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National Research University –

Higher School of Economics
International College of Economics and Finance

Academic research paper

State ownership and the M&A deal structure

MSc 1st year student
Daria Volkova
Argument Consultant
PhD Keyong Hun Lee

Moscow, 2015

Contents

# of page
Abstract

3

Part 1. Introduction

4

Part 2. Discussion

6

Section 2.1 Overview of M&A market in Russia

6

Section 2.2 Literature review

11

Section 2.3 Methodology

22

Part 3. Conclusion

26

Bibliography

27

Additional materials

28

3

Abstract
This paper is an extended proposal of future research, which seeks to contribute to the existing
literature in the field of state ownership and the M&A deal structure. In the focus of investigation one
might find the Russian M&A market, which has a large share of the deals with state-controlled
companies involved. The influence of the government on the deal structure is observed in two aspects.
First one is the choice of the method of payment by the acquirer which might be affected by the
presence of political connections (low-cost loans, etc.). The second one is a market performance of
acquirer after the deal announced which might be relatively better due to the presence of state control
on board. These questions are widely theoretically described, and the methodology of future research is
provided.

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liabilities’ issue and the problem of non-solicitation. One could sum it up to the 10 most important aspects of the deal /16. sale of the assets and the merger itself. cash is known as a mostly risk-less and quite liquid source of the deal’s financing. these source of financing may lead to the impairment of the credit ratios. There’re 3 main options applicable for the M&A transaction’s structuring: stock purchasing. such mode of payment as an equity may enhance the credit rating of the acquirer. meaning that it’s better for them to accept the idea of a merger than a news about an acquisition. compensation for a target. The companies have many incentives to contemplate such transactions.Part 1. One may notice that issuing stock to the holders of the target leads to the dilution. From the target’s point of view. true mergers are rarely happened. earnout as a pricing structure. while others prefer to pay in stock. From the acquirer’s point of view. 5 . One can provide more details on the deal structure question. One can name the synergy effect. In many cases talking about M&A one assumes the acquisition. Introduction Mergers and acquisitions constantly take place worldwide. In fact. shareholders’ approval and the taxation issues. It includes such serious questions as the deal structure. payment in cash can be easily conducted with the excessive funds from either working capital or the unlimited credit line. The second point which should be carefully addressed as one of the most important parts of the M&A deal is the method of payment. which normally are taking into account till the begging of the transactions. consents of the third party. Quite often such thing happens because of the public perceptions and staff’s considerations. However. which improves the company’s position in the sense of the economy of scale. gain in efficiency and improved market visibility. On contrary. When the M&A transaction takes place. there’re several issues that should be addressed up to the beginning of the procedure. The type of the structure depends on the negotiation position and competing interests of both the acquirer and the target. even if the merger took place. The value of the deal is sustained to be constant in the sense that it doesn’t vary with the value of the stock. cash versus equity issues. especially if it’s partially or entirely state-controlled. the problem of working capital adjustment. which is inevitably good for the company. The chosen type leads to several consequences. These consequences are the following: transferability of liability. which may be unwilled by the shareholders of the acquiring company. In some cases the involved parties are looking for the gain in new technologies or goodwilllike assets which come around during the time./. Some companies choose to pay in cash.

In the section 2 one would describe the previous research in three major directions related to the topic:   the impact of state ownership on the M&A market in Russia. which means the process of transferring the ownership from the government to the private sector. Then it follows the concluding comments and remarks. In section 3 one would provide the methodology of own research. in which the state-controlled companies are  involved? Is there an evidence of the backward ownership transferring in the sense that M&A deals lead to the state control expansion through the corporate sector? These questions will be addressed in the paper. are partially or entirely owned by the state. one would rise a question of the state-controlled companies as a participants of the M&A transactions. the impact of state ownership on the acquirer’s performance: the direct one and the indirect one (via the method of payment). the impact of state ownership in the context of the availability of financial resources on the  method of payment along with another substantial theories. 6 . which operate as a solo entities. Most of these countries had an experience of so-called privatization. in many countries this process has not been completely finished: large part of the companies. However. One would ask several questions concerning the role of state-controlled companies in the M&A field:   What is the scale of participation in M&A deals by the state-controlled companies? What are the details of the M&A deals. While the previous research was mostly concentrated on the other aspects of M&A market. In the discussion part one would start section 1 with a review of M&A market in Russia. This topic is extremely vital topic for the emerging economies. using the quantitative and qualitative approached with respect to the Russian market of M&A deals.One would reasonably extend the idea of state controlled enterprises and its participation in the M&A process. The rest of the paper would be organized as follows.

Rosnano. During the period between 1997 and 2002 the average total deals’ value per year was approximately US$5 bln. Same trend was hold till 2012.5 bln (270% increase). Moreover. one would rationally drop off the non-commercial state-owned companies which are functioning as an instrument of government policy.html 7 . inevitably influenced Russian economy. when the second mega deal (US$56 bln)– the acquisition of TNK-BP by 1 Gazprom has finished the acquition of Sibneft. First of all.rbc. This diversification will be important further. It can also be the case when more than 50% of voting shares belong to both the state and 100% state-owned companies.ru/news/merge/2005/10/21/5206887. it needs to make a brief description of the current market situation and give some historical statistics on the M&A in Russia.1 bln – was completed. each of them is devoted to the literature review. which can be treated as a very slack period for the Russian M&A market. In 2003 there was a beginning of the actual M&A activity in Russia with total deals’ value of US$18. It’s convenient to assume that this kind of companies have the state as a shareholder with 50% or more percent of voting shares. Discussion Section 2. This year was marked with the largest merger (US$6. This would be necessary when studying the method of payments as an element of M&A deal structure. Particularly.Part 2. Next years till 2007 the M&A market continued to grow. which led to the two times increase in the average total value of deals (US$40. The last case which one can assume is the subsidiary of the state-owned company. During this period. Rosatom.1. in 2005 the first mega deal – the acquisition of Sibneft by Gazprom 1for US$13. Current information contains the particular data from 1997 up to nowadays. URL: http://quote. etc. in 2008 there was a huge slowdown in M&A activity due to the global financial crisis. Overview of M&A market in Russia Before one can jump to the overview of previous research conducted in field of M&A deal structure and the state ownership aspect.5 bln). However. The short statistics of M&A activity in Russia would be very useful in the light of further research /8. It has also went through the privatization period which makes it highly representative. Russia is chosen as a sampling base due to the fact that its economy can be referred as an emerging. fore example. After a short analytical note the rest of this part will be logically divided into 3 sections. one would point out several highlighted moments. one would be precise about the meaning of state-controlled companies. one would treat the companies as state-participated if there’s even a minority interest of the state in the equity. methodology and the prospects of future research respectively. Additionally./.4 bln) of Tyumen oil company with British Petrolium which resulted as joint company TNK-BP.

