Mergers and acquisitions have been emerged as a great of interest in the corporate finance world, both in theory and practice, over the past several decades. For economies, mergers and acquisitions create added value by helping to transfer lower-value uses to higher-value uses. In general, the target of managers of companies is to maximize profits and create value for the shareholders. Thus, the company's managers choose the manner to increase firm value by mergers and acquisitions as one of major strategies.
The primary motivation of mergers and acquisitions is profitability for company in general and the shareholders in particular. Mukherjee, Kiymaz & Baker (2004) summarized the rationale may differ from one merger to another. They specified that a common measure of success of a merger is the increased value of the combined firm under a famous terminology of economic synergy. Sharma & Ho (2002) pointed out that "somehow a combination of firms will result in improved operations and a better financial and operational profile, and that acquisitions are value-increasing events". Trahan (1993, pp.21-35) suggested that sources of value in acquisitions relate to the impact on shareholder wealth. He also created a hypothesis of financial synergies with the likelihood that a firm will engage in an acquisition program to transfer idle capital from acquiring firms to targets in an efficient manner. It helps to increase debt to lower cost of capital, reduce agency costs and create value for of successor companies in the process.
Most of empirical studies so far have the same conclusion that mergers and acquisitions have undouble effects on shareholders of merging firms. Pautler (2003) showed that mergers and acquisitions are one of the reasons for stock price changes in companies. He affirmed that when an announcement of mergers releases, the target firms' shareholders usually gain from remarkable increases in stock price while acquiring firms ' shareholders consider it as a disadvantage. Cartwright & Schoenberg (2006) recognized through acquisitions positive short term returns produced to target firm's shareholders. Some studies also show that the level of outstanding performance which depends on different factors is demonstrated by shares of targeted companies. Amit, Livnat & Zarowin (1989) observed that in high liquid firms excess returns are highest for shareholders but lowest for shareholders of nearly bankrupt targets
Mergers and acquisitions have been interested research issue for a long time in the world, especially in the United Stated. In Vietnam, it bas been newly born and have paid attention from activating the Vietnam Stock Exchange in 2000 and mainly developed in nearly two years now. The number of transactions has been increased annually but achieved only to 230 transactions in 2009. It has been mainly happened in medium and small scheme companies. Each transaction is average at $ 20 millions. Mergers and acquisitions have been happening slowly because of the legal procedures, strategic partners and humans. Reasons for mergers and acquisitions practice have not been exaggerated but major categories as financial objectives, operational motives and management agenda contributed to the company results after mergers and acquisition. Therefore, the discussions of "Why do mergers and acquisitions occur?" "Are mergers and acquisitions good investment?" and "How do merger and acquisitions affect to the shareholders?" are useful for the strategy makers, for both the acquiring firms and the targeted firms with intention to get involve in mergers and acquisitions.
Purpose of research:
The purpose of research is to investigate the value for shareholders following the mergers and acquisitions in Vietnam Stock Exchange with the time horizon for the period 2000 - 2009.
Methodology:
The research employs the methodology using quantitative approach to test when the population is groups together from non-random sample of acquiring and targeted firms' stock returns.
In the literature, the research uses finance books, articles and internet. For the empirical study, the data is collected from a reliable source, SRTC and Vietnam Security Review, which considered having high reliability. Based on event study that introduced by Fama, Fisher, Jensen and Roll (1969) to test the rate of return of one security by comparing the price on announcement day with the price of that securities on the days before. The research has a high validity. Especially for calculations, the research uses the Excel program. Then, research generalizes the result from the population.
Quantitative Research questions and hypotheses:
The purpose of this study is to test the hubris theory that compares the price of a security on announcement day with the price of that security on the days before to the rate of return for the chosen firms. The independent variable is prices of securities will be defined generally as determined by the supply and demand and the confidences of investors have on the securities. The dependent variable is rate of returns on one security will be defined generally as money gains or loses when investing in a security and the intervening variables as information asymmetric, managers' interest, will be statistically controlled in the study.
4.1 Quantitative research questions:
- Is there a relationship between shareholders' value and price of security on announcement of mergers and acquisitions?
- Do shareholders' value adhering to the price of security on announcement of mergers and acquisitions as measured by efficient market?
To what degree do shareholders' value concern to capital structure and firm value by SRTC survey?
According to Roll (1986), the hubris hypothesis is advanced as one of explanations for mergers and acquisitions. Hubris theory explains why transactions are done in an acquisition process even when a valuation above current market prices. Maybe it is represented a positive valuation error. This would indicate higher returns for the shareholders in the targeted firm and lower returns for the shareholders in the acquiring firm on announcement of mergers and acquisitions.
4.2 Base on the hubris hypothesis, the research formulates the hypothesis as:
Hypothesis 1: A positive abnormal return for the shareholders when announcement of mergers and acquisitions in the targeted firms released.
Hypothesis 2: A negative abnormal return for the shareholders when announcement of mergers and acquisitions in the acquiring firms released.
Model:
The rate of return on securities j for event day t is defined by;
(1)
Where
Rj,t = Rate of return to firm j on day t
t = number of trading days relative to bid date (t=0)
Pj,t = Price of security j on day t
Rj,t express the continuously…
(2)
Where
ARj,t = abnormal return to firm j on day t
Rj,t = Rate of return to firm j on day t
= parameter estimates for firm j
t = number of trading days relative to bid date (t=0)
Pj,t = Price of security j on day t
Rm,t = return on the Vietnam market portfolio on day t
Data collection
Initially, the research intended to get the population of 230 mergers and acquisitions firms in Vietnam during period 2000-2009. But after considering the data from the SRTC under a valid result by comparing to the conditions to select firm to list in Vietnam Stock Exchange, the research concentrates on the firms with requirement capital of $ 4.5 millions. Thus, a sample under the condition consisted of 45 firms. The coding data is categorized into two groups foreign firms buy shares from domestic firms (coded 1) and domestic firms buy shares from domestic firms (coded 2). Then, the research downloads the daily stock price from the data based of SRTC. On the day of announcement, t=0 and the period for testing abnormal returns is t=-30 and t=+30. Using the Microsoft Excel program, average daily normal returns for each stock will be calculated as AR and average normal returns for each group will be calculated as AVG. The standard z-score measures AR and AVG to compare z scores that represent raw score in each group that are different from another.
6. Statistical analysis methods
With the p-value of .05 and .01, the research measures the level of confidence to test the results of AR and AVG of the targeted firms and acquiring firms on the day of announcement and on the period related to the announcement t=-30 to t=+30. The research considers the gains or losses for shareholders of both firms achieved from the announcement of mergers and acquisitions.
Hypothesis 1: based on the hubris hypothesis, predict the target firm should increase value, the market price of target firm' stock increase. That makes the value for shareholders increase. The result is significant statistical with p- value of .05 or .01.
Hypothesis 2: based on the hubris hypothesis, predict the acquiring firms have to pay much for the target firm so the market price of acquiring firm' stock decrease. The result is significant statistical with p- value of .05 or .01.
7. Research design
- Reviewing some concepts of mergers and acquisitions and the relationship between mergers and acquisitions with shareholders value when announcement is released.
- Presenting the theoretical determinants influence on the relationship: hubris hypothesis, efficiency hypothesis and capital structure and firm value.
- Formulating the hypothesis and model depend on the data collection of mergers and acquisitions transactions in Vietnam from 2004 - 2009.
- Statistical analysis methods and receiving empirical results, then deciding which hypothesis is accepted.
- Some recommendation will be offered to increase value for shareholders when mergers and acquisitions transactions for firms in Vietnam.
