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UNIVERSITY

BUSINESS & SOCIAL SCIENCES

DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS

AN EMPIRICAL STUDY OF ACQUIRERS ABILITY TO CREATE SHAREHOLDER WEALTH*

Thomas Grauer Nielsen & Jimmy Thien Phu Nguyen

Advisor: Damiana Rigamonti

May 2016

Department of Economics and Business Economics

Aarhus University

(Characters: 133.128)

* Subject area: M&A. Education: BSc and BScB

Abstract

Abnormal returns in stock markets are subject to many studies. In particular, the ability

to test on specific industries has received much attention. The number of M&As have

increased in the last decade, which also includes M&A deals in the pharmaceutical

(pharma) industry, where companies acquire to reach distinctive capabilities to survive

in the dynamic and complex business environment. Companies also utilize M&A to in-

crease their ability to create shareholder wealth, though this has shown partially not to

be correct. Previous studies conducted, have found rather different results on M&A

transactions.

more precise the study tests the abnormal stock return around the announcement day.

Furthermore, the study is conducted with a data sample consisting of 250 deals in the

pharma industry between 2000 and 2014. The data used in this thesis is obtained manu-

ally from Zephyr starting with 367 deals, where the excess 117 deals are excluded man-

ually due to lack of information such as missing ISIN number or overlapping events etc.

Four main characteristics are defined in order to examine cumulative abnormal re-

turn (CAR). The thesis distinguishes between cross-border and domestic, method of

payment, deal value, and geography. The geography is defined as the location of the

bidder in either EU or US. Methodologically the event study is based on abnormal stock

returns in a three-day event window.

Historically previous studies have found evidence for both positive but also nega-

tive shareholder wealth on M&A deals. Also, some deal characteristics have more signif-

icant results than others. If the deals are made cross-border, the abnormal return is high-

er compared to domestic deals. After sorting for deal characteristics, the deal values are

tested and discovered to have no significant result. Hence, there is no impact on the ac-

quirers shareholder wealth. Eventually, these findings are associated with the previous

empirical studies.

possible to further investigate all characteristics and compare them with each other.

Moreover, this thesis examines the characteristics and evaluates the impacts in order to

explorer whether cross-border, method of payment, deal value or geography can ex-

plain CAR. According to the efficient market hypothesis (EMH), the results disprove the

theory stating that the market is efficient in semi-strong form. Hence, the prices fully

reflect all available information and therefore it is not possible to earn an abnormal re-

turn because investors change investment strategy immediately after receiving new rel-

evant information.

After analysing the data, it is discovered that the data deviates from a normal dis-

tribution. Thus, test statistics are conducted to test for the M&A characteristics and in-

clude seven parametric tests. To account for robustness; marginal significance, non-

parametric tests, and robustness of asset pricing models are considered.

Conclusively the event study shows partial significant result regarding the acquire

companys ability to create a positive return for their shareholders. The findings from

the regression analysis are rather complex due to the non-normality of the data. Never-

theless, the results show that two of the characteristics are significant, cross-border and

share-based payment. With a 5% significance level, cross-border deals have shown a

positive effect for bidders shareholders, whereas with a 1% significance level, share-

based payment have a negative effect. Hence, there seems to be evidence for limited

conclusive event-study results.

Thus, the analysis concludes that the extent to which M&A deals can create share-

holder wealth from announcements is limited and open for further research.

Cross-border, Method of payment, Deal value, EU, US, Efficient Market Hypothesis.

Table of Contents

1. INTRODUCTION .................................................................................................................................... 1

1.1 MOTIVATION AND PROBLEM STATEMENT ..................................................................................... 2

1.2 DELIMITATION ................................................................................................................................. 3

1.3 DATA SOURCES ................................................................................................................................ 4

1.4 THESIS STRUCTURE .......................................................................................................................... 4

2.1 THE ROLE OF PHARMACEUTICAL M&A ............................................................................................. 5

2.2 THEORY OVERVIEW.............................................................................................................................. 6

2.2.1 Behavioural theory......................................................................................................................... 6

2.2.2 Neoclassical theory ........................................................................................................................ 8

2.3 REVIEW OF RELEVANT EMPIRICAL EVIDENCE .................................................................................... 9

2.3.1 Underlying strategic motives in Health Care M&A .................................................................. 10

2.3.2 Cross-Border or domestic acquisitions ........................................................................................ 11

2.3.3 Method of payment ...................................................................................................................... 14

2.3.4 Deal Value ................................................................................................................................... 16

2.3.5 US or EU ..................................................................................................................................... 18

2.4 SUMMARY OF PREVIOUS STUDIES ...................................................................................................... 19

3.1 INTRODUCTION TO THE EVENT STUDY METHODOLOGY ................................................................. 20

3.2 EFFICIENT MARKET HYPOTHESIS ...................................................................................................... 21

3.3 EVENT WINDOW, DATE AND ESTIMATION PERIOD .......................................................................... 22

3.4 ABNORMAL RETURN & CHOICE OF MODEL ..................................................................................... 23

3.5 PARAMETRIC AND NON-PARAMETRIC TESTS ................................................................................... 25

3.5.1 Parametric tests ........................................................................................................................... 26

3.5.2 Non-parametric tests ................................................................................................................... 27

3.6 CROSS-SECTIONAL REGRESSION ....................................................................................................... 29

3.7 THIN TRADING ................................................................................................................................... 31

4.1 DATA SELECTION PROCESS................................................................................................................ 32

4.2 DESCRIPTIVE STATISTICS ................................................................................................................... 34

4.3 VALIDITY OF SOURCES ....................................................................................................................... 36

4.4 TESTING FOR NORMALITY ................................................................................................................. 36

5.1 TESTS STATISTICS ............................................................................................................................... 38

5.1.1 Cross-Border versus Domestic .................................................................................................... 40

5.1.2 Method of payment ...................................................................................................................... 41

5.1.3 Deal Value ................................................................................................................................... 43

5.1.4 US or EU ..................................................................................................................................... 44

5.2 SUMMARY OF FINDINGS .................................................................................................................... 45

5.3 CROSS-SECTIONAL REGRESSION ANALYSIS ...................................................................................... 47

REFERENCES............................................................................................................................................. 55

APPENDICES ............................................................................................................................................. 63

List of figures

FIGURE 1: CROSS-BORDER VS. DOMESTIC DEALS IN THE PHARMA INDUSTRY .. 12

List of tables

TABLE 1: PREVIOUS STUDIES ................................................................................................ 19

NOT DEFINED.

List of abbreviations

APT Arbitrage Pricing Theory

DV Deal Value

EU European Union

MV Market Value

UK United Kingdom

US United Stated

Note: Comma (,) is used as decimal separator and punctuation (.) as thousands separator.

1. Introduction

Mergers and acquisitions (M&As) are one of the most critical means, when companies

have to adapt to the dynamic business environment. Moreover it is the consolidation

between two companies, most likely with an adjustment in company control through

the change in ownership or a new entity. In time, this form of investment has become

important in the business development and is one of the most preferred strategies when

firms aim to expand and remain competitive. The core objective is to create shareholder

value (Bruner, 2004). M&As are often seen in the United States of America (USA) and

Europe, who holds the majority of the number of deals. Since the 19th century, global

M&As have progressively increased its yearly activity. The motives behind M&As can

differ but are usually caused due to macroeconomic factors, from technological changes

and regulatory issues, to management incentives. Nevertheless, M&As create opportuni-

ties for firms to enter new markets or increase market share. Furthermore, it enables

businesses to achieve their goals faster and often at lower costs. M&As are preferred

since it gives the opportunity to create synergies in line with improving efficiency.

Martynova and Renneboog (2009) explain that it generates increasing share prices at the

announcement. After the financial crises in 2008 M&As have had a relapse, and since

2009, it has recovered and hit a record point in 2014. Based on Mergermarket (2014)

global M&A activity in 2014 consisted of USD 3.230 billion.

M&As are a commonly researched topic with many empirical studies; two of them

is often the effect on shareholders wealth or the drivers of M&As. Implementing M&As

do not differ from other corporate decisions, when it comes to creating shareholder

wealth. The basis for any investment is an expectation that the return on investment ex-

ceeds what is invested. This phenomenon is universal and can be observed almost eve-

rywhere in everyday life. The shareholders consistently expect that any decisions made

by the management are directed to increase the value or else principal agency conflicts

will emerge. In literature relative return is referred as "abnormal return." Investors will

always try to create an abnormal return and thus "beat the market". Active trading strat-

egies with this property are examined in numerous studies. In line with this, specific

industries have had several studies' interest.

The pharma industry is the combination of biotechnology and drug industries. To-

gether they represent a high-tech industry due to the amount of R&D concentration and

the amount of investments firms put into R&D on total costs. Moreover, intangible as-

sets are seen to be the most valuable since it gives the company the potential to develop

and produce blockbusters. R&D and innovation are highly prioritized that it intensifies

1

acquisitions for target companies with high R&D activity. Especially foreign firms ac-

quire, to capture new innovative activities. The incentive is bigger for foreigners than

domestic acquires since, in theory, they are already part of these activities (Ruckman,

2005).

It is found interesting to conduct a study that can contribute to the existing empirical

literature. Is it profitable for the acquirers' shareholders to be involved in M&A transac-

tions? Or do other M&A characteristics improve the firm's ability to create shareholder

wealth? Or worse case, can the shareholder wealth get destroyed upon the announce-

ment?

The pharma industry is diverse and led by the biggest drug producers in the world. The

industry differentiates with higher scientific knowledge than manufacturing know-how.

This is by far the most interesting aspect of the pharma industry. The firms invest in

many intangible assets without actually knowing whether or not it will succeed. Thus,

performance for pharma companies is measured in R&D. R&D covers the research as

well as the failures including. These aspects are financed through the sales of existing

products. R&D is often associated with the size of the company in line with a number of

sales. Pharma companies invest with different motives in order to meet their individual

goals, meaning that there are many characteristics in M&As in the pharma industry that

can be identified as determinants. Thus, there can be different patterns in the complex

pharma industry, which raises the question regarding or not there is a correlation be-

tween M&A characteristics and the way they invest in the pharma industry.

Several previous studies are made on M&As effect on the shareholder wealth

where few studies are pharma industry specified. Most industry-specific studies are

conducted on the financial sector. This thesis represents an analysis based on the litera-

ture on M&As and on different M&A characteristics. Additionally, the unique aspect

will be by measuring M&As in the pharma industry and to identify if there are any

trends. The analysis will be based on existing literature on M&A deals as well as the

pharma industry, regarding a quantitative analysis that will examine the M&As back-

ground in the pharma industry. To consider this, CAR will be tested during the an-

nouncement of the deal.

2

Since this industry is globally interdepended, companies engage intensively in

M&As, where it is implemented both as complements and substitutes to early stage re-

search. Finally, the potential abnormal returns to blockbuster drugs are significant.

RQ: Analysing M&As in the pharmaceutical industry: Can acquirers' shareholders expect a cu-

mulative abnormal return on M&As?

enhance the importance of the deal as well as the complexity. The sub-questions will be

answered in line with the research question:

SRQ 1: Do cross-border and domestic acquisitions create shareholder wealth in the pharma in-

dustry?

SRQ 2: Do methods of payment have an impact on the shareholder wealth in the pharma indus-

try?

SRQ 3: Does the deal value have an impact on the shareholder wealth in the pharma industry?

industry?

1.2 Delimitation

Delimitation is necessary to make, due to the scope of the study. Most considerably this

study only focuses on the short-term wealth of shareholders. Also, only the acquirer's

shareholders influence return is assessed on deal announcement. This thesis builds upon

the assumption regarding efficient capital markets; the efficient market hypothesis

(EMH) will be explained in section 3.2. Hence, the particular gain for each deal and the

long-term wealth of shareholders will not be evaluated or analysed. Since the term

M&As contain both mergers and acquisitions, this thesis will only analyse acquisitions,

thus signifying the controlling share, as an M&A deal. Moreover, this thesis only inves-

tigates the pharma industry and excludes all other industries since it is not appropriate.