On the other hand. in 2014 there were only 3 announcements about the very large deals. which account for the 2 The deal of the century: Rosneft acquires TNK-BP. URL: http://smart-lab. as it was mentioned above. there’s a decline in the total value of deals (US$71 bln in 2014 versus US$115 bln in 2013). including the data on the number of deals and its total value per year. which is 595 deals. M&A dynamics in Russia (2005-2014) 595 505 393 362 78 336 338 308 272 117 101 210 60 316 73 66 80 71 38 28 total value of mega deals (US$ bln) total value of medium deals (US$ bln) total number of deals Plot 1. Source: [8] According to the latest statistics.php 8 . while in 2013 there were only 316 deals. Based on the analysis of the whole period of M&A activity in Russia. one might notice that normally only very large deals stimulated the M&A market to grow. The lack of liquidity due to financial situation led to the decrease of the number of very large deals.ru/blog/83473.Rosneft2– was completed. the one can indicate the significant increase in total number of relatively small deals. This deal came out the second largest deal in the world in 2012. in 2014 one can indicate the significant increase in the total number of deals. while in 2013 there were a way more (14 announced deals). Since 2013 up to 2015 there was a downward trend in M&A activity in Russia. Basically. Here one considers the deal as a very large if its value is more than US$2 bln. However. The plot 1 provides the details of M&A activity in Russia.

in 2014 there were 293 relatively small deals. One may also note that the companies from BRIC block are more interested in modern business techniques rather than in new technologies. First of all. these companies try to meet the increasing demand on the consumer goods for the middle class. one would take into account the historical data on the M&A activity in Russia. Thus.deals with the value of US$100 million or less. The decline of the M&A activity in 2014 was almost 50% comparing with plentiful year 2012. the total value of deals in 2014 grew up on 44. one can assume that the decline in 2015 would be very similar to this number. Brazil. the participation in M&A deals is a good way to obtain the modern technologies and most up-to-date management techniques.26 trillion. Middle East [Egypt. India. Thus. Using the “emerging markets” abbreviation one assumes such regions as China. which is quite lower than the total value of deals in 2007. According to the data.5%. Saudi Arabia. However. The data on the GDP growth demonstrates approximately 8% decline in 2009 after crisis year 2008. Reasonably. Moreover. preliminary year of financial crisis. the buyers from BRIC countries try to find such assets which may become a platform for the global expansion of their business. while nowadays one can forecast twice less decline in the GDP growth. which is almost three times more than in the previous year (103 deals). one should consider the common dynamics of the Russian economy after the crises both in 2008 and nowadays. 2015 year would have the decrease in almost US$30 bln of total value of deals. The main point of acquiring the companies from mature economies is the transferring of business experience and the access to the new markets. There’re basically 3 main reasons. The global M&A market demonstrates the positive trend to grow (plot 2). UAE]. Buying the assets in mature economies. The buyers are attracted by a fast growing consumer sector in this economic block. The comparison of 2009 and 2007 shows that the decline in post-crisis period was almost 70%. Morocco. 9 . In this situation one may notice than emerging markets stand for the center of M&A activity in the world. each 4th M&A deal involves a company listed in BRIC region as a buyer or seller. Russia. the BRIC countries are the leaders in the number of M&A deals. absorbing up to 60% of all transactions in the world. reaching the value of US$3. To build the forecast on 2015. Thirdly. Basically. according to the statistics. One would analyze why the BRIC’s companies do participate in M&A deals. Secondly. BRIC’s companies are looking for an access to the energy and natural resources in order to stimulate the economic development of their own country. Consequently. Turkey. the decline in the M&A activity might be less crucial that after the financial crisis in 2008.

One might notice that most actively developing direction of M&A in Russia tends to be the domestic deals. It can be explained by the fact that investors from emerging economies are wellacquainted with the culture of a target.M&A dynamics in the world (2005-2014) 16537 16029 14646 13126 12388 12461 13282 13670 14215 9859 2428 3295 3670 2409 1711 2089 total value of deals (US$ bln) 2249 2295 2259 3259 total number of deals Plot 2. including the language. Due to this advantage the average abnormal returns to the stock of acquirer from the mature economies are two times lower (1. During several year the share of domestic deals constantly varies in 70-80% out of all deals completed. However. In this case the average abnormal return raises up to the given level of 2%. it’s not always true. Back to the case with Russian economy. However. one say cross-border M&A in Russia significantly increased after the WTO accession due to the bureaucratic barriers’ easing. especially if the acquirer from the mature economy has a substantial experience in development of M&A deals on emerging markets (6 or more deals completed). this trend might be neglected in the future because of the Ukrainian crisis. the business environment tends to decade due to the tight economic and political 10 .1%) than the same indicator for the buyers from emerging markets (2. Source: [8] The latest research of BCG demonstrates that the buyers from mature economies which develop M&A deals on emerging markets get lower profit that the buyers from emerging markets doing the same at home.05%). corporate culture and motivation of a target. The natural resources are no longer the most popular direction of M&A activity. Despite the fact that there was a positive statistics in 2014. It moved out by the consumer companies from mature economies which are acquiring plenty of Russian companies.

