19.363 *** [4.59] -4.705 *** [-2.87] -6.787 *** [-2.82]

-1.624 ** [-2.41] 0.934 ** [2.01] -14.043 *** [-7.3] -0.212 *** [-2.64] -4.629 *** [-2.74] 0.084 * [1.66] -0.165 *** [-2.67] 7.689 *** [4.41] -1.203 [-0.98] -3.805 ** [-2.33] 3.602 ** [2.54] -5.486 *** [-2.62] 3.198 ** [2.19] 4.58 ** [2.24] 8.498 *** [4.76] -4.386 *** [-2.86] 1,931 24.8% 22.2% 8.511 ***

-1.894 *** [-2.79] 1.023 ** [2.2] -13.987 *** [-7.26] -0.216 *** [-2.68] -4.675 *** [-2.77] 0.085 * [1.7] -0.158 ** [-2.56] 7.666 *** [4.41] -1.288 [-1.05] -3.914 ** [-2.39] 3.52 ** [2.47] -5.486 *** [-2.64] 2.931 ** [2.02] 4.614 ** [2.26] 7.634 *** [4.19] -4.201 *** [-2.74] 1,931 25.1% 22.5% 8.43 ***

N R R adjusted F
*** significant at 1%, *** significant at 5%, * significant at 10%

Why do foreign acquirers pay more?

46

Appendix III:
This table represents a replication of Table 6 and includes the variable % Target closely held as a proxy for targets with closely held shares.

All (1) Cross-border Private acquirer Private acquirer _x_ Cross-Border % Target closely held Target stock return Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently am ended Tender offer Hostile acquisition Com pleted deal Euro deal Financial acquirer Cash paym ent 8.715 *** [4.97] -5.063 *** [-2.75] -6.298 ** [-2.39] -0.026 [-0.86] -15.501 *** [-6.23] -0.182 * [-1.92] -4.135 ** [-2.13] -0.41 [-0.87] 0.126 ** [2.14] -0.131 * [-1.84] 7.274 *** [3.71] -1.771 [-1.3] -3.906 ** [-2.2] 2.33 [1.48] -5.478 ** [-2.42] 2.664 * [1.67] 5.624 ** [2.41] -4.257 ** [-2.5] 8.647 *** [4.23] 1,595 25.1% 22.0% 7.52 ***

Private (2) 1.559 [0.69]

Public (3) 8.635 *** [4.79]

-0.026 [-0.61] -16.208 *** [-4.3] -0.233 [-1.49] -0.205 [-0.07] 0.948 [1.17] 0.089 [0.86] -0.098 [-0.76] 5.714 [1.59] -4.01 [-1.45] -4.085 [-1.44] 4.103 [1.64] -7.854 * [-1.92] 1.246 [0.48] 2.645 [0.73] -3.267 [-1.48]

-0.006 [-0.006] -15.351 *** [-15.351] -0.145 [-0.145] -6.496 *** [-6.496] -1.174 [-1.174] 0.154 [0.154] -0.151 [-0.151] 7.715 *** [7.715] -1.189 [-1.189] -3.917 *** [-3.917] 1.254 [1.254] -5.187 *** [-5.187] 3.931 *** [3.931] 7.445 *** [7.445] -6.486 *** [-6.486] 9.256 *** [9.256]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

572 20.1% 12.4% 2.898 ***

1,023 28.1% 23.6% 6.671 ***

Why do foreign acquirers pay more?

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Appendix IV (a):
This table represents a replication of Table 6 but includes a proxy for investor protection as suggested by Djankov et al. (2008).

All (1) Cross-border Private acquirer Private acquirer _x_ Cross-border Investor protection _ Djankov 2008 Target stock return Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently am ended Tender offer Hostile acquisition Com pleted deal Euro deal Financial acquirer Cash paym ent 9.326 *** [5.78] -4.92 *** [-2.99] -5.944 ** [-2.47] 0.5 [0.18] -13.859 *** [-7.09] -0.224 *** [-2.76] -4.712 *** [-2.77] 0.185 [0.47] 0.083 [1.64] -0.159 ** [-2.57] 7.557 *** [4.31] -1.329 [-1.08] -3.862 ** [-2.36] 3.437 ** [2.4] -5.551 *** [-2.63] 3.06 ** [2.09] 4.488 ** [2.2] -4.035 *** [-2.6] 7.186 *** [3.93] 1,921 24.7% 22.0% 8.243 ***

Private (2) 2.609 [1.27]

Public (3) 9.138 *** [5.54]

1.751 [0.66] -15.08 *** [-4.56] -0.289 ** [-2.2] -1.293 [-0.48] 1.168 * [1.76] 0.081 [0.98] -0.116 [-1.14] 7.138 ** [2.44] -2.826 [-1.16] -4.074 [-1.6] 3.774 * [1.72] -6.115 * [-1.67] 3.671 [1.63] 3.134 [0.9] -4.096 ** [-1.99]

0.339 [0.339] -13.306 *** [-13.306] -0.198 [-0.198] -6.838 *** [-6.838] -0.276 [-0.276] 0.099 [0.099] -0.19 [-0.19] 7.333 *** [7.333] -0.486 [-0.486] -3.753 *** [-3.753] 3.416 *** [3.416] -6.889 *** [-6.889] 2.617 *** [2.617] 5.15 *** [5.15] -3.542 *** [-3.542] 7.617 *** [7.617]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

696 19.5% 12.9% 3.021 ***

1,225 27.0% 23.1% 6.623 ***

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Appendix IV (b):
This table represents a replication of Table 6 and includes a proxy for investor protection as suggested by Spaman (2010).

All (1) Cross-border Private acquirer Private acquirer _x_ Cross-border Investor protection _ Spaman 2010 Target stock return Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently amended Tender offer Hostile acquisition Completed deal Euro deal Financial acquirer Cash payment 9.125 *** [5.65] -5.032 *** [-3.05] -5.513 ** [-2.28] 3.377 ** [2.24] -13.72 *** [-7.01] -0.228 *** [-2.8] -4.711 *** [-2.76] 0.278 [0.71] 0.083 [1.63] -0.16 ** [-2.56] 7.378 *** [4.24] -1.309 [-1.07] -3.88 ** [-2.36] 3.858 *** [2.7] -5.363 ** [-2.52] 2.939 ** [2] 4.442 ** [2.18] -4.267 *** [-2.73] 7.251 *** [3.97] 1,897 25.0% 22.4% 8.604 ***

Private (2) 2.702 [1.31]

Public (3) 8.902 *** [5.39]

1.567 [0.81] -15.039 *** [-4.55] -0.286 ** [-2.17] -1.131 [-0.42] 1.258 * [1.89] 0.08 [0.96] -0.117 [-1.14] 7.511 ** [2.56] -2.934 [-1.21] -4.285 * [-1.67] 4.187 * [1.91] -5.288 [-1.47] 3.429 [1.51] 2.976 [0.86] -4.381 ** [-2.13]

3.482 *** [3.482] -13.211 *** [-13.211] -0.204 [-0.204] -6.967 *** [-6.967] -0.191 [-0.191] 0.093 [0.093] -0.199 [-0.199] 6.995 *** [6.995] -0.416 [-0.416] -3.622 *** [-3.622] 3.848 *** [3.848] -6.767 *** [-6.767] 2.543 ** [2.543] 5.044 *** [5.044] -3.539 *** [-3.539] 7.708 *** [7.708]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

690 19.9% 13.4% 3.149 ***

1,207 27.4% 23.6% 6.762 ***

Why do foreign acquirers pay more?

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Appendix IV (c):
This table represents a replication of Table 6 and includes the anti-self-dealing index developed by Djankov et al. (2008).

All (1) Cross-border Private acquirer Private Acquirer _x_ Cross-border Anti self dealing index Target stock return Target RoA LN Target Q LN Deal value Percent sought Percent held before Challenged deal Diversifying deal Subsequently am ended Tender offer Hostile acquisition Com pleted deal Euro deal Financial acquirer Cash paym ent 9.326 *** [5.78] -4.92 *** [-2.99] -5.944 ** [-2.47] 2.116 [0.18] -13.859 *** [-7.09] -0.224 *** [-2.76] -4.712 *** [-2.77] 0.185 [0.47] 0.083 [1.64] -0.159 ** [-2.57] 7.557 *** [4.31] -1.329 [-1.08] -3.862 ** [-2.36] 3.437 ** [2.4] -5.551 *** [-2.63] 3.06 ** [2.09] 4.488 ** [2.2] -4.035 *** [-2.6] 7.186 *** [3.93] 1,921 24.7% 22.0% 8.243 ***

Private (2) 2.609 [1.28]

Public (3) 9.146 *** [5.54]

7.296 [0.66] -15.078 *** [-4.56] -0.288 ** [-2.19] -1.327 [-0.49] 1.165 * [1.75] 0.081 [0.97] -0.116 [-1.14] 7.167 ** [2.45] -2.821 [-1.16] -4.089 [-1.61] 3.736 * [1.7] -6.043 * [-1.67] 3.672 [1.63] 3.132 [0.91] -4.114 ** [-2]

3.137 *** [3.137] -13.303 *** [-13.303] -0.198 [-0.198] -6.848 *** [-6.848] -0.279 [-0.279] 0.098 [0.098] -0.19 [-0.19] 7.345 *** [7.345] -0.488 [-0.488] -3.739 *** [-3.739] 3.396 *** [3.396] -6.863 *** [-6.863] 2.624 *** [2.624] 5.142 *** [5.142] -3.525 *** [-3.525] 7.62 *** [7.62]

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

696 19.5% 13.0% 3.027 ***

1,225 27.0% 23.1% 6.628 ***

Differences between takeover premiums across countries

50

DIFFERENCES BETWEEN TAKEOVER PREMIUMS ACROSS COUNTRIES


Investor protection matters less than you think

May 2011

Marc Rustige
Frankfurt School of Finance & Management, Sonnemannstrae 9-11, 60314 Frankfurt am Main, Germany E-mail: m.rustige@fs.de, Phone: +49 69 154008 389

Michael H. Grote
Frankfurt School of Finance & Management, Sonnemannstrae 9-11, 60314 Frankfurt am Main, Germany E-mail: m.grote@fs.de, Phone: +49 069 154008 326

Abstract: Takeover premiums offered in acquisitions vary with target location. The average premiums in the US, the UK and continental Europe amount to 37.8%, 32.0% and 25.9%, respectively. Deal and target characteristics explain the difference between UK and continental European premiums. US targets, however, also command a significantly higher premium in multiple regression models. We use the most recent measures for shareholder protection and find that different investor protection regimes neither directly nor indirectly explain the heterogeneity in takeover premiums. Instead, we argue that different shareholder compositions, i.e., inside vs. outside ownership, drive international differences.

JEL-Classification: G34, G15 Key words: Investor protection, takeover premiums, ownership structure

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1 Introduction
Practitioners and researchers note that bid premiums offered in acquisitions of public targets differ substantially depending on the targets location. Bloombergs (2010) mergers and acquisitions (M&A) report documents that average deal premiums in North America have ranged between 20% and 60% in recent years, whereas mean premiums in Europe have seldom exceeded 30%. Rossi and Volpin (2004) find that takeover premiums for targets in the US and the UK average 44.3% and 45.8%, respectively, whereas the mean bid premium in Europe is only 33.9% (see Alexandridis et al. (2010) for similar results). Despite substantial work on the market for corporate control, research on the reasons for this sizeable difference is surprisingly scarce. We analyze whether differences in the target countries investor protection regimes explain the sizeable variations in takeover premiums, as suggested by Rossi and Volpin (2004). We investigate a sample of 3,345 announced acquisitions with a deal value of more than 10 million Euros in the years from 2000 to 2009 and with a target located in the US, the UK or continental Europe. We limit our sample to those transactions in which the acquirer holds less than 50% of the targets stock prior to the acquisition announcement and seeks to own more than 50% after completion. As in previous research, we find significantly higher takeover premiums in the US and UK compared with continental Europe. In our sample, the mean bid premium is 37.8% in the US (median 29.9%) and 32.0% in the UK (median 25.8%). Premiums in continental Europe, on the contrary, average 25.9% (median 20.9%). Hence, the mean premium in the US is almost 50% higher than in continental Europe. We find that deal and firm characteristics explain the difference between premiums in the UK and continental Europe. The higher premiums for US targets, however, remain robust. Rossi and Volpin (2004) document a positive relationship between the level of investor protection and the mean bid premium offered. They model a shareholder protection index using the anti-director index originally developed by LaPorta et al. (1998) and argue that better shareholder protection, on the one hand, enhances (potential) competition among the bidders (see Schwert (2000)). On the other hand, better protection is associated with a more diffuse ownership of the targets, which may reduce the takeover premiums as well. However, Rossi and Volpin (2004) note

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that UK and US targets drive these results: the proxy for investor protection becomes insignificant when dummies for US and UK targets are added to the multiple regression model. We revisit the analysis of Rossi and Volpin (2004) since recent studies criticize the underlying index of shareholder protection by LaPorta et al. (1998) for miscoding and ambiguities. Substantial adjustments have been made to the index, and Djankov et al. (2008) and Spamann (2010) develop three alternative measures that reflect the current status of the regulatory environment. Evaluated by the newly constructed indices, the US investor protection regime no longer stands out. We use the original and three revised investor protection indices provided by literature and find that only two of them have a positive influence on bid premiums. The difference of the takeover premiums between the US and Europe, however, even increases if we control for investor protection. We conclude that variations in investor protection regimes doe not explain the different bid premiums directly. Nevertheless, investor protection may also influence bid premiums in less direct ways. First, better investor protection may increase competition between bidders. Alexandridis et al. (2010) model a time-varying competition index for the activity on the market for corporate control in each country and find evidence that target announcement returns are positively related to variations in the degree of competition on the M&A market. We use the same method and test the influence of the competition proxy on bid premiums. We also find that competition has a robust and significant influence even if we control for deal and target characteristics. However, the significance of the competition proxy is lost when we take into account the level of investor protection and country dummies for US and UK targets. Again, the coefficient of the US dummy turns out to be highly significant: the higher premiums in the US are not explained by competition. Second, LaPorta et al. (1999) find that higher shareholder protection correlates with a more diffuse shareholder structure. Using the new measures of investor protection, Spamann (2010) cannot replicate this finding. Nevertheless, we test the influence of target shareholder concentration on takeover premiums. Following the predictions of the free-rider problem put forward by Grossman and Hart (1980), we expect that premiums will be higher for targets with a low shareholder concentration. Assuming an atomistic shareholder structure in which each shareholders action does not influence the outcome of a takeover bid, Grossman and Hart (1980) show that a free-rider problem emerges: because the individual shareholder is non-

Differences between takeover premiums across countries

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decisive to the outcome of the bid, she will free-ride on the restructuring efforts of the acquirer and only accept the bid if the price offered by the acquirer equals the expected value increase in the combined entity. Thus, to consummate the deal, the acquirer will have to transfer the entire expected value of the synergies to the shareholders of the target. Holmstrm and Nalebuff (1992) extend this model and show that a more concentrated shareholder structure attenuates the free-rider problem such that the takeover premiums decrease. Substantial differences in the ownership structure across countries have been documented (LaPorta et al. (1999); Faccio and Lang (2002); Holderness (2009)) and may have an influence on our results. We use the Worldscope item percentage closely held shares as a proxy for the shareholder concentration. 4 When we include this proxy in the multiple regression model, we find a negative, though insignificant influence on the bid premium. Again, the higher US premiums remain unaffected by the inclusion of the shareholder concentration in our regressions. Third, not the shareholder concentration per se but rather the different sorts of blockholders within regions might drive the results. The models of Shleifer and Vishny (1986) and Stulz (1988) and the empirical findings of Bauguess et al. (2009) suggest that differences in the composition may have an influence on the bid premiums. Stulz (1988) argues that the level of managerial or inside ownership is positively related to bid premiums. The reasons are a lower ex ante firm value due to entrenched management, a lower takeover likelihood and management negotiating for higher premiums. Similarly, Shleifer and Vishny (1986) suggest that the bid premiums decrease with higher outside-blockholder ownership in the target since the existence of large outside blockholders increases the ex ante value of the company because of better monitoring. Furthermore, the likelihood of a takeover is higher, which is reflected in the pre-announcement share price. Bauguess et al. (2009) test this relationship empirically for the US market using target announcement returns. They classify the targets owners either as (active) outside shareholders or as insiders and find that active outside ownership has a negative relationship with target returns, whereas inside ownership has a positive relationship. Due to insufficient data, we cannot directly control for the shareholder

The item closely held shares in Worldscope represents shares that are held by insiders and includes shares that are held by officers, directors and their immediate families, shares that are held in trust, shares that are held by any other corporation, including pension plans and shares held by individuals who hold 5% or more of the outstanding shares.

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54

composition. If, however, a higher degree of inside ownership in US firms compared to European firms causes the heterogeneity in bid premiums, then we expect the relationship between the shareholder concentration and bid premiums to be systematically different. With increasing degrees of ownership concentration, bid premiums will decrease more sharply in Europe than in the US. We use a multiple regression model with interaction variables and analyze differences in the influences of the target shareholder structure across countries. In line with the predictions of Grossman and Hart (1980) and Holmstrm and Nalebuff (1992), we find that in continental Europe and the UK, bid premiums decrease significantly with increasing ownership concentration. In the US, however, takeover premiums do not decrease with rising ownership concentration - they rather increase slightly. Most importantly, when we include the interaction variables in the regression, the US dummy is no longer significant. Hence, the heterogeneity in the takeover prices is caused by the higher premiums offered for US-targets with a concentrated ownership structure. To reinforce these findings, we compare the bid premiums for targets that have less than 10% closely held shares; 473 firms match this criterion. We find that bid premiums for these targets do not differ significantly among the three regions: the mean takeover premiums are 34.3%, 31.4% and 35.3% in the US, UK and continental Europe, respectively. These results underscores the influence of the target shareholder composition on takeover premiums. Our paper is closest to Rossi and Volpin (2004), who argue for a relationship between investor protection and takeover premiums. We contribute to the literature in two ways. First, we extend the research of Rossi and Volpin (2004) and use more recent and correctly specified measures for investor protection to explain the higher bid premiums in the US versus UK and continental Europe. We find that the heterogeneity in prices offered for targets across countries is not explained by different levels of investor protection, differences in competition in the market for corporate control or differences in the target shareholder structure. Second, we advance the research on takeover premiums by arguing that differences in shareholder composition, i.e., inside versus outside blockholders, cause the heterogeneity in bid premiums. The question of whether investor protection may influence shareholder composition in the long term is beyond the scope of this paper.