Tests on specific industry related variables such as the amount of R&D will not be cov-

ered. Hence, strategic motives will not be tested on each specific deal, though a brief ex-

planation is presented.

3

Only completed and announced deals in the period from 1/1/2000 to 31/12/2014

is implemented. Though deals that are announced in 1999 and completed in the begin-

ning of 2000 are not excluded in the sample.

Finally, a limit of 300 million in deal value is included. A value lower than this

may cause the issue regarding thin trading, which will be explained in section 3.7. Fur-

thermore, smaller deals may also cause missing stock data.

This thesis has used secondary data. These data are extracted from Zephyr and

Datastream. Zephyr has been utilized to obtain all M&A deals and Datastream to collect

stock and index prices to calculate CAR. Zephyr has provided all the 250 M&A deals,

and they can conclusively represent the whole sample of the thesis.

all literatures are known and reliable sources, collected within the authors responsibil-

ity. Nevertheless, all sources are evaluated to be valid and either research articles from

respected journals and scientifically known books. Authors have ensured reliability and

validity by evaluating the sources from an objective point of view.

This thesis is structured with the principle that theory is examined and presented before

the practical is analysed. The event study approach will be implemented to answer the

research question(s). Hence, tests should be made to test whether the shareholder return

is higher than the market return. This thesis is structured in four parts. Section 1 covers

an introduction in line with motivation and the authors' thoughts towards the thesis.

The first central section (Section 2) will investigate the role of pharmaceutical M&As.

Moreover, the literature forms the basis for the questions formulated in this thesis. The

theories and models are explained as well. Section 3 consists of the methodology with

the essential factors to conduct an event study. Additionally, the test statistics and cross-

sectional regression are defined. Also accurate descriptions of the estimation period and

event window are presented. Section 4 presents the data used in the thesis. A deeper

description will be made of the data selection and process. The validity of the tests and

the regression will be shown as well. In section 5, empirical findings and the regression

will be analysed and presented in a table. Section 6 discusses the key findings and closes

4

the thesis with a conclusion that contains a clear answer to the research question. Section

7 starts with a critical discussion and the limitations regarding this thesis; the section

closes with suggestions for further research.

The following section introduces the role of pharmaceuticals M&As, including the activ-

ity in the industry. Further, a discussion on behavioural theories and neoclassical theo-

ries associated with M&As is conducted. The section also includes empirical evidence on

previous studies involving ross-border versus domestic, method of payment, deal value and a

geographical perspective focusing on EU and US. In the end, a summary of the previous

findings is presented in table 1.

Many studies are conducted regarding stock price returns based on M&As. An

overview on both general as well as industry specified research is given. Deeds & Hill

(1996) suggest that product development is the key driver of firms in the pharmacy in-

dustry. Baum, Calabrese, & Silverman (2000) explain as success criteria that firms must

look at the entry mode and how to address know-how and resources, to choose an op-

timal partner. A study made by Shan, Walker, & Kogut (1994) on correlations among

firms amount of innovation, size and method of payment show that bigger companies

tend to have an increasing focus on internal research (Rothaermel & Deeds, 2004).

The Economist (2014) explains that developing drugs is a high risk and uncertain busi-

ness. The majority of new medicines either fail during phase development or fail due to

the costs of developing them, meaning firms do not earn enough to recover. If enterpris-

es in the pharma industry do not have the necessary drugs or do not have any confirm-

ing drugs in the process to grow, they buy other firms. Examples can be some of the

largest drug makers; GlaxoSmithKline (GSK) and Pfizer, who have emerged from

M&As.

Through time, the strategies from these firms have changed. Drug makers used to

develop a broad scope of drugs to obtain an extensive product portfolio. With pressure

from different aspects such as knowledge sourcing and transferable drug research and

innovation, firms focus more on being the best in one area and giving up on where they

are weak (Halliday, Drasdo, Lumley, & Walker, 1997). A study made by Bain & Compa-

5

ny proved that this approach is successful. Further, their research proves that during the

past twenty years, the ten biggest pharmaceutical companies all to some extend have

implemented M&A in regard to create shareholder return. An example of this trend is

GSKs deal with Novartis to trade assets. GSK benefits by improving their already

strong position regarding vaccines and Novartis by improving their position in cancer

drugs (economictimes.com).

Regardless of country and company in the pharma industry, M&A motives are still

to some extend mutual. In the pharma industry firms intend to improve innovation to

enhance their efficiency and keep up with the technology. They aim to increase the size

and market value, to increase their market portfolio and attract new customers. Lastly,

firms aim to diversify their products, if possible, and to reach full integration, which is

one of the main reasons for takeover in the health care industry.

Global M&As have given the opportunity for firms to enter foreign markets. This

allows firms to reach their underlying motives from global perspectives, which includes

international diversification and global market power.

The motives need to support the main objective, which is to create shareholder value.

The following sections are a theoretical framework created to answer research question.

The subjects included are behavioral theory containing agency theory and the hubris

motive. Further, the neoclassical theory and synergies will be discussed. The chosen

theories will overlap and therefore not equally exclusive. Moreover, the theories are all

fundamentally rooted in corporate finance, and thereby the M&A theories.

Behavioural theory can be distinguished between two major categories on why corpora-

tions merge: the agency theory and the hubris motive. Following sections distinguishes

between the two theories

actions such as M&As. Agency theory explains the arising problems between agents

6

(shareholders, stakeholders etc.) and principals (executives, managers etc.), also known

as agency problems (Ackert & Deaves, 2010). The problem arises, when incentives be-

tween agents and principals are not aligned. Ross (1973) describes the agency theory as:

an agency relationship has arisen between two (or more) parties when one, designated as the

agent, acts for, or on behalf of, or as a representative of the other, designated the principal, in a

particular domain of decision problems.

In other words, the issue occurs when agents do not act in the best interests of the

principals. It is difficult for the principals to control the act of the agents. If they spend a

significant amount of money on business trips, or engage in risky investment, it may not

necessarily be in the interest of the principals (Ackert & Deaves, 2010). The management

of the acquiring company is mostly concerned about own utilities, and therefore chooses

the target company, who are creating the highest value for them and not for the owners

(Berkovitch & Narayanan, 1993). This issue is often related to companies where owner-

ship and management are separated (Ackert & Deaves, 2010). Further (Michael C Jen-

sen, 1987) suggests that management will not give up on projects that they have been

working on for a long time, even though it destroys value.

The agency theory is combined with many financial theories, including a theory of

the ownership structure in firms (Michael C. Jensen & Meckling, 1976). The theory en-

lightens the issues of cost created when the agency problem arises between the agents

and principals, and how the problem can destroy market value of a firm. The authors

define the costs as the costs of controlling managers behaviour and the loss in the firm.

The costs arise, when the level of management and ownership increases, and managers

are often more concerned about maximizing own utility instead of maximizing market

value. The owners spend the money for monitoring the managers and thereby increas-

ing the costs.

Hence, regarding M&A activity the managers may have a tendency of assessing

companies who creates most internal value, instead of shareholder wealth, which is a

principal-agency problem.

7

2.2.1.2 The Hubris Motive

The hubris motive explains the managerial psychology and suggests that managers tend

to behave irrationally when assessing the target firm. Roll (1986) argued that the incen-

tive when acquiring a company lies in the pride, or the hubris, even knowing that there

exists considerable evidence against earning abnormal returns from acquisitions. He

further argues that negative returns following acquisitions are well known, and there-

fore managers will strive for succeeding where others have failed. This strive leads to

overconfident behaviour, and managers act similar to the market, which do not reflect

all available information. This behaviour causes an interpretation of the merged compa-

ny to have a higher market value than the market expects (Roll, 1986). Oppositely from

the agency theory, the management believes that their behaviour is in line with the

shareholders interests. Hence they are unaware and unknowingly act wrong and over-

estimate their own abilities to valuate the merger correctly (Malmendier & Tate, 2008).

Roll (1986) argues for that if there are no synergies to corporate takeovers hence the hu-

bris states that on average the market value of the target should be more than substitut-

ed by the average decrease in the value of the acquiring firms. Further, he explains that

expenses regarding takeovers create an aggregated net loss of acquisition.

Regarding M&As the hubris motives, states too much in the sense of explaining

why most deals fail within three years. Particularly, in the pharma industry companies

invest in millions, where the majority still fail (Bruner, 2004). The hubris increases the

welfare in societies, through innovation and expansion in markets and products (Amel,

Barnes, Panetta, & Salleo, 2004). Bruner (2004) argues for that hubris can be one motive

to explain M&A activity.

firms environment regarding, technology, economy, and regulatory (Mitchell & Mul-

herin, 1996). M&A activity is a rational response of dynamic and changing industries,

and rational managers obtain or advance the performance of the firm by reacting to the-

ses changes. If managers have a rational behaviour, they should be able to create a posi-

tive net present value (NPV), and further to create shareholder wealth by increasing

market value (S. Sudarsanam, Holl, & Salami, 1996). Firms only implement M&As, if the

expected NPV is positive for both the acquirer and the target. If NPV is positive for ac-

quirers, synergies are created (Berkovitch & Narayanan, 1993). Referring to synergies it

8

can be distinguished between, operational, managerial and financial synergies. The op-

erational synergies refer to operational enhancement, which normally are an increase of

the revenue, cost reduction, asset reduction or tax reduction (Bruner, 2004).

A synergy enhancement of the revenue refers to a merged company that they can

sell more products and thereby create higher revenues, than the two firms independent-

ly. Cost reduction mainly refers to the economics of scale, improved utilization of assets,

greater purchasing power, etc. Asset reduction is in line with cost synergies because as-

set reductions are often an exclusion of unused assets after a merger, including redun-

dant buildings or inventories. Tax reduction discusses an increase in depreciation tax

shield, following the transaction. Tax reduction can also be a transferring of net operat-

ing losses, which is fulfilled if the target company is unable to fulfil the expenditures to

reduce tax expenses. By combining the operating losses with a profitable acquiring

company, the transferring of losses can optimize tax synergies (Bruner, 2004).

Managerial synergies are achieved if the management of the acquiring firm is more

competitive compared to the management of the target company (Trautwein, 1990). The

financial synergies discuss a reduction of the merged weighted average cost of capital

(WACC) and thereby optimizing tax shield by debt. If the financing of the deal creates

value for the investors that cannot be created without the other part, thus synergies are

generated. Combining two not perfectly correlated cash flows can also generate financial

synergies because the joint stream created at this moment is less risky. The probability of

financial distress is lower and entails lower risk per unit of cash flow (Lewellen, 1971).

Further, this risk reduction will imply attractiveness for creditors and potential inves-

tors.

Previous event studies have been conducted and have proven that M&A transactions

can generate abnormal return. These studies are made both on a particular M&A charac-

teristic or a specific industry. The following section will address important aspects that

characterise an M&A deal. Finally, the sub-questions are defined based on empirical

evidence. Moreover, the sub-questions are utilized as variables in the regression. The

regression will be further explained in the analysis. The overall purpose is to analyse

what influence they have on the acquirers CAR.

9

2.3.1 Underlying strategic motives in Health Care M&A

M&A activity in the pharma industry is increasing, especially with regards to cross-

border technology sourcing (Gugler & Dunning, 1992; Contractor & Lorange, 1988; Ha-

mel, 1991). The overall principle of M&As are that businesses go beyond own frames

and increase their capabilities (Hamel, 1991). Moreover, M&As include both the

knowledge sharing as well as increasing capabilities. A previous empirical study on

pharma industry shows that there is evidence of a statistically significant positive CAR.

Their results show a mean of 4,17%, hence shareholders can in average expect a positive

return on 4,17% (Hassan, Patro, Tuckman, & Wang, 2007)

This section focuses on the strategic motives behind M&As, where the first interest

is technology. Technology sourcing is defined as the amount of technology the acquir-

er can obtain from target to enhance the firms competitive advantage. The extent of

technology sourcing can be expressed as absorptive capacity. Moreover Cohen & Levin-

thal (1990) define that absorptive capacity cannot be seen as a substitution but as a com-

plement for firms existing development. The newly acquired technologies are building

upon the existing internal technology. Further Hamel (1991) suggest that firms have dif-

ferent motives. Thus, they learn in different places regarding their learning-related char-

acteristics. Dyer & Singh (1998) emphasizes the importance of company sourcing of

knowledge and experience similarities are more important than one companys base.