The share of such deals during given period was only 8. One can assume that one of the reasons of low transaction activity between China and Russia can be the fact 11 . With escalating the Ukrainian conflict. there was a quite huge deal of acquiring the 43. The total share of this sector in the overall number of deals was 25%. The Chinese companies were assumed to be mostly interested in the buying of the assets of Russian companies.9% compared with 2013 year). there’re several other sectors where M&A activity presented. Not surprisingly. The buyers from Europe and USA competed more than 2/3 of all cross-board deals with ½ of total value of all cross-border deals. telecommunications.1% out of total selling assets to foreign acquirers. meaning that some of them performed to the less extent that the others. Later on the cross-border M&A activity in and out of Russia should be analyzed. It’s consumer sector. However. Such dynamics can be explained by the fact that investors appreciate the real estate as a sustainable asset which will not depreciate in time. The most dynamic one was the real estate and reconstruction (153 versus 63 deals). media and innovations. The more details on the largest deals in 2014 are collected in the table 1 in the Additional materials section. The companies did slowdown in the overall M&A process the own growth rates. there’s a huge fall in M&A activity in metals and mining sector (decrease in 68. one would treat the situation around all the sectors as not very stable.6 bln in the 4th quarter of the year (the minimal total value of deals through 5 years). However. there were only 2 deals completed in 2014 between Chinese and Russian companies with non-disclosed value of the deal.9% of Stroygazconsulting (construction holding) by the private investor Ruslan Baysarov [9]. Thus. which was basically the post-crisis year. reaching the value of US$8. especially if the state-controlled companies sell out their assets. It’s the greatest shortcut since 2009. One would treat it as acquisition because actually the strategic investor acquires the part of the company.situation. The state-controlled companies had a significant impact on the dynamics in this sector: they have participated in 43% of all deals completed in the real estate and reconstruction sector. banking and insurance. the buyers from the countries of Asia Pacific region demonstrated a very little interest in completing the deals through the period of 2010-2014. the total volume of outboard investments decreased significantly (approximately 50% less then in the previous year. Such cofactors as a drop in oil prices and depreciation of ruble defined the huge decrease in M&A activity till US$6. when the share of such deals reduced in 97%. Even more astonishing results are provided by 2014 year. Moreover. Surprisingly. One might analyze the structure of domestic M&A activity in Russia and highlight the most active sectors of the economy which were involved in the M&A activity.1 bln). One more reason of such popularity of this sector is the fact that infrastructure development attracts the financial support from the state.

one would analyze its performance in detail. consumer products. while in 2014 it was only 25%. This paper mostly addresses to the problem of privatization in Russia. real estate and reconstruction. The total value of deals in buying foreign assets by Russian companies increased on almost 50% (US$7. As it was mentioned above.65% out of total value of deals where Russian companies bought some assets from abroad and almost same share these deals took out of the total number of deals. This process began after 1990th. However. The diagram shows that some sectors performed incredibly high in 2014 such as banking and insurance. where both corporate and state-controlled companies participate. The next section is devoted to the review of previous research in this field and some particular studies concerning the state-controlled companies in Russia. Russian companies mostly targeted European and Former USSR countries .that Chinese companies are very strong in their negotiation position. Literature review  Addressing the question on the impact of state ownership on the M&A market in Russia One would start with a paper of Russian economist Alexey Lyakin (2010) /9. The nice tendency of import M&A activity is the shift from buying the energy and natural resourced companies only to the companies out of wider range of sectors. The largest deal in this import M&A activity was the acquisition of gold producer Altynamas Gold by Polymetal with the deal value of US$1. innovations. The author points out that the size of the private and government sector in Russia constantly changes.2. The activity of Russian companies outside of the country is also very interesting point. One would forecast the negative effect of this event on the willingness of Russian companies to participate in acquisition of foreign companies. in 2014 the Russian economy has a shock of depreciation of domestic currency. Section 2. The author is 12 .08 bln. in 2013 almost 80% of total value of all import M&A deals were related to the energy and natural resources sector. Namely. Since a wide review of Russian M&A market leaves an open question about the state-controlled companies. while in 2014 each 1st out of 5 deals were related to this sector. Comparing the number of deals. That’s why the expectations of both parties do not coincide quite often. One of the channels of these changes is mergers and acquisitions. when huge reforms in the Russian economy were done.1 bln) with an equivalent increase in the total number of deals (80 deals in 2014 versus 40 deals in 2013). the tendency was the opposite. in 2013 there was each four out of five deals related to the energy and natural resources sector./.

One might see that within the mechanism of M&A the state-controlled ownership significantly expands.6 26 34 % % 380 8 5% 352.6 18 % 12. total value of the deals: between statecontrolled companies 3 (US$mln) Share out of [1] 8. 4 47 % 6. from 18. So.8% in some years. One more interesting point in this table is the following: the overall surplus of assets bought from corporate sector to the assets sold noticeably varies with the minimum value in 2003 (US$33 mln) and the maximum value in 2007 (US$20. This paper provides very interesting data on the M&A activity of state-controlled companies during the period 2003-2009 yrs. 9 33 39 121 1. However.1 bln).8 22.3 up to 57.7 19. from this table one may conclude that the state-controlled companies are more often the acquirers than the targets. There was also extremely large surplus in post-crisis 2009 (US$16. 4 143. 4 54 % 15. This is true with any total value of the deals with state-controlled companies involved. 2 18. The table 2 presents the data on the total value of the deals for a given period. This indicator varies quite well.1 16 % 70 58% 825 9% 176 2 8% 20 0% 569 1% 159 21 13% 73 54. # The structure of M&A deals with state-controlled companies involved (2003-2009) 200 20 20 20 200 20 200 Values 3 04 05 06 7 08 9 sum Total value of all deals 1 completed (US$ bln) Total value of deals with state-controlled 2 companies (US$ bln) Share out of [1] Using [2]. 3 41% 112 2402 0 5 2% 7% 13 .2 bln). The estimates of this indicator are quite different from the ones given by KPMG due to methodological issues. the levels approximately coincide.particularly interested in the scale and dynamics of this process of changing the size of corporate sector by the means of M&A.