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The remainder of the paper is organized as follows. In Section 2, we describe our sample of acquisitions and present univariate results on the bid premiums. In Section 3, we test whether investor protection explains the higher bid premiums in the US. In Section 4, we test the influence of competition, target shareholder structure and target shareholder composition. Section 5 concludes.

2 Sample composition and univariate results


We select all acquisitions from the Thomson One Banker database where the target company is publicly listed, located in either the US or Europe and the transaction was announced between 2000 and 2009. The acquirer may be from any country. We further require that the acquirer holds less than 50% of the targets stock prior to the announcement and seeks to own more than 50% after the completion, with a minimum deal value of 10 million Euros. Additionally, the targets Datastream identifier has to be available in Thomson. Last, we exclude all transactions flagged as Acquisition (which denotes spin-offs in the database), Exchange Offer, Recapitalization or Buyback. This selection filter yields a total of 6,452 deals, with 3,944 transactions in the United States, 975 acquisitions in the United Kingdom and 1,533 deals in continental Europe. With few exceptions, the previous academic literature examining prices paid in acquisitions has routinely either used the information on bid premiums provided directly by Thomson (e.g., Rossi and Volpin (2004)) or calculated target announcement returns as a proxy for the price offered by the acquirer (e.g., Bargeron et al. (2008)). We decide not to use either method. First, the bid premium provided by Thomson One Banker seems inaccurate, as it is calculated relative to the targets share price four weeks prior to the announcement. This calculation is problematic since fluctuations in the daily share price may skew the analysis. Second, we find that Thomson assigns an erroneous time series identifier in nearly 6% of the observations in our sample. Similarly, we do not use target announcement returns because they represent a noisy estimate of the takeover premium. They do not exclusively reflect the price offered but rather also incorporate the probability of bid failure and bid amendment (Betton et al. (2008)). Hence, for the remaining 6,452 deals, we hand-collect the information on the consideration structure provided by Thomson One Banker in the CONSID text field and individually extract the initial pershare price offered by the acquirer. We include only deals that involve all-cash payment, all-share payment or a combination of both, and we exclude transactions

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56

that involve a choice between cash and share payments. Furthermore, we exclude deals in which the consideration is unavailable on a per-share basis and deals in which the acquiring entity is flagged as government, joint venture or individual. For the remaining deals, we calculate the bid premiums, following the method applied by Jindra and Walkling (2004), as the percent difference between the first per-share offer announced and the targets average share price in the period of -30 to -10 days prior to the announcement date. In the case of share offers, the acquirers shares are valued at the closing stock price on the day prior to the initial announcement. Similarly, any currency translations are based on the exchange rate one day before the announcement. All price-time series are taken from Thomson Datastream. Bid contests, i.e., multiple bidders bidding for one target, are likely to have a distorting effect, as the targets share price will jump upon the announcement of the first bid. Any subsequent offer by a second bidder will typically trigger smaller price increases in the targets stock. Hence, the bid premium for this second bid may not be calculated in relation to the already appraised share price. To avoid this bias, we group bid announcements for an individual target within a time span of 60 days into one contest and relate all offers within one contest to the announcement date of the first bid. We check the announcement dates and time-series identifiers provided by Thomson for each transaction with implausible bid premiums and adjust the data in 235 observations. To avoid a bias due to thinly traded stocks in which the share price may not adequately reflect the firms value, we exclude all transactions where the target does not show any share-price movements within the time span of -30 to 10 days prior to the announcement. To eliminate any distorting effects of outliers, we truncate the sample at the top and bottom percentiles. The remaining target firms are matched to Worldscope, and information on market capitalization, total assets, return on assets and total liabilities as of the fiscal year preceding the transaction are extracted. We again truncate these accounting data to eliminate outliers. To account for the targets pre-announcement share-price development, we require the targets stock price to be available for 150 days prior to the deal announcement. The final sample includes 3,345 transaction announcements.

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Table 1: Sample distribution The table lists the distribution of observations by announcement year and target location (United States (US), United Kingdom (UK) or continental Europe (CoE)) in our sample of 3,345 acquisitions. Information on the nation and the announcement year stem from Thomson One Banker.
Target location UK CoE 102 33 36 54 43 74 90 95 63 40 630 114 66 59 81 60 86 106 114 93 65 844

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total

US 281 182 111 142 135 192 267 270 167 124 1,871

Total 497 281 206 277 238 352 463 479 323 229 3,345

Table 1 depicts the distribution of the observations by year and region. The data reflect the downturn of the M&A volume following the millennium rally as well as the upswing in volume prior to the financial crisis in 2008/2009. Similar to other studies on mergers and acquisition in Europe (Martynova and Renneboog (2006)), we find that the active market for corporate control in the United Kingdom is reflected in the sample distribution. More than 40% of all observations in Europe involve UK targets. We calculate and compare the mean and median of the bid premiums in each region. Table 2 shows the results. We find takeover premiums in the United States (US) to be 37.82%, on average (median: 29.91%), and thus almost 50% higher than the mean bid premiums in Continental Europe (CoE), which average 25.91% (median: 20.92%). Premiums for targets in the United Kingdom have a mean of 32.00% and a median of 25.76%. The differences between the mean and median premiums are highly significant.

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Table 2: Bid premiums by region The table lists the average and median bid premium offered by acquirers between 2000 and 2009 for targets in the US, UK and Continental Europe (CoE). The bid premium is calculated as the percent difference between the initial offer price and the targets average share price between -30 and -10 days prior to the acquisition announcement. The test of difference is based on a two-sample t-test (mean) and the Wilcoxon Rank-sum test (median).

US vs. UK US Mean Median N 37.82% 29.91% 1,871 UK 32.00% 25.76% 630 CoE 25.91% 20.92% 844 Diff. 5.83% 4.15% P-value 0.000 *** 0.000 ***

US vs. CoE Diff. 11.92% 8.99% P-value 0.000 *** 0.000 ***

UK vs. CoE Diff. 6.09% 4.83% P-value 0.000 *** 0.000 ***

*** significant at 1%, ** significant at 5%, * significant at 10%

Still, the heterogeneity in bid premiums between the regions may be driven by systematic differences in deal and firm characteristics. In Table 3, we compare our sample of acquisitions in the US, the UK and continental Europe along a set of attributes that may have an influence on the takeover premiums. In accordance with the variables used by Rossi and Volpin (2004), we compare the target size (market capitalization) and dummies for cross-border deals, hostile acquisitions, tender offers and contested bids. We additionally include a set of further controls that may have an influence on the bid premiums. The variable Target stock return represents the targets buy-and-hold return over the 120 trading days from day -150 to day -30 prior to the acquisition announcement. Likewise, we control for the targets profitability and include the targets return on assets and growth opportunities approximated by Tobins Q, which is calculated as the ratio of the total assets less total common equity plus the year-end market capitalization, divided by the total assets. We further include the percentage of the targets equity that the acquirer seeks to acquire (percent sought) and the percentage of the targets equity that the acquirer holds at announcement. A selection of five further dummies completes the controls. We include a dummy indicating whether the deal is of a diversifying nature, whether the offer is subsequently amended, whether the acquirer is a private entity, whether the payment is cash-only and, finally, whether the acquirer is a financial investor.

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Table 3: Descriptive statistics The table lists the descriptive statistics of deal and firm characteristics for target in the US, UK and continental Europe (CoE). Target market capitalization is the targets market capitalization in the fiscal year prior to the announcement. Target Q represents the targets Tobins Q, and Target RoA is the targets return on assets in the fiscal year prior to the acquisition. Percent sought and Percent held at announcement represent the percentage of the target that the acquirer is initially seeking to own post-acquisition and the percentage that the acquirer already holds at announcement, respectively. Target stock return represents the targets buy-and-hold from -150 to -30 days. Cash deal equals 1 if the consideration exclusively consists of cash. Private acquirer equals 1 if the acquirer is flagged as a private company. Cross-border equals 1 if the targets and acquirers nation do not match. Hostile acquisition equals 1 if the deal attitude is flagged as hostile. Tender offer is 1 if the deal is conducted through a tender offer. Contested bid equals 1 if more than one bidder is involved. Financial acquirer equals 1 if the acquirer is a financial investor. Subsequently amended deal equals 1 if the initial offer is increased. Diversifying deal equals 1 if the first two digits of the targets and acquirers primary SIC codes do not match.

Mean Target market capitalization ( mio.) Target Q Target RoA Percent sought Percent held at announcement Target stock return Cash deal Private acquirer Cross-border Hostile acquisitions Tender offer Contested bid Financial acquirer Subsequently amended deal Diversifying deal 677 1.64 -0.7% 97.9% 1.6% 4.3% 76% 26% 13% 8% 20% 10% 18% 11% 49%

US Median (151) (1.28) (3%) (100%) (0%) (1.2%)

Mean 678 1.49 1.9% 95.8% 3.7% 5.8% 86% 23% 25% 8% 78% 15% 20% 15% 64%

UK Median (117) (1.26) (4.8%) (100%) (0%) (3.7%)

Mean

CoE Median (199) (1.22) (5.1%) (94%) (0%) (6.5%)

763 1.54 4.7% 81.2% 9.6% 7.8% 25% 25% 38% 7% 58% 15% 20% 12% 60%

The analysis in Table 3 shows that differences between the regions are substantial and underscores the importance to control for deal and firm characteristics. Targets acquired in continental Europe are, for instances, larger with respect to the mean and median market capitalization. Furthermore, the percentage of the target shares the bidder seeks to acquirer is lower in Europe. At the same time, toeholds, i.e., acquirers holding target shares prior to the acquisition, are larger in Europe. With respect to the indicator variables, we find that cash deals are more frequent in the US and UK, whereas tender offers are more frequent in the UK and continental Europe.

3 Investor protection and takeover premiums


Rossi and Volpin (2004) investigate the cross-country determinants of mergers and acquisitions and find that takeover premiums are higher in countries with a strong investor protection regime. To measure the investor protection they rely on the anti-director index developed by LaPorta et al. (1998) and multiply this by the

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rule of law index used as well by LaPorta et al. (1998). The anti-director index ranges from 0 (low rights) to 6 (high rights) and measures on a per-country basis whether six different laws associated with the strengthening of shareholder rights were in force by 1993. The rule of law index measures the law-and-order tradition in each country and is provided by the International Country Risk Group. In a multiple regression model with the takeover premium as the dependent variable, Rossi and Volpin (2004) find that investor protection has a significantly positive influence, even when controlling for deal and target characteristics. However, when adding dummies for US and UK targets to capture potential country-specific characteristics, the significance of the shareholder protection proxy disappears. Instead, the US and UK dummies are highly significant, indicating that bid premiums in these countries are significantly higher than in the rest of the world. Based on these results, Rossi and Volpin (2004) conclude that the influence of the shareholder protection dummy is predominantly driven by US and British targets. We first test the influence of shareholder protection on the bid premiums in our sample by replicating the analysis of Rossi and Volpin (2004) and construct a shareholder protection index using the same approach. The index is not available for all countries in our sample. A total of 34 transactions cannot be considered due to a missing index value. Panel A in Table 4 lists the number of observations and the shareholder protection score used by Rossi and Volpin (2004). The United States and the United Kingdom emerge as the countries with the highest shareholder protection rating. However, the anti-director rights index of LaPorta et al. (1998), which is the basis for the approach of Rossi and Volpin (2004), has been criticized in recent research for inconsistent coding and conceptual ambiguities (Djankov et al. (2008)). Instead, alternative and more precise measures have been suggested by literature. Hence, we consider three additional quantifications of shareholder protection. We first use the revised anti-director rights index developed by Djankov et al. (2008). Using the same underlying laws and regulations as in LaPorta et al. (1998), this index reflects the regulations applicable in May 2003 (instead of 1993) and defines them with more precision. We again multiply this anti-director rights index with the law-and-order index published by the International Country Risk Group as of January 2010. The results are displayed in Panel B of Table 4. Most notably, the previously very strong anti-director rating of the United States is now substantially lower, suggesting that investor protection in the United States is within the average

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range of all other countries in our sample. The main reason for this effect is that the original index of LaPorta et al. (1998) treats the US as having cumulative voting. Djankov et al. (2008) revise this assumption, as the law in the US only covers enabling provisions for cumulative voting and has no mandatory rule. An alternative revision of the original anti-director rights index is presented by Spamann (2010). This index revision reflects the status as of 2005 and is shown in Panel C of Table 4. Some of the laws and regulations in force are interpreted differently and, in the case of the US, are even stricter, which renders the US belowaverage in terms of investor protection. Last, we use the anti self-dealing index introduced by Djankov et al. (2008). In contrast to the previous indices, this index does not rely on the laws in force but instead builds on the laws and regulations applicable in a hypothetical transaction in which majority shareholders exploit their power at the expense of minority investors. The applicable laws and consequences of this behavior are evaluated on a percountry basis by attorneys in 102 different countries. The quality of the shareholder protection in the reference case is expressed by a score ranging between 0 and 1 (Panel D of Table 4).

Table 4: Investor protection by country The table lists the different investor protection ratings used for each country. Panel A displays the shareholder protection index based on the anti-director rating and the rule-of-law score originally developed by LaPorta et al. (1998) (LLSV 1998). Panel B displays the shareholder protection index based on the revised anti-director rights index of Djankov et al. (2008)) and the rule-of-law score provided by the International Country Risk group as of January 2010 (DLLS 2008 (1). Panel C reports the revised anti-director index developed by Spamann (2010), and Panel D lists the anti-self-dealing index described by Djankov et al. (2008) (DLLS 2008 (2)).

Panel A DLLS 2008 (1) Spam an 2010

Panel B

Panel C

Index source:

LLSV 1998

Panel D DLLS 2008 (2) Shareholder protection 1.67 4.59 4.17 3.33 4.00 4.00 4.00 2.67 5.00 2.50 4.00 1.67 4.00 4.00 2.25 4.00 3.33 n/a n/a n/a n/a n/a n/a n/a n/a 3.48 Anti self dealing index 0.65 0.95 0.38 0.28 0.33 0.42 0.20 0.42 0.37 0.27 0.46 0.54 0.46 0.79 0.22 0.21 0.44 0.29 0.33 0.18 n/a n/a n/a n/a n/a 0.41

Country 10.00 8.57 8.98 9.23 10.00 10.00 10.00 8.33 7.80 10.00 10.00 10.00 10.00 7.80 6.18 10.00 8.68 n/a n/a n/a n/a n/a n/a n/a n/a 5.00 4.29 2.69 0.92 3.00 4.00 2.00 0.83 3.12 2.00 2.00 0.00 3.00 3.12 1.24 2.00 2.60 n/a n/a n/a n/a n/a n/a n/a n/a 2.46 3 5 3.5 3.5 3.5 3.5 2.5 2 5 3 4 3 3.5 5 2 2.5 2.5 2 4 2 n/a n/a n/a n/a n/a 8.33 9.17 8.33 8.33 10.00 10.00 10.00 6.67 8.33 8.33 10.00 8.33 10.00 10.00 7.50 10.00 8.33 7.50 8.33 6.67 n/a n/a n/a n/a n/a 2.50 4.59 2.92 2.92 3.50 3.50 2.50 1.33 4.17 2.50 4.00 2.50 3.50 5.00 1.50 2.50 2.08 1.50 3.33 1.33 n/a n/a n/a n/a n/a 2.88 2 5 5 4 4 4 4 4 6 3 4 2 4 4 3 4 4 n/a n/a n/a n/a n/a n/a n/a n/a 8.33 9.17 8.33 8.33 10.00 10.00 10.00 6.67 8.33 8.33 10.00 8.33 10.00 10.00 7.50 10.00 8.33 n/a n/a n/a n/a n/a n/a n/a n/a

Num ber of deals Rule of the law Shareholder protection Shareholder protection Anti director rights

Anti director right index

Anti director rights

Rule of the law

Rule of the law

United States United Kingdom France Germ any Sw eden Norw ay Netherlands Italy Spain Sw itzerland Denm ark Belgium Finland Ireland-Rep Greece Austria Portugal Poland Czech Republic Hungary Isle of Man Jersey Guernsey Monaco Liechtenstein Average

1,871 630 142 97 87 82 75 63 55 38 37 31 29 27 22 15 10 10 6 6 4 3 2 2 1

5 5 3 1 3 4 2 1 4 2 2 0 3 4 2 2 3 n/a n/a n/a n/a n/a n/a n/a n/a

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What becomes apparent in the comparison of the different quantifications of the indices is that the US is rated among the strongest investor protection regimes only if measured by the original and potentially erroneous index of LaPorta et al. (1998). The more recent measurements place the US in the upper middle with respect to investor protection. This finding already casts doubt on the explanatory power of investor protection for the higher premiums in the US. The UK, on the contrary, is consistently rated as the country with the highest shareholder protection. We use a multiple regression model to test whether the different measures of investor protection explain higher bid premiums in the US and UK. All models are estimated including fixed effects for the year and the targets industry measured at the 1-digit SIC code. Table 5 displays the results.
Table 5: Multiple regression analysis including shareholder protection The table shows the results of the multiple regression on the takeover premiums. US Target and UK Target equal 1 if the target is located in the US or UK, respectively. Shareholder protection LLSV 1998 represents the shareholder protection index, as developed by LaPorta et al. (1998). Shareholder protection DLLS 1998 and Shareholder protection Spamann 2010 represent the revised shareholder protection indices of Djankov et al. (2008) and Spamann (2010). Antiself-dealing index DLLS 2008 represents the anti-self-dealing measure developed by Djankov et al. (2008). LN Target market cap. is the logarithm of the targets market capitalization in the fiscal year prior to the announcement. Crossborder equals 1 if the targets and acquirers nation do not match. Hostile acquisition, Tender offer and Contested bid equal 1 if the deal attitude is flagged as hostile, the deal is conducted through a tender offer or more than one bidder is involved. Target stock return represents the targets stock return from -150 to -30 days. Target RoA is the targets return on assets in the fiscal year prior to the acquisition. LN Target Q represents the targets Tobins Q. Percent sought and Percent held at announcement represent the percentage of the target that the acquirer is seeking to acquire and the percentage that the acquirer already holds at the announcement, respectively. Diversifying deal equals 1 if the first two digits of the targets and acquirers primary SIC codes do not match. Subsequently amended and Private acquirer equal 1 if the initial offer is increased or if the acquirer is flagged as a private company. Cash consideration and Financial acquire equal 1 if the consideration exclusively consists of cash or if the acquirer is a financial investor. All models include dummies for the year and the targets industry. T-values are reported in brackets based on the Huber/White/sandwich estimator for robust standard errors.