Another motive behind M&As are the strategic orientation. Koza & Lewin (1998)

clarifies that M&As in the pharma industry can be divided into exploitative or explora-

tive. A firm that pursues M&As are explorative and aim for long-term growth through

innovation and diversification or viability through new resources. The motive behind

explorative M&As are the economic incentive to discover new opportunities. On the

other hand, exploitative M&As are more internally focused, which aim to improve cur-

rent businesses by searching for new sources, firms can refine capital and assets (Koza &

Lewin, 1998). This form of M&As motives is also associated with cross-border R&D.

In the international business environment for the pharma industry, there has been

an increased interest in intangible assets such as technology, R&D, and knowledge. It is

essential for firms to seek targets that feature these factors (Doz & Hamel, 1995). Hence,

this leads to an increase in cross-border deals based on technology sourcing. Hagedoorn

& Narula (1996) further explain in their study that the increase fulfils the need for glob-

ally technological capabilities.

10

R&D has become necessary and one of the most attractive factors in the pharma indus-

try due to the increasing global competition along with the interdependence of technol-

ogy and its on-going development (Cantwell, 1994). Since the health care industry is de-

fined as a high-tech industry, acquisitions can be referred to bilateral technology sourc-

ing. John H. Dunning (1995) suggests that M&As made in this particular industry often

have the purpose of identifying new technologies as well as improving own. Hence, this

allows the acquirer to develop innovation and become more efficient. Strategically,

M&As can come with high risk and uncertainty, though with potentially high earnings.

Nevertheless, some firms also choose M&As for the purpose of learning and widen their

scope in the international business environment (John H. Dunning, 1995).

Particular in the pharma industry Porter (1986) explains that firms performances

are significantly correlated. This means that how they perform in the national market is

profoundly affected by their position and competitiveness in other operating markets.

Hence, it is critical for the firm in this industry to understand and implement the R&D

recourses and capabilities that are associated with the different markets. Also, related to

the pharma industry, R&D is a rather complex variable that can be very expensive for

firms. Additionally, it is time-consuming and uncertain investments. Halliday, Drasdo,

Lumley & Walker (1997) explain in their study of R&D in the pharma industry that the

firms are highly pressured to develop blockbusters as well as medicine contemporary

with achieving economies of scale in a global perspective. Fortunately, the increasing

globalization and interdependence mean that the drug researchers along with the inno-

vation have become more structured and transferable. Hence, firms have bigger incen-

tive and opportunity to utilize M&As. Valle & Gambardella (1993) suggests that firms

can learn from start-ups but more importantly they can learn from competitors with

similar or complementary R&D approaches.

M&As can be distinguished in national and international deals. More specific it can be

divided into: cross-border or domestic deals. As mentioned not many studies have con-

ducted M&A transactions with a focus on the pharma industry. The majority of the

M&As in the 90s have emerged domestically. Due to globalization as well as integra-

tions of national markets it leads to an increase in cross-border. Moreover, the rise in

competition especially global competition leads to an increase in cross-border transac-

tions. In numbers, according to Sudarsanam (2010) cross-border deals accounted for 52%

of the foreign direct investment (FDI) in 1987. This number increased to 83% in 1999.

11

As figure 1 shows, between 2000 and 2014 the number of cross-border deals is sta-

ble. Note that during this period economic changes have occurred but have not had any

effect on the cross-border M&As trend. Furthermore, the domestic deals account for a

much larger fraction. Moreover, the deal value is included in the figure.

1.600.000,00 350

1.400.000,00 300

1.200.000,00

250

1.000.000,00

# of deals

Million

200

800.000,00

150

600.000,00

100

400.000,00

200.000,00 50

- 0

2000 2001 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Drug companies focus on becoming more and more global due to important tech-

nology sourcing as well as increase in market power (Lipton, 2006; Burns, Housman, &

Robinson, 2009). According to Cohen & Levinthal (1990) it is again crucial for the phar-

maceutical companies to invest in intangible assets, such as R&D. The better firms can

utilize the market differences to their advantage, the greater advantage they get. The

health care industry is high-tech and very specialized. Thus, R&D is firms way to de-

velop and maintain the broad coverage. Greenfield investment in the health care indus-

try is too expensive, thus cross-border M&As are a way for firms to establish inter-firm

knowledge sharing (Dyer & Singh, 1998). Furthermore, when firms make use of cross-

border M&As it is acknowledge that the target firm has valuable resources and capabili-

ties. This thesis will present suggestions on the R&D of the firms M&A activities and

scientific knowledge, through literature and empirical findings (Cohen & Levinthal,

1989; Lane & Lubatkin, 1998).

Cross-border and domestic deals each have their motives. M&As in the pharma

industry have parallels (Kim & Inkpen, 2005). Domestic deals are often cost saving

through economies of scale where cross-border deals are made for companies to expand

with a further purpose. When a firm becomes too big for its national market, it ration-

12

ally is expected to focus on expanding globally. Firms can profit from these exploitations

(Cohen & Levinthal, 1990).

Several literatures have concluded a pattern in the M&A activity where cross-

border deals tend to have a positive effect (Doukas & Travlos, 1988). They explain that

exploiting foreign markets can reduce risk due to geographical diversification and even-

tually lead to a higher return. Kang (1993) present is theory regarding FDI and further

states that MNCs are bigger and gain easier access to different countries, thus they are

better at exploiting imperfect markets than domestics corporations, hence MNCs will

generate higher CAR. Though some have also a proven that it has a negative influence

where domestic deals have proved to have a positive influence on the acquirers return.

Moeller & Schlingemann (2005) proves this theory in their study that focuses on deals in

the United States. Relevant to this thesis Aw & Chatterjee (2004) explain in their study

on cross-border acquisition and the post-takeover performance of United Kingdom (UK)

acquirers of domestic UK, US, and EU that the CAR decreases significantly during post-

acquisition. However cross-border deals are exposed to liability of foreignness, such as

cultural differences, regulatory structure, etc. These liabilities are further analyzed in La

Porta, Lopez-de-Silanes, Shleifer, & Vishny (2000) study where they evaluate what im-

pact corporate governance and the legal system have. They specify that investor protec-

tion alongside with an insufficient legal system can cause complications in the difference

in implementation of information. Kim & Inkpen (2005) suggest that firms invest in

cross-border will generate positive return. Moreover firms have bigger incentive to in-

vest in other firms that are similar to the acquirer to avoid liability of foreignness and

expenses that may follow. Hence dealing with cross-border M&As can be more compli-

cated than domestic deals.

Another significant perspective is to look at Dunning (2000) and Kim & Inkpen

(2005) internationalization theories. This theory explains that firms prefer internal trans-

actions before open market, assuming that dealing internally is more beneficial. Moreo-

ver, three critical factors are important to implement the theory. For a firm to pursue this

internationalization theory it should have: internationalization, to increase the firms

capabilities, location, for strategic orientation and technology, to enhance competitive

advantage (Koza & Lewin, 1998). There is a tendency that the government is more en-

couraged to support national firms and more unconcerned towards foreign companies

M&A activity (Boot, 1999). Also, there are fewer incentives for firms to invest or expand

cross-border, since, operationally, domestic firms are doing better. This is also known as

the home field advantage hypothesis. Finally operating and supervising a business

away from home country is rather complex and can be very costly (Kim & Inkpen, 2005).

13

Based on the relevant literature review it is expected that the results show a posi-

tive abnormal return if the deals are cross-border. The majority of the previous studies

have shown clear indications that cross-border deals create shareholder wealth. The fol-

lowing sub-question is formulated:

SRQ 1: Do cross-border and domestic acquisitions create shareholder wealth in the pharma in-

dustry?

The method of payment is a more complex variable to analyse. There are several ways to

pay the deal. The thesis distinguishes between three methods of payment. The acquirer

company can choose to pay in cash, which is most common since it is rather simple and

easy for both acquirer and target company to evaluate. When choosing cash, it is paid in

return for the target companys shares. Payment with shares is much more complicated

and requires due diligent assessment of the firm. Share payment is based on a defined

ratio, which means that a certain number of the bidders shares are traded with one

share from the target company. Financial advisors are often used to reduce any form of

irregularities between acquirer and target (Cao & Madura, 2013). Masulis, Wang, & Xie

(2007) further suggests that the method of payment is a direct reflects of the announce-

ment. They explain that there is a relation between the stock markets and the an-

nouncements. Finally, acquirer company can choose a mixed payment, which is defined

as a random combination of; cash, shares, debt, cash assumed, debt assumed.

Some studies Harris & Raviv (1988), Stulz (1988) even show that the abnormal re-

turn differs regarding the method of payment. Executives focus on maintaining power

and influence, which have a sizable influence on an M&A decision-making. It is more

common for executives to choose cash offering rather than issuing more shares. Issuing

new shares will mitigate the companys stock holdings and is very costly.

Mayer, Franks & Harris (1988) present in their study that share-based payment

generate a negative CAR for the shareholders. Moeller, Schlingemann, & Stulz (2004)

suggests in their study regarding acquisitions in the public sector that there is a signifi-

cant positive abnormal return when acquirer pay in cash. This theory is further con-

firmed by Martynova & Renneboog (2009), a study on European M&As. Though, nu-

merous studies have investigated the link between the method of payment and the list-

ing status of target companies. Chang (1998) explains in the study regarding takeovers

of privately held targets and its returns. She compares stock payment and equity offers.

14

If a target acquisition is financed through stocks there are parallels to the placement of

equity; the reason is that the number of shareholders who own the target company are

limited. Chang (1998) further presents positive abnormal return in privately held tar-

gets that are financed through share offerings. Where cash offerings offer no abnormal

return.

In another study Fuller, Netter, & Stegemoller (2002) analyse that deals that are fi-

nanced through shares have a less negative impact on the prices. They suggest that the

impact may even be positive for private targets. They argue that a liquate reduction is a

direct reflection from the valuation of assets. Finally Chang (1998) reports that when a

company accepts a share offer, it is the effect of the companys progressive performance,

which will have a positive respond in the market. A more industry specified study by

Walter, Yawson, & Yeung (2005) focuses on the banking industry and further explain

that major banks (top-tier banks) tend to deliver a positive abnormal return if there

share payment is involved. This is from an acquirers perspective; seen from a targets

perspective a stock offering is only an obstacle in the deal process (Song, Wei, & Zhou,

2013).

Seen in other studies the method of payment often reflects the advisors reputation.

However Bowers & Miller (1990) presents no association between cash or non-cash and

advisor reputation. Francis, Hasan, & Sun (2014) explain in their study on the financial

advisors in cross-border M&As that there is a positive correlation between experienced

advisors with the effect from an announcement when it is a stock offering. Also Travlos

(1987) proves that if the executives overvalue their company they are more likely to offer

shares. Amihud, DeLong, & Saunders (2002) show in their empirical study that there is

significant correlation between the firms structure and what method of payment is cho-

sen. Moreover, they explain in domestic M&As that when deals are dealt in cash, it re-

flects quality. Eventually, this will lead to optimism in the market and thus favourable

reactions. Myers & Majluf (1984) present the same idea that executives act in the interest

of the shareholders. Thus, cash offering will be viewed positively.

In cross-border M&As, it is different, since this may not reflect the quality of the

deal. Officer, Poulsen, & Stegemoller (2009) show those target companies that are de-

manding to provide a higher return for stock offerings. This may be seen due to invest-

ments in intangible assets, research, and development (R&D) or other knowledge as-

pects. These aspects are critical in the pharma industry. All these factors hinder the

shareholders to obtain a true understanding of the acquisitions. Nevertheless, it is diffi-

cult for the shareholders to perceive the fair value and benefit. This is proven in the pri-

15

vately held targets. With uncertainty from shareholders, stock offering diminishes any

negative asymmetry that may emerge and create an optimistic return on bidders. Seen

from earlier studies, there is a significant correlation between shareholder wealth and

method of payment.