8 13 31 % % 92. With the similar scheme the 30% of stock of Rostelecom . due to the bankruptcy4. basically the state transfers back the ownership. the national automobile producer.shtml 14 . the state-controlled banks used the budget funds to acquire purely private companies. However.7 42 % 14.0 1 26% Table 2.rbc. Source: [9] One might also note the peculiar dynamics of this process.ru/economics/23/11/2011/626416.2 16.rbc.2 bln. Once again one might take into account that when the state-controlled company acquires some pure corporate company.ru/finances/10/06/2010/419402. while the targets used the payment for their assets to repay the debts.national telecommunication’s operator – was transferred under state control3.5 12 % 167 79 14% 37 31% 620 1 8% 2699 655 7 1% 8% 9. During this period most deals were completed between the large state-controlled banks and the industrial producers. As an example of such deals one might consider the acquisition of Angstrem Group – the producer of integrated circuits – by the state-controlled Vnesheconombank for US$1.selling from statecontrolled to purely private companies 4 (US$mln) Share out of [1] selling from purely private companies to state-controlled 5 (US$bln) Share out of [1] 377 4% 0. in 2008-2009 one might notice the significant change in the way of M&A activity of state-controlled corporations. Basically. The common observer could treat it as a realization of anti-crisis program stated by the government.shtml 4 http://top. 4 44 % 103 0 3% 4. The given period is directly linked to the expansion of state-controlled corporations in the oil/gas sector. The most active buy-side M&A activity of state-controlled companies was hold in 2004-2005 and 2007 yrs. It’s like backward privatization // nationalization.4 1 5% 984 4% 971 3% 9. Same happened with the IzhAvto. # Share of mega deals with state-controlled companies involved on Russian M&A market 200 200 200 200 200 200 Values 4 5 6 7 8 9 3 http://top.

the author says that the scale of nationalization through M&A didn’t reach the same extent as it was demonstrated by the European countries. From this table 3 one might follow the main interests of the state in the limited number of industries. Most of the deals completed during the crisis period were supposed to cover national interests in prevailing in several key industries (financial sector. which is quite natural for the period of recession. where several mega deals were completed in the period 2004-2006. As an examples of the second point. the companies sold out their assets in order to repay the growing debts. the deals in 2009 were completed due to financial problems of the companies or the pursuing of state’s interests in technological problems’ solving.Total share of mega deals with SC 1 companies involved 89% 84% 59% 64% 44% 88% Out of [1]. such as the probability of bankruptcy. During the crisis period the activity of Russian state-controlled companies in M&A process was significantly slack. telecommunications). oil and gas. The other part of the deals was completed due to the natural reasons. Source: [9] However. 15 . The industrial structure of the acquisition by the state-controlled companies is very interesting. one might use the acquisition of drilling companies by the state-controlled oil producer Transneft or the acquiring of ferry businesses by the state-controlled Russian Railways RZD. the sectors involved Oil & Gas Financial sector 89% 84% 59% 43% 5% 13% 28% - Energy & Natural resources - - - 21% 11% 17% Telecommunications - - - - - 39% Real estate & Reconstruction - - - - - 13% - - - - - 6% Information technologies Table 3. The state-controlled companies were not involved in any mega deals during given period. etc. One may conclude that the share of state-controlled companies extended through M&A process during the good times in the market and shortened in the bad times. As it was said above. The only exception is oil and gas industry. In other words.

because the consequences of each of the cases are widely examined. One may conclude that in these circumstances the deal structure would be different from the one studied in the most of the previous papers because the management can probably 16 . it’s necessary to address the question of the deal structure. As it was covered in the introduction. According to the author’s estimation. meaning that most of the companies in this sector are pure corporate. First. One would try to cover some of them which are mostly relevant to the problem of state ownership and M&A deal structure. Consequently. it has at least three advantages: lower costs on capital. One would take into consideration the fact that the emerging markets are obviously functioning in a different way. It gives the opportunity to choose more correctly the way of financing the deals. There’re many aspects which belong to this concepts but here and longer we would be searching into the area of M&A deal financing. these kind of deals should be also verified by the special government parties (ministries.One of the possible explanations can be the fact that according to the Russian law any mega deal should be confirmed by the board of directors and common shareholders’ meeting. increased diversification of risks and the increase in the well-being of the shareholders from the acquirer’s side.  Addressing the question of the impact of state ownership in the context of the availability of financial resources on the method of payment along with another substantial theories There’re many theories which attempt to explain the difference in financing the deals. Although the research in the field of state ownership and the deal structure leads to some theoretical insides like the deep understanding of the state policy functioning through the M&A process. If the company has correctly chosen the mode of payment. However. oil and gas sector takes the leadership in M&A activity in Russia. As it was noted earlier. the financial sector has almost the same share of the total value of deals in the section of pure private companies through the period as it has metals sector with the leadership to the last. etc. It has such particularities as the deep information asymmetry and relatively weakly developed markets of debt and equity. However. even without statecontrolled companies’ participation. rather than the mature economies. There’re quite few companies in metals sector which are statecontrolled. most of the emerging economies have the great share of statecontrolled companies.) with a written announcements from the company about the voters’ decision taken by the directors and shareholders. there’re two ways of deal financing: either cash or equity payment. It’s true also for the Russian M&A market. The very last point mentioned by the author of this paper was the comparison of M&A activity in Russia with and without state-controlled companies’ participation. these sector most actively participates in M&A in Russia. one would also note that the studying of this topic gives food for thought to the management of the company.