Model (1) US Target UK Target Shareholder protection LLSV 1998 Shareholder protection DLLS 2008 Shareholder protection Spamann 2010 Anti self dealing index DLLS 2008 LN Target market cap. Cross-Border Hostile acquisition Tender offer Contested bid -3.079 *** [-8.47] 5.373 *** [4.15] -4.227 ** [-2.47] 6.536 *** [4.55] 4.433 *** [2.71] 7.5 *** [2.63] -1.698 [-0.73] 1.206 [1.38]

Model (2) 12.29 *** [7.15] -2.693 [-1.13]

Model (3) 15.701 *** [5.61] -1.345 [-0.73]

Model (4) 9.041 *** [2.82] -3.148 [-0.55]

2.384 ** [2.14] 2.402 ** [2.19] 6.924 [0.77] -3.046 *** [-8.43] 5.169 *** [4.02] -4.218 ** [-2.48] 6.495 *** [4.54] 4.208 ** [2.57] -3.093 *** [-8.51] 5.476 *** [4.22] -4.216 ** [-2.48] 6.452 *** [4.49] 4.449 *** [2.73] -3.074 *** [-8.49] 5.227 *** [4.06] -4.155 ** [-2.44] 6.655 *** [4.66] 4.328 *** [2.64]

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Target stock return Target RoA LN Target Q Perc sought Percent held at announcement Diversifying deal Subsequently amended Private acquirer Cash consideration Financial acquirer N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

-13.326 *** [-4.31] -0.199 *** [-3.71] -1.889 [-1.45] 0.097 [1.51] -0.199 ** [-2.5] -0.651 [-0.57] -0.352 [-0.21] -6.875 *** [-5.19] 5.968 *** [3.92] -2.965 ** [-2.24] 3,311 21.9% 21.1% 22.51 ***

-13.334 *** [-4.3] -0.201 *** [-3.74] -1.821 [-1.41] 0.093 [1.48] -0.192 ** [-2.49] -0.763 [-0.67] -0.339 [-0.21] -6.669 *** [-5.06] 5.786 *** [3.81] -2.941 ** [-2.24] 3,333 21.8% 21.0% 22.69 ***

-13.324 *** [-4.31] -0.199 *** [-3.71] -1.904 [-1.47] 0.096 [1.5] -0.196 ** [-2.47] -0.612 [-0.54] -0.386 [-0.24] -6.893 *** [-5.21] 5.898 *** [3.87] -3.077 ** [-2.32] 3,311 22.0% 21.1% 22.71 ***

-13.374 *** [-4.29] -0.199 *** [-3.71] -1.704 [-1.32] 0.108 * [1.74] -0.186 ** [-2.4] -0.744 [-0.66] -0.313 [-0.19] -6.656 *** [-5.05] 5.834 *** [3.84] -2.906 ** [-2.21] 3,333 21.8% 20.9% 22.39 ***

In Model (1), we follow Rossi and Volpin (2004) and replicate their shareholder protection index. Rossi and Volpin (2004) find that the index has a significant influence on the bid premiums when they control for target size, cross-border acquisitions, hostile bids, tender offers and contested bids. However, when they include dummies for the US and UK targets to control for the fact that nearly 75% of their observations are located in these countries, the coefficient of the shareholder protection index is no longer significantly different from zero. The coefficients of the two country dummies in turn, are significantly positive. They conclude that the influence of their shareholder protection measure is driven by deals with US and British targets. In a separate regression, we replicate their analysis and find largely the same results (Appendix I). In Model (1) of Table 5, we control for a set of further variables including dummies for US and UK targets and find that the shareholder protection index has no significant influence on the bid premiums. The US dummy, in turn, is highly significant: acquirers offer premiums for US targets that are, on average, 7.5% percentage points higher than premiums for targets in continental Europe. Bid premiums in the UK are, on the contrary, not significantly different from those in continental Europe.

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In Model (2), we measure the shareholder protection using the revised antidirector rights index of Djankov et al. (2008), which reflects the regulatory status as of 2003 and, hence, better matches our sample period. The analysis shows that shareholder protection has a significantly positive influence. However, it does not explain the higher bid premiums in the US. The marginal effect of US targets increases to 12.29 percentage points. We find similar results when we use the revised anti-director index developed by Spamann (2010) in Model (3). The marginal effect of the US dummy increases even further, whereas the influence of the shareholder protection index remains almost unchanged. Last, we test the influence of the anti-self-dealing index of Djankov et al. (2008) in Model (4). The coefficient of the index is insignificant. The US dummy, however, remains highly significant although it reduces in magnitude. The results of the analysis in Table 5 indicate that the higher takeover premiums in the US are robust if we control for shareholder protection. Depending on the measure of shareholder protection, acquirers offer between 7.5 and 15.7 percentage points more for targets located in the United States. Investor protection does not explain the differences in bid premiums between the US and Europe documented in Table 2. In contrast to Rossi and Volpin (2004), our UK dummy is insignificant in all models. We do not find any significant difference between average premiums in the UK and continental Europe. The reason for this may be multi-layered. First, the sample of Rossi and Volpin (2004) covers transactions in 35 countries around the world, whereas we limit our sample to deals in the US and Europe. Hence, our UK dummy captures the difference in bid premiums relative to the average level of bid premiums in continental Europe, whereas in Rossi and Volpin (2004), the coefficient reflects the difference relative to the average premiums in all remaining countries. If the premiums in the additional countries covered by Rossi and Volpin (2004) are lower than the European average, then this may explain the lack of significance of our UK dummy. Second, the result may be due to a different dependent variable. We calculate the bid premiums based on actual per-share consideration information and relative to the average target share price over a 20-day window, whereas Rossi and Volpin (2004) use Thomson One Bankers estimate of the premium. Finally, the differences may be rooted in different sample compositions. Rossi and Volpin (2004) investigate the period from 1990 to 1999, whereas we examine the period from 2000 to 2009.

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4 Indirect influence of investor protection on bid premiums


Investor protection may also influence bid premiums in less direct ways. First, better investor protection may increase competition and thus lead to higher bids in the market for corporate control. Second, different levels of investor protection may lead to different shareholder structures and to different types of blockholders. Competition, shareholder structure and shareholder composition are driven by institutional settings (Roe (2006)) and possibly by investor protection; thus, we analyze them separately. Competition on the market for corporate control and bid premiums Alexandridis et al. (2010) investigate the influence of competition on the market for corporate control and provide evidence that the level of competition is significantly related to target announcement returns and takeover premiums. They argue that in a highly competitive environment, acquirers tend to bid more aggressively and offer higher premiums to consummate the deal. Hence, stronger competition leads to higher premiums and target announcement returns. They document different levels of competition across countries, and their competition index is highest for the Anglo-Saxon markets. However, Alexandridis et al. (2010) do not show whether this influence can explain the differences in mean bid premiums across countries. We aim to bridge that gap and control for competition in our multiple regression analysis. To measure the level of competition, we use the same approach as Alexandridis et al. (2010) and calculate the percentage of public firms in a country that were traded on the market for corporate control in a given year. We first retrieve the total number of listed companies per year for each country from the World Banks WDI database. We then use Thomson One Banker to extract the number of total control deals. We define a deal as a total control deal if the acquirer owns less then 50% before the announcement and is seeking to own more than 50% after the announcement, with a deal value of at least 10 million Euros. The competition index is defined as the ratio of annual deals to the total population of public companies for the same year. We again use a multiple regression model to analyze whether the degree of competition explains the differences in takeover premiums. The results are shown in Table 6.

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Table 6: Influence of competition on bid premiums The table shows the result of the regression with the bid premiums as the dependent variable. US Target and UK Target are both dummies equal to 1 if the target is located the US or UK, respectively. Competition index represents the ratio of all deals announced in a given year divided by the total number of public companies in a country in the same year. Shareholder protection LLSV 1998 represents the shareholder protection index as developed by LaPorta et al. (1998). Shareholder protection DLLS 1998 and Shareholder protection Spamann 2010 represent the revised shareholder protection indices of Djankov et al. (2008) and Spamann (2010). Anti-self-dealing index DLLS 2008 represents the antiself-dealing measure developed by Djankov et al. (2008). LN Target market cap. is the logarithm of the targets market capitalization in the fiscal year prior to the announcement. Cross-border equals 1 if the targets and acquirers nation do not match. Hostile acquisition equals 1 if the deal attitude is flagged as hostile. Tender offer equals 1 if the deal is conducted through a tender offer. Contested bid equals 1 if more than one bidder is involved. Target stock return represents the targets stock return from -150 to -30 days. Target RoA is the targets return on assets in the fiscal year prior to the acquisition. LN Target Q represents the targets Tobins Q. Percent sought and Percent held at announcement represent the percentage of the target that the acquirer is initially seeking to own post-acquisition and the percentage that the acquirer already holds at the announcement, respectively. Diversifying deal equals 1 if the first two digits of the targets and acquirers primary SIC codes do not match. Subsequently amended equals 1 if the initial offer is increased. Private acquirer equals 1 if the acquirer is flagged as a private company. Cash consideration equals 1 if the consideration exclusively consists of cash. Financial acquirer equals 1 if the acquirer is a financial investor. All models include dummies for the year and the targets industry. T-values are reported in brackets based on the Huber/White/sandwich estimator for robust standard errors.

Model (1) US Target UK Target Competition index Shareholder protection LLSV 1998 Shareholder protection DLLS 2008 Shareholder protection Spaman 2010 Anti self dealing index DLLS 2008 LN Target market cap. Cross-border Hostile acquisition Tender offer Contested bid Target stock return Target RoA LN Target Q Perc sought Percent held at announcement Diversifying deal -3.03 *** [-8.32] 3.648 *** [2.86] -3.823 ** [-2.25] 3.267 *** [2.61] 3.153 * [1.96] -13.4 *** [-4.2] -0.225 *** [-4.2] -1.321 [-1.02] 0.196 *** [3.56] -0.15 * [-1.95] -1.532 [-1.35] 1.304 *** [5.41]

Model (2) 7.552 *** [2.66] -0.759 [-0.33] 0.403 [1.39] 0.829 [0.94]

Model (3) 11.313 *** [5.89] -2.244 [-0.97] 0.364 [1.32]

Model (4) 14.427 *** [4.94] -1.037 [-0.57] 0.448 [1.58]

Model (5) 8.864 *** [2.76] -1.365 [-0.24] 0.391 [1.4]

2.206 ** [2.03] 2.305 ** [2.12] 4.205 [0.47] -3.079 *** [-8.48] 5.282 *** [4.08] -4.095 ** [-2.4] 6.591 *** [4.59] 4.403 *** [2.69] -13.343 *** [-4.3] -0.198 *** [-3.69] -1.842 [-1.42] 0.089 [1.39] -0.207 *** [-2.59] -0.709 [-0.62] -3.043 *** [-8.43] 5.089 *** [3.96] -4.124 ** [-2.42] 6.544 *** [4.58] 4.173 ** [2.55] -13.343 *** [-4.29] -0.2 *** [-3.74] -1.793 [-1.39] 0.085 [1.35] -0.201 *** [-2.59] -0.833 [-0.73] -3.086 *** [-8.5] 5.36 *** [4.13] -4.099 ** [-2.41] 6.513 *** [4.54] 4.398 *** [2.69] -13.339 *** [-4.3] -0.198 *** [-3.7] -1.877 [-1.45] 0.085 [1.33] -0.207 *** [-2.6] -0.697 [-0.61] -3.07 *** [-8.49] 5.131 *** [3.99] -4.062 ** [-2.38] 6.683 *** [4.68] 4.305 *** [2.63] -13.376 *** [-4.29] -0.199 *** [-3.7] -1.691 [-1.31] 0.099 [1.58] -0.196 ** [-2.52] -0.815 [-0.72]

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Subsequently amended Private acquirer Cash consideration Financial acquirer

0.361 [0.22] -6.644 *** [-4.98] 6.481 *** [4.3] -3.138 ** [-2.36] 3,333 20.9% 20.1%

-0.304 [-0.19] -6.862 *** [-5.18] 5.916 *** [3.89] -2.887 ** [-2.18] 3,311 21.9% 21.1%

-0.301 [-0.18] -6.649 *** [-5.04] 5.749 *** [3.79] -2.868 ** [-2.18] 3,333 22.0% 21.0%

-0.331 [-0.2] -6.87 *** [-5.19] 5.839 *** [3.84] -2.978 ** [-2.25] 3,311 22.0% 21.1%

-0.282 [-0.17] -6.632 *** [-5.02] 5.802 *** [3.82] -2.84 ** [-2.16] 3,333 21.8% 21.0%

N R R adjusted

*** significant at 1%, ** significant at 5%, * significant at 10%

If we control for deal and firm characteristics, we find a positive and significant influence of the level of competition on bid premiums (Model 1). This pattern is in line with the results of Alexandridis et al. (2010). In Models (2) to (5), we additionally control for the US and UK locations of the targets and include the four different measures for shareholder protection previously employed. The coefficient of the competition proxy reduces substantially and loses significance in all four models. As before, the coefficient of the US dummy is highly significant in all models and ranges between 7.5 and 14.4 percentage points. The influence of the variables for shareholder protection is unaffected by the inclusion of the competition proxy. The shareholder protection proxy is significant in two out of the four models. The results indicate that the higher premiums in the US are a robust phenomenon, even if we control for competition and various measures of shareholder protection. Target shareholder concentration The influence of the target shareholder concentration on variations in bid premiums between countries has remained unaddressed in research thus far. However, the seminal paper of Grossman and Hart (1980) suggests that the targets ownership concentration is an important determinant of the takeover premium. We use the information in Worldscope on the targets percentage of closely held shares as a proxy for the ownership structure. This number represents the percentage of shares held by officers and directors, shares held in trusts, shares held by another company and shares held by individuals who hold 5% or more of the outstanding shares. These data are available for 2,852 observations in our sample. Although only an imperfect proxy for the ownership concentration, it is the only available data source that provides time series of ownership concentration simultaneously for both Europe and the United States.

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A comparison of the mean and median percentage of closely held shares reveals significant differences between the regions (Table 7). Targets in the US and UK show a similar concentration of ownership, with approximately 30% closely held shares (median 24.7% in the US and 26.7% in the UK). The percentage of closely held shares of targets in continental Europe, on the contrary, is significantly higher, reaching approximately 46% for both the mean and the median.
Table 7: Target closely held shares by region
The table lists the average and median percentage of the targets closely held shares. Data stem from Worldscope. The test of difference is based on a two-sample t-test (mean) and the Wilcoxon Rank-sum test (median).

US (1) Mean Median N 29.35% 24.67% 1,615

UK (3) 29.80% 26.73% 586

CoE (3) 45.61% 46.41% 651

(1) - (2) -0.45% -2.06%

Test of difference (1) - (3) -16.27% *** -21.74% ***

(2) - (3) -15.81% *** -19.68% ***

*** significant at 1%, ** significant at 5%, * significant at 10%

Based on these univariate findings and the theory of the free-rider problem, the differences in the target shareholder concentration may explain the heterogeneity in bid premiums. We test the explanatory power in a multiple regression setting. The results are reported in Table 8. The sample size is reduced by 12 observations due to missing investor protection indices. Model (1) of Table 8 replicates the previous findings of Table 6 for the reduced sample with available data on the ownership concentration. Bid premiums in the US are significantly higher, even if we control for the heterogeneity in the degree of competition and for investor protection using the revised shareholder protection score of Djankov et al. (2008). In Model (2), we add the percentage of target closely held shares as an additional control variable. The coefficient of the target shareholder concentration is negative but not significant. The coefficient of the US dummy remains almost unchanged. We recalculate the models with the alternative measures of shareholder protection (results are reported in Appendix II). The results remain qualitatively unchanged. We conclude that higher bid premiums in the US are a robust phenomenon, even if we control for systematic differences in shareholder concentration.