Wansley, Lane, & Yang (1983) concludes in their study on abnormal returns and

type of payment, with a sample of 203 M&As, that CAR increases by 33.54% if cash is

chosen whereas CAR only increases by 17.47% around half as much if the deal is share-

based.

Based on the relevant literature review it is expected that the results show a posi-

tive abnormal return if the deals are paid in cash. Moreover, it is expected none or even

negative abnormal return if the deal is financed through shares and mixed. The majority

of the previous studies have shown clear indications that cash payment creates share-

holder wealth. The following sub-question is formulated:

SRQ 2: Do methods of payment have an impact on the shareholder wealth in the pharma indus-

try?

The deal value in acquisitions is assessing, the price paid by the acquirer. Some re-

searches argue for and against a big deal size. Researchs made by Boston consulting

group (2007) and BusinessWeek (2002), argues for that deals above 1$ billion and 500$

million respectively, destroy shareholder value for the acquiring company. The reason

why are those larger deals entail more difficulties regarding maximizing the synergies

created through M&A transactions. Hambrick (1997) studied the role of the CEO hubris,

and argues for that larger acquisitions have a positive effect on the performance of the

acquiring company. Further they found evidence for losses in the shareholder wealth for

the acquiring company. They claim that greater premiums and larger deals tend to

cause more shareholder losses.

From 2000 to 2014 the M&A deals in the pharma industry fluctuated a lot. Figure 2

show the average value of the deals as well as the number of deals.

16

Figure 2: Total M&A deals in the pharmaceutical industry

1.000.000,00 450

900.000,00 400

800.000,00 350

700.000,00 300

# of deals

600.000,00

Million

250

500.000,00

200

400.000,00

300.000,00 150

200.000,00 100

100.000,00 50

- 0

One of the main reasons why acquisition has an adverse impact on the shareholder

wealth is that acquiring companies pay substantial premiums above the market value of

the target company (Hambrick, 1997). Notice, that deal value is highest in year 2000 due

to large deals from GSK and Pfizer. Another reason why larger target should have a

negative impact on bidders shareholder wealth is that larger deals tend to be more com-

plex in the process of merging. The complexities of a big merge destroy the synergies

due to high costs linked with the implementation (Loderer & Martin, 1990). In the oppo-

sition Roll (1986) argues for that larger acquisition should have positive effects regard-

ing the return on the bidder firm returns. He further argues that larger targets hold their

stocks less closely and are more liable to hand over their shares, hence acquirer pay low-

er premiums regarding the bidding price (Roll, 1986). Moreover, he argues for that the

acquirer have fewer rivals concerning larger targets, which can lead to at lower premi-

um paid. The argument makes sense because a high price, demand sufficient funds

which can eliminate competition. With same approach Atiase (1985), suggests that on

larger targets, the valuation tends to be more precise, which again leads to a fair valued

premium paid for the target stocks. Atiase (1985) argues for acquiring companies to hire

financial advisors with a good reputation, which should lead to better advice.

Based on the relevant literature review different results are presented. Some argue

for positive and some for negative abnormal returns. Thus, it is complicated to predict

whether the deal value has a positive or negative influence on CAR. The previous stud-

17

ies show no clear indications of the influence to CAR regardless of the deal value. The

following sub-question is formulated:

SRQ 3: Does the deal value have an impact on the shareholder wealth in the pharma industry?

2.3.5 US or EU

A geographical perspective related to M&As and event studies, in particular, is not con-

ducted frequently. This section aims to investigate if there is a significant difference in

the acquirers location, defined as either EU or US. Previous empirical studies are diffi-

cult to obtain regarding geographical comparison. Hence, this section presents previous

studies where the acquirer is located in EU and US respectively.

Datta & Puia (1995) have tested cross-border acquisitions with acquirers located in

the US. Their findings show on average no impact for acquiring firms shareholders. In

opposition Markides & Ittner (1994) tested international acquisitions and the market

value of US bidding firms. Their findings show on average that cross-border acquisi-

tions create value for the acquiring firm. Concluding on those previous empirical studies

testing for US located companies it complicated to determine whether it is creating or

destructing value. Other previous studies have conducted the M&A activity where ac-

quirer is located in EU. Renneboog & Goergen (2004) have analysed the short-term

wealth effects of European acquirers. The findings show a minor positive result on

cross-border deals for the acquiring company, though the results show greater positive

impact on the targets market value.

Finally Campa & Hernando (2004) finds evidence concluding that acquiring com-

panies in the European market are not affected by acquisitions. Concluding on the pre-

vious studies regarding European acquirers the results deviates, stating that the share-

holder wealth can either be positively or non-affected.

results is presented. Some argue for a positive impact on the shareholder wealth where

others argue for no influence, independent of the acquirer is located in EU or US. The

previous findings do not show any clear indication of the influence of the shareholder

wealth, which is going to be in line with the expectations. It is expected that the results

deviate, with few or no significant results. The following sub-question is formulated:

indsutry?

18

2.4 Summary of previous studies

M&A studies are often tested. These studies somewhat give different results regarding

CAR. Some studies find significance that acquirer creates shareholder wealth due to

M&As whereas other studies find significance that acquirer creates negative wealth. Ta-

ble 1 shows a summary of previous studies.

Hassan et al. (2007) Pharma Positive

Fuller et al. (2002) General Positive

Doukas & Travlos (1988) Cross-Border Positive

Moeller & Schlingemann (2005) Cross-Border Negative

Aw & Chatterjee, 2004 Cross-Border Positive

John H Dunning (2000) Cross-Border Positive

Kim & Inkpen (2005) Cross-Border Positive

Moeller, Schlingemann, & Stulz (2004) Cash Payment Positive

Martynova & Renneboog (2009) Cash Payment Positive

Chang (1998) Cash Payment Neutral

Walter, Yawson, & Yeung (2005) Cash Payment Positive

Bowers & Miller (1990) Cash Payment Neutral

Mayer et al. (1988) Share Payment Negative

Boston consulting group (2007) Deal Value Negative

Loderer & Martin (1990) Deal Value Negative

BusinessWeek (2002) Deal Value Negative

Datta & Puia (1995) US Neutral

Markides & Ittner (1994) US Positive

Renneboog & Goergen, 2004 EU Positive

Campa & Hernando, 2004 EU Neutral

This section describes the methodology of event studies and the assumptions at this

moment. Moreover, the efficient market hypothesis, a description of the event window,

estimation period and event day will be explained. Further, the calculation models and

the abnormal return will be discussed. The section also contains descriptions and dis-

cussions of the statistical tests and the cross-sectional regression. Finally, a discussion on

thin trading will be conducted.

19

3.1 Introduction to the event study methodology

This thesis will be conducting an event study. This event study will measure what ef-

fects if any, a particular event has on the value of a firm. Moreover, an event study can

be divided into five stages. The first stage is to define an event. These definitions can

differ from earnings announcement or M&A activities. The second stage is to define a

period of time or often defined as an event window, which includes the announce-

ment day. The third stage refers to the second stage where a sample must be drawn

from databases with similar announcements. The fourth stage depends on the research

question and is all about adjusting. The sample is here specified and can be narrowed

into geographical, period and industry limitations. When dividing the event study into

five stages, the two last stages look at what effects each event have on a firms stocks.

The fifth stage statistically proves whether the event (announcement) have any signifi-

cant influence on a firms stocks. The final stage includes several statistical tests to

strengthen the clarifications.

other company. MacKinlay (1997) explains that the efficient market is rational, which

means an announcement will immediately reflect the firms stocks. To obtain an overall

caption of the effect of the event, a three or five-day event window can be chosen, which

means one or three days prior and after the event. This event window works as observa-

tory period for any changes in stock prices. This approach is necessary in order to com-

ply with any leaks of information (rumours) before the announcement. It also respects

the time the market spends to spread rumours. One criticism concerning this approach

is to obtain a precise estimate on the market reaction, these stock prices that are related

have to take place in the given event window. Nevertheless, if the window is too small,

it may not give a reliable caption of the effect. On the contrary, if the window contains

too many days, other aspects may weaken the effect and eventually misinterpretation

regarding the stock prices can occur. Moreover, the stock prices have to be compared to

the normal return before any conclusions can be drawn.

The expected return excluding the event can in another way be defined as the

normal return. There are two ways to calculate the normal return; statistically or eco-

nomically. Abnormal return is defined as the difference in stocks between the estimated

normal return and the actual post return. This thesis implements the market model cf.

appendix I.

Fama, Fisher, Jensen, & Roll (1969) introduced the first event study, where they an-

alyse what new information can do to the stock prices. Until today, their methodology

20

has become the most standardized tool to measure stock prices and its effect on events

(Binder, 1998).

Fama (1970) describes one of the basic assumptions for doing an event study, which is

the efficient market hypothesis. The theory states that prices are fully reflected by all

available information. A market, where prices always reflect all available information is

called an efficient market. Regarding this thesis, the hypothesis states that an an-

nouncement of an M&A transaction should be incorporated immediately in the contrib-

uting firms stock price. In other words, it is not possible to earn an abnormal profit, be-

cause investors immediately after receiving new relevant information, change invest-

ment strategy.

The Efficient market hypothesis differentiates between three types of market effi-

ciency; weak, semi-strong and strong form (Fama, 1970). The weak form of market effi-

ciency tests that only historical prices are reflected in the stock prices, however, no other

available information can predict the future performance of stocks. The semi-strong

form additionally includes all available public information compared to the weak mar-

ket efficiency, such as deal announcements, stock splits, etc. The strong form contains

both public and private information, where given investors or traders have monopolistic

access to relevant information regarding the price of stocks. The effect of insider infor-

mation is not possible to measure, and therefore, it is assumed that market efficiency in

the semi-strong form holds. The strong form is considered to be a very extreme ap-

proach and is not a true representation of the real world. The random walk model infers

the core of the efficient market hypothesis (Fama, 1970).

Event studies test the consistency of the efficient market hypothesis because they

are based on the fact that announcements should affect the securities price (Fama, 1991).

In other terms, event studies test the market efficiency in the semi-strong form. Fama

(1991) describes event studies as the best way of testing market efficiency as a result of

the return based on the announcement of the event.

The joint hypothesis states that if the efficient market hypothesis is rejected, it

should be because of market inefficiency or if the model used for calculating the abnor-

mal returns is not correctly used. Moreover event studies are testing two hypotheses: the

hypothesis about the event is bringing relevant price information to the market, and the

hypothesis observing market efficiency.

21

3.3 Event window, date and Estimation period

The event day is the official day of an announcement according to Bloomberg. The event

day is set as t = 0. The period between T0 and T1 is represented as the estimation win-

dow or period. The period between T1 and T2 is denoted as the event window. The

timeline is graphically illustrated in figure 3.

The estimation window is used for estimating the market model, where the event

window is used for calculating the abnormal returns. In this thesis an estimation win-

dow of 200 trading days are chosen, where Bartholdy, Olson, & Peare (2007) argues for

an estimation window between 200 and 250 days, when daily returns are used. The

choice of estimation window in the thesis is following the approach of (MacKinlay,

1997). Longer estimation windows estimate a more exact coefficient of beta. The state-

ment requires beta to be constant through the estimation window (Daves, Ehrhardt, &

Kunkel, 2000). An assumption for the coefficient of beta to be constant is that the stock,

in line with the chosen index, is constant as well, during the estimation period.

In association with the efficient market hypothesis, the announcement should af-

fect the stock prices prompt. Theoretically, a one-day event window is sufficient, but

due to information reaching the public market after closing time, or announcements on a

holiday, a one-day event window is not likely to be adequate. To oblige for potential

complications a three-day event window is chosen cf. figure 3. The three-day event win-

dow in practice apprehends any effect of an announcement (MacKinlay, 1997). This the-

sis will only center on a three-day event window, even though Peterson (1989) argues

for a five-day period.