it would use equity to finance the deal. the same result was later on obtained empirically by many authors. such as the usage of the internal financial sources and the preference of debt increase in case of needed external financing. Basically. This ideas are provided as an equilibrium solution for the developed model which describes the issue-invest decisions. than before. In case if the target was estimated incorrectly. It's equivalent to the decrease in the value of the stock of the acquirer right after the deal announced.have another motives which should be considered addressing the question of M&A deal financing. Since we already widely covered the state ownership issue on the Russian M&A market. On contrary. The information asymmetry This theory initially was introduced by Stewart Mayers and Nicholas Majluf /11. The new shareholders (former target owners) would get less paid in this case. Another aspect that was covered in the paper of Mayers and Majluf is the effect of the information asymmetry regarding the target. the M&A deals are paid in stock. It's often the case that the market has very positive expectations about the future performance of the acquirer. the market would immediately value it less. The model also gives the rational explanation of some particular behavior of the acquirer. It would be short-sighted to assume that only state ownership determines the method of payment chosen by acquirer. Most of these papers examine the mature economies. The authors use the microfounded approach to address the question of the method of payment. but it's necessary to note that findings of the article prove the influence of market misvaluation on the choice of the mode of payment. on may note the necessity to observe the main theories which attempt to explain the different M&A financing are developing during the last 20 years. and consequently it overvalues the stock of the acquirer. Interestingly. It’s an example of information asymmetry in practice. Basically. 17 . it would probably tend to use cash as a method of payment. if for some reason the acquirer values its stock higher than the market./. if the acquirer perceives its stock as undervalued. it prefers to use the stock by means of payment./ We will introduce this research in the following sections. While there's an information asymmetry. it says that if the acquirer is not sure about the fair value of the target. for example. In the following parts one would describe the most relevant theories which were developed to explain the difference in the method of payment. since historically it has the largest share of M&A deals completed in value and the number of deals. by Alberta Di Giuli /3. the authors assume that the acquirer and the other parties may have the different information about the actual perspectives of the acquirer. one would like to address the question of the deal financing more detailed. Thus. as well as the information available for the research. Thus.

One more interesting paper which describes the problem of information asymmetry in the context of M&A deal financing is the article of Robert Hansen /7. Basically. The author proposed the following idea about the deal financing. if the acquirer foresees that future investments. some empirical estimation of 106 deals in the USA during 1976-1978 is also provided. in quite recent papers the authors found the solution for the identification problem. the acquirer tends to minimize the risk of valuation by choosing the proper medium of exchange. etc. After Mayers. these variables should increase after the deal completion. Boateng and Bi pointed out that there's still a problem of accounting conversion from Soviet-style to the Western-style (IFRS). Particularly. because the empirical research requires to use almost the same explanatory variables for both theories’ proof. which basically means the method of payment chosen by acquirer. For the case of investment opportunities. However. This paper also uses mostly theoretical approach to address the question. Despite the fact that it should be only temporary issue. this is quite hard to make the difference in conclusions for both information asymmetry theory and the theory of other investment opportunities. These variables are Book-to-market value. The investment opportunities Initially. The authors refer to the standard game theory approach. the acquirer may have several investment opportunities. In this paper the author uses the special terminology as «medium of exchange». However./. It shows that if there's an information asymmetry about the fair value of the target. many researchers tend to find the evidence of this theory in empirical studies. Thus. Thus. many emerging economies have this problem./. which prove the theoretical results. while in case of stock payment the target shareholders have the same incentives as the acquirer to prevent misvaluation by the market. where M&A deal is only one of them. Tobin’s Q. many Chinese authors address the issue of the presence of information asymmetry due to the lack of accounting transparency. Consequently. this topic was introduced by Stewart Mayers /10. 18 . in case of cash payments there's a substantial probability of adverse selection and excessive payment. which says that the target would take the cash payments only in the case if it is larger than its private valuation. Such strategy lets the acquirer to prevent the increase in credit ratios. However. Otherwise it rejects and the deal will not be completed. most of which suffered from the political and economic transformation in the recent years. which is essential for easy borrowing in different financial institutions. The interesting development of this topic can be applied to the emerging markets. This financial reporting transformation leads to the increase of information asymmetry. while it chooses to finance the M&A deal by means of stock. it would prefer to safe the cash in order to pay by cash in the future.

Then Di Giuli empirically tested the effect of post-merger investments on the choice of the mode of payment.the theory of financial resources’ availability. the target agrees to the deal with overpriced acquirer. the companies differ by the ratio of total cash to total assets. the author proposes to separate the proxy variables for two different theories. For the investment opportunities motive she offers to use the indicator of actual capital investments in the period of 4 years after the M&A deal completion. Again. Basically. with another sample in 1187 deals during 15 years (1990-2005). In more recent paper /4. One interesting extension which one can notice in this paper is clarified incentives of the target to be sold to the overvalued acquirer. many companies see no reason to increase the debt ratio. The last one supposed to indicate the present of misevaluation. She collected the data on 1642 M&A deals in USA during the period of 16 years (1984-2000) and found that actually the large post-merger investments positively influence on the choice of stock as a method of payment. Nowadays. It also can not get a huge loan with quite low interest rates without the special treatment from the bank. The company can not suddenly increase the revenue. the amount of cash depends on many factors. In more recent studies there was a valid theoretical explanation of why the data on actual capital investments can be used as a proxy for the presence of other investment opportunity for the company. Thus. while for the asymmetry of information aspect she prefers to use the indicator of Book-to-market value. Another reason is the lack of administrative resource to get a loan on good terms. So./.We already mentions the paper of Di Giuli (2007). which are even more vital for the emerging markets . the size of this ratio may influence the choice of the method of payments. For example. the cash can be obtained by either larger revenue or by the means of a loan from the bank. she found that the presence of investment opportunities lead to the deal financing through the equity. However. Consequently. Another indicator which should be carefully 19 . Availability of financial resources This theory bases on the assumption that quite often many companies have a limited number of financial resources. Due to these reasons the acquirer may prefer to pay in stock for a target. After analyzing these two theories in the previous literature. Di Giuli studied this question again. one may conclude that most often the amount of available cash is very limited. one might move to another theory. and it should form the financing approach according to its abilities. but now it is the time to provide more details. Basically. which is difficult to manage. Due to these reasons. the companies have to borrow the funds from the bank. Thus. the estimation showed that target managers are very interested in the long-term performance of the acquirer and perceive the high quality of the deal.