Differences between takeover premiums across countries


Table 8: Multiple Regressions: Closely held shares of the target
The table shows the results of the regression with the bid premiums as the dependent variable. US Target and UK Target are both dummies equal to 1 if the target is located in the US or UK, respectively. Target closely held shares is the percentage of shares that are closely held, as reported by Worldscope. Competition index represents the number of all deals announced in a given year divided by the total number of public companies in a country in the same year. Shareholder protection DLLS 1998 represents the revised shareholder protection index of Djankov et al. (2008). LN Target market cap. is the logarithm of the targets market capitalization in the fiscal year prior to the announcement. Cross-border equals 1 if the targets and acquirers nations do not match. Hostile acquisition equals 1 if the deal attitude is flagged as hostile. Tender offer equals 1 if the deal is conducted through a tender offer. Contested bid equals 1 if more than one bidder is involved. Target stock return represents the targets stock return from -150 to -30 days. Target RoA is the targets return on assets in the fiscal year prior to the acquisition. LN Target Q represents the targets Tobins Q. Percent sought and Percent held at announcement represents the percentage of the target that the acquirer is initially seeking to own post-acquisition and the percentage that the acquirer already holds at the announcement, respectively. Diversifying deal equals 1 if the first two digits of the targets and acquirers primary SIC codes do not match. Subsequently amended equals 1 if the initial offer is increased. Private acquirer equals 1 if the acquirer is flagged as a private company. Cash consideration equals 1 if the consideration exclusively consists of cash. Financial acquirer equals 1 if the acquirer is a financial investor. All models include dummies for the year and the targets industry. T-values are reported in brackets based on the Huber/White/sandwich estimator for robust standard errors.

70

Model (1) US Target UK Target Target closely held shares Competition index Shareholder protection DLLS 2008 LN Target market cap. Cross-Border Hostile Tender offer Contested bid Target stock return Target RoA LN Target Q Perc sought Percent held at announcement Diversifying deal Subsequently amended Private acquirer Cash consideration Financial acquirer 0.397 [1.27] 1.428 [1.17] -3.11 [-7.93] 4.866 [3.53] -6.081 [-2.15] 6.793 [4.31] 3.235 [1.85] -12.666 [-3.71] -0.196 [-3.52] -0.915 [-0.68] 0.107 [1.43] -0.172 [-1.88] -1.627 [-1.35] 0.527 [0.31] -5.514 [-3.87] 5.146 [3.15] -2.494 [-1.76] 8.652 *** [4.01] -2.723 [-1.06]

Model (2) 8.367 [3.89] -3.051 [-1.18] -0.025 [-0.92] 0.379 [1.22] 1.428 [1.17] -3.198 [-7.77] 4.824 [3.51] -6.159 [-2.18] 6.752 [4.27] 3.127 [1.79] -12.63 [-3.69] -0.195 [-3.5] -0.842 [-0.62] 0.098 [1.28] -0.173 [-1.89] -1.606 [-1.33] 0.455 [0.27] -5.463 [-3.83] 5.259 [3.2] -2.523 [-1.78] ***

*** *** ** *** * *** ***

*** *** ** *** * *** ***

*** *** *

*** *** *

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

2,840 21.6% 20.6% 19.56 ***

2,840 21.6% 20.6% 19.05 ***

Differences between takeover premiums across countries Target shareholder composition

71

Not only the ownership concentration but also the ownership composition, i.e. the relation of inside versus outside ownership, may differ across countries. For their sample of western European companies, Faccio and Lang (2002) report, for instance, strong differences in ownership patterns between continental Europe, the UK and Ireland. Widely held firms are significantly less common in continental Europe. In contrast, family-controlled companies dominate the market. The heterogeneity in ownership composition across countries may influence takeover premiums, as the theoretical models of Stulz (1988) and Shleifer and Vishny (1986) suggest. A higher proportion of active outside ownership in the shareholder structure of firms in Europe versus those in the US may result in higher takeover premiums for US targets. Due to insufficient data, we cannot directly analyze the ownership composition of our sample firms. Instead, we employ an indirect assessment of the ownership compositions role. If a higher proportion of active outside shareholders in European firms drives the differences in bid premiums between the regions, we expect takeover premiums for targets in Europe to decrease more sharply when the target is more closely held. Figure (1) plots the bid premiums in the regions conditional upon the percentage of closely held shares. The upper half shows the average bid premium, whereas the lower half plots the frequency of observations. The influence of the targets shareholder structure indeed differs between continental Europe and the US. Bid premiums for targets in continental Europe decrease with a rising percentage of closely held shares, which is in line with the prediction of Grossman and Hart (1980) and Holmstrm and Nalebuff (1992). In contrast, takeover premiums in the US show a slightly rising trend with increasing ownership concentration. The influence of ownership concentration in the United Kingdom remains inconclusive.

Differences between takeover premiums across countries


Figure 1: Bid premium and target closely held shares by region

72

The upper chart displays the mean bid premium in percent per region clustered by the deciles of the targets closely held shares. The lower chart shows the number of observations clustered by the deciles of the targets closely held shares.

Bid Premium in %

United States
40

United Kingdom

Continental Europe

Observations

0-10%20% 100 0 10% -

200

300

400

10

20

30

0-10% 10% - 20%

20% - 30%

30% - 40%

40% - 50%

50% - 60%

0-10%20% 10% -

20% - 30%

30% - 40%

40% - 50%

50% - 60%

20% - 30%

30% - 40%

40% - 50%

50% - 60%

60% - 70%

60% - 70%

60% - 70%

We test these results as well in a multiple regression model. As reported in Model (1) of Table 8, the undifferentiated inclusion of the targets closely held shares proportion does not show any significance. This finding is in line with our prediction in Figure (1), as the antipodal influences of ownership concentration in the US and continental Europe cancel each other out. We allow the shareholder structure to have differing influences on the bid premiums in the US, UK and Europe by including interaction variables. We interact the US and UK dummies separately with the percentage of closely held shares and include both variables in our model. Table 9 reports the results. The inclusion of the interaction variables changes the interpretation of the coefficients. The two US and UK country dummies now represent the marginal effect of the targets location for the case of widely held targets. The variable Target closely held shares reflects the influence of the percentage of the targets closely held shares in Europe, whereas the sum of Target closely held shares and the interaction variables Target closely held shares _x_ US or Target closely held shares _x_ UK measure the influence of the percentage in the US and UK, respectively.

>70%

>70%

>70%

Differences between takeover premiums across countries


Table 9: Multiple Regressions: Target closely held shares
This table depicts the results of a multiple regression analysis. US Target and UK Target are both dummies equal to 1 if the target is located the US or UK, respectively. Target closely held shares is the percentage of shares that are closely held, as reported by Worldscope. Competition index represents the number of all deals announced in a given year divided by the total number of public companies in a country in the same year. Target closely held _x_ US and Target closely held _x_ UK are interaction terms of target closely held shares and the US and UK dummy, respectively. Competition index represents the number of all deals announced in a given year divided by the total number of public companies in a country in the same year. Shareholder protection DLLS 1998 represents the revised shareholder protection index of Djankov et al. (2008). LN Target market cap. is the logarithm of the targets market capitalization in the fiscal year prior to the announcement. Cross-border equals 1 if the targets and acquirers nation do not match. Hostile acquisition equals 1 if the deal attitude is flagged as hostile. Tender offer equals 1 if the deal is conducted through a tender offer. Contested bid equals 1 if more than one bidder is involved. Target stock return represents the targets stock return from -150 to -30 days. Target RoA is the targets return on assets in the fiscal year prior to the acquisition. LN Target Q represents the targets Tobins Q. Percent sought and Percent held at announcement represent the percentage of the target that the acquirer is initially seeking to own post-acquisition and the percentage that the acquirer already holds at the announcement, respectively. Diversifying deal equals 1 if the first two digits of the targets and acquirers primary SIC codes do not match. Subsequently amended equals 1 if the initial offer is increased. Private acquirer equals 1 if the acquirer is flagged as a private company. Cash consideration equals 1 if the consideration exclusively consists of cash. Financial acquirer equals 1 if the acquirer is a financial investor. All models include dummies for the year and the targets industry. T-values are reported in brackets based on the Huber/White/sandwich estimator for robust standard errors.

73

e US Target UK Target Target closely held shares Target closely held _x_ US Target closely held _x_ UK Competition index Shareholder protection DLLS 2008 LN Target market cap. Cross-Border Hostile Tender offer Contested bid Target stock return Target RoA LN Target Q Perc sought Percent held at announcement Diversifying deal

Model (1) 3.426 [1.25] -4.929 [-1.4] -0.104 ** [-2.35] 0.133 ** [2.44] 0.027 [0.37] 0.339 [1.09] 1.476 [1.22] -3.171 *** [-7.63] 4.598 *** [3.33] -6.147 ** [-2.2] 6.641 *** [4.2] 2.799 [1.59] -12.652 *** [-3.71] -0.193 *** [-3.46] -0.854 [-0.63] 0.072 [0.9] -0.198 ** [-2.11] -1.658 [-1.38] continued on next page

Differences between takeover premiums across countries

74

Subsequently amended Private acquirer Cash consideration Financial acquirer N R R adjusted F


*** significant at 1%, ** significant at 5%, * significant at 10%

0.332 [0.19] -5.403 *** [-3.8] 5.119 *** [3.13] -2.686 * [-1.91] 2,840 21.8% 20.7% 18.47 ***

The results confirm the findings of Figure (1). The influence on the ownership structure on bid premiums for continental European targets is significantly negative (coefficient -0.104 percentage points). The influence of the targets shareholder concentration on UK targets premiums is also negative, although the effect is slightly less strong (coefficient -0.104 + 0.027 = -0.077 percentage points). However, for targets in the US, the bid premiums rise slightly with increasing shareholder concentration ( -0.104+ 0.133 = 0.029 percentage points). Most importantly, however, the US dummy becomes insignificant if we control for this antipodal influence of the ownership structure. This indicates that the takeover premiums do not differ between the regions for low percentages of target closely held shares. To reinforce this finding, we investigate the bid premiums for a subsample of targets with a disperse ownership structure. In these firms, neither the shareholder concentration nor the shareholder composition should have an influence on the bid premiums. Any remaining differences in the bid premiums across countries for this subsample must be caused by reasons beyond ownership concentration and composition. We define targets as widely held if the targets percentage of closely held shares is equal to or below 10%, which results in 473 observations. Table 10 displays the results.

Differences between takeover premiums across countries


Table 10: Bid premiums for targets with less than 10% closely held shares
The table lists the average and median bid premiums offered for targets with equal to or less than 10% closely held shares. The bid premium is calculated as the percent difference between the initial offer price and the targets average share price between -10 and -30 days prior to the acquisition announcement. The test of difference is based on a two-sample t-test (mean) and the Wilcoxon Rank-sum test (median).

75

US vs. UK US UK CoE Diff. P-value

US vs. CoE Diff. P-value

UK vs. CoE Diff. P-value

Mean Median N

34.29% 28.44% 311

31.41% 25.87% 107

35.30% 28.63% 55

2.88% 2.57%

0.402 0.228

-1.01% -0.19%

0.821 0.892

-3.89% -2.76%

0.451 0.368

We do not find any significant differences in the average and median bid premiums offered for targets with a disperse shareholder structure. The mean premium for US targets is 34.3%, whereas the mean premiums in Europe average 31.4% in the UK and 35.3% in continental Europe. The differences are not significant. The same pattern holds true for the median bid premiums. We test the robustness of the results in a multiple regression analyses (the results are reported in Appendix III). The findings of the univariate analysis in Table 10 are confirmed. Premiums do not differ between the countries for targets with less than ten percent closely held shares. The results also provide evidence that alternative explanations for the higher premiums in the US, such as better restructuring opportunities in the Anglo-Saxon countries, are not sufficient to explain the heterogeneity. These structural advantages would be applicable for disperse held targets as well. Taken together, our findings show that the higher bid premiums for US targets are driven by differences in the influence of the target shareholder concentration the regions. Based on previous theoretical models (Stulz (1988); Shleifer and Vishny (1986)) and empirical evidence (Bauguess et al. (2009)), we argue that systematic differences in the shareholder composition cause this antipodal influence, i.e., a higher proportion of inside ownership in the US and a higher proportion of active outside ownership in European firms can explain the effect.

5 Conclusion
We contribute to the literature on the market for corporate control by analyzing the differences in bid premiums between the US, the UK and continental Europe. In line with previous research, we find that acquirers offer a significant 11.9 percentage points more for US targets than for targets in continental Europe and a significant 5.8 percentage points more for companies in the UK relative to firms in continental

Differences between takeover premiums across countries

76

Europe. Investor protection is often mentioned as an explanation for these substantial differences; we analyze whether this holds true. We use recently developed quantifications of investor protection and thus extend the research of Rossi and Volpin (2004). Whereas some of the shareholder protection indicators have a significant influence on bid premiums, none explain the higher bid premiums offered in the United States. This also holds true when we run a multiple regression model and control for deal and target characteristics. We find that bid premiums in the UK are no longer different from the average level in continental Europe. We further investigate the indirect effects that investor protection regulations may have on the bid premiums by either stimulating stronger competition on the market for corporate control or fostering a more disperse ownership structure. Although our proxy for competition, which is modeled after Alexandridis et al. (2010), has some influence on the bid premiums, it does not explain the higher premiums in the US. Similarly, the inclusion of a control for the target shareholder structure in our models does not significantly reduce the higher premiums in the US. We finally consider differences in shareholder composition, i.e., inside vs. outside blockholders, across countries as a possible explanation for different bid premiums. Theoretical models and empirical evidence for the US suggest that bid premiums decrease with outside ownership (e.g., pension funds) and increase with inside ownership (e.g., management). The data availability about ownership structure in Europe is not sufficient to test the influence of shareholder ownership directly. We approximate the influence of this effect in a multiple regression model, including interaction variables to allow for differing shareholder composition per country. As predicted by Grossman and Hart (1980) and Holmstrm and Nalebuff (1992), the average bid premiums in the UK and continental Europe decrease with rising ownership concentration in the target. In the US, on the contrary, premiums slightly increase with rising shareholder concentration, which is in line with findings of high insider ownership in the US (Holderness (2009)). For widely held targets, we do not find any significant differences in bid premiums among the US, the UK and continental Europe. The results support the notion that the higher takeover premiums in the US are a result of systematic differences in shareholder composition rather than investor protection. The question of whether investor protection might influence shareholder composition in the long term is beyond the scope of this paper.

Differences between takeover premiums across countries

77

References
Alexandridis, G., D. Petmezas, and N.G. Travlos (2010), "Gains from Mergers and Acquisitions Around the World: New Evidence", Financial Management (39), 16711695. Bargeron, Leonce L., Frederik P. Schlingemann, Ren M. Stulz, and Chad J. Zutter (2008), "Why do private acquirers pay so little compared to public acquirers?", Journal of Financial Economics (89), 375390. Bauguess, Scott W., Sara B. Moeller, Frederik P. Schlingemann, and Chad J. Zutter (2009), "Ownership structure and target returns", The Journal of Corporate Finance (15), 4865. Betton, Sandra, B. E. Eckbo, and Karin S. Thorburn (2008), "Corporate takeovers", Handbook of Corporate Finance, 291429. Bloomberg (2010), "2010 M&A Outlook , Bloomberg Press, London. Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (2008), "The law and economics of self-dealing", Journal of Financial Economics (88), 430465. Faccio, Mara, and Larry H. P. Lang (2002), "The ultimate ownership of Western European corporations", Journal of Financial Economics (65), 365395. Grossman, Sanford J., and Oliver D. Hart (1980), "Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation", The Bell Journal of Economics (11), 42-64. Holderness, Clifford G. (2009), "The myth of diffuse ownership in the United States", The Review of Financial Studies (22), 13771408. Holmstrm, Bengt R., and Barry J. Nalebuff (1992), "To the raider goes the surplus?", Journal of Economics and Management Strategy (1), 3762. Jindra, Jan, and Ralph A. Walkling (2004), "Speculation spreads and the market pricing of proposed acquisitions", The Journal of Corporate Finance (10), 495 526. LaPorta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny (1998), "Law and finance", The Journal of Political Economy (106), 11131155. LaPorta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer (1999), "Corporate ownership around the world", The Journal of Finance (54), 471517. Martynova, Marina, and Luc Renneboog (2006), "Mergers and acquisitions in Europe" , in Luc Renneboog, and Piet Duffhues, eds.: Advances in corporate finance and asset pricing (Elsevier, Amsterdam). Roe, Mark J. (2006), "Legal Origins and Modern Stock Markets", Harvard Law Review (120), 460527. Rossi, Stefano, and Paolo F. Volpin (2004), "Cross country determinants of mergers and acquisitions", Journal of Financial Economics (74), 277304. Schwert, G. W. (2000), "Hostility in takeovers", The Journal of Finance (55), 2599 2640. Shleifer, Andrej, and Robert W. Vishny (1986), "Large shareholders and corporate control", The Journal of Political Economy (94), 461488. Spamann, Holger (2010), "The "Antidirector rights index" revisited", The Review of Financial Studies (23), 467486.

Differences between takeover premiums across countries Stulz, Ren M. (1988), "Managerial control of voting rights", Journal of Financial Economics (20), 2554.

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Differences between takeover premiums across countries

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Appendix I:
The table depicts the results of a multiple regression analysis with the bid premiums as the dependent variable and the same controls used by Rossi and Volpin (2004). US Target and UK Target are both dummies equal to 1 if the target is located the US or UK, respectively. Shareholder protection LLSV 1998 represents the shareholder protection index as developed by LaPorta et al. (1998). LN Target market cap. is the logarithm of the targets market capitalization in the fiscal year prior to the announcement. Cross-border equals 1 if the target and acquirers nations do not match. Hostile acquisition equals 1 if the deal attitude is flagged as hostile. Tender offer equals 1 if the deal is conducted through a tender offer. Contested bid equals 1 if more than one bidder is involved. All models include dummies for the year and the targets industry. T-values are reported in brackets based on the Huber/White/sandwich estimator for robust standard errors.