Regarding event studies and this thesis, it is vital to determine an event day cor-

rectly. The problem with defining the exact event day during an M&A deal is the proba-

22

bility of information leakage, and several rumors regarding the current transaction,

which will influence the securities price. The announcement day is commonly chosen in

event studies concerning M&A transaction, which is determined in this thesis.

Several models can be used to determine and calculate the expected return of stocks.

They are commonly separated into a group of statistical models and economic models

(MacKinlay, 1997). The statistical models include the Constant Mean Return Model and

The Market Model, where the economic models include the Capital Asset Pricing

Model (CAPM) and the Arbitrage Pricing Theory (APT). For both groups of models,

the same statistical assumptions are valid, but the economic models contain more theo-

retical limitations. In accordance to MacKinlay (1997) the economic models provide

more disadvantages than advantages, which lead to a minor choice of economic models

in event studies.

The Constant Mean Return Model,' assumes that mean return of stocks is con-

sistent over time, where The Market Model assumes that the relation between the mar-

ket return and the stock return is stable and linearly.

When eliminating the part of variation related to the market, the variance of the

abnormal returns is reduced. According to MacKinlay (1997) The Market Model is

more adequate compared to The Constant Mean Return Model. The actual benefit of

choosing the market model depends on the R-squared in the regression on the market

model. A high R-squared, increase the explanatory power and reduce the variance, and

increases the gain of the abnormal return (MacKinlay, 1997). The Market Model is im-

plemented in this thesis to calculate abnormal returns.

The Market Model is used for calculating abnormal returns. Parameters in the

model estimate a pre-event period sample using the estimation window with ordinary

least squares (OLS) regression (Binder, 1998). The linear relationship between the return

for a specific stock and the market return is as follows:

23

!" = 0 !" = !!! (2)

Where Rit and Rmt state the return on the specific stock and market portfolio in pe-

riod-t. The period is the estimation period described in section 3.3, concerning both the

stock and the market portfolio. The return is calculated as logarithmic returns, which

increases the normality in the data (J. Y. Campbell, 1996). The zero mean disturbance

term is illustrated as it , where 2i , i and i are parameters regarding the model. To

measure the return on the market portfolio Bartholdy, Olson, & Peare (2007); MacKinlay

(1997) suggest a broad index as the benchmark, which represents the stocks in the sam-

ple. The MSCI AWCI Healthcare is chosen, for the biggest part of the sample, which in-

cluding large and mid cap securities in 23 developed countries and 23 emerging mar-

kets. The benchmark used for the remaining sample is the major indices in the respec-

tive country.

The abnormal returns can be calculated on behalf of the market model. The return

is calculated by the difference between the estimated return based on the estimation pe-

riod, and the actual return. The abnormal return is measured by the formula:

ARit is given as the abnormal return on the stock at time t, where Rit illustrating the

actual return observed for the stock at time t. The parameters i and i , are coefficients,

respectively the intercept and the systematic risk. The linear structure of the model is

specified by those coefficients. The OLS method is used for estimating the parameters.

cannot be drawn, before the abnormal returns are aggregated in time and through the

securities. The abnormal returns will first be accumulated for each stock, through time.

Afterward, the abnormal returns can be accumulated across the amount of securities

(MacKinlay, 1997). The formula for the cumulative abnormal return in the event win-

dow for a given stock can be drawn as:

Where AR j,1 is given as the abnormal return the day prior the event day for a par-

ticular stock j . The following AR represents the abnormal returns on the event day, and

the day past the event day respectively. The CAR is a sample of the dependent variable,

24

which is used in the regression analysis and the parameters tested in the significance

tests, described in the following sections.

Various test statistics will be performed on the calculated CAR. Moreover, it is im-

portant according to Bartholdy, Olson, & Peare (2007) to run more than one test since

different tests may give different results and increase the robustness. If the given as-

sumptions do not hold, misspecification may occur in regards to the difference in the

assumed distribution for the hypothesis and the actual distribution. Consequently, this

can lead to an over rejection of the null hypothesis in regards to the chosen significance

level, this is also known as type I error. Nevertheless a type II error can eventually lead

to accepting a false null hypothesis. Ultimately, type I or type II errors appear incorrect

interpretations of the null hypothesis. To eliminate the misspecifications, non-

parametric tests are implemented, which is explained by Brown & Warner (1980) and

have a less restrictive structure than parametric tests. All test statistics are based on a

null hypothesis where the return is equal to zero thus bidders shareholders receive no

abnormal return.

since none of them is each others superior. Running these tests in line with Brown &

Warner (1985), the hypothesis should be defined as:

tests. Four assumptions should hold if the output is reliable. One assumption failing is

enough for the parametric tests to fail and therefor the non-parametric is more powerful.

The assumptions are defined as:

Independency

Normality

25

Moreover, normality is critical and should be tested firstly. Normality test is fur-

ther explained and presented in table 5.

All tests are performed either as parametric or non-parametric tests. Next section will

contain a deeper clarification of both test categories and how they differ.

Testing for CAR in the event window, parametric tests, based on a standard t-test, are

implemented to see whether the difference between two means is zero. These tests have

shown to be reliable and provide relevant outputs. Though, multiple studies show that

non-normality is a major obstacle and thus Corrado (2011) suggest that if the data is not

normally distributed non-parametric is more appropriate to implement. Using the mar-

ket model to calculate the expected return, this thesis defines the numerator to be the

effect M&A announcement has on the stock prise. According to Bartholdy, Olson, &

Peare (2007) the denominator refers to an estimated variance that is used specifically for

the test statistics, which mean that each parametric tests are exclusive and designed for

obstacles that may emerge for the specific data (Brown & Warner, 1985).

CAR (T! , T! )

!"# T! , T! = ~N 0,1 (7)

var(CAR T! , T! )

!!

var CAR T! , T! = !! var(AR ! )

(8)

Binder (1998) and previous studies identify four obstacles regarding abnormal return. It

may:

Different variances across the observations

The variance may be bigger in event window than estimation window

Not be independent across periods

In order to address these problems these five parametric cf. appendix III, test are con-

ducted and defined as:

26

T1: T-test cross sectional dependence (Brown & Warner, 1985)

T3: T-test with standardized excess return and cross sectional independence

(Brown & Warner, 1985)

T3adj: Variance adjustment t-test cross sectional independence (Patell, 1976)

T4: Induced variance adjustment Cross sectional (Brown & Warner, 1985)

(Boehmer, Masumeci, & Poulsen, 1991)

Patell t-test, as well as Boehmer, Masumeci & Poulsen (BMP) t-test, are very uncer-

tain compared to the other tests when the assumption regarding normality is not ful-

filled (Corrado, 2011). Nevertheless Bartholdy, Olson, & Peare (2007) further prove that

BMP t-test in studies that includes the large indices rejects the null hypothesis too often.

Different from the parametric tests, according to Campbell & Wesley (1993) it is not es-

sential for non-parametric tests that the sample is normally distributed. Bartholdy, Ol-

son, & Peare (2007) explain in their event study that the rank and sign test perform more

reliable and better test power than parametric tests even if the assumptions does not

hold. Thus non-parametric tests do not provide poor results. This is proved in Brown &

Warner (1980) and Brown & Warner (1985) with multiple tests on parametric and non-

parametric tests and analyse the performances for each test.

Event studies are in general sensitive when the sample contains outliers.

McWilliams & Siegel (1997) clarify that this usually occurs in relatively small samples. In

this case, non-parametric tests can be used to identify whether or not the results are

based on outliers (DeLong, 2001). Corrado (1989) have then proved that rank test is most

suitable to utilize when samples are small. Since this thesis uses some sub-samples that

are relatively small, the non-parametric tests are critical.

Three non-parametric tests are made cf. appendix III, and defined as:

27

T7: Generalized sign test (Cowan, 1992)

!!!!

T! = ~N 0,1 (9)

(!! !!! )

This method compares the positive abnormal return from the event window with the

estimated window. This test assumes that there is equal share of positive as well as neg-

ative abnormal return. Hence, this test takes normality into account. Finally, it is power-

ful towards increasing variance since it only looks at whether the abnormal return is

positive or not and excludes the amount of abnormal return (Arnold Richard Cowan,

1992).

1 !

N !!!(K !" K!

T! = !

~N(0,1) ( 10 )

1 !! 1 !

K !" K !

L! + L! !!!! N !!!

The rank test allocates each return a rank (!" ) hence, the abnormal return till become

ordinal scaled. The return will be uniform regardless of any asymmetry there may be

related.

Moreover, compared to standard parametric tests the rank test and sign test (non-

parametric) are best specified. This is shown in multiple event studies. The rank test per-

forms better in the null hypothesis and stronger in the alternative hypothesis.

Another way to support the strength of the non-parametric test Arnold Richard

Cowan (1992) describes the generalized sign test to be an alternative test to the rank test.

This method has shown to be a more precise and qualified test if the event window is

longer. Moreover, it occurs to be more superior if returns have high variance or if the

stocks are thinly traded.

28

3.6 Cross-sectional regression

When it comes to M&As, there are many aspects that influence the shareholder wealth.

It is interesting to test for correlations between abnormal returns and the characteristics

of the given event. Therefor a cross-sectional regression is optimal to test these hypothe-

ses. The most common method to test if the independent variable influences the de-

pendent variable is the ordinary least square (OLS) (Verbeek, 2012).

y = X + ( 11 )

The formula explains that the dependent variable noted as y multiplied with the

given x-factors. This thesis corresponds to CAR, whereas xs are the different factors. X

is vector stacking where x explains the factors and describe the significance on y.

Binder (1998) explains that the regression analysis simplifies the estimation of the

parameters and abnormal returns. In this study, control variables are defined as varia-

bles that have an effect on the CAR. These variables are chosen to conduct the regres-

sion:

29

Table 2: Regression variables

Variable Definition

Dependent Variable:

CAR of acquirer, with a three-day event

window (-1;+1) and t=0 as announcement

day. CAR is calculated with log return with a

CAR (-1;+1) period of 201 days prior to announcement

date. The national indices as well as the MSCI

AWCI Health Care index have been

implemented as market return.

Deal and Acquirer:

Cross-border

made across countries

Deal Value

million. Total deal value

Cash

paid in cash

Shares

paid in shares

Geography

from US, EU or other.

Year (1999-2014)

2014

The regression is performed in EViews and calculated using the OLS method.

Since the data set is cross-sectional, heteroscedasticity may be a problem. To adjust for a

possible bias of the OLS estimated variance, all regressions are corrected using White's

30

(1980) heteroscedasticity consistent standard errors. The initial full regression model

including all variables is as followed:

! = + ! ! + ! ! + ! ! ! ( 12 )

! + ! ! + ! ! +! ! + ! !

! !

When measuring the different return models or abnormal returns, it is challenging if the

stocks are not traded on each trading day (Maynes & Rumsey, 1993). Using the market

model to measure the stock return on stocks that are poorly traded may lead to impre-

cise test statistics. Moreover Campbell & Wesley (1993) explain that the standardized

test will too often reject the null hypothesis.

A study made by Arnold R. Cowan & Sergeant (1996) argues that generally in

event studies and trading frequency the return distribution outfaces the trading fre-

quency. Specifically this means that the return increases when the trading frequency

decreases. Though they further substantiate that even though stocks are less frequently

traded the generalized sign and rank tests (non-parametric) still perform well unless the

variance increases. Also Arnold R. Cowan & Sergeant (1996) also suggest adjusting for

thin trading to test statistics. Thus, to comply and avoid these obstacles thinly and me-

dium traded stock should be excluded from the sample. This method is seen in most of

the American studies. Alternatively, the test statistic can be modified. When excluding

the thinly traded stocks, the reliability of the study increases. More specifically Bar-

tholdy, Olson, & Peare (2007) explain that stocks that are traded less than 40% of all days

are categorized as thinly traded. Moreover they define medium traded stocks to be,

transactions on 40% to 80% of all trading days.