First. Despite the fact that the sample of the authors contained only European countries for 3 years (1997-2000). the author found the negative influence of high debt ratio on the payment in cash. the Russian economy had a lot of substantial reforms. the authors of this paper studied the mode of payments in M&A deals in two different aspects. Particularly./ one might find the evidence of positive link which was tracked between the size of the assets and the payment in cash for a target. But most of these studies cover the mature 20 . In line with this result. During almost 30 years the scholars all over the world investigate the effect of different method of payment on the acquirer's stock returns./. one might pay attention to the one interesting finding of the authors. Basically. Many of the researchers tend to exploit the hypothesis of asymmetric information. when the major effect of the method of payments on the stock returns was clear.  Addressing the question of the impact of state ownership on the acquirer’s performance: the direct one and the indirect one (via the method of payment) o the indirect impact of state ownership of the acquirer’s performance The paper one would like to view in detail is the article of Agyenim Boateng and XiaoGang Bi / 1. they studied the difference in the abnormal returns of the acquirer’s stock in case of paying in cash and stock using the indicator of “buy and hold returns”. The motivation of this research is quite interesting and very practical. it's political and economic situation was very close to the former USSR. same as the Chinese one. It's necessary to say that the Chinese economy is also related to the emerging markets. most of the studies conducted for the Chinese M&A market can be used as a plentiful base for the studies around Russian M&A market. So. It’s most likely that well-diversified company may aggregate more free cash due to easier access to the debt market. Moreover. the authors say that a privileged access to the cheap financing increases the probability of equity financing. These theories can be used in line with the idea of state ownership when we study the M&A deal structure in the context of the method of payments. which also can be addressed to the emerging markets. In the paper of Faccio and Massulis / 6. in order to explain the duality of choice in payment method (cash or stock). the authors studied the effects of the characteristics of an acquiring companies on the mode of payment used to finance the acquisition. The authors point out that privileged access is often available to the state-controlled companies with the government on board.treated when checking this hypothesis is the level of diversification of the company. which are hold by the acquirer and the target concerning the value of the company. The empirical studies in this field suggested the following results. At the second stage. In the previous decade.

there’re 80. the presence of state ownership positively relates on the cash as a deal's financing offer. For example. Despite the fact that Chinese government has undertaken many reforms. from the previous research in this field it's known that the Chinese companies normally have quite low debt ratio. The authors provide the statistics concerning the size of state-controlled sector in China. the size of the leverage. acquirer's market value. It also grows fast: since 1998 untill 2011 there were almost 23 750 deals completed in China. It's very important to estimate the long-term performance of the stock of the acquirer during the period after the bid. The researchers hypothesized that the choice of the method of payment should depend on the objective and subjective factors. It should be the case that M&A on emerging markets are quite different from the ones in mature economies in the sense of impediments such as various government policies. which attempt to the question of choosing cash or stock as a method of payment. the Chinese government tends to expand the influence of Chinese companies outside the country. such companies would offer the cash much more often than stock as a means of payment in order to prevent the dilution. the financial institutions remain imperfect. The authors collected the data set which contains the bids of the deals completed by Chinese 21 . This paper would be considered as an empirical research which continues and develops the theoretical studies. The authors assumed that it can be determined by such explanatory variables as the Tobin's Q.1% of Chinese companies which have are partially or completely owned by the state. the market value of the acquiring company. Finally. the regression analysis done by the authors showed that such factors as Tobin's Q. It may be the reason of financial segmentation. the size of the leverage. This situation naturally stimulates the companies to pay in cash.economies. This is closely coincides with an idea of “national champions” in China. saving the control under these MNC. Due to the second part of the authors research. which allows them easy borrowing for the deal financing. one may consider the comprehensive approach of analyzing the M&A performance dependent on the method of payment. Despite the financial reforms that were done in the previous decade. Unlike the Russian trend to nationalization. This approach assumes the using of buy and hold abnormal return method along with calendar time approach. Consequently. But the other indicators’ influence is much less obvious. We already addressed several hypotheses. the presense of partial ownership of the company by the state and some other financial indicators. which let to the incorrect pricing of the target. For example. while the emerging markets are still not studies enough. the state ownership may have an impact on the decision on the method of payment. For some of the factors there was an objective evidence. One may reasonably assume that the close link to the government may result in the low cost borrowing from the state-controlled banks.

this data set contained the information on the deals' details.based companies particularly in the mainland China during 1998 – 2007 yrs. Th authors estimated so-called buy and hold abnormal returns variable (BHAR) for each acquiring company.12% 6. which can be seen from the table 5.37 BHAR 6. Thus. applying the different benchmarks to the reference portfolios.50% % Table 4. the total sample contained 23 311 domestic M&A transactions. The authors found the proof of the hypothesis that the companies prefer to finance the deals by the stock in the presence of high asymmetry of information since there’s a few disclosure on financial markets.  The direct impact of state ownership on the acquirer’s performance The very important note should be provided here. Moreover. which was stated by the authors of the previous research. Since the authors investigated the different length of pre-bid period (1 and 3 years before the bid). In both cases the companies which have equity financing do outperform the companies which finance the deals through cash. Difference in Buy and Hold abnormal returns (BHAR) due to the method of payment All Cash Share Benchmark 1 12. That’s what exactly can be done in this paper in the context of future research. They suggested to extend the research by adding more governance variables to this model in order to clarify the reasons. the results are found for both of these periods. which can motivate the companies to finance the deals by either cash or the stock.31 BHAR % % 8.28 15. In the Methodology section one will construct the similar research plan with the only one difference: the influence of the state ownership will be directly included in the estimation of M&A performance. Source: [1] The results obtained by the authors suggest that for the period before the bid the BHAR is higher for the companies which finance the acquisition through the stock than the cash.24 BHAR % % 8.85% Benchmark 2 13.21 14. such as the date of announcement. the date of completion and the chosen method of payment. The 22 . The same can not be said for the post-event period – there’s no absolute proof.47% Benchmark 3 29.

Following by Du and Boateng. which leads to the problem of information asymmetry. the authors mainly address the question about influence of state ownership on domestic and cross-border M&A. one may consider the reasons why is it interesting to investigate the effects of state ownership along with another institutional variables on the stock returns of the acquirer. /15./ along with Bilei Zhou et al. From empirical research of 20000 Chinese-listed companies one may note that state-owned companies faces a fewer financial constraints. one might note that the government tends to help owned companies by inducing the tax rebates. However. As in any theory. Particularly. the effect of state ownership on the acquirer’s performance is still controversial and should be studied for particular market in a greater detail./. 23 . financial assistance and soft lending. Another reason why the company can be inefficient under the state ownership is the fact that such companies usually have the high level of bureaucracy. This is an application of an institutional theory in the M&A field of research. We already saw the negative consequences of severe information asymmetry. Some researchers consider the state-controlled companies as inefficient comparing to the private companies because the government may try to pursue the political rather than economic purposes when ruling the company (for example. in these papers. there are both pros and cons for the participation of the government in the ownership of the company. Nevertheless.good motivation of such variation was provided in the paper of Min Du and Agyenim Boateng /5. which is therefore reflected in the price of stock of the acquirer. Both authors emphasize the importance of this studying since it’s poorly covered in the world literature on the topic of M&A in emerging markets. there’re another point of view on state-controlled companies. Back to the M&A discussion. It can be easily concluded that the market perceives such companies as the ones with economic and political advantages. it seeks to support full employment. rather than maximize the profit).

where the methodology is very close to the one which will be developed here. but one would prefer to study the direct impact of state ownership on the M&A performance in the context of short-term and longterm. one would use the Tobin’s Q ratio. The particular definition is provided in the table. 1. There’s list of the ministries published in an open government electronic resource which contains the information on the state departments which has a shares in the particular (named) companies. This information can be added to the list of all M&A deals which meet the requirements described later on. measured as a percentage of shares owned by the government (either federal.3. The note is that all the following variables are assumed to be calculated for the acquirer. regional or local). Such turn will be guided by the paper of Du and Boateng (2015). In fact. one should determine the explanatory variables and hypothesize about its possible influence on acquirer’s choice of payment method. Due to the information asymmetry. the Tobin’s Q ratio reflects the market valuation of the company. Methodology That is the time to move to the empirical research on the question of the state ownership and M&A deal structure. H1: The greater the share of the of the state in the corporate ownership structure positively related to the payment in stock. one would introduce several control variables. 2. which are the important indicators for another theories.  Part 1: the determinants of the method of payment First of all. Since it is already said that the government participation in fact can create an advantage for the acquirer by means of low-cost loan and many other indirect assistant services. The empirical part will be organized in the following way. how it was done in paper of Boateng and Bi (2014). one would included this variable in the model. one will examine the effect of state ownership on the choice of payment method along with another variables. if nothing other is said. following the theory of availability of financial resources. The main explanatory variable one would have a special attention is the state ownership. It will consist the two separate parts. This part has very close methodology to Boatend and Bi (2014). In the 24 . which should be included into the model in order to prevent the biasness of the results. It would be interesting to track the influence of the deal structure on the M&A performance. each of them addresses the impact of state ownership on various aspects on the deal structure. Following the theories which can explain the difference in payment method discussed earlier.Section 2.

The data on the capital expenditures in the following period should be manually collected for the necessary companies. one might choose the amount of the capital investment in post-merger period as an indicator of for this aspect. the regression model which will be estimated looks as follows: Payment=β 0 + β 1 StateOwn+ β 2 TobQ+ β 3 CapEx+ β 4 Diversif + β5 LnRelatSize+ β6 LnAssets+ε 25 . otherwise 0. otherwise¿ the book value of assets∈thelast fiscal year before the acquisition Relative Theory referenced Availability of financial resources Availability of financial resources Asymmetry of information Investment opportunities Controls Controls Controls The dependent variable is obviously the method of payment – the binary variable which is equal to 1 if the payment was in stock. Following the theory of investment opportunities. t label of Full ariables Own age name of the Description variables State ownership the percentage of shares owned by the government Leverage (long−term book value of debt ) book value of total assets Tobin’s Q ratio (market value of equity+ book value of debt) book value of total assets x Capital investment latSize sif Logarithm of Size Diversified deal sets Logarithm of Assets the amount spent as capital investment ¿ the post−merger period (¿ 2 years) transaction value of deal ln book value of total assets 1 fiscal year ago ¿ 1.previous research it was revealed that the company with higher Tobin’s Q ratio more often pay in stock than in cash.industries ¿ {{ 0. Thus. The period is cut up to 2 years. H3: The acquirers which have alternative investment opportunities more likely pay in stock. Otherwise it can be the case that the management of an acquirer would have enough time to recover after the M&A deal in order to invest in something else. This suggestion forms the first hypothesis: H2: The company with higher Tobin’s Q will be more likely to pay in stock for a target.

t . First.T = t =s i=1 1+ Ri . For the second part the empirical section one essentially needs the data on the stock returns. The sample should be carefully sorted out from the population following the restrictions mentioned therein: 1. BHAR basically is the actual returns during the event window. even better. T – the length of the period of holding the stock (36 month) s+T BHAR i=∏ ( 1+ Ri . the Thomson Reuters database (SDC). one will prepare the descriptive statistics. The return of the company after the merging: s+T Ri . This data can be obtained from the Bloomberg database or. The multiple acquisitions must be excluded. We expect to obtain the sample of the size approximately 1500 observations. Otherwise one would not be able to separate the effects of different acquisitions.t ) −1 ns n s – the number of stocks in the portfolio in the beginning of the month s.T =∏ ( 1+ Ri .t )−1 t =s Ri . The data should contain the information about the date of announcement and the date of completion.  Part 2: the impact of state ownership on M&A performance One may note that this approach is power-driven and it needs to use the powerful statistical software. The acquirer should be involved in one deal process only. The information about the bid should be available. One would refer to the previous research in this field to address the issue of the measurement of investors’ investment experience by using the BHAR indicator. 3. analyze it. The period of sample will be 12 years (2002-2014). 2.the return of stock i in month t The benchmark reference portfolio return: ∏( [ ∑ ] s+T ns Rref .The population will be obtained from the database of the M&A deals with Russian-listed companies Zephyr (Bureau Van Dijk).t )−Rref . The data about the company should contain the information about the price of the stock and some financial (accounting) reports. Then one will use probit class of models and also check for robustness. T −1 t =s 26 . which includes the period of 36 months after the bid minus the benchmark portfolio return.

