Target corporate governance, acquirers' location choices, and partial acquisitions☆
Introduction
There is a substantial literature relating firm-level corporate governance with firm performance, valuation and agency cost outcomes (see Gompers et al., 2003, Cremers and Nair, 2005, Bhagat and Bolton, 2008, Henry, 2010; and Brown et al., 2011 for a literature review). However, this relationship has not been widely extended to the market for corporate control. If such a relation is evident at the general firm-level, then it is reasonable to expect that corporate governance reform could represent a specific acquisition motive and source of value creation in corporate acquisitions. To evaluate this expectation, we examine the association between individual and index-based firm-level corporate governance attributes of target firms prior to involvement in partial acquisition transactions and post-acquisition performance measures of acquired firms. We do this for a sample of partial acquisition transactions involving listed target firms from the East and Southeast Asian region over the 2000 to 2010 period. We build on the cross-country analysis of Zhu et al. (2011) which identified the financial performance of target firms as a key discriminator between domestic or cross-border acquisition interests. Extending from the underlying link between corporate governance structure and firm performance or stock valuation, our primary proposition is that target firm-level corporate governance structure is an important additional, or moderating, variable to the relation between target performance and bidder destination choice which was not identified in Zhu et al. (2011).
We focus on the target firm perspective in acquisitions and evaluate firm-level corporate governance structure as a target selection attribute, relate target corporate governance quality with bidding firms' acquisition location preferences and, subsequently, link pre-acquisition corporate governance status with post-acquisition performance outcomes of target firms. This will tell us if corporate governance modification or enhancement is an acquisition motive, whether the importance of corporate governance as a motive relative to others differs depending on acquisition location, and whether target firm pre-acquisition governance structure is related to post-acquisition performance outcomes. This leads to two competing corporate governance-related propositions that are assessed in this study:
- 1)
Bidding firms acquire target firms with inferior governance structures to generate acquisition benefits from improved managerial decision-making, incentive realignment and greater operational effectiveness and oversight (corporate governance reform perspective); or
- 2)
Bidding firms acquire target firms with superior corporate governance to minimise agency problems, information asymmetry, acquisition risk and issues associated with corporate control and management transfer (corporate governance quality perspective).
A key requirement is employing a sample of successful partial acquisition transactions, as partial acquisitions, defined as acquiring greater than 50% post-acquisition ownership but less than 100% ownership in target firms,1 allow for the direct assessment of post-acquisition performance outcomes. Furthermore, we differentiate these into domestic and cross-border acquisitions and compare corporate governance structures and pre- and post-acquisition performance levels across these acquisition classifications to assess whether they are associated with bidder acquisition location preferences. The East and Southeast Asian region provides an attractive setting for this analysis for a number of reasons. Firstly, there is evidence of recent increasing emphasis on corporate governance policy resulting from the consequences of the 1997–1998 Asian Financial Crisis, which has also led to regulatory moves towards deregulation and increased capital and investment mobility (Claessens et al., 2000), resulting in a significant increase in the magnitude of acquisition activity (Dang and Henry, 2016). Based on data from the SDC Platinum database, the number and value of completed takeover deals have experienced annual average increases of 32% and 20%, respectively, over the 2000–2013 period, and the contribution of East and Southeast Asia acquisition activity to the total number of worldwide transactions has increased from 27.03% in 2000 to 46.28% in 2013 and from 11.26% to 30.47% in terms of total transaction volume. Furthermore, and of particular relevance to this study, the magnitude of partial acquisitions undertaken in East and Southeast Asian countries is substantially greater compared to countries such as the US, UK and Australia. Secondly, the region includes a mix of developed and developing countries providing different levels of corporate governance focus and regulatory enforcement (Chen et al., 2009, Claessens and Yurtoglu, 2013), and contrasting ownership models which create variation in monitoring and external governance environments (Lebedev et al., 2015). This diversity in institutional and governance environments is clearly evident from the country-level governance indices scores exhibited in Appendix B. The existence of variation in firm-level corporate governance across countries and firms is expected to increase the likelihood of corporate governance being an acquisition-related consideration or motive. However, the focus of the paper on partial acquisitions implies that firm-level corporate governance modification of target firms is more relevant than bonding to a different country-level institutional environment that would result from a full-acquisition process. Wang and Xie (2009), for instance, show that the difference in shareholder rights (based on the GIM anti-takeover provision index) between US bidding and target firms is associated with takeover synergy gains and the operating and market performance outcomes for bidding and target firms. This paper provides an extension by focusing specifically on the target firm-level perspective and the idea of “firm-level corporate governance structure (board, CEO and ownership-based attributes) and/or reform as an acquisition motive”, and extending this to domestic and cross-border acquisitions, and in a cross-country setting.
This study differs from existing research in several important ways. First, this study attempts to find if there is any correlation between target firm-level corporate governance structure at the time of takeovers and the motivations for the bidder's takeover location decision. In the current literature, much attention has been paid to the relationship between country-level governance factors and investment and acquisition decisions (Rossi and Volpin, 2004, Bris and Carbolis, 2008, Bris et al., 2008, Kim and Lu, 2013). Rossi and Volpin (2004) and Bris et al. (2008) find support for the bonding effects of cross-border full acquisitions, with cross-border bidders coming from countries with higher levels of investor protection and corporate governance than that of target firm countries. Furthermore, Leuz et al. (2009) and Kim et al. (2011) find that foreign investors tend to invest less in firms from countries with poorer governance environments and “cherry-pick” better-performing firms from these countries, and also indicate that home country governance quality impacts on their foreign investment choices. However, completion of partial acquisitions only does not allow for full bonding to the investor protection environment of the bidding firms' country, making firm-level corporate governance change a more plausible post-acquisition action. As a result, our study is motivated to examine the relation between target firm-level governance structure and bidding firm location preferences. We find that domestic and cross-border bidders pursue target firms with varying performance prior to acquisitions, however, they both are attracted to target firms with better corporate governance structures, suggesting that firm performance may be a value-creation motive whereas corporate governance structure is selected as a risk-mitigation or agency control device. These findings expand on previous works that focus on the association between investment preferences and/or corporate governance and acquisition decision-making and target firm performance,2 and especially the work of Zhu et al. (2011) in relation to the performance of target firms in partial acquisitions. Particularly, Zhu et al. (2011) do not examine whether the corporate governance structure of target firms at the time of takeovers is associated with target firms' pre-bid performance. In contrast, we confirm the importance of looking beyond typical acquisition-related thinking and planning around expected gains and bid premium levels and towards target firm corporate governance and ownership structure as key determinants of acquisition location decisions, as well as acquisition outcomes.
Second, there is a general consensus among existing studies that partial acquisitions play a key role in improving the governance quality of target firms, such as the replacement of poor management (Martin and McConnell, 1991), and increased monitoring reducing agency problems and managerial self-interest influences on target firm decision-making (Faccio and Lang, 2002, Kang and Kim, 2008, Doidge et al., 2009). We provide relatively direct evidence on this issue by examining if pre-acquisition corporate governance structure is related to acquired firms' long-term post-acquisition performance. If acquiring target firms with weaker corporate governance, and subsequent corporate governance structure modification, is a source of value creation then we expect to find a negative association between pre-acquisition target firm corporate governance quality and the change in post-acquisition target performance.3 Furthermore, if domestic bidders are more likely to acquire target firms for disciplining or structural modification reasons, then we predict a negative relationship between pre-acquisition target corporate governance quality and the magnitude of the change in post-acquisition performance and no, or a positive, relationship in the case of target firms involved in cross-border acquisitions. We find evidence, although relatively weak, that is consistent with this assertion.
Third, it has been extensively documented that the post-bid integration process in cross-border acquisitions is likely to be more problematic in terms of generating expected synergies due to the corporate cultural differences between the bidding and target firms (Weber et al., 1996), and the cultural, institutional, and corporate governance practice differences between the bidding and target countries (Bris et al., 2008, Erel et al., 2012, Kim and Lu, 2013). Subsequently, it is expected that the gains from domestic acquisitions would, on average, be greater than those from cross-border acquisitions. This study finds that the post-acquisition operating performance improvement is greater for domestic targets relative to cross-border targets. This finding is in line with the work of Zhu et al. (2011), though their study does not reveal the motivations for this finding. We show that target pre-acquisition corporate governance quality is negatively associated with post-acquisition operating performance gains for domestic targets and positively related to post-acquisition operating performance outcomes for cross-border targets, providing a direct link between target corporate governance status and acquisition performance effects. However, we find that the long-term market performance of cross-border targets exceeds that of domestic targets, suggesting that investors perceive greater value creation for international acquisitions, independent of the underlying motives and the relationship between the bidding and target firms.
The remainder of the paper is organized as follows. Section 2 reviews the existing literature and develops the related hypotheses. A description of data is given in Section 3, while methodologies used to examine the research questions are presented in Section 4. Section 5 reports our empirical results, and Section 6 concludes the paper.
Section snippets
Partial acquisitions
Target firms are typically delisted from the stock market after full takeovers; therefore, it is impossible to examine the post-bid performance of the full-ownership acquired firms. Unlike fully-acquired targets, partially-acquired firms via partial acquisitions remain independent after the bid and, hence, they provide a richer backdrop against which post-acquisition effects can be assessed. In other words, partial acquisitions provide the opportunity to analyse the effect of acquisition events
Data and sample selection
We study a comprehensive sample of acquisitions involving listed target firms, announced between January 2000 through December 20105 across eight East and Southeast Asian countries - Hong Kong, Malaysia, Indonesia, Philippines, Singapore, South Korea, Taiwan, and Thailand. These countries were most
The role of target corporate governance in the bidders' location decisions
This paper first employs a univariate setting to compare the pre-bid performance of target firms in the treatment sample with control firms for the two types of takeover location separately. The matched-pair firm sample is considered as the benchmark to compare with the domestic-acquired firms and cross-border acquired firms, respectively. In order to check the robustness of the univariate analysis outlined above, the industry-median sample is used in additional analysis. Further, as another
Target corporate governance and bidders' location choices
Panel A of Table 3 compares the pre-acquisition attributes and performance of partially-acquired firms with the matched-pair sample for the domestic and cross-border partial acquisition samples, separately. The results show that domestic-acquired firms have lower liquidity (LIQUID) and higher leverage (LEVRG) in the pre-takeover period. In terms of operating and profitability performance, domestic target firms have inferior operating performance (ROA) and weaker profitability (NM) than
Conclusion
This study makes use of the partial acquisition setting in the East and Southeast Asian region to examine the attributes and pre- and post-acquisition performance of domestic and cross-border target firms, and the potential role of target corporate governance and ownership structure on acquisition location preferences and performance outcomes. The study, first, finds that bidders consider both profitability performance and corporate governance of target firms as central concerns of their
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We are very grateful to Barry Williams (Journal Special Issue Editor), the anonymous reviewer, Anh Tran, Mark Humphery-Jenner, Tomas Herman Reyes, Mohamed Sherif, Murillo Campello, Robert Faff, and Buly Cardak. We also thank the participants at the 27th Australasian Finance and Banking Conference (2014), the 64th Midwest Finance Association Annual Conference (2015), the 2015 Paris Financial Management Conference, the 2016 Financial Markets and Corporate Governance Conference, and the 2016 Vietnam International Conference in Finance, for very fruitful comments and suggestions. Man Dang acknowledges research grant from the UD's Foundation for Science and Technology Development (B2017-DN4-03). Also, we would like to thank the members of the UEUD's Finance Teaching and Research Team for their support on the paper. All errors are entirely our own.