Eventually, these stocks are removed from the data sample. Still there may be more

obstacles left in the sample. One is seen when there are no prices on a particular trading

day. Maynes & Rumsey (1993) explain in their study that there are three possible meas-

urements on how to comply with and to ensure the quality of the tests and to minimize

its influence. The three different procedures are described as the uniform return, the

trade-to-trade, and the lumped return procedure. First mentioned the returns are equal-

ly allocated over the non-trading days. The trade-to-trade procedure, which is used in

this study, uses the market model to calculate the expected return.

31

To calculate the expected return all information regarding stocks and market over

time is used. When the returns for trading days are calculated the returns for market

indices are calculated for the same period. Lastly the lumped return procedure sets

the non-trading days rate equal to zero. This method can be questioned on its reliability.

This approach underestimates the variance, which eventually biases the test statistics

but is simple and easy to calculate. Despite the critiques this procedure are often utilized

to adjust for thin trading since they perform closely to the trade-to-trade procedure but

are less complicated (Bartholdy et al., 2007).

4. Sample Data

The section depicts the process of selecting and sorting data, which constitutes the final

sample of M&A deals used in the statistical tests and cross sectional regression. The sec-

tion embraces a descriptive statistic of the sample and a discussion on the assumptions

for parametric tests. Moreover a short section validating the sources will be showed.

This thesis consists of data on M&A transactions in the pharma industry within the

timeline between 2000 and 2014 obtained from Zephyrs database. All deals are com-

pleted between January 1, 2000 and December 31, 2014 and have no geographical crite-

ria. In order to obtain the most significant data from Zephyr all deals fulfil these follow-

ing criteria:

Deal status are announced, completed or confirmed within the time period.

Deal type is exclusively acquisition. Reverse takeovers and bankruptcy acquisi-

tions are not included.

A deal value is established at a minimum of 300 million. This will exclude all

minor acquisition.

Acquirer company as well as target company are all listed companies.

Acquirers method of payment is cash, shares, debt assumed, cash assumed.

The health care industry is defined through the criteria that data are within US

SIC 283. All else are excluded. The chosen SIC code focuses on the drug industry.

32

Based on these criteria the preliminary sample consists of 367 deals. Eventually 53 deals

are reduced due to their missing ISIN number according to Zephyr. Additionally, 7

deals with wrong country codes are excluded. These wrongly included deals are exclud-

ed since they will mislead the final sample and give incorrect results.

The downloaded deals from Zephyr are used in Datastream in order to retrieve

daily stock prices (from acquirer company) within the event period and leads to a reduc-

tion of 15 deals because they lacked on information on stock prices or simply datastream

cannot provide the necessary information.

Besides, 20 deals are excluded due to overlapping events. Overlapping events are

deals announced on the same day, which may effect and mislead the stock prices and is

therefore excluded from the sample. Further, 4 deals are deleted since their trading days

do not cover the event. As Bartholdy et al. (2007) explain stocks traded less than 40% of

the trading period is removed. However, this thesis excludes both thinly and medium

traded stocks with trading less than 80% of the estimation period. Based on this explana-

tion 15 deals are excluded from the sample. Lastly, 2 deals are removed due to missing

index, and 1 deal is removed since the index is not traded around the event.

In order to benchmark the deals, index returns are retrieved from Datastream.

Since this thesis focuses on the pharma industry, one particular index is used for all ac-

quisitions. These index returns are explained as total return indices. The benchmark in-

dices used are the acquirer countries respective Morgan Stanley Capital International

(MSCI) based on the MSCI AWCI Healthcare Index. The health care index includes large

and mid cap stocks in 46 countries between developed and emerging markets. All stocks

are classified in the health care sector. Alternative indices are chosen to 15 deals in sev-

eral countries since MSCI ACWI Healthcare do not cover. Thus national indices are cho-

sen.

Bartholdy et al. (2007) explain, as long as stocks are liquid enough (do not suffer

from thin trading), the index should give a significant reflection of the market.

Table 3 includes the step and search results from the data together with the manu-

ally excluded deals.

33

Table 3: Sample selection

743,057 6,554

Debt assumed, Shares

Manuel

Missing target country code 7 360

To define the sample and the subsamples, a descriptive statistics are presented. The

study consists of 250 deals in the pharma industry and the sample is divided into differ-

ent sub-samples. The sample distinguishes between cross-border or domestic deals,

where the sample is almost equally divided including 119 and 131 deals respectively.

The deal value, represents a split in quartiles, including 25% of the deals in the deal val-

ue 1, 2, 3 and 4, where deal value 1 contains the biggest deals.

34

The method of payment is divided into three main categories: Cash, shares, and

mixed payment. The method of payment, are not equally divided by the three categories

where the biggest part are cash payments. The share payment only includes 41 deals

and can be argued as a smaller sub-sample. Bartholdy et al. (2007) argue for a minimum

of 50 observations to engage enough power in the statistical tests. The sample is finally

divided in geography, where US and EU deals are included. The descriptive statistics

are illustrated in table 4.

The following table contains other statistics to identify the distribution of the sam-

ples and sub-samples. The statistics include the mean, standard deviation, kurtosis, and

skewness. Normal distribution has a skewness of 0, and a kurtosis of 3, which will be

explained in section 4.4.

The mean of CAR in table 4 illustrates a positive tendency, except domestic, share-

based payment, deal value 1 and US. The highest mean is represented by cross-border

deals, where the share payment shows the lowest mean. The skewness illustrates that

most of the sub-sample are right skewed, hence positive skewness. The sub-samples

where the means are negative reflect that all are left skewed. Thus they are not symmet-

ric and therefore not normally distributed. The standard deviations are all below one,

which is crucial for type I errors. Sub-samples with standard deviations above one can

contain outliers. The kurtosis is above three for all sub-samples; hence, the samples are

thick tailed. Consequently, this leads to an over rejection of the null hypothesis. The re-

sults of the descriptive statistics show that none of the sub-samples are normal distrib-

uted, which will be discussed in the section regarding the test for normality.

35

Note, the 32 deals remaining from EU/US is defined as other and not included.

The collection of M&A transactions are obtained through Bureau Von Dijks Zephyr,

which is a well-recognised database in the business environment. Zephyr is acknowl-

edged for the reliability of the data about M&A transactions. Thomson Reuters

Datastream is a database used for collecting stock data regarding the acquiring company

including prices on the primary indices used to benchmark. Datastream is often used for

collecting data on listed companies, given that both databases are secondary sources, the

risk of faulty data can appear.

Hence, these risks have a minimal effect on the overall analysis and considered as a

reliable estimator.

Various assumptions must hold when conducting test statistics. When performing the

parametric test the assumptions are independency, normality, constant variance and

measurement on an interval scale.

All assumptions must hold, if one fails the non-parametric tests are chosen since

they are more powerful. This study is testing for normality to ensure the most important

and powerful tests, which will secure reliable results and avoid misinterpretations. The

criteria for normality are symmetric, which mean the skewness is zero. Further, it

should have a normal coefficient of kurtosis. Skewness defines to what extend the dis-

tribution asymmetries regarding the mean where kurtosis measures the bell shape of the

tails. If the kurtosis is defined to be more than 3 (peak) it is called leptokurtic, mean-

while, if the distribution is skewed (more then zero), it is an indication to positive skew-

ness. Hence, the distribution is skewed to the right (Brooks, 2014).

Fama (1976) suggests that deals on daily basis deviate more from normal distribu-

tion than monthly when it comes to returns. Moreover, they have a tendency to be fat-

tailed. Campbell & Wesley (1993) find in their study on daily return on NASDAQ that

non-parametric tests often show better results about parametric tests due to the a high

degree of failing normality. Eventually, both studies explain that in general skewness

and kurtosis are sensitive when the sample size is small. Bartholdy et al. (2007) under-

36

line that when the sample is thinly traded there is a bigger tendency that the sample de-

viates from a normal distribution. Stocks that are less traded have a lower skewness and

smaller kurtosis. Consequently, this can cause an over rejection of the null-hypothesis.

Jarque-Bera is a goodness of fit test that determines whether the samples are nor-

mally distributed or not (Jarque & Bera, 1980). The Jarque-Bera test is calculated with

kurtosis and skewness cf. appendix II, to identify whether or not they deviate from a

normal distribution. The normality is performed with a 5% significance level, and reject-

ed if the p-value is below 5%.

Furthermore table 5 shows that none of the sup-samples, used in this thesis fulfill

the assumption of normality. The table shows that all subsamples are significant with a

p-value below 5%. Hence there is strong evidence that none of the sub-samples are nor-

mally distributed.

Table 5: Normality

Total Sample 150,6468 0,0001 NO

Cross-Border 115,3551 0,0001 NO

Domestic 47,7819 0,0001 NO

Cash payment 173,4948 0,0001 NO

Share payment 15,2744 0,0001 NO

Mixed payment 31,2888 0,0001 NO

Deal Value (1) 94,0371 0,0001 NO

Deal Value (2) 19,5093 0,0001 NO

Deal Value (3) 69,9235 0,0001 NO

Deal Value (4) 26,6845 0,0001 NO

US 55,4319 0,0001 NO

EU 350,4783 0,0001 NO

The key issue regarding normality is to understand how much it can deviate from

normality before the parametric tests are dropped. Since the estimated models are made

on a time series data, it is relevant to give an introduction to autocorrelation and hetero-

scedasticity briefly. This thesis does not conduct a test on autocorrelation since a test is

already made on normality where it failed. Autocorrelation is when the residuals corre-

late, hence equivalent to the abnormal return. Autocorrelation is often seen when the

data is based on time. Hence, the data can be linked with different trends. In the case of

37

autocorrelation, OLS will be biased. Thus, the estimated abnormal return of the event

window will give a wrong result. To test for autocorrelation, LM-test can be used.

have a constant variance. Moreover, when the data is based on time-series, there is the

risk that the variance may change over time. To test for heteroscedasticity Whites test

can be implemented.

5. Empirical findings

This section covers the findings of the test statistics regarding the defined M&A charac-

teristics concluded with a summary of findings. It furthermore contains an analysis of

inter-correlation and a cross-sectional regression.

The test statistics are made under the null hypothesis of zero abnormal return as stated

in section 3.5 (H0: CARj=0). If the test statistics shows significant results, and therefore

states that abnormal returns are created, the null hypothesis is rejected. Further, the

CAR deviates from a zero return. The CAR in the test statistics is calculated focussing on

the three-day event window. The tests are based on significance levels of 1%, 5% and

10%, respectively.

The t-statistics describe the creation of CAR, where a positive t-statistic means that

shareholder wealth is created only if the results are significant. A negative t-statistic

means that shareholder wealth is destroyed. Discussed in previous sections, the statisti-

cal tests are divided into parametric tests and non-parametric tests. The parametric tests

are stated as T1-T5, including two adjusted tests, which gives a total of seven parametric

tests. Further, the non-parametric tests are stated as T6-T8, with a total of three tests. The

statistical tests differ regarding assumptions relating to the distribution of the sample.

The parametric tests are using the standard t-test, under the assumption of normally

distributed samples. If the sample deviates from the normality the non-parametric tests

are more robust.

As stated in section 4.4, the descriptive statistics show that none of the sub-samples

are normally distributed, therefore the non-parametric tests create stronger evidence

38

and are more reliable. According to EMH, no significant abnormal returns are expected,

since the market should be efficient in the semi-strong form.

Table 6 shows the tests statistics for the complete sample of 250 deals.

In the total sample CAR is positive with 1,00% excess return. The statistics tests for

the total sample show that the ordinary t-test with cross-sectional dependency (T1), the

t-test with a standardized excess return and cross-sectional independence (T3) and the t-

test with induced variance adjustment reject the null hypothesis, at significance levels of

5%, 1% and 10%, respectively. The T1 test concludes that the sample destroys share-

holder value, by rejecting the null hypothesis, where the other statistical tests find that

shareholder wealth is created. The remaining parametric tests are not significant, and

therefore, the null hypothesis is not rejected. On the non-parametric tests, none of the

tests show any significant results. Hence, this study fails to reject the null hypothesis

and fails to find abnormal return.