Model (1) US Target UK Target Shareholder protection LLSV 1998 LN Target market cap. Cross-border Hostile acquisition Tender offer Contested bid 4.519 *** [10.96] -3.465 *** [-9.98] 6.504 *** [4.78] -4.566 [-1.57] 5.105 *** [4.3] 3.841 ** [2.37] 3,311 14.8% 14.2% 22.99 ***

Model (2) 12.678 *** [4.4] 1.847 [0.77] 1.159 [1.26] -3.579 *** [-10.32] 7.244 *** [5.36] -4.56 [-1.62] 8.368 *** [6.18] 4.494 *** [2.75] 3,311 15.8% 15.1% 22.25 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

Differences between takeover premiums across countries

80

Appendix II:
This table replicates the findings of Table 8 using the same control variables but different measures for investor protection. Shareholder protection LLSV 1998 represents the shareholder protection index, as developed by LaPorta et al. (1998). Shareholder protection Spamann 2010 represents the revised shareholder protection indices of Spamann (2010). Anti-self-dealing index DLLS 2008 represents the anti-self-dealing measure developed by Djankov et al. (2008).

Model (1) US Target UK Target Target closely held shares Competition index Shareholder protection LLSV 1998 Shareholder protection Spamann 2010 Anti self dealing index DLLS 2008 LN Target market cap. Cross-Border Hostile Tender offer Contested bid Target stock return Target RoA LN Target Q Perc sought Percent held at announcement Diversifying deal Subsequently amended Private acquirer Cash consideration Financial acquirer N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

Model (2) 10.635 *** [3.41] -2.42 [-1.23] -0.022 [-0.81] 0.448 [1.39]

Model (3) 7.028 * [1.95] -1.925 [-0.31] -0.025 [-0.92] 0.397 [1.26]

6.382 * [1.95] -1.79 [-0.71] -0.021 [-0.79] 0.425 [1.32] 0.352 [0.36]

1.617 [1.4] 1.712 [0.17] -3.206 *** [-7.72] 5.115 *** [3.68] -5.995 ** [-2.11] 6.867 *** [4.32] 3.343 * [1.91] -12.627 *** [-3.7] -0.194 *** [-3.46] -0.847 [-0.62] 0.105 [1.33] -0.172 * [-1.82] -1.541 [-1.27] 0.437 [0.26] -5.635 *** [-3.93] 5.357 *** [3.26] -2.507 * [-1.76] 2,821 21.6% 20.6% 19.07 *** -3.208 *** [-7.72] 5.18 *** [3.71] -5.998 ** [-2.12] 6.828 *** [4.3] 3.349 * [1.92] -12.62 *** [-3.7] -0.194 *** [-3.47] -0.878 [-0.65] 0.102 [1.29] -0.173 * [-1.84] -1.548 [-1.28] 0.398 [0.23] -5.621 *** [-3.93] 5.299 *** [3.22] -2.571 * [-1.8] 2,821 21.7% 20.6% 19.11 *** -3.215 *** [-7.78] 4.842 *** [3.52] -6.159 ** [-2.19] 6.828 *** [4.33] 3.228 * [1.85] -12.651 *** [-3.69] -0.195 *** [-3.47] -0.786 [-0.58] 0.107 [1.4] -0.171 * [-1.87] -1.597 [-1.32] 0.478 [0.28] -5.457 *** [-3.83] 5.322 *** [3.24] -2.505 * [-1.77] 2,840 21.6% 20.5% 19.01 ***

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Appendix III:
The table replicates the multiple regression model shown in Table 6 for the subsample of targets with less than 10% closely held shares.

Model (1) US Target UK Target Shareholder protection LLSV 1998 Shareholder protection DLLS 2008 Shareholder protection Spaman 2010 Anti self dealing index DLLS 2008 Competition index LN Target Market Cap Cross Border Hostile Tender Offer Contested Bid BAH 150_30 Target RoA LN Target Q Perc sought Percent Held at announcement Diversifying Deal Subsequently Amended Private Acquirer Cash Consideration Buyside Fin Sponsor 1.868 [1.97] -4.174 [-4.21] 5.212 [1.5] -9.47 [-1.37] 8.27 [2.3] 5.389 [1.25] -23.93 [-4.82] -0.067 [-0.57] -8 [-2.45] -0.368 [-0.62] -0.798 [-1.23] -4.136 [-1.49] 3.862 [0.83] -3.458 [-0.92] 3.113 [0.95] 0.422 [0.12] ** *** 5.706 [0.55] 1.921 [0.22] -0.152 [-0.04]

Model (2) 9.23 [1.6] -6.072 [-0.63]

Model (3) 13.418 [1.08] -2.547 [-0.33]

Model (4) 1.7 [0.2] -7.064 [-0.47]

5.168 [0.98] 4.01 [0.72] 15.087 [0.67] 1.663 [1.9] -4.127 [-4.16] 5.075 [1.44] -9.568 [-1.38] 8.321 [2.3] 5.362 [1.25] -24.112 [-4.86] -0.068 [-0.58] -7.992 [-2.45] -0.368 [-0.65] -0.788 [-1.22] -4.305 [-1.52] 4 [0.86] -3.306 [-0.88] 2.997 [0.9] 0.413 [0.12]

**

***

**

1.562 [1.67] -4.026 [-4.17] 5.026 [1.44] -9.249 [-1.35] 8.142 [2.25] 5.247 [1.21] -24.118 [-4.85] -0.071 [-0.61] -8.146 [-2.49] -0.452 [-0.74] -0.812 [-1.24] -4.299 [-1.54] 3.809 [0.82] -3.267 [-0.87] 2.958 [0.89] 0.518 [0.15]

* ***

**

***

**

1.657 [1.61] -4.129 [-4.21] 5.348 [1.51] -9.643 [-1.4] 8.177 [2.25] 5.403 [1.26] -23.922 [-4.81] -0.069 [-0.59] -8.165 [-2.49] -0.402 [-0.68] -0.797 [-1.24] -4.185 [-1.51] 3.805 [0.82] -3.384 [-0.91] 3.158 [0.96] 0.315 [0.09]

* ***

***

**

**

***

***

**

**

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

470 30.1% 24.4% 4.35 ***

470 30.3% 24.6% 4.44 ***

470 30.1% 24.5% 4.37 ***

470 30.1% 24.5% 4.46 ***

The conglomerate discount revisited

82

THE CONGLOMERATE DISCOUNT REVISITED

Marc Rustige
Frankfurt School of Finance & Management, Sonnemannstrae 9-11, 60314 Frankfurt am Main, Germany E-mail: m.rustige@fs.de, Phone: +49 69 154008 389

Abstract: Corporate diversification does not necessarily reduce shareholder value. Abnormal stock returns upon announcement of acquisitions depend on the acquirers previous extent of corporate diversification. In our sample of 7,453 European transactions, we find that diversifying acquisitions are value enhancing when the acquirer is not yet diversified. For already highly diversified acquirers, on the contrary, diversifying acquisitions yield significantly lower abnormal returns than comparable focusing deals. We conclude that a moderate diversification is consistent with shareholder value maximization.

JEL-Classification: G34, F21

Key words: Corporate control, diversification, event study

The conglomerate discount revisited

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1 Introduction
Does corporate diversification destroy shareholder value? The majority of finance literature suggests that conglomerates trade at a discount relative to the imputed value of their individual business segments. The notion of this conglomerate discount was first shaped by the seminal papers of Lang and Stulz (1994) and Berger and Ofek (1995). Both document that multi-segment firms are associated with a lower value than a surrogate portfolio of comparable singlesegment firms. Berger and Ofek (1995) conclude that diversification reduces value. However, the existence of such a diversification discount has become a controversially discussed topic in scholarly journals. Questions of causal interference (Campa and Kedia (2002); Graham et al. (2002); Villalonga (2004a)) and potential flaws in measurement (Mansi and Reeb (2002); Villalonga (2004b); Glaser and Mller (2010)) have been addressed recently and evidence on the wealth effects of corporate diversification is far from conclusive. At the same time, diversification continues to be an important phenomenon. Approximately 30% of all firms operate in more than one industry (Ammann et al. (2011)), and about 38% of the European acquisitions in our sample are diversifying. We try to shed light on the wealth effects in these transactions and investigate the announcement returns in diversifying and focusing deals. Our results suggest that diversifying acquisitions earn significantly higher abnormal returns if the acquirer is not yet diversified. However, for acquirers that are already highly diversified, we document positive returns to refocusing acquisitions. We use an event study rather than the surrogate portfolio approach, as it provides substantial advantages. First, the announcement returns are forward looking and serve well as an indicator for the post-acquisition performance of merging firms (Healy et al. (1992)). Second, by applying the event study method, we can bypass some disadvantages of the surrogate portfolio approach that have been previously criticized. The event study method is less subject to measurement problems that are associated with segment reporting inaccuracies (Villalonga (2004b)). Furthermore, the bias that may results from the use of book value of debt in the valuation of the surrogate portfolio (Mansi and Reeb (2002); Glaser and Mller (2010)) is circumvent. Finally, the endogeneity problem put forward by Graham et al. (2002), whereupon the diversification discount is caused by the acquisition of ex

The conglomerate discount revisited

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ante already discounted targets, is resolved. By controlling for other effects known to influence abnormal returns, we are able to isolate the wealth effect of diversification. We investigate a sample of 7,453 completed European acquisitions between 1985 and 2009. In accordance with the literature (e.g., Moeller et al. (2004)), we only consider acquisitions in which the acquirer owns less than 50% of the target pre-acquisition and more than 50% post-acquisition. Additionally, the deal value has to be greater than ten million Euros and the acquirer has to be matchable to Datastream and Worldscope. Deals are classified as diversifying based on the Standard Industrial Classification (SIC) code, as reported by Thomson One Banker. If the first two digits of the acquirers primary SIC code do not match with any of the targets SIC codes, the deal is classified as diversifying/unrelated and

focusing/related otherwise. We do not find evidence that diversifying acquisitions destroy value. The acquirers abnormal returns in the event window [-3;3] are small but significantly positive for related and unrelated acquisitions. The difference between both groups is insignificant. The same holds true for absolute changes in the acquirers market value in monetary terms. Neither related nor unrelated acquisitions are on average associated with a reduction in the acquirers equity value. Even if we control for common firm and deal characteristics in a multiple regression model, we find no significant difference in the wealth effects of related and unrelated deals. We further investigate whether diversifying acquisitions generate significantly lower expected synergies, as measured by the combined cumulated abnormal returns of the acquirer and target. The overall wealth generated is significantly positive for diversifying and focusing deals. The difference between both is insignificant. These findings cast doubt on the notion that diversification destroys value. Based on a theoretical review of benefits and costs of diversification, we hypothesize that the wealth effects of related and unrelated acquisitions are depending on the acquirers current extent of diversification. We argue that the marginal benefits of diversification, such as the internal capital market, increased debt capacity and tax advantages, decline the more diversified the acquirer already is. In turn, the marginal costs of diversification, such as inefficient crosssubsidization, divisional rent seeking and principal agency problems, increase with the number of business lines that the conglomerates management already oversees at the time of the transaction. The net value effect from balancing the

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costs and benefits of diversification will decrease with every business line that is added. The results from a multiple regression analysis support our hypotheses. For the subsample of diversifying deals, we find that the abnormal returns are negatively related to the number of business lines in which the acquirer is active. Every additional business line reduces the announcement return in unrelated acquisitions by 0.13 percentage points. The opposite effect is true for focusing transactions, i.e., for deals in which the target is related to the acquirers core business segment. The more diversified the acquirer is, the higher the announcement returns for these focusing deals. The results are robust in a joint model with interaction terms, which delivers further insights: acquirers that are focused prior to the deal announcement earn higher abnormal returns in diversifying acquisitions than in focusing transactions. The marginal effect of diversification, however, decreases the more business lines the acquirer oversees. For companies with more than three unrelated business segments, the marginal effect is significantly negative. Our results suggest that on average, a moderate expansion into unrelated business segments enhances value as long as the degree of diversification is manageable such that the benefits outweigh the costs. We contribute to the current literature on corporate diversification in two ways. First, for a comprehensive and contemporary sample of European acquisitions, we show that on average, diversifying acquisitions are not associated with a reduction in shareholder value and do not yield lower expected synergies, as measured by the combined announcement returns of the acquirer and target. Second, we extend the previous literature on diversification by empirically showing that the benefits of diversification are dependent on the acquirers current degree of diversification. For focused acquirers, the benefits of diversification outweigh the costs. However, the more diversified the acquirer already is, the less beneficial is a further diversification: highly diversified acquirers earn higher abnormal returns if they refocus and strengthen their core business. This finding has implications for how the value effects of diversification have to be assessed. The undifferentiated notion that diversification is on average, value destructive is incomplete. Acquisitions that result in a moderate diversification are in line with shareholder wealth maximization. The remainder of the paper is organized as follows. In Section 2, we review the literature on the wealth effects of corporate diversification and develop our hypothesis. In Section 3, we present our sample composition and methods. Section

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4 reports the wealth effects of diversifying vs. focusing acquisitions, and in Section 5, we test the influence of the acquirers current degree of diversification on the announcement returns. Section 6 concludes.

2 Literature review and hypothesis generation


Wealth effects of corporate diversification Empirical research on the wealth effects of corporate diversification can be classified by the method of measurement. On the one hand, the surrogate portfolio approach has been used most extensively. Thereby, the market value of a conglomerate is benchmarked to the implied value of its individual business segments as if they were operated as separate firms. For each segment, an imputed value is calculated using a portfolio of single-segment firms as reference. On the other hand, short short-term event studies have been utilized to analyze the immediate value effects upon the announcement of diversifying acquisitions and refocusing programs. Lang and Stulz (1994) and Berger and Ofek (1995) initiated the empirical discussion on diversification using the surrogate portfolio approach. Both find that conglomerates trade at a discount relative to their focused peers and interpret this as evidence that diversification is value destroying. Berger and Ofek (1995) quantify the conglomerate discount to be approximately 13-15%. The finding of a lower valuation for conglomerates has been shown to be robust for other geographic areas and time spans (Servaes (1996); Lins and Servaes (1999); Fauver et al. (2003)). More recently, a strand of research has challenged the notion of this conglomerate discount with respect to the causal interference and the measurement method. Graham et al. (2002) find that diversifying acquirers tend to bid for unrelated targets that are trading a discount already prior to the deal announcement. The authors show that the lower valuation of conglomerates can be explained by the addition of these discounted targets. Campa and Kedia (2002) and Villalonga (2004a) find evidence that a firms decision to diversify is not random and that after the endogeneity is controlled for, the discount reduces. However, Hoechle et al. (2011) document that even after controlling for endogeneity and corporate governance, the diversification discount remains robust. Mansi and Reeb (2002) and Glaser and Mller (2010) address the issue of a methodical bias that results from using the book value of debt rather than the market value in valuing conglomerates.

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Villalonga (2004b) argues that the discount is an artifact of inaccuracies in segment reporting and shows that by using plant-level data, the discount turns into a premium. Thus, results based on the surrogate portfolio provide as much evidence that corporate diversification is value reducing as that it is not. Event studies, on the contrary, provide a measure to assess the changes in the acquirers market value when unrelated acquisition are announced and compare it to related transactions. Evidence for the US market suggests that diversifying deals yielded negative announcement returns during the 1980s and early 1990s, while focusing acquisitions earned positive returns (Morck et al. (1990); Maquieira et al. (1998); Chevalier (2004)). However, the difference between both is generally insignificant. For the recent period between 1999 and 2006, Akbulut and Matsusaka (2010) report that related and unrelated acquisitions yield significantly negative returns. For the European market, Doukas et al. (2002) document significantly positive returns to related and significantly negative returns to unrelated acquisitions of Swedish companies between 1980 and 1995. Martynova and Renneboog (2006) use a pan-European sample of the acquisition wave in the 1990s and report positive acquirer returns for related deals and insignificant returns for unrelated acquisitions. Abnormal returns have also been used to assess corporate refocusing announcements. Comment and Jarrell (1995) and Berger and Ofek (1999) document positive excess returns upon the announcement of divestments, which they interpret as evidence that diversification did not pay off. Benefits and costs of corporate diversification Closely associated with the wealth effects of corporate diversification is the discussion on the benefits and costs of diversification. The direct benefits from operational synergies are limited due to the unrelated nature of the business operations in conglomerates. Potential value enhancers rest within the indirect benefits from financial synergies. Lewellen (1971) argues that the lower volatility of cash flows in conglomerates results in a higher debt capacity of the firm. Majd and Myers (1987) assert that due to asymmetric tax burdens, total tax liabilities can be reduced in multi-segment firms. However, the most significant advantage of diversification is the internal capital market. Funds that are generated in the conglomerates business lines are accumulated on this market and can be reallocated by the groups management between the segments to fund the most profitable projects. This process is associated with various benefits. First, internal funding is less costly than external financing due to lower transaction costs and

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information asymmetries (Hadlock et al. (2001); Martin and Sayrak (2003)). Second, the underinvestment problem in otherwise capital-constraint segments can be resolved by cross-subsidization (Lamont (1997); Shin and Stulz (1998)). Finally, Stein (1997) argues that the internal capital market provides the group management with the opportunity to engage in winner picking. Investment projects are more transparent for the groups management than for outside investors, and the funds can be allocated more efficiently and more flexibly. The costs of diversification are closely linked to agency problems in multisegment firms that exist at two levels: between the firm and division management and between the firm management and outside investors. As for the former, the firm-level managers are responsible for allocating the markets funds to the segments, whereas the divisional managers compete with each other for the allotment of resources. A strand of research focuses on the inefficiencies that result from the rent-seeking behavior of the divisional management. Scharfstein and Stein (2000) and Rajan et al. (2000) show that this rent-seeking may result in funds being directed away from the most profitable projects towards inferior projects such that the outcome of the capital allocation process is less efficient than if the firms had raised its funding externally. The conflict between firm management and outside investors, on the contrary, is caused by managers who engage in unrelated acquisitions to pursue private benefits rather than shareholder value maximization. Diversifying acquisitions allow for private benefits in two ways. First, following Amihud and Lev (1981), the personal wealth of the firm-level management is highly related to the income that is earned from their position. Therefore, the risk of their wealth strongly correlates to the risk of the company. Corporate diversification, which reduces a firms bankruptcy risk, provides an effective means for the management to diversify their personal employment risk. A second private benefit for the management is tied to the predictions of Jensen (1986), who argues that management has an incentive to pursue empire building. Large corporations are associated with more management power and prestige (Stulz (1990)) and higher executive compensation (Jensen and Murphy (1990); Bebchuk and Grinstein (2007)). Diversification facilitates empire building to the extent that internal capital markets provide excess cash and a higher debt capacity. This conflict between outside investors and firm-level management intensifies especially in firms that have a weak corporate governance regime, and negative wealth effects of diversification have been related to poor corporate governance. However, Hoechle et al. (2011) document that a significant and sizeable wealth effect of diversification remains

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even after controlling for corporate governance. This result is in accordance with the predictions that agency conflicts within conglomerates are not attenuated with an elaborated governance system. Marginal benefits and costs of diversification A perspective that has remained largely unaddressed in empirical research on diversification is the dependence of the diversification benefits and costs on the extent to which the acquirer is already diversified. We argue that the marginal benefits of adding an additional unrelated business line decline with the number of industries in which the acquirer is active. The marginal costs of diversification, in turn, increase with a rising degree of diversification. Hence, the resulting marginal net effects of diversification from balancing the benefits and costs decrease the more diversified acquirer already is. We discuss these effects in detail and derive testable implications for our sample. A firm that emerges from a focused entity to a diversified company with two unrelated business lines can realize most of the advantages of diversification. Compared to a single segment firm, the establishment of the internal capital market allows the management to pool and redistribute cash flows between the segments, which reduces the dependency of the cash-constraint business lines on the external capital market. Similarly, the combination of two unrelated business lines reduces the firms cash-flow volatility, which increases the debt capacity. Any additional diversification will certainly further add towards these advantages; however, the marginal benefit will be lower. Whereas the absolute size of the internal capital market will further grow by moving from two to three unrelated business lines, the incremental return from the diversification effect of combining the unrelated assets will be lower. Following standard portfolio theory, the marginal reduction of portfolio volatility decreases in the number of combined assets (Elton et al. (2011)). Thus, we argue that the marginal benefits of diversification are positive but decreasing. The costs of diversification, in turn, increase the more diversified the firm is. Rajan et al. (2000) show theoretically that as long as diversity, measured by the heterogeneity in investment opportunities in a firm, is low, the reallocation of funds between the divisions will be efficient, and the internal capital market can enhance value. However, as diversity increases, the inefficiency of the capital allocation increases. Using a sample of US firms between 1980 and 1993, the authors show that the valuation difference between a diversified firm and a surrogate portfolio of

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single-segment firms increases with the diversity in investment opportunities within the conglimerate. Billett and Mauer (2003) complement this research by showing that for conglomerates with a high level of diversity, the number of business lines has a negative influence on the valuation discount. Additionally, we argue that with an increasing degree of diversification, transparency decreases and information asymmetries increase. The more business lines have to be supervised, the less informed will the firm-level managers be about the true growth potential in each segment. This problem reduces the group managers ability to engage in winner picking. Furthermore, this issue results in higher opportunities for the divisional managers to engage in rent-seeking. This reasoning is closely related to the predictions of Stein (1997), who argues that internal capital markets may function more efficiently when headquarters oversee a small and focused set of projects. Last, to the extent that the funds available at the managements discretion increase with the size of the internal capital market, we argue that the problem of empire building is more severe in diversified firms. A good governance system may attenuate this empire building. However, the inefficiencies of the capital allocation within a diversified firm can be assumed to be independent of the corporate governance regime. Thus, we argue that the marginal costs of diversification increase with the number of unrelated industries that the acquirer is active in at the acquisition announcement. Based on these hypotheses, we derive two testable implications. First, given the decreasing marginal benefits of diversification, abnormal returns in unrelated acquisitions will be lower the more business segments the acquirer already oversees. Second, the abnormal returns will be higher in focusing deals when the acquirer is highly diversified. The rational behind is that any attenuation of a firms degree of diversification will be perceived positively for these firms since the costs of diversification outweigh its benefits. Focusing deals (i.e., acquisitions of targets that are within the acquirers primary business line) increase the concentration of the business activities and, thus, reduce the costs associated with diversification.

3 Data and methods


We use the Thomson One Banker database to compile a sample of completed mergers and acquisitions across Europe between 1985 and 2009. In order to be included in the sample, the acquirer or the acquirers parent needs to be publicly listed and located in Europe. The target needs to be a public entity, private entity or

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a subsidiary of a public or private entity. We only consider deals in which the acquirer owns less than 50% of the targets stock prior to the deal announcement and is seeking to own more than 50% after deal completion with a minimum deal value of ten million Euros. We further require the acquirer to be successfully matched to Datastream and Worldscope. We calculate the acquirers abnormal announcement returns based on the market model approach (Brown and Warner (1980); Brown and Warner (1985)) and use a 250 trading day estimation period starting 300 days before the announcement. In order to avoid any distortion of the parameters due to infrequently traded stocks, we require a minimum of 100 days with returns during the estimation period. We also replicated the analysis using trade-to-trade returns to account for thinly traded stocks (Maynes and Rumsey (1993); Bartholdy et al. (2007)). The results remain unaffected. We finally exclude all observations in which the share price does not show any movement in the windows [-5;5] around the announcement. This results in a sample of 10,115 deals with abnormal returns. We use the Worldscope database to retrieve information on the acquirers return on assets, total assets, total common equity and market capitalization at the end of the fiscal year before the announcement. The accounting information on the acquirers profitability and market value is used as a control variable and the data on the book value of assets is used to calculate Tobins Q as a measure of the growth opportunities. Following La Porta et al. (2002) we calculate Tobins Q as the book value of total asset minus the book value of equity plus the market value of equity divided by the book value of total assets. This information is available for 9,785 observations. To limit the influence of distorting outliers, we truncate the sample and exclude 333 observations in the 1st and 99th percentile for the cumulate abnormal returns in the event windows [-3;3] and for the acquirers return on assets. Based on the same rationale, we further exclude 250 observations in which the deal value, the acquirers market capitalizations, total assets, common equity or Tobins Q is above the 99th percentile. Because some of the accounting ratios are not meaningful for companies in the financial service industry, we exclude all firms with a primary SIC code in this division (SIC 6000 - 6999) and all firms that are flagged by Thomson as financial sponsors. We also exclude all acquirers whose primary industry is public administration. These exclusions results in a total of 7,453 observations in our final sample.

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Table 1: Sample description The table shows the distribution of our 7,453 observations with respect to the acquirers and targets nation and the number of announcements per year.

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Panel A: Distribution by acquirer nation Country United Kingdom France Sweden Germany Netherlands Italy Spain Switzerland Ireland-Rep Finland Norway Denmark Belgium Portugal Austria Greece Poland Iceland Luxembourg Guernsey Turkey Other Deals 3,695 667 431 409 357 312 303 218 190 182 178 138 94 54 52 50 45 20 16 11 11 20

Panel B: Distribution by target nation Country United Kingdom France Germany Italy Spain Sweden Netherlands Norway Denmark Finland Switzerland Belgium Ireland-Rep Poland Portugal Austria Turkey Greece Czech Republic Romania Hungary Luxembourg Lithuania Other Outside Europe - thereof USA Deals 2,319 519 415 278 264 260 251 144 109 103 102 90 77 58 52 43 37 31 28 15 14 12 6 46 2,180 1,465 7,453

Panel C: Distribution by year Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Deals 22 72 120 216 236 226 162 132 138 176 216 236 310 455 557 644 409 354 309 332 463 513 556 388 211

Total

7,453

Total

Total

7,453

Table 1 depicts the distribution of the observations by country and year. In accordance with the findings of other studies that focus on mergers and acquisitions (M&A) in Europe (e.g., Martynova and Renneboog (2006)), Panel A documents a strong dominance of UK acquirers. With respect to the target countries in Panel B, we find approximately 70% of the deals to be intra-European. Again, the UK, with its active market for corporate control, dominates the sample with almost 30% of the observations being UK targets. The distribution of the announcements per year in Panel C reflects the increase in M&A volume around the turn of the century, as well as the rise prior to the financial crisis. The classification of the deals into diversifying and focusing transactions is central for our analysis and far from trivial. Following the methodology used in previous studies (Matsusaka (1993); Chevalier (2004); Akbulut and Matsusaka (2010)), we classify our deals into related and unrelated acquisitions by comparing

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the Standard Industrial Classification (SIC) codes of the acquirer and target. The SIC code system is hierarchically organized with 1,504 different industries at the four-digit level, 416 industry groups at the three-digit level and 83 major industry groups at the two-digit level. The application of the SIC scheme to measure the relatedness between the acquirer and the target is associated with two distinct choices. First, we may compare the SIC-codes of the target and the acquirer at the two-, three- or four-digit level. Second, we may choose to only compare the primary SIC codes of the acquirer and target or to consider the SIC codes of the other (secondary) business lines as well. With regard to the first choice, the literature does not provide any specific guidance. Previous authors have defined unrelated acquisitions by comparing acquirers and targets at the two-digit level (Matsusaka (1993); Hubbard and Palia (1999); Chevalier (2004)), the three-digit level (Akbulut and Matsusaka (2010)) and the four-digit level (Morck et al. (1990)). For our study, we argue that comparing the acquirer and target SIC codes at the two-digit level (major industry group) provides the most suitable option to distinguish between related and unrelated business areas. Figure (1), which depicts the hierarchical logic exemplarily for the SIC code 2333 Mens and Boys neck wear, provides further support for this notion: At the three-digit SIC code level and especially at the four-digit SIC code level, operations of the neighboring codes are not very distinct from each other. We strive to establish sufficiently strict hurdles for a deal to be classified as diversifying. Using the threeor four-digit level increases the risk of classifying a deal as diversifying when it is in fact related.

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Figure 1: The figure displays exemplarily the hierarchical logic of the standard industrial classification logic for the SIC code 2333 (Mens and Boys Neckwear).

Division Agriculture, Forestry, and Fishing

Major industry group 20 Food and Kindred Products

Industry Group 231 Men's And Boys' Suits, Coats, And Overcoats

Industry 2321 Men's and Boys' Shirts, Except Work Shirts

Mining

21 Tobacco Products

232 Men's And Boys' Furnishings, Work Clothing, And Allied Garments 233 Women's, Misses', And Juniors' Outerwear

2322 Men's and Boys' Underwear and Nightwear

Construction

22 Textile Mill products

2333 Men's and Boys' Neckwear

Manufacturing

23 Apparel and Other Finished Products Made From Fabrics and Similar Materials ... ...

234 Women's, Misses', Children's, And Infants'

2334 Men's and Boys' Separate Trousers and Slacks

...

...

...

...

...

...

As for the second choice, we only consider the acquirers primary SIC code. Accordingly, any acquisition outside of the acquirers main business line is classified as diversifying. This procedure is coherent, as any acquisition in which the target is not related to the acquirers core business eventually increases the degree of diversification. Even if the target is related to one of the acquirers secondary business lines, the concentration of business activities will decrease following the acquisition. As for the question of which target SIC codes to consider, we argue that a comparison of the acquirers primary industry with all of the targets business lines provides the most suitable procedure. If the targets secondary business lines are neglected, we may incorrectly classify a deal as diversifying although the targets secondary industry matches with the acquirers primary business line. Therefore, as a reference case, we define an acquisition as diversifying if the first two digits of the acquirers primary SIC code do not match any of the targets SIC codes. To assure that our results are not driven by this definition, we check the robustness of the findings using two alternative definitions: on the one hand only use the acquirers and targets primary codes and on the other hand compare all codes of both, the acquirer and the target. Based on this reference definition, our sample is divided into 4,622 focusing transactions and 2,831 diversifying deals. This distribution is largely in accordance with the ratios that are documented in other studies (Akbulut and Matsusaka

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(2010)). Table 2 depicts the proportion of diversifying acquisitions by the acquirers industry division.
Table 2: Observations by acquirer industry division The table shows the distribution of the total of 7,453 deals in the sample and the proportion of diversifying deals across the industries as classified by the SIC codes (1-digit).

Primary division Agriculture Construction Manufacturing Mining Retail Trade Services Transportation and Ut Wholesale Trade Total

N 21 252 3,807 261 425 1,416 971 300 7,453

Diversifying 81% 56% 40% 39% 44% 31% 31% 36% 38%

The sample is highly dominated by observations in the manufacturing industry, with more than half of all acquirers being primarily active in this area. With respect to the distribution of the diversification activity, cyclical industries, such as construction and retail trade tend to be associated with more unrelated acquisitions. We investigate the differences between diversifying and focusing firms and collate deal and firm characteristics which have been shown to influence announcement returns. We compare the mean and median of the acquirers market capitalization, deal value, relative size of the deal (i.e., deal value over the acquirers market capitalization), acquirers return on assets and Tobins Q. Additionally, we compare the consideration structure (cash vs. share), bid competition (challenged deal), targets organizational form (private, public or a subsidiary) and indicators on whether the deal is a tender offer, a hostile acquisition or a cross-border acquisition. Table 3 reports these results.

The conglomerate discount revisited


Table 3: Differences between diversifying and focusing acquisitions The table reports the summary statistics for our sample of 7,453 acquisitions announced between 1985 and 2009. Deals are classified as diversifying (DIV) if the acquirers primary SIC code at the two-digit level does not match any of the targets SIC codes at the two-digit level and focusing (FOC) otherwise. Acq. market cap represents the market capitalization at the end of the fiscal year, prior to the acquisitions announcement. Deal value is the value of the deal excluding assumed liabilities. Rel. size is the relative size of the deal and calculates as the deal value divided by the acquirers market capitalization. Return on assets stems from Worldscope. Tobins Q is calculated as total assets less total common equity plus the year-end market capitalization divided by total assets. Cash deal and Share deal are dummy variables that equal 1 if the deal consideration entirely consists of either cash or equity. Challenged deal is a dummy variable that equals 1 if more than one bidder is reported by Thomson One Banker. Private target, Public target and Subsidiary target are dummy variables that indicate the legal status of the target. Tender offer is a dummy with value 1 if the acquirer launches a tender offer for the target, and Hostile acquisitions equals 1 if the transactions attitude is described as hostile in Thomson One Banker. Cross-border is a binary variable with value 1 if the targets nation does not match the acquirers nation. Information on the deal characteristics and the indicators stem from Thomson One Banker, accounting information are from Worldscope. Test-statistics are based on the ordinary t-test (means), the Wilcoxon rank-sum test (median) and the Fisher exact test (proportions).

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FOC Acq. market cap ( Mio.) Deal value ( Mio.) Rel. size Return on assets Tobins Q 5,380 232 20% 8% 1.98

DIV

Mean Diff.

P-Value 0.041 0.000 0.053 0.139 0.000

FOC 1,209 50 6% 7% 1.53

DIV

Median Diff -82 * -10 *** -1% *** 0%

P-Value 0.074 0.000 0.000 0.156 0.001

4,826 -553 ** 160 16% 8% -72 *** -4% * 0%

1,127 41 5% 8%

1.83 -0.15 *** Proportion Diff DIV 0.41 0.02

1.48 -0.05 ***

FOC Cash deal Share deal Challenged deal Private target Public target Subsidiary target Tender offer Hostile acquisition Cross-border 0.40 0.05 0.02 0.37 0.19 0.44 0.12 0.01 0.60

P-Value 0.163 0.020 0.345 0.002 0.007 0.385 0.164 0.598 0.000

0.04 -0.01 ** 0.02 0.40 0.00 0.04 ***

0.17 -0.02 *** 0.43 -0.01 0.11 -0.01 0.01 0.00

0.53 -0.07 ***

*** significant at 1%, ** significant at 5%, * significant at 10%

Diversifying acquirers are smaller than focusing buyers, as measured by the acquirers market value, and diversifying deals are significantly smaller than focusing deals, as measured by the average and median deal value excluding assumed liabilities. This relationship is also reflected by the differences in relative size. The deal value in focusing deals accounts for 20% of the acquirers size on average (median 6%), whereas the diversifying targets tend to be smaller, relative to the acquirer at a mean of 16% (median 5%). Similarly, a comparison of Tobins Q reveals that diversifying acquirers have significantly lower growth opportunities in both mean and median terms. With respect to the deal characteristics, unrelated targets are less often paid for with shares. Furthermore, the targets in diversifying

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acquisitions are more frequent private entities and less often public firms. Last, diversifying deals are significantly less often cross-border.

4 Wealth effects of diversifying and focusing acquisitions


We investigate the short-term wealth effects of related and unrelated acquisitions first by presenting the acquirers change in market value in relative terms and second by analyzing the combined announcement returns for the acquirer and target. Announcement returns for diversifying vs. focusing acquisitions The reference event window for our cumulated abnormal returns are the seven days that surround the acquisition announcement (CAR[-3;3]). Table 4 depicts the results.
Table 4: Wealth effects of diversifying vs. focusing acquisitions The table shows the mean and median of cumulative abnormal returns upon the announcement of diversifying and focusing transactions. The cumulative abnormal returns are calculated based on a market model approach with an estimation window of 250 trading days starting 300 days before the first deal announcement. The test statistics are based on the ordinary t-test (means) and Wilcoxon rank-sum test (median).

