5.6 Results and Discussions
5.6.8 Managerial Ownership and Target Firms' Sizes
However, as a policy implication, this study suggests that managers can use financial leverage as a mechanism to protect the interest of their shareholders as the literature suggests.
5.6.5 Relationship between Managerial Share Ownership and Sizes of Targets in M&A Transactions.
In this section, the study investigates whether managerial share ownership in firms affects the sizes of target firms acquirers from the emerging markets pursue in M&A transactions. From literature, it is suggested that sizes of firms matter in mergers and acquisitions transactions, and that transactions where both firms are of similar sizes usually succeed. It is further suggested that acquirers tend to be bigger in sizes relative to their targets and that firms whose sizes are large are less likely to become targets in acquisition transactions. We therefore undertake to explore if managerial ownership in acquirer firms from the emerging markets motivate them to pursue target firms of particular sizes in acquisition deals. Our hypothesis as has previously been stated in Section 5.4.1.2 of this chapter is that;
H5.2: Managerial ownership of emerging market acquirers is more likely to motivate them to pursue smaller target firms in acquisition deals.
5.6.6 Diagnostic Tests
The results from diagnostic tests confirmed that in terms of validity, our results meet the various requirements of the regression models as shown in Panel B of Table 5.4 presented below. In particular, for the probit cross-sectional regression, the overall fitness of our model is good as shown by the p-values of 0.992 for the HL test Statistic, indicating no evidence of poor fit. This is good, since here we know the model is specified correctly. Tests for heteroscedasticity also confirm no presence of heteroscedasticity as the p-value for this is roughly 0.111, which gives little evidence against the null hypothesis of homoscedasticity.
5.6.7 Regression Results
5.6.8 Managerial Ownership and Target Firms’ Sizes
From Table 5.4, the study finds the marginal effect coefficient for managerial ownership to be negative and statistically insignificant. This suggests that the managerial share ownerships in emerging market acquirer firms do not motivate them to acquire smaller-sized firms in
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acquisition deals. This result fails to confirm our hypothesis (H5.2) that, managerial ownership of acquirer firms from the emerging markets is more likely to influence them to pursue smaller targets in acquisition deals. The reason may be that, acquirer firms from the emerging markets consider these smaller target firms as young start-up companies that usually have financial challenges, and the assumption is that only much larger acquirers could provide managerial and financial resources required to enable businesses to operate successfully which most acquiring firms from the emerging markets do not have. This result seems to be in line with Vretenar et al. (2017)’s suggestion that efficiency and managerial synergy motives are a major factor that influence firms to pursue various sizes of firms during acquisitions rather than managerial share ownership in firms. They argue that, small and medium-sized enterprises (SMEs) are more likely to be acquired for efficiency reasons, while large companies can be acquired due to both efficiency and managerial synergy motives. The result again supports Mikkelson and Partch (1989)’s view that, the likelihood of successful acquisitions of firms is unrelated to managers’ holdings. However, this result runs contrary to the assertion by Fuller et al. (2002) that, acquirers of small targets in acquisition deals tend to perform better in the long-run in terms of operating performance in the stock market than those that pursue large firms. It also departs from Song and Walking (1993)’s claim that, size and managerial ownership have negative relationship with the probability of an acquisition attempt, and that the rate of acquisition bids that lead to a control change reduces as sizes of firms increase. As a policy implication, managers of firms from the emerging markets should not let their shareholdings or stakes in these firms influence them to pursue targets of particular sizes during acquisition transactions, even though acquiring firms of certain sizes can yield positive results to make the M&A deal successful. Rather, selection of targets must be done by creating a profile of the company to be acquired. The profile may include the expected features or qualities that the target company must have to be eligible for acquisition or a merger. This may comprise the activity the target firm does, its market position, its size, production range, profitability, structure and number of employees, its level of indebtedness and liquidity, the company’s structure of assets and equity, and several similar indicators.
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Table 5.4: Probit Marginal Effects Results on Whether Managerial Ownership Influences Sizes of Targets Emerging Market Acquirers Pursue in Acquisitions
Panel A: Regression Results
DEPENDENT VARIABLE:
FIRM SIZES
PROBIT REGRESSION COEFFICIENTS
PROBIT MARGINAL EFFECTS AT MEAN
STANDARD ERROR EXPLANATORY VARIABLES;
LTASSETS -0.202*** -0.046*** 0.082
MGROWN -0.000 -4.24E-05 0.000
ROA -0.076*** -0.017*** -0.076
FIN -0.326** -0.074** 0.189
TOBIN’S Q 0.1696 0.039 0.135
DEBT 0.008 0.002 0.012
CONSTANT 1.801*** 0.410*** 0.821
Panel B: Diagnostic Tests
H-L Statistic 1.5532 Prob. Chi-Sq (8) 0.992 Andrew Statistic 19.0117 Prob. Chi-Sq (10) 0.0401
Test for Heteroscedasticity LM= 2.536410 P value=0.111 Source: Author's Estimation, 2018, based on data collected
Notes: The table shows probit regression coefficients and their marginal effects for the sizes of firms emerging market acquirers become interested in acquiring. *, ** and *** represent 10%, 5% and 1% significance respectively.
On the effects of the control variables on sizes of targets emerging market acquirers pursue in M&As, the result of the firms’ total assets as shown in Table 5.4 above indicates a marginal effect coefficient which is negative and statistically significant at 1%. This suggests that, the sizes of these emerging market acquirers are less likely to influence them to pursue smaller- sized firms during acquisition transactions. The negative sign possessed by the firms’ total assets coefficient means that, an increase or improvement in the acquirers’ sizes does not motivate them to become interested in smaller-sized firms in M&As transactions. The reason could be that, an increase in these acquirer firms’ total assets is an indication that they have a lot of assets they can leverage on, and these assets can be used as a way of paying for the cost of any target, so if their total assets is high, they would be in position to pursue larger-sized targets in acquisition transactions instead of smaller ones. The results as indicated in Table 5.4 reveal that, a percentage change in the value of these acquirers’ total assets is about 4%
less likely to motivate them to pursue smaller-sized targets based on their sizes in acquisition
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deals which validates the result of this study. This finding broadly supports Homberg et al (2009)’s suggestion that, planned synergies are realised from acquisitions where the acquirer is bigger than the target firm, but in a situation where the acquirer is smaller than the target firm, the acquirer mainly increases its ability to exploit economies of scope and scale and market power. This result, however, appears inconsistent with views expressed by Ahuja and Katila (2001) that, the sizes of both the acquirer as well as the target firms matter in a merger or acquisition transactions, and that transactions where both companies are of similar sizes tend to succeed. They maintain that, when acquirer and target firms are similar in sizes, it becomes less difficult for the acquirer firm to identify the value of skills and knowledge to derive as a result of taking over the target firm. It also becomes easier to integrate these same skills and apply them within the acquirer’s business system.
The study again finds the marginal effect coefficient for returns on assets (ROAs) of the firms to be negative and statistically significant. This shows that, ROAs of emerging market acquirers are equally less likely to influence these firms’ investment decisions on sizes of target firms they pursue during acquisition transactions. The negative sign associated with the ROAs coefficient means that, an increase in the returns these acquirers derive on their assets will not serve as a motivation for them to pursue targets whose sizes are smaller in acquisitions. The reason might be that, as firms ROAