Effects of the acquisition-based majority ownership: Evidence from the Czech firms

• Thesis title in Czech: Vlivy změny majoritního vlastníka v důsledku akvizice: důkazy z českých firem
• Thesis title in English: Effects of the acquisition-based majority ownership: Evidence from the Czech firms
• Key words: post-acquistion performance, performance indicators, majority ownership, Czech firms
• English key words: post-acquistion performance, performance indicators, majority ownership, Czech firms
• Academic year of topic announcement: 2016/2017
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: prof. Ing. Evžen Kočenda, M.A., Ph.D., DSc.
• Author: hidden - assigned by the advisor
• Date of registration: 13.06.2017
• Date of assignment: 13.06.2017
• Date and time of defence: 20.06.2018 08:30
• Venue of defence: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Date of electronic submission: 10.05.2018
• Date of proceeded defence: 20.06.2018
• Opponents: doc. Bc. Jiří Novák, M.Sc., Ph.D.

References

CAPRON, L. (1999). The long-term performance of horizontal acquisitions. Strategic Management Journal, 20: 987–1018. doi:10.1002/(SICI)1097-0266(199911)20:11<987::AID-SMJ61>3.0.CO;2-B

DEMSETZ, H. and VILLALONGA, B. (2001). Ownership structure and corporate performance. Journal of Corporate Finance 7(3): 209–233.

FAVRE-BONTÉ, V. and THÉVENARD-PUTHOD, C. (2013). Resource and Skill Transfers in Subcontractor SME Acquisitions: Influence on the Long-Term Performance of Acquired Firms. European Management Review, 10: 117–135. doi:10.1111/emre.12014

HANOUSEK, J., KOČENDA, E. and SHAMSHUR, A. (2015). Corporate Efficiency in Europe. Journal of Corporate Finance, 32, 24-40

KING, D. R., DALTON, D. R., DAILY, C. M. and COVIN, J. G. (2004). Meta-analyses of post-acquisition performance: indications of unidentified moderators. Strategic Management Journal, 25: 187–200. doi:10.1002/smj.371

KONKOLSKI, S. (2011). Strukturalizace a analýza faktorů ovlivňujících efektivnost fúzí a akvizic. 192 s bez ISBN

LOUGHRAN, T. and VIJH, A. M. (1997). Do Long-Term Shareholders Benefit From Corporate Acquisitions?. The Journal of Finance, vol. 52, no. 5, 1997, pp. 1765–1790. JSTOR, www.jstor.org/stable/2329464.

TUCH, C. and O'SULLIVAN, N. (2007). The impact of acquisitions on firm performance: A review of the evidence. International Journal of Management Reviews, 9: 141–170. doi:10.1111/j.1468-2370.2007.00206.x

YOOK, Ken C. (2004). The Measurement of Post-Acquisition Performance Using EVA. Quarterly Journal of Business and Economics, vol. 43, no. 3/4, 2004, pp. 67–83. JSTOR, www.jstor.org/stable/40473385.

Preliminary scope of work in English

Typical acquisition motives include, but are not limited to: (i) for an acquiring company a strategy of expansion, and (ii) for individual investors and private equity funds an investment opportunity. A change of majority shareholder resulting from either of the motives represents a key milestone for the company. It is commonly followed by an attempt to optimise company’s operation, and to improve its performance. To what extent does a change of majority shareholder lead to an improved outcome of the acquisition target?

Existing studies and analyses on acquisitions by Tuch (2007), Yook (2004) or Loughran (1997) mostly focus on post-acquisition effects on shareholders’ returns, and market stock price of the acquiring company after an announcement of the intention to acquire. They conclude negative effects. Performance of acquisition targets has been studied only on a small sample in form of case studies by Favre-Bonté (2013). Furthermore, the studies primarily examine publicly traded companies and large corporations on developed markets. More recently, Popli (2017) studied post-acquisition performance of Indian firms from the perspective of belonging to a larger business group, the number of M&A deals realized prior to the transaction and also group product-diversity with positive outcomes. Farinós and Latorre (2017) use Heckman two-step model to test for self-selection bias stemming from acquisition of either listed or unlisted companies on the acquirers’ (listed companies only) abnormal returns proving with the goal of proving whether or not results of other studies not controlling for the self-selection bias show false results. They conclude insignificant difference between results found when employing standard OLS and Heckman model, hence that the inference from OLS estimators is not necessarily invalid, even though the estimators may be biased.

In the Czech market, research has been rather limited. Konkolski (2011) examined different a priori and a posteriori factors affecting performance of companies after acquisition based on interviews with top managers and questionnaires targeting 39 companies. This research was carried out on a rather small sample and included only basic statistics overview of responses, no regression analysis. Overall evaluation of performance was made via EVA and EBITDA relative to assets and sales indicators.

The Czech market has many specifics that make it distinguishable. The post-transition history of Czech market is relatively short. While there is a very limited number of publicly traded companies, there is a high number of SMEs with lower number of shareholders. Shareholders usually execute the role of the management rather than appoint external managers to name a few exemples. Therefore, the Czech market is suitable for analyzing local acquisitions from a different perspective than acquisitions realized on large developed markets.

This thesis shall aim to fill the gaps by analysing how acquisition targets in the Czech market environment perform in terms of revenue, EBITDA growth and other operational performance indicators in short to middle-term after the transaction, regardless of the acquirer’s returns.


Hypotheses:
1. Hypothesis #1: The size of the majority shareholder’s share does not affect company’s performance.
2. Hypothesis #2: Cross-industrial acquisitions do not outperform within-industry acquisitions.
3. Hypothesis #3: Acquisitions by natural persons (entrepreneurs) do not yield better results than acquisitions by legal persons.
4. Hypothesis #4: Acquisitions of SMEs do not yield better results in short-term (3 years) than acquisitions of large corporations.
5. Hypothesis #5: Acquisitions of large corporations do not yield better results in middle-term (5 years) than acquisitions of SMEs.

Methodology:
PData on acquisition targets will be collected from Bisnode’s Magnusweb for 3 periods: last complete fiscal year before acquisition (t0), 3 (t1) and 5 (t2) years after acquisition for available sample of transactions realized in the period 2005 – 2011. Core data to be downloaded will include: balance sheet and income statement for each of the companies and each of the 3 periods of interest, industry categorization (according to NACE), percentage share of the majority shareholder, and categorization of the majority shareholder (natural or legal person). The sample selection will be conditioned on the availability of financials 5 years after the transaction in order to compare results in short to middle-term after the acquisition.

Main studied performance indicators derived from companies’ financials will include: revenues, EBITDA volume changes, relative EBITDA to sales change, and gross margin. These variables will be tested separately for t1 and t2 as independent variables for dependence on different combinations of, amongst others, the following variables: the size of the majority shareholder’s share, the company’s size, industry, acquisition type (vertical / horizontal), change in direct costs. Two models will be used for testing: classical OLS and two step Heckman model.

An endogeneity issue might be expected to arise in OLS due to self-selection problem (restriction of the sample only on companies where majority shareholder changed) and possibly also due to ownership structures affecting the company’s performance. The logical goal of most acquisitions is lying in optimization of operations, hence often an attempt to increase revenues directly. Nevertheless, there are other performance indicators that might be targeted after acquisitions, thus different indicators are expected to show different dependences on combinations of similar regressors. Also, there exists a possible solutions to the endogeneity issue and that is a use of fixed effects estimation to capture heterogeneity.

For the use of Heckman model, appropriate selection equation determining probability of the event of change of the majority shareholder will have to be defined which may be rather difficult, since drivers for majority shareholder change vary, are very subjective for each case and may not be observable (e.g. the case of inheritance). Logical relevant regressor to be used in probit model could be growth or average of EBITDA to sales over the period 2003 – 2005 as a relative operating performance indicator that objectively evaluates both small family firms and large companies with no need to add further variable capturing heterogeneity in companies according to their size. The EBITDA to sales indicator is commonly used in research on operating performance and evaluation of effectiveness as e.g. by Martynova (2006). Furthermore, M&A Research Centre (2016) identified it as one of key indicators of an attractivity of a potential target. An additional probit regressor could be industrial categorization (NACE) to reveal a probability of companies being acquisition targets by specific industries.

The primary aim of the models shall be to examine and compare effects and their magnitudes on multiple performance indicators.

Expected contribution:
The thesis shall provide an analysis and assessment of acquisitions involving a change of majority shareholder realized between 2005 and 2011 in the Czech Republic with a 3- and 5-year retrospection from the perspective of the acquisition target’s performance. By testing models employing various performance indicators and combinations of regressors, a complex view on company’s post-acquisition efficiency dependence on transaction and company characteristics, and also assumed motives shall be revealed. In practice, the models and results may help for ex ante estimation of ex post results of transactions characterized by certain parameters.

Outline:
1. Introduction
2. Literature review
3. Czech market specifics
a. Enterprise statistics and characteristics
b. Development and trends of the market in terms of acquisitions
c. Regulatory framework and role of regulatory institutions (Office for the Protection of Competition, Financial Administration)
4. Empirical model
5. Data description
6. Results and their implications
7. Conclusion