In conclusion, three out of six parametric tests reject the null hypothesis. All non-

parametric tests fail to reject the null hypothesis. Notice, the sample is not normally dis-

tributed, thus the non-parametric tests outperform the parametric tests. There is no sig-

nificant evidence showing that the deals create shareholder wealth. The total sample

shows no indications on abnormal return.

39

5.1.1 Cross-Border versus Domestic

Table 7: Cross-Border sample test statistics

The average CAR for the cross-border sub-sample is 2,33%, with a sample size of

119 deals. The parametric tests T1, T3, T4 and T5, rejects the null hypothesis of CAR

with significance levels of 1%, 1%, 5% and 5% respectively. The positive CAR for the

parametric tests is in line with Aw & Chatterjee (2004), Doukas & Travlos (1988), Dun-

ning (2000) and Kim & Inkpen (2005) show significant positive results in CAR in their

respective studies regarding cross-border M&As. In opposition Moeller & Schlingemann

(2005) find significant negative results on CAR in their study. The T2 adjusted and T3

adjusted fails to reject the null hypothesis. The parametric tests show cross-border deals

create an abnormal return. No significant results are found in the non-parametric tests,

and therefore unable to reject the null hypothesis. Thus, it can be concluded that cross-

border deals do not statistically have a significant impact on CAR for the acquiring

companies.

The average CAR for domestic deals shows an average CAR of 0,20% in excess re-

turn, consisting a sample size of 131 deals. The parametric and non-parametric tests do

not show any significant results for domestic deals, and fail to reject the null hypothesis.

Significant results are found in the test statistics for cross-border and the sample indi-

cates to create higher abnormal return compared to the domestic sample.

40

5.1.2 Method of payment

This section distinguishes between three types of payment methods in the 250 deals,

including Cash, Share and Mixed-payment. The statistical tests are presented respective-

ly.

The average CAR for the cash-based sub-sample shows 1,28% excess return, con-

sisting a deals size of 134. The parametric test T1 with cross-sectional dependence and

T3 test with the standardized excess return and cross-sectional interdependence rejects

the null hypothesis with significance levels of 1% and 10%, respectively. The t-statistic

for these tests shows a positive effect on CAR. The remaining parametric tests fail to re-

ject the null hypothesis with a 10% significance level. The conclusively cash-based pay-

ment does not have any statistically significant impact on acquires CAR.

Chang (1998) and Bowers & Miller (1990) previous studies on cash payment also

show a neutral impact on CAR. Moeller, Schlingemann, & Stulz (2004); Martynova &

Renneboog (2009) and Walter, Yawson, & Yeung (2005) show statistically significant

results concluding that cash-based payment has a positive impact on acquire CAR.

In table 10, the test statistics for share-based payment are presented.

Source: Own contribution

The average CAR for the share-based sub-sample shows -2,60% in excess return,

consisting a sample size of 41. The sample size is small and may give weak statistical

power. The parametric tests T1 with cross-sectional dependence and the T4 test with

induced variance adjustments, rejects the null hypothesis with significance levels of 10%

41

and 5%, respectively. The tests show a negative impact on CAR. The remaining para-

metric tests fail to reject the null hypothesis. The non-parametric tests T6 and T7 reject

the null hypothesis with significance levels of 10% and 5%, respectively. The t-statistic

shows that CAR is negative impacted. The remaining T8 rank Corrado test fails to reject

the null hypothesis saying CAR is equal to zero.

Concluding on the share-based sample the test statistics shows statistically signifi-

cant results saying that share-based payment method has an adverse impact on CAR

and the shareholder wealth. In line with the conclusion, several theories conclude that

paying with shares create a negative impact on the shareholder wealth, which is in line

with Martynova & Renneboog (2009) findings.

In table 11, the test statistics for mixed payment are presented. The mixed payment

is defined as a combination of cash, shares, and debt.

Source: Own contribution

The mixed-based sample shows an average CAR of 2,47% in excess return, consist-

ing 75 deals. The parametric test T1, T3, and T5 rejects the null hypothesis with signifi-

cance levels of 5%, 5% and 10%, respectively. The tests argue for a positive impact on

CAR. The remaining tests fail to reject the null hypothesis. The non-parametric test T6

rejects the null hypothesis, with a 10% significance level. The remaining tests fail to re-

ject the null hypothesis.

Concluding the mixed sub-sample, the statistics show a weak indicator of positive

effects on CAR. Otherwise, the statistics show a neutral impact on the CAR. Hence to

specify the requirements regarding the mixed payment, the comparisons with previous

studies are difficult.

Discussed in the literature review it is expected that the share-based payment will

have a statistically significant negative impact on CAR. In line with the test statistics, the

share-based payment shows to affect the CAR negatively.

42

5.1.3 Deal Value

This section distinguishes between quartiles of deal values. The statistical tests are pre-

sented from Deal Value 1, including the 25% largest deals, followed up by Deal Value 2,

3 and 4.

The test statistics for Deal Value 1 are presented in Table 12.

Source: Own contribution

The Deal Value 1 consisting 62 deals, with an average CAR of -0,74% in excess re-

turn. All the parametric tests and the non-parametric tests are significant at the level of

10%. Hence the tests fail to reject the null hypothesis. The conclusion is that large deals

in the pharma industry do not have any significant impact on CAR.

In table 13, the test statistics for Deal Value 2 are presented.

Source: Own contribution

The Deal value 2 includes 63 deals, with an average CAR of 1,28% in excess return.

The test statistics shows a significant result in only the T1 parametric test, at a 1% signif-

icance level, concluding that the null hypothesis is rejected. The t-statistic shows a posi-

tive impact on CAR. The remaining parametric tests and non-parametric tests fail to re-

ject the null hypothesis.

In table 14, the test statistics for Deal Value 3 are presented.

43

Source: Own contribution

The deal value 3 includes 62 deals and has an average CAR of 2,12% in excess re-

turn. The test statistics shows significant results in the T1 test, saying that the null hy-

pothesis is rejected. The remaining tests including parametric and non-parametric tests

fail to reject the null hypothesis. Deals presented in the third quartile do not have any

impact on the shareholder wealth.

Source: Own contribution

The fourth quartile and smallest deals are having a CAR of 1,34% in excess return,

including a sample size of 63. The test statistics shows significant results in T1 and T5,

rejecting the null hypothesis. The tests are significant at the level of 10% and 5%, respec-

tively. The remaining tests fail to reject the null hypothesis, concluding the test statistics

subsequently show no statistically significant results of the deals in the fourth quartile

whether CAR is positively of negatively impacted.

Discussed in the literature review, it is expected that the CAR regarding deal value

can be complicated and be either positively or negatively affected by large deals. The

test statistics are in line with the expectations, showing that all quartiles fail to reject the

null hypothesis.

5.1.4 US or EU

on the location of the acquirer. The section will first examine US followed up by EU.

44

Source: Own contribution

The US sample consists 127 deals, with an average CAR of -0,27%. Explaining the

CAR, the test statistics shows no significant results with a significance level above 10%.

The test statistics fail to reject the null hypothesis, concluding CAR is equal to zero. If the

acquirer is placed US, there is no statistically significant result saying that CAR is nega-

tively or positively impacting the shareholder wealth.

Source: Own contribution

The EU sample size is 91, with an average CAR of 1,63% in excess return. Explain-

ing the CAR the parametric tests shows significant results in T1, significant at the level

of 1%, and T3, significant at the level of 10%. The tests reject the null hypothesis, with a

t-statistic indicating a positive effect on CAR and the shareholder wealth. The non-

parametric test T6 and T8 shows significant results rejecting the null hypothesis with a

significant level of 10%. The T7 test fails to reject the null hypothesis. The results of the

tests are thus mixed. Even though CAR deviates significantly from zero, it is not possi-

ble to determine whether the effect is positive or negative for the shareholder return,

when the acquirer is EU located.

In line with the discussion and expectations in the literature review, it is expected

that the results show no clear evidence on CARs influence on the shareholder wealth.

The results show no clear evidence on whether CAR is positively or not impacted by the

geographical deal characteristics, which is in line with this thesis expectations.

This section summarises the findings in the previous sections. An illustration of the find-

ings is enhanced in table 18.

45

Table 18: Summary of findings

Total sample Positive (3*/7) -

Cross-Border Positive (4*/7) -

Domestic - -

Cash Payment Positive (2*/7) -

Share Payment Positive (2*/7) Positive (2*/3)

Mixed Payment Positive (3*/7) Positive (1*/3)

Deal value 1 - -

Deal value 2 Positive (1*/7) -

Deal value 3 Positive (1*/7) -

Deal value 4 Positive (2*/7) -

US - -

EU Positive (2*/7) Positive (2*/3)

*: # of tests below a significance level of 10%

Source: Own contribution

sample characteristics show significant results in the non-parametric tests. The strongest

indication of CAR deviating from the null hypothsis is the share-based sample and the

EU sample. The share-based sample shows a clear indication of having a negative im-

pact on CAR, with two significant results in the parametric tests and non-parametric

tests respectively.

Though the results differ in the t-statistic, which complicate the predictions on the effect

on CAR. Ignoring the distribution of the samples, the cross-Border deals have a strong

indication of a positive impact on CAR. Moreover, the t-statistics has a level above two

and a significance level of 10%, in all the parametric tests.

Finally, the mixed payment method shows three significant results in the paramet-

ric tests and one significant non-parametric test, though at the significance level 10%.

The mixed payment gives a weak indication that CAR is created when deals are paid

with a combination of shares, debt, and cash. Though the sample does not differentiate

between the combinations, whether it is share/debt, cash/shares, etc.

46

5.3 Cross-sectional regression analysis

This section contains the cross-sectional regression analysis. In previous sections test

statistics are conducted and based on the specific sub-samples. The cross-sectional re-

gression analysis differs from the previous test statistics by combining all chosen varia-

bles at the same time, whereas test statistics only look at one variable at a time. The re-

gression model is explained in section 3.6.

The dependent variable in the total CAR with the event window defined as [-1;+1].

The independent variables in the regression model are defined as cross-border, cash,

shares, other, and US where all variables are dummies. The deal value is interval scaled

in euros ().

A test for correlation is conducted before the regression analysis. The aim of this is

to test whether there are any correlations between the control variables and the deal

value. If correlation appears the variables cannot be used in the same regression model

at the same time, since inter-correlation will occur. Table 19 shows that, none of the con-

trol variables correlates with each other. Hence, all can be concluded in the regression at

the same time.

47

Table 19: Correlation

EMPLOYEES

CAR

MV

DV

CAR 1,0000 -0,0024 -0,0622 -0,0578

MV -0,0024 1,0000 0,0759 0,0118

EMPLOYEES -0,0622 0,0759 1,0000 0,1785

DV -0,0578 0,0118 0,1785 1,0000

The different models are performed in EViews. Table 20 presents the coefficient

and the std. error for all variables. The p-value is noted with stars and shows whether

the variables are significant or not. Further included in table 20 are the R-Squared and

the adj. R-squared, and explains how specified the models are. The model is better de-

fined if the R-squared is high. Adding more variables the R-squared will increase, where

the adj. r-squared corrects them, hence the adj. R-squared gives a correct explanation of

the models extent to explain the variances.

P-values and the F-statistics are linked, which is also shown in 20. F-statistics ex-

plain if or not all the variables are equal to zero. Verbeek (2012) explains if all variables

are equal to zero thus the model fails to explain the dependent variables since the inde-

pendent variables do not differ from each other.

The expectations in the literature review combined with the result from the test sta-

tistics it is expected that the result of the regression will show a significantly positive

CAR on deals made cross-border compared to domestic deals. Moreover on the method

of payment, it is expected that share-based payment will influence the shareholder

wealth negatively. Also, it is expected that deal value show insignificant results regard-

less of the size of the deal. Hence, CAR can be influenced both in a positive and negative

direction. Finally, it is expected that the geographical deal characteristics show insignifi-

cant results, regardless of the location of the acquirer is in EU or US.

The cross-sectional analysis is built upon the total CAR, which is the dependent

variable that consists of the sample of 250 observations. This cross-sectional analysis will

give a reliable indication on CAR.

what influence it has on CAR. All control variables are added to the regression analysis;

48

none of the control variables are excluded since none of them are correlated. The last

model in table 20 includes all variables defined in the regression.

Model 1

Model 2

Model 3

Model 4

(base)

Dependent variable CAR

Intercept 0,0267 0,0348 0,0228 0,0288

(Std. Error) (0,0274) (0,0272) (0,0295) (0,0292)

Cross-Border 0,0237 0,0190 0,0249 0,0200

(Std. Error) (0,0098**) (0,0099*) (0,0100**) (0,0101**)

Deal Value -0,0001 0,0001 -0,0001 -0,0001

(Std. Error) (0,0001) (0,0001) (0,0001) (0,0001)

Cash Payment -0,0171 -0,0168

(Std. Error) (0,0118) (0,0119)

Share Payment -0,4563 -0,0459

(Std. Error) (0,0157***) (0,0158***)

US 0,0060 0,0073

(Std. Error) (0,0112) (0,0111)

Other 0,0028 0,0030

(Std. Error) (0,0187) (0,0187)

MV -0,0001 0,0001 0,0001 0,0001

(Std. Error) (0,0001) (0,0001) (0,0001) (0,0001)

Employees -0,0001 -0,0001 -0,0001 -0,0001

(Std. Error) (0,0001) (0,0001) (0,0001) (0,0001)

Year Yes Yes Yes Yes

R-square 0,0904 0,1229 0,0921 0,1246

Adj. R-square 0,0152 0,0421 0,0085 0,0355

F-statistic 1,2024 1,5207 1,1016 1,3983

(p-value) (0,2567) (0,0719*) (0,347369) (0,112398)

***: Significant at the 1% level **: Significant at the 5% level *: Significant at the 10% level

Table 20 investigates CAR on different variables. The F-statistics are only signifi-

cant in model 2. Hence, model 2 is the only model where some of the independent vari-

ables are equal to zero. Model 2, containing cross-border, deal value, cash and share

payment as independent variables show significance in share payment, with a coeffi-

cient of -0,4563 and a 1% significance level. Hence paying with shares creates a signifi-

cantly lower CAR than mixed payment in a domestic deal due to the positive intercept.

49

Further, this also proves that share payment creates a lower CAR than cash payment.

This is proven in the coefficients of the two variables. The rest of the variables in model

2 show that none of the remaining variables are significance enough to explain the per-

formance of CAR. R-square and adj. R-square rather low of 12,29% and 4,21% respec-

tively, hence the explanatory power is bad. Eventually, model 2 can only explain 4,21%

of the variance.

3,55% in the adj. R-square, note that the adj. R-square is used since it is mere precise the

R-square, since adding variables can penalize the explanatory power. Model 4 shows a

significant result in cross-border as well as deal value where cross-border has a positive

coefficient of 0,0200 at a 5% significance level. Share payment shows a negative coeffi-

cient of -0,0459 at a 1% significance level. The positive coefficient indicates that cross-

border create positive shareholder wealth than domestic deal, which is also found in the

test statistics. Furthermore, the negative coefficient from share payment indicates that

financing a deal through shares create negative return for shareholders and creates low-

er return than mixed and cash.

This thesis investigates 250 deals from the pharma industry from the period 2000-2014.

The deals cover globally with the majority from US where also Great Britain, Ireland,

Germany, Switzerland, Netherlands, France, Belgium, Sweden, Spain, Denmark, Ice-

land, Italy, Russia, and others are involved. The analysis is accomplished through the

event study methodology of abnormal returns and calculation models respectively

(MacKinlay, 1997). After a review of the pharma industry and characteristics of M&As,

there are no doubt that M&A activity contains several possibilities, which makes it a

beneficial managing tool to sustain in a dynamic and complex business environment.

Also, M&As have become frequent to FDI. This thesis supplies to the literature on M&A

characteristics by analyzing 250 deals in the pharma industry. Moreover, the overall

purpose of this thesis is to determine the acquiring companies ability to create share-

holder wealth.

The results from previous empirical studies show evidence of diverse results. Some

of the studies find a positive influence on the shareholder wealth where others find none

or even negative impact on the shareholder wealth. Nevertheless, the majority of the

evidence indicates that there is a positive CAR when acquisitions are cross-border. This

50

is the result of benefits included when a company acquires cross-border, such as diversi-

fication and increased market power.

give a comprehensive result. The sample is divided into 11 characteristics on M&A

deals. Theses characteristics are all based on cross-border or domestic, method of payment,

deal value, and geography. Also with the event study methodology, the abnormal returns

are provided for the use of the market model. CAR is verified with the implementation

of seven parametric tests and three non-parametric tests. Finally, a cross-sectional re-

gression analysis is conducted to further test CAR.

The thesis conducted following results based on the sub research questions stated

in the introduction:

SRQ 1: Do cross-border or domestic acquisitions create shareholder wealth in the pharma indus-

try?

Based on the sub-question, the results show partially significant results and gained

shareholder wealth to the acquirer company when the acquisition is cross-border. The

evidence is based on significant results in a greater part of the parametric tests, knowing

that the non-parametric tests are more powerful due to the distribution of the sample

deviating from a normal distribution. The cross-sectional regression shows that cross-

border deals generate significantly higher returns to shareholders compared to domestic

deals.

SRQ 2: Do methods of payment have an impact on the shareholder wealth in the pharma indus-

try?

cash, share and mixed payment method. The cash-based payment shows no major evi-

dence on CAR, with only two parametric tests showing significant results. Also, the

non-parametric tests and cross-sectional regression do not show any significant results,

concluding that CAR is equal to zero. Share-based payment shows strong significantly

lower returns to shareholders compared to mixed payment, when looking at the cross-

sectional regression. With two significant parametric and two non-parametric tests re-

spectively combined with the cross-sectional regression, the conclusion is that CAR is

negatively affected when the deals are paid in shares. Lastly, the mixed-based payment

shows significant results in four tests, concluding that there is a limited evidence of a

positive CAR.

51

SRQ 3: Does the deal value have an impact on the shareholder wealth in the pharma industry?

The deal value shows almost identical results, saying that CAR is not influenced by

the size of the deal. The strongest evidence is from the deal value 4 containing the small-

est deals, with two significant results and a t-statistic showing positive impact on CAR.

The remaining sub-samples and the cross-sectional regression has no evidence for the

impact on CAR. Hence, the size of the do not differ significantly.

industry?

quires located in the US. The EU sub-sample shows four significant tests. The non-

parametric tests outperform the parametric and show deviating results. The CAR can

both be positive and negative impacted when the acquiring companies are located in

EU.

Based on the sub-questions and results there are limited evidence for positive re-

turn on deals made in the pharma industry. Executives implementing this strategy can

expect a CAR of approximately 2% for the shareholders. Though this is associated with

uncertainty. The results are only significant at a 5% and 10% level, combined with the

insignificant non-parametric tests it enhances the uncertainty.

On the EMH, the results contradict the theory stating that the market is efficient in

the semi-strong form thus prices are fully reflected by all available information and

therefore it is not possible to earn an abnormal return because investors change invest-

ment strategy immediately after receiving new relevant information.

Based on this an overall conclusion is that there is great uncertainty regarding the

specific characteristics on the M&A deals, where some characteristics have a positive

impact on CAR others do not or even exhibit negative CAR.

Hence, acquirers shareholders in the pharma indsutry can expect a limited proportion of cumula-

tive abnormal return on M&A transactions.

52

7. Critical discussion

The objective of this thesis is to achieve a complete understanding of the pharma indus-

try and the acquirers shareholder wealth in M&A deals. Due to the extent of this thesis

and the limited access of data, all factors regarding deals and characteristics is not cov-

ered. These limitations are necessary to solve the many aspects M&As contain. The fol-

lowing section will present a critical discussion of the limitations this thesis has had, and

suggestions will be made on potentially further research. Finally, this section will give a

clarification of the authors thoughts regarding this research thesis.

This thesis is based on the ability of the bidders company to create shareholder

wealth, from a short-term perspective. Eventually this means that targets shareholders

are not taken into consideration. Analysing only one determinant of an M&A activity,

context regarding both parties capability to create abnormal return around announce-

ment may be lost. Capron & Pistre (2002) explain that the context referred to may re-

quire a deeper understanding of the bidder company due that the recourses and capabil-

ities transferred between the bidder and target may have a greater influence. An analy-

sis of the target company can be implemented and create a new interpretation of the

shareholder wealth. Moreover it can give an even deeper explanation of the M&A activi-

ty.

Another interesting dimension to perform this research can be to look at the share-

holder wealth in the long run. Different from this event study a long-term event study in

line with Raghavendra Rau (1998) will be conducted. The long-term study can be inter-

esting to conduct since it can measure synergies from resources and capabilities between

the two parties. Moreover the performance can be measured for the new entity.

As already noted in study, there are limitations to the methodology used when

conducting an event study. The market efficiency theory contains that stock prices asso-

ciated with the transactions have to appear on the chosen event window, in order to

give a precise a reliable estimation of the market. Hence if a rumour is priced in the

stock, there is no possibility to measure any influences. In addition all movements re-

garding stock prices that appear within the event window are related to the M&A an-

nouncement. This research does not cover and control other possible factors that may

affect the stock price. Another limitation is that acquirer companies have to be listed in

order to be included in such event studies. This opens for further research on emanating

non-listed companies.

53

Another interesting dimension, but due to the scope of the thesis, is to look at the

financial advisors, their reputation and how they perform. In general the top advisors

have the best reputation, which is associated with high price. Though some studies find

the top advisors does not necessarily create more shareholder wealth than other advi-

sors.

The data implemented in this thesis consist only of large deals. Section 5.1.3 show

that CAR is unpredictable regardless of the deal value. Hence CAR can still have an ad-

verse influence on the shareholder wealth even though the deal value is high. The 250

deals explained in section 4.2 cannot represent the whole population for the pharma in-

dustry, since only large deals are implemented in the sample. This may cause biases.

These the findings cannot be interpreted and represent the whole population.

Including random deal values will firstly give a larger sample and secondly make

this research more general. Using only large deals (minimum 300 million) can bias the

findings. The conclusion drawn based on the data used is not representable for the en-

tire population.

54

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62

Appendices

I. Eviews Program Code

E-views code, used for obtaining alpha and beta data i.e. market model

For !i = 1 to 250

smpl @all

matrix(250, 2) beta

series afkast = x!i

series indeks = i!i

vector comp = x!i

vector index = i!i

smpl 1 202$

equation mm.ls afkast c indeks

beta(!i,1) = c(1)$

beta(!i,2) = c(2)$

delete comp index$

next

63

II. Formulas

Jarque-Bera formula:

! !!! !

= ! ( ! + !

)

64

III. Test statistics

T-test with cross-sectional dependence, (Brown & Warner, 1985)

!

!! = ~ 1 ,

()

1 ! !

= !

!!!

1 !! 1 !

! = !" = !

! !!! !

!

!!! !

!!"# =

3 !

1 !

! ! !"

!! = ~(0,1)

1 ! 1 ! 1 !

! 1 !!![ !" !!! !" ]

Warner, 1985; Patell, 1976)

1 !

! ! !"

!!! = (0,1)

1 1 1 ! 1 !

! ,! !

! !! !

! 1 !!!(!" ! !" ) (1 + + !! !

!

! !" !

1 !! ! !!

! !!! !" 1 !

!! = = !" ~(0,1)

1 ! !!!

!

65

Standardized excess return cross-sectional independence. Adjusting for forecast vari-

ance (Brown & Warner, 1985; Patell, 1976)

!! !

!!! !"

!!! = (0,1)

! ! 2

! 4

!

Adjusting for event induced variance cross-sectional method (Brown & Warner, 1985)

1 !

!!! !"

!

=

1 ! 1 ! !

( 1) !!![!" !!! !" ]

al. 1991).

1 ! !

!!! !"

!

=

1 ! ! 1 ! !

( 1) !!![!" !!! !" ]

2 !!

!!

!

! !!!

=

()

!! !

!

1 1

= ( !" )

200 ! !!!

!!!!"#

66

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