Combining this ranking with the ranking by the size of market capitalization. which were complied in a special way. 2. The companies are now ranked by quintiles in ascending order by the indicator of Book-to-Market value. Book-toMarket value and Industry control portfolio. the one would present the regression model: BHAR s=β 0 + β 1 StateContrAcq+ β 2 StateContrTarg+ β3 Cash+ β 4 Stock + β 5 Diversif + β 6 LnRelatSize+ β 7 LnAssets+ where StateContrAcq is the dummy. The size decile reference portfolios: 1. + 60 month) from the January of the particular year (for example. For the beginning of each year range the companies by the market capitalization in the descending order to form 10 size deciles. if the acquirer is state-controlled company and analogically StateConrtTarg is the dummy. one would get (10 deciles * 5 quintiles) 50 size/ Book-to-Market value reference portfolios. which equals to 1.buy and hold abnormal returns during 3 years after M&A deal. 27 . Download the data on the market capitalization of the tradable companies from the sample. where the first decile has the companies with the largest capitalization and the last decile represents the companies with the smallest capitalization.BHAR i . +36 month) starting from the month of event window for actual returns and finally calculate the buy and hold abnormal returns. 50 size/ Book-to-Market value reference portfolios and the most complicated one – the size. since it was created in a detailed and accurate methodology. if the target is state-controlled company. which have the lowest BTMV ratio. month. 2006). The last type of the benchmarking . starting from the most “glamorous” companies. One may require the particular way of constructing these benchmarks. Book-to-Market value and Industry control portfolio – is the mix of the second benchmark portfolio with additional requirement for the companies to belong to the same industry group.the size. starting 36 month before date of the bid. One might provide a step-bystep explanation of the construction method in order to use it in the future own research. Then again one combines this modified sample with the actual returns in the event window. Finally. Quite similar procedure is used for construction of 50 size/ Book-to-Market value reference portfolios. Combine the sample of reference portfolios and the sample with actual returns during the event window (-36 month. 3. which equals to 1. There were three kinds of the benchmark portfolios: the size decile reference portfolios. The next step was to construct and estimate the benchmark portfolios. Calculate the return of each company from each decile for each year during the period of (-36 4.

28 .

this research will be very useful both for the scholars and the managers. one would expect the positive effect of state control on the choice of cash as a method of payments. The particular example of the political connections and corporate governance can be seen in Russia. it moves economic activity in the country. According to the theory of availability of financial resources. The most relevant examples can be taken from the M&A practice in China. The sign of the relationship is difficult to predict at the moment. This behavior is twofold. sample collection and strong econometric techniques. There’re several issues that should be addressed by the management of the company before the procedure of merger has started. Overall. The regression analysis would indicate the effect of state control on the performance of the acquirer.Part 3. One might estimate the long-term performance of the acquirer by the buy and hold abnormal returns. This section found a great coverage in the world literature around M&A topic. The results of estimation should be verified by the tests on typical econometric problems like heteroskedastisity and multicollinearity. Conclusion In this extended proposal one analyzed the impact of state ownership on the M&A deal structure. there’re another theories that should be considered when doing empirical estimation. since it reveals the actual particularities of M&A deals in the presence of a state control. 29 . One would be more precise about the method of payment chosen by the company. On the other hand. such actions demonstrate nationalization motives. One would also expect to find the significant difference in the abnormal returns on acquirer’s stock for the pure private and statecontrolled companies. However. since its political situation has a lot of similarities to the Russian economy in the sense that it was pure socialistic in the past. More formally. Like in many other emerging economies. However. the completed research after this proposal should necessary contain careful data mining. there’s a strong influence of the state on the investment decisions taken by the “private” companies. In many cases such state-controlled firms drive the M&A market in its sector. On one hand. one would be interested in the details of the deals with state-controlled companies involved. such as the theory of information asymmetry and the theory of investment opportunities. Following the methodology presented earlier. it lead to the expansion of state control over the pure private sector. Finally. Another characteristic of the M&A deals is the performance of the acquirer after the deal announced. It coincides with the results of many authors who did empirical research both on the mature and developing markets. the state ownership might have a significant impact on the preference over cash as a payment method.

30 .

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2 n/a Comme nts 1.6 turing 19% strategic investm 1.# The object of transactio n Sector Typ e of the deal Acquirer 1 "NNK-Aktiv" Oil & Gas "Stroygazk 2 onsulting" Transport & Infrastructu re Alliance Group/"N M NK" Private investor Ruslan A Baysarov 3 "NNK-Aktiv" Oil & Gas A "NNK" 4 "TGK-9" Energy & Utilities Volzhskay A a TGK USM Holdings 5 Ltd Metals & Mining Managem ent of A USM UgraGazPer 6 erabotka Oil & Gas Polyus Gold Internation 7 al Ltd Metals & Mining SIBUR A Holding Private investor Oleg A Mkrtchan Target Alliance Group/"N NK" Private investor Zyad Manasir Alliance Group KSHolding Private investor Alysher Usmanov Rosneft Halyard Global Ltd Acq uire d Shar e joint comp any.5 ent 10% 32 .8 4 strategic investm ent horizona l integrati on + econom y of scale Reorgani zation.8 ent Rosneft sold seconda ry manufac 1. 60:4 0 De al val ue (U S$ bl n) horizona l integrati on + econom y of 6 scale 44% 5 60% 4. vertical integrati on 49% strategic investm 1.

ru Partners cation Vkontakte nications A Group Ltd Advisory 48% 1.8 9 10 Not e United Media & Capital Diversif Telecommu Mail. Table 1.4 motives Private Media & investor strategic Telecommu LetterOne Gleb 1.NNK and Alliance group. Then NNK merged with partially owned Alliance Group to create a joint company. n of AltynAlmaz Metals & Internatio Sumeru 100 resourse Gold Ltd Mining A nal plc LLP % 1. the subsidary of Alliance Group. Source: own research. NNK acquired 60% of Alliance Oil.1 base the largest deal of 2014 was basically the series of M&A deals between 2 companies .1 investm Altimo nications A Group Fetisov 14% 5 ent Sumeru extensio Polymetal Gold BV. Initially. 2 .

Total value of deals in different industries (US$ bln) 2013 Plot 3. Source [8] 2014 .