Panel A: Mean acquirer announcement returns All Focusing Diversifying Diff.

(1)
CAR [3;3] T-value N 0.91% *** [13.42] 7,453

(2)
0.94% *** [10.81] 4,622

(3)
0.87% *** [7.96] 2,831

(4)
0.07% [0.49]

Panel B: Median acquirer announcement returns All CAR [3;3] Z-value N 0.55% *** [12] 7,453 Focusing 0.57% *** [9.73] 4,622 Diversifying 0.52% *** [7.06] 2,831 Diff. 0.05% [0.43]

*** significant at 1%, ** significant at 5%, * significant at 10%

The results in Panel A in Table 4 show that on average, shareholders of the acquirer gain approximately 0.91% in European M&A (Column 1). This result is in accordance with the findings of Alexandridis et al. (2010), who find that acquirers returns in Europe are on average, small but significantly positive. Columns (2) and (3) in Table 4 show the abnormal returns for focusing and diversifying acquisitions, respectively. Both groups earn significantly positive market reactions, and the

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returns are not statistically different from each other (Column (4)). Panel B in Table 4 replicates the results based on a median analysis. The interpretation remains unchanged. Again, the announcement returns are small but significantly positive for both diversifying and focusing acquisitions, and the difference between both groups is insignificant. As a robustness check, we calculate the absolute changes in the acquirers market value. The results of Moeller et al. (2004) suggest that large acquirers yield lower announcement returns. If our results in Table 4 are biased because of differences in the size between focusing and diversifying acquirers, we expect the absolute value changes to be significantly different. We compute the value changes by multiplying the cumulated abnormal returns with the acquirers market value on the day prior to the start of the event window (results not shown). The average absolute change in the acquirers market value is insignificantly different from zero, irrespective of the targets relatedness. In terms of the median, the analysis suggests a positive value increase around the acquisition. Focusing acquisitions result in a median value addition of 2.80 million Euros, whereas diversifying acquisitions lead to an increase in acquirers market value of 2.41 million Euros. The difference between both groups is insignificant. As a further robustness verification, we replicate the analysis in Table 4 for the event windows [-1;1] and [-5;5]. The qualitative interpretations do not change (Appendix I). We further check the validity of these findings in a multiple regression model and include the deal and firm characteristics that are reported in Table 3 as controls. Considering the dominance of UK acquirers and targets in our sample, we additionally include two additional dummies (UK acquirer and UK target). To account for industry and time fixed effects, we also include dummy variables for the acquirers and targets main industry divisions and for the announcement year (coefficients are not reported). Table 5 displays the results.

The conglomerate discount revisited


Table 5: Multiple regression model The table reports the results of the cross-sectional analysis with the cumulative abnormal returns as dependent variable. The abnormal returns are calculated based on a market-model approach with an estimation window of 250 trading days starting 300 days before the first deal announcement. The explanatory variable, Diversifying, equals 1 if the acquirers primary SIC code does not match any of the targets SIC codes at the 2-digit level. LN Acq. market cap is the logarithm of the acquirers market capitalization at the end of the fiscal year preceding the acquisition. LN Deal value is the logarithm of the deal value excluding assumed liabilities as reported by Thomson One Banker. Return on assets and LN Tobins Q represents the acquirers profitability and Tobins Q at the end of the fiscal year preceding the acquisition and stem from Worldscope. Cash deal, Tender offer, Cross-border, Challenged deal, Hostile acquisitions, Public target, UK acquirer and UK target are dummy variables. The respective information is taken from Thomson One Banker. Industry and time-fixed effects are controlled by dummies for the year of the announcement and the acquirers and targets first two digits of its primary SIC code. T-statistics are in parentheses and are calculated based on robust standard errors, applying the Huber/White/sandwich estimate of variance.

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Dependent variable

CAR[-3;3] (1)

CAR[-1;1] (2) 0.1175 [0.94] -0.4205 *** [-10.57] 0.3126 *** [6.14] -0.0057 [-0.52] 0.0004 [0] 0.3804 *** [3.45] 0.0129 [0.09] -0.0733 [-0.27] -0.2246 [-0.5] -0.3490 [-0.52] -0.9112 *** [-4.14] -0.6128 *** [-4.65] 0.0414 [0.28] 7,453 6.7% 4.8% 3.69 ***

CAR[-5;5] (3) 0.0692 [0.35] -0.5305 *** [-8.77] 0.3735 *** [5.06] 0.0490 *** [2.69] -0.8187 *** [-2.75] 0.4681 *** [2.67] 0.1751 [0.79] 0.0090 [0.02] -0.0958 [-0.14] 0.2056 [0.24] -1.0911 *** [-3.34] -0.2983 [-1.41] -0.2369 [-1.01] 7,453 5.5% 3.6% 2.96 ***

Diversifying LN Acq. market cap LN Deal value Return on assets LN Tobins Q Cash deal Cross-border Tender offer Challenged deal Hostile acquisition Public target UK acquirer UK target

-0.0248 [-0.16] -0.5279 *** [-10.79] 0.3462 *** [5.66] 0.0302 ** [2.18] -0.3446 [-1.54] 0.4024 *** [2.82] 0.2450 [1.4] -0.5028 [-1.53] -0.1255 [-0.23] 0.3488 [0.43] -0.8445 *** [-3.08] -0.5240 *** [-3.04] 0.0390 [0.21] 7,453 6.4% 4.5% 3.81 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

The results that are displayed in Model (1) of Table 5 confirm the findings of our bivariate analysis. The diversification dummy does not show any significant influence on the cumulated abnormal returns in the event window [-3;3]. The conclusion holds if the event windows [-1;1] and [-5;5] are investigated (Columns (2)

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and (3)). These results suggest that on average, diversifying deals do not result in lower abnormal returns when compared to the focusing transactions. The coefficients of the other variables are similar to those of earlier studies. The acquirers size shows a significantly negative influence, which suggests that the announcement returns are lower for large acquirers (Moeller et al. (2004)). Cash deals earn significantly higher abnormal returns, as compared to deals that include a stock consideration (Travlos (1987)), and the deals that involve public targets show significantly negative market reactions (Fuller et al. (2002)). Similar to what Faccio et al. (2006) document, we also find that announcement returns for acquirers from the UK are significantly lower, at least for two of the three tested event windows. Expected synergies in diversifying vs. focusing acquisitions We further test whether diversifying acquisitions are associated with lower expected synergies, which we approximate by the weighted combined returns of the bidder and target. We analyze the subsample of public target acquisitions for which we can calculate the target announcement returns. The calculation of the abnormal returns mirrors the method that was previously used for the acquirers announcement returns. The combined announcement returns are calculated by weighting the abnormal returns of the acquirer and target with the market value as of 50 trading days prior to the announcement. Table 6 shows these results. Panels A and B report the results for the mean and median, respectively.

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Table 6: Acquirer, target and combined announcement returns for public target acquisitions The table shows the mean and median of cumulative abnormal returns for the acquirer, the target and the combined entity upon the announcement of diversifying and focusing transactions. The cumulative abnormal returns are calculated based on a market model approach with an estimation window of 250 trading days starting 300 days before the first deal announcement. The combined cumulative abnormal returns are calculated by weighing the acquirer and target abnormal returns with the respective market value. Test statistics are based on the ordinary t-test (means) and the Wilcoxon ranksum test (median).

Panel A: Mean Focussing Acquirer CAR [3;3] T-value N Target CAR [3;3] T-value N Combined CAR [3;3] T-value N (1) 0.24% [0.87] 555 18.12% *** [23.91] 555 2.48% *** [9.51] 555 Diversifying (2) 0.60% * [1.67] 306 17.69% *** [18.31] 306 2.25% *** [6.55] 306 Diff. (3) -0.35% [-0.78]

Panel B: Median Focussing (4) -0.07% [0.29] 555 14.50% *** [18.4] 555 1.80% *** [8.32] 555 Diversifying (5) -0.20% [0.71] 306 16.50% *** [13.79] 306 1.09% *** [5.39] 306 Diff. (6) 0.13% [-0.59]

0.43% [0.35]

-2.00% [0.04]

0.23% [0.53]

0.71% [0.86]

*** significant at 1%, ** significant at 5%, * significant at 10%

The acquirers announcement returns for the reduced sample of the public target acquisitions are lower than those of the full sample in terms of the mean and median. These results are in accordance with the previous studies documenting that acquisitions of public targets yield lower announcement returns than those of private or subsidiary target acquisitions (Fuller et al. (2002); Faccio et al. (2006)). As in the full sample, the difference in acquirers abnormal returns between focusing and diversifying acquisitions is insignificant in terms of both the mean (Column (3)) and median (Column (6)). The targets earn significantly positive abnormal returns ranging from 17% to 18% in terms of the mean (Columns (1) and (2)) and from 14% to 16% in terms of the median (Columns (4) and (5)). Again, the targets stock price appreciations are not significantly different between focusing and diversifying acquisitions (Columns (3) and (6)). The combined abnormal returns show that both groups of acquisitions yield small but significantly positive wealth effects of 2.48% for focusing acquisitions (Column (1)) and 2.25% for diversifying acquisitions (Column (2)) (median: 1.80% and 1.09%, respectively). The difference is not significant. Akbulut and Matsusaka (2010) document a similar stock price pattern for the US. The expected synergies in related and unrelated acquisitions are on par. We verify the robustness of these findings. Specifically, we use the event window [35;1] to reflect that a significant portion of the value appreciation in the target occurs well before the announcement (Schwert (1996)). These results are reported in

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appendix II. Again, related and unrelated acquisitions do not show any significant difference in the pattern of the announcement returns.

5 Influence of the diversification degree


Thus far, our results show that unrelated firm expansions, on average, neither destroy shareholder value nor yield lower expected synergies. However, as hypothesized in Section 2, this perspective may be misleading. Specifically, we argue that the wealth effects in diversifying acquisitions depend on the degree of the acquirers degree of diversification. We test the implications laid out above and expect a negative relationship between the acquirer abnormal returns and the degree of diversification for diversifying acquisitions. Furthermore, we propose that a positive relationship exists between the degree of diversification and abnormal returns for acquisitions that increase the focus of the firm. We model the current extent of the acquirers diversification based on the number of major industries (two-digit SIC level) that are reported by Thomson One Banker. For each acquisition, up to 47 different four-digit SIC codes of the acquirer are listed in the database. We group these codes at the two-digit level. Table 7 shows the distribution of the diversification status.
Table 7: Acquirer diversification degree The table reports the number of deals by the acquirers degree of diversification. We proxy the acquirers diversification extent by the number of different two-digit SIC codes (major industry group).

# of acquirers' major industry groups 1 2 3 4 5 6 7+ Total

# of deals

2,096 2,083 1,427 904 451 292 200 7,453

In almost one quarter of the observations in our sample, the acquirer is active in only one major industry upon the announcement of the deal. However, we still find a

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large number of firms that have several unrelated business operations. In more than 25% of all observations, the acquirer is active in four or more major industries. We control for the number of the acquirers major industries in a multiple regression and test for the influence on the acquirers abnormal returns. We first run two separate regressions for diversifying and for focusing acquisitions and second examine the effect in a joint sample using interaction variables of the diversification dummy with the number of the acquirers major industry groups. The results are reported in Table 8. Model (1) replicates the analysis of Table 5, including the proxy for the degree of diversification. In the full sample, this proxy shows a positive yet insignificant influence. In Models (2) and (3), we test for the influence separately for diversifying and focusing acquisitions. The degree of diversification shows a negative influence on the abnormal returns in diversifying acquisitions (Model 2). For each additional business line in which the acquirer is active, the abnormal return reduces by 0.13 percentage points when controlling for deal and firm characteristics. This result confirms our first hypothesis: the more diversified the acquirer is at announcement, the lower the announcement returns for diversifying acquisitions. Given that the acquirers overall abnormal returns at the announcement of an acquisition are small, the magnitude can be considered economically significant. For the sample of focusing acquisition in turn, the relationship between the degree of diversification and the abnormal returns is significantly positive (Model 3). This result is in accordance with our second hypothesis: a more diversified acquirer will observe higher abnormal returns upon the announcement of a focusing acquisition, which attenuates the degree of diversification.

The conglomerate discount revisited


Table 8: Multiple regression model with the proxy for acquirer diversification The table reports the results of the cross-sectional analysis with the cumulative abnormal returns as dependent variable. The abnormal returns are calculated based on a market model approach with an estimation window of 250 trading days starting 300 days before the first deal announcement. The explanatory variable Diversifying equals 1 if the acquirers primary SIC code does not match any of the targets SIC codes at the two-digit level. Degree of diversification represents our proxy for the degree of acquirer diversification and equals the number of different two-digit SIC codes of the acquirer as reported by Thomson One Banker. Additionally, we include an interaction term of this proxy with the diversification dummy. LN Acq. market cap is the logarithm of the acquirers market capitalization at the end of the fiscal year preceding the acquisition. LN Deal value is the logarithm of the deal value excluding assumed liabilities as reported by Thomson One Banker. Return on assets and LN Tobins Q represents the acquirers profitability and Tobins Q at the end of the fiscal year preceding the acquisition and stem from Worldscope. Cash deal, Tender offer, Cross-border, Challenged deal, Hostile acquisitions, Public target, UK acquirer and UK target are dummy variables. The respective information is taken from Thomson One Banker. Industry and time fixed effects are controlled by dummies for the year of the announcement and the acquirers and targets first two digits of the primary SIC code. T-statistics are in parentheses and calculated based on robust standard errors, applying the Huber/White/sandwich estimate of variance.

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All (1) Diversifying (DIV) Degree of diversification Degree of diversification_x_ DIV LN Acq. market cap LN Deal value Return on assets LN Tobins Q Cash deal Cross-border Tender offer Challenged deal Hostile acquisition Public target UK acquirer UK target -0.5334 *** [-10.81] 0.3451 *** [5.64] 0.0302 ** [2.18] -0.342 [-1.53] 0.4008 *** [2.81] 0.2466 [1.41] -0.5017 [-1.53] -0.1297 [-0.24] 0.3389 [0.41] -0.8438 *** [-3.07] -0.5311 *** [-3.08] 0.0431 [0.23] 7,453 6.4% 4.5% 3.78 *** -0.0461 [-0.29] 0.0329 [0.81]

Diversifying (2)

Focussing (3)

All (4) 0.7507 *** [2.67]

-0.1305 ** [-2.25]

0.199 *** [3.47]

0.181 *** [3.24] -0.2862 *** [-3.79]

-0.5215 *** [-6.38] 0.2663 ** [2.51] 0.0585 ** [2.54] -0.4807 [-1.26] 0.9023 *** [3.81] 0.5095 * [1.78] -0.061 [-0.11] 0.3194 [0.32] 2.0555 [1.51] -1.0241 ** [-2.2] -0.7865 *** [-2.71] 0.4196 [1.35] 2,831 9.2% 4.9% 2.17 ***

-0.5608 *** [-8.98] 0.3954 *** [5.2] 0.021 [1.21] -0.3013 [-1.1] 0.1429 [0.79] 0.0958 [0.42] -0.7035 * [-1.69] -0.3859 [-0.61] -0.7575 [-0.84] -0.7314 ** [-2.14] -0.4748 ** [-2.16] -0.1014 [-0.42] 4,622 7.4% 4.8% 4.26 ***

-0.5366 *** [-10.89] 0.3423 *** [5.59] 0.0305 ** [2.2] -0.348 [-1.56] 0.408 *** [2.86] 0.2537 [1.45] -0.4923 [-1.5] -0.1539 [-0.28] 0.3341 [0.41] -0.843 *** [-3.07] -0.533 *** [-3.09] 0.0598 [0.32] 7,453 6.6% 4.7% 3.83 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

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In Model (4), we test for the validity of the results in a joint model. We interact the proxy for the degree of diversification with the diversification dummy. This interaction changes the interpretation of the variables. The diversification dummy now measures the marginal effect of diversification in the (hypothetical) case that the acquirer is active in zero business lines prior to the deal announcement. Similarly, the coefficient of our proxy for the diversification degree measures the marginal effect of one additional business segment on the abnormal returns in the case of a focusing acquisition. Last, the sum of the coefficients of the diversification degree proxy and the interaction variable measures the marginal effect of additional business line for the case of diversifying acquisitions. The results confirm the findings of the split-sample analysis. The degree of acquirer diversification has an antipodal effect in diversifying and focusing acquisitions. The abnormal returns increase with the degree of diversification in focusing acquisitions and decrease in diversifying deals. Furthermore, the coefficient of the diversification dummy turns out to be highly significant, which indicates that for undiversified acquirers, unrelated acquisitions yield higher announcement returns than comparable related deals. However, as Brambor et al. (2006) point out, the interpretation of interaction variables has to be validated by analyzing the conditional standard errors. The standard error of the marginal effect of the diversification variable, which is of interest here, is itself conditional upon the value of the interacted variable. We follow the suggestion by Brambor et al. (2006) and graphically interpret the difference between focusing and diversifying acquisitions, depending on the degree of the acquirers diversification in Figure (2).

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Figure 2: Marginal effect of diversification depending on the acquirers number of business lines The figure displays the marginal effects of diversification depending on the number of acquirers major industries (number of different two-digit SIC codes). The analysis is based on the multiple regression Model (4) in Table 8.

Marginal Effect of diversification in %

-2

-1

# of acquirer's major industries


Marginal Effect 95% Confidence Interval

Figure (2) displays the marginal effect of the diversification dummy and the 95% confidence interval depending on the degree of diversification (number of major industries). For an acquirer that is active in only one major industry, the marginal effect of diversification is positive and significant: the abnormal returns in diversifying acquisitions are significantly higher than in focusing transactions. However, the more diversified the acquirer already is, the less positive is the marginal effect of diversification. We do not find a significant difference between diversifying and focusing acquisitions for acquirers with two or three business lines. If the acquirer is, however, active in more than four unrelated industries, the marginal effect of diversification is significantly negative. Robustness checks We test the robustness of our results with respect to two dimensions in our analysis: the length of the event-window and definition of diversifying acquisitions. We first replicate the analysis for the event windows [-5;5] and [-1;1] (Appendix III). The significance of the antipodal influence of the acquirers degree of diversification remains robust and even gains significance if the event window is widened to [-5;5]. The marginal effect of diversification is significantly positive for acquirers that are not

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yet diversified, whereas the trend inverts the more business segments the acquirer has. In the event window [-1;1], the negative influence of the acquirers diversification degree for diversifying acquisitions also remains also significant. The positive influence for focusing acquisitions is, however, no longer statistically different from zero. The second influence that might bias our results is the distinction between related and unrelated deals. As discussed in Section 3, several approaches exist to define diversification. As a reference case, we defined an acquisition as unrelated if the first two digits of the acquirers primary SIC code do not match any of the targets SIC codes. We replicate the analysis using the stricter definition of diversification by considering all major industries of the acquirer and target. This process imposes higher hurdles for a deal to be classified as unrelated and results in 1,597 diversifying acquisitions (21.4%). The antipodal influence of the number of the acquirers number of major industries remains robust in the joint model. We document a significantly positive influence for focusing deals and a significant and negative influence for diversifying acquisitions (Appendix IVa). We also test the robustness if the relatedness is defined by comparing only the primary industries of the acquirer and target. This less strict definition yields 3,369 diversifying deals (45.2%). Again, the antipodal effect remains qualitatively unchanged (Appendix IVb). Taken together, the findings are in accordance with our earlier predictions. The development from a single-segment firm to a multi-segment entity allows to capture the advantages of corporate diversification, whereas the drawbacks are initially manageable. However, with an increasing degree of diversity in the business operations of a firm, the costs of diversification become severe and begin to outweigh the benefits. For firms with two or three major industries, the costs and benefits of a further diversification balance the drawbacks of the unrelated business expansions. When the acquirer already oversees more than three business segments, the costs outweigh the benefits.

6 Conclusion
The wealth effects of corporate diversification are one of the most controversially discussed topics in corporate finance. In fact, previous literature provides as much evidence that diversification is value destructive as that it is not the case. We revisit the topic and use an event study and to calculate

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announcement returns which provide a clear measure of the wealth effects in unrelated acquisitions. Our results show that diversification is, on average, not value reducing. Related and unrelated acquisitions earn small positive but significant abnormal returns upon the deal announcement that are not significantly different from each other. This finding is robust when we control for deal and firm characteristics and for different event windows. Furthermore, we do not find evidence that diversifying acquisitions are associated with lower expected synergies. The announcement returns of the combined entity are significantly positive for both groups of acquisitions, and the difference is insignificant. We hypothesize that the degree of the acquirers diversification influences the net benefits from diversification. We argue that the benefits of diversification show declining marginal returns the more diversified the acquirer already is. The costs of diversity, in turn, increase in diversified firms. Analyzing our sample of European acquisitions we find support for this notion. In the multivariate model, diversifying acquisitions yield significantly higher announcement returns than focusing deals if the acquirer is not yet diversified. The difference between diversifying and focusing acquisitions decreases with the number of business lines of the acquirer. For highly diversified acquirers, the difference inverts and focusing acquisitions yield significantly higher announcement returns. Taken together, our results provide empirical support that the acquirers degree of diversification constitutes an important input parameter when assessing the wealth effects of corporate diversification. As long as the advantages of diversification, such as the internal capital market, surpass the agency costs and inefficiencies that are associated with multiple firm segments, diversification does not reduce value. Thus, a moderate diversification is in line with shareholder value maximization.

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Appendix I
The table replicates the analysis of Table 4 using the announcement returns in the event window [-1;1] for robustness validation.

Panel A: Mean acquirer annoucnement returns All Focusing Diversifying Diff

(1)
CAR [1;1] T-value N 0.80% *** [15.96] 7,459

(2)
0.77% *** [12.01] 4,627

(3)
0.86% *** [10.56] 2,832

(4)
-0.09% [-0.81]

Panel B: Median acquirer annoucnement returns All CAR [1;1] Z-value N 0.37% *** [13.53] 7,459 Focusing 0.35% *** [9.98] 4,627 Diversifying 0.41% *** [9.19] 2,832 Diff -0.06% [-1.09]

*** significant at 1%, ** significant at 5%, * significant at 10%

The table replicates the analysis of Table 4 using the announcement returns in the event window [-5;5] for robustness validation.

Panel A: Mean acquirer annoucnement returns All Focusing Diversifying Diff

(1)
CAR [5;5] T-value N 0.90% *** [11.17] 7,454

(2)
0.89% *** [8.64] 4,620

(3)
0.92% *** [7.1] 2,834

(4)
-0.03% [-0.18]

Panel B: Median acquirer annoucnement returns All CAR [5;5] Z-value N 0.62% *** [10.45] 7,454 Focusing 0.62% *** [8] 4,620 Diversifying 0.62% *** [6.72] 2,834 Diff 0.00% [-0.35]

*** significant at 1%, ** significant at 5%, * significant at 10%

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Appendix II
The table replicates the analysis of Table 6 using the announcement returns in the event window [-35;1] for robustness validation.

Panel A: Mean Focussing Acquirer CAR [-35;1] T-value N Target CAR [-35;1] T-value N Combined CAR [-35;1] T-value N (1) 1.14% * [1.86] 555 25.02% *** [23.22] 555 4.02% *** [7.12] 555 Diversifying (2) 1.05% [1.36] 306 24.66% *** [16.16] 306 3.36% *** [4.37] 306 Diff. (3) 0.10% [0.1]

Panel B: Median Focussing (4) 0.38% [1.28] 555 23.07% *** [17.93] 555 4.04% *** [7.16] 555 Diversifying (5) 0.66% [0.91] 306 22.34% *** [13.22] 306 3.38% *** [4.51] 306 Diff. (6) -0.28% [0.08]

0.36% [0.19]

0.73% [0.11]

0.67% [0.7]

0.66% [0.99]

*** significant at 1%, ** significant at 5%, * significant at 10%

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Appendix III
The table replicates the analysis of Table 8 using the announcement returns in the event window [-5;5] for robustness validation.

All (1) Diversifying (DIV) Degree of diversification Degree of diversification_x_ DIV LN Acq. market cap LN Deal value Return on assets LN Tobins Q Cash deal Cross-border Tender offer Challenged deal Hostile acquisition Public target UK acquirer UK target -0.5471 *** [-8.96] 0.3704 *** [5.02] 0.0491 *** [2.7] -0.8107 *** [-2.73] 0.4634 *** [2.64] 0.1798 [0.81] 0.0122 [0.03] -0.1083 [-0.16] 0.176 [0.21] -1.0888 *** [-3.34] -0.3197 [-1.51] -0.2248 [-0.96] 7,453 5.5% 3.6% 2.96 *** 0.0051 [0.03] 0.0988 ** [1.97]

Diversifying (2)

Focussing (3)

All (4) 1.0736 *** [3.04]

-0.1504 ** [-2.15]

0.322 *** [4.37]

0.2974 *** [4.2] -0.3838 *** [-4.07]

-0.4238 *** [-4.27] 0.2864 ** [2.26] 0.0964 *** [2.86] -1.3845 ** [-2.46] 0.9304 *** [3.27] 0.2603 [0.73] 0.4833 [0.76] 0.9618 [0.75] 1.4589 [1.16] -1.4112 ** [-2.51] -0.6946 * [-1.9] 0.0733 [0.18] 2,831 7.3% 2.9% 1.71 ***

-0.6173 *** [-7.86] 0.4131 *** [4.48] 0.029 [1.38] -0.5408 [-1.56] 0.2358 [1.04] 0.0929 [0.32] -0.1567 [-0.31] -0.7996 [-1.05] -0.7242 [-0.71] -0.9575 ** [-2.34] -0.1716 [-0.64] -0.3545 [-1.2] 4,622 6.7% 4.1% 3.24 ***

-0.5513 *** [-9.03] 0.3666 *** [4.97] 0.0495 *** [2.72] -0.8188 *** [-2.76] 0.473 *** [2.7] 0.1893 [0.86] 0.0248 [0.06] -0.1407 [-0.21] 0.1695 [0.2] -1.0878 *** [-3.33] -0.3222 [-1.52] -0.2024 [-0.86] 7,453 5.7% 3.8% 3.01 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

The conglomerate discount revisited

115

The table replicates the analysis of Table 8 using the announcement returns in the event window [-1;1] for robustness validation.

All (1) Diversifying (DIV) Degree of diversification Degree of diversification_x_ DIV LN Acq. market cap LN Deal value Return on assets LN Tobins Q Cash deal Cross-border Tender offer Challenged deal Hostile acquisition Public target UK acquirer UK target -0.4148 *** [-10.36] 0.3137 *** [6.15] -0.0057 [-0.53] -0.0024 [-0.01] 0.382 *** [3.46] 0.0112 [0.08] -0.0744 [-0.27] -0.2203 [-0.49] -0.3388 [-0.5] -0.912 *** [-4.14] -0.6054 *** [-4.58] 0.0372 [0.25] 7,453 6.7% 4.8% 3.67 *** 0.1396 [1.09] -0.034 [-1.06]

Diversifying (2)

Focussing (3)

All (4) 0.4042 * [1.77]

-0.0932 ** [-2.04]

0.0208 [0.46]

0.0152 [0.34] -0.0951 [-1.55]

-0.4001 *** [-5.9] 0.2676 *** [2.94] -0.0065 [-0.33] 0.0165 [0.05] 0.5835 *** [3.23] 0.2325 [1.05] 0.3118 [0.67] -0.1917 [-0.23] 0.235 [0.17] -1.0546 *** [-2.71] -0.7806 *** [-3.55] 0.3755 [1.56] 2,831 9.9% 5.6% 2.14 ***

-0.4311 *** [-8.5] 0.3522 *** [5.66] -0.002 [-0.15] -0.0108 [-0.05] 0.2711 * [1.92] -0.1426 [-0.78] -0.2223 [-0.65] -0.1928 [-0.39] -0.7935 [-1.22] -0.8556 *** [-3.13] -0.5576 *** [-3.3] -0.153 [-0.79] 4,622 7.2% 4.6% 3.42 ***

-0.4158 *** [-10.38] 0.3128 *** [6.13] -0.0056 [-0.52] -0.0044 [-0.03] 0.3844 *** [3.48] 0.0136 [0.1] -0.0712 [-0.26] -0.2283 [-0.51] -0.3404 [-0.51] -0.9117 *** [-4.15] -0.606 *** [-4.59] 0.0427 [0.28] 7,453 6.7% 4.8% 3.65 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

The conglomerate discount revisited


Figure 1: Robustness test for CAR [-5;5]

116

Marginal Effect of diversification in %

-2

-1

# of acquirer's major industries


Marginal Effect 95% Confidence Interval

Figure 1: Robustness test for CAR [-1;1]


1

Marginal Effect of diversification in %

-2

-1

# of acquirer's major industries


Marginal Effect 95% Confidence Interval

The conglomerate discount revisited

117

Appendix IVa
Table 8: Robustness validation with diversification measured by considering all industries of the acquirer and target (CAR-3;3)

All (1) Diversifying (DIV) Degree of diversification Degree of diversification_x_ DIV LN Acq. market cap LN Deal value Return on assets LN Tobins Q Cash deal Cross-border Tender offer Challenged deal Hostile acquisition Public target UK acquirer UK target -0.5357 *** [-10.86] 0.3488 *** [5.7] 0.0304 ** [2.19] -0.3386 [-1.52] 0.3982 *** [2.79] 0.2605 [1.49] -0.5005 [-1.53] -0.133 [-0.25] 0.3389 [0.42] -0.8388 *** [-3.06] -0.5305 *** [-3.08] 0.0492 [0.26] 7,453 6.4% 4.5% 3.78 *** 0.1304 [0.74] 0.0331 [0.83]

Diversifying (2)

Focussing (3)

All (4) 0.7998 ** [2.51]

-0.1477 [-1.59]

0.0896 * [1.94]

0.0878 ** [1.98] -0.2548 *** [-2.66]

-0.6068 *** [-5.58] 0.227 [1.53] 0.089 *** [2.75] -0.7734 [-1.54] 0.8066 ** [2.46] 0.1058 [0.27] 0.0193 [0.03] 1.1998 [0.76] -0.1096 [-0.05] -0.8679 [-1.44] -0.5997 [-1.53] 0.1815 [0.43] 1,597 11.2% 4.8% 1.93 ***

-0.529 *** [-9.4] 0.3793 *** [5.6] 0.0167 [1.09] -0.3105 [-1.25] 0.2892 * [1.81] 0.2787 [1.41] -0.5392 [-1.47] -0.4552 [-0.82] 0.6135 [0.7] -0.9001 *** [-2.92] -0.4814 ** [-2.47] 0.0294 [0.14] 5,856 6.9% 4.7% 3.51 ***

-0.5357 *** [-10.86] 0.3482 *** [5.69] 0.0302 ** [2.17] -0.3417 [-1.53] 0.4035 *** [2.83] 0.2638 [1.51] -0.4973 [-1.52] -0.1485 [-0.28] 0.3208 [0.39] -0.8407 *** [-3.07] -0.522 *** [-3.03] 0.0528 [0.28] 7,453 6.5% 4.6% 3.77 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

The conglomerate discount revisited

118

Figure 1: Robustness validation with diversification measured by considering all industries of the acquirer and target (CAR-3;3)

Marginal Effect of diversification in %

-2

-1

# of acquirer's major industries


Marginal Effect 95% Confidence Interval

The conglomerate discount revisited

119

Appendix IVb
Table 8: Robustness validation with diversification measured by considering primary industries of acquirer and target (CAR -3;3)

All (1) Diversifying (DIV) Degree of diversification Degree of diversification_x_ DIV LN Acq. market cap LN Deal value Return on assets LN Tobins Q Cash deal Cross-border Tender offer Challenged deal Hostile acquisition Public target UK acquirer UK target -0.5338 *** [-10.81] 0.3459 *** [5.66] 0.0302 ** [2.18] -0.341 [-1.53] 0.4 *** [2.8] 0.2492 [1.42] -0.501 [-1.53] -0.1294 [-0.24] 0.3413 [0.42] -0.8431 *** [-3.07] -0.5313 *** [-3.08] 0.0442 [0.23] 7,453 6.4% 4.5% 3.78 *** -0.0186 [-0.11] 0.0315 [0.77]

Diversifying (2)

Focussing (3)

All (4) 0.7433 *** [2.68]

-0.0982 * [-1.84]

0.2123 *** [3.39]

0.2022 *** [3.28] -0.2883 *** [-3.71]

-0.5335 *** [-7.01] 0.2613 *** [2.75] 0.0439 ** [2.08] -0.4292 [-1.2] 0.7326 *** [3.4] 0.5474 ** [2.08] -0.0769 [-0.16] 0.1318 [0.14] 0.679 [0.55] -1.0822 *** [-2.6] -0.6698 ** [-2.48] 0.2889 [1.01] 3,369 8.5% 4.8% 2.40 ***

-0.5515 *** [-8.46] 0.4079 *** [5.06] 0.0246 [1.32] -0.3659 [-1.28] 0.1649 [0.85] 0.0833 [0.35] -0.8076 * [-1.79] -0.2303 [-0.36] -0.2373 [-0.23] -0.7165 * [-1.95] -0.5271 ** [-2.32] -0.0641 [-0.26] 4,084 5.8% 4.0% 3.17 ***

-0.5356 *** [-10.87] 0.3417 *** [5.59] 0.0305 ** [2.2] -0.3537 [-1.58] 0.4089 *** [2.87] 0.2611 [1.49] -0.4967 [-1.52] -0.1325 [-0.25] 0.3447 [0.42] -0.8428 *** [-3.07] -0.5351 *** [-3.1] 0.059 [0.31] 7,453 6.6% 4.7% 3.89 ***

N R R adjusted F
*** significant at 1%, ** significant at 5%, * significant at 10%

The conglomerate discount revisited

120

Figure 1: Robustness validation with diversification measured by considering primary industries of acquirer and target (CAR-3;3)
1

Marginal Effect of diversification in %

-2

-1

# of acquirer's major industries


Marginal Effect 95% Confidence Interval

Essays on corporate acquisitions

121

CURICULUM VITAE
Marc Rustige Born 1981 in Frankfurt

Academic education

10/2001 07/2006

J. W. Goethe University, Frankfurt Studies of business administration (Dipl. Kaufmann) Major in Finance and Supply Chain Management Frankfurt School of Finance and Management PhD program in Financial Economics Supervisor: Prof. Michael H. Grote

Since 01/2009

Work experience

Since 09/2006

The Boston Consulting Group GmbH, Berlin Consultant

Publications Rustige, M., Grote, M., 2009, Der Einfluss von Diversifikationsstrategien auf den Aktienkurs deutscher Unternehmen, Schmalenbachs Zeitschrift fr betriebswirtschaftliche Forschung, (zfbf), Vol.. 61(5), pp. 470-498.

Recognitions Best Paper Award in International Finance, Southwest Finance Association (2011) Druecker & Co. Award for best diploma thesis in Mergers & Acquisitions (2006)

Essays on corporate acquisitions

122

DECLARATION OF AUTHORSHIP
I herewith confirm that I have authored this dissertation thesis independently and without use of others than the indicated sources. The thesis in this form or in any other form has not been submitted to an examination body and has not been published.

Marc Rustige, June 1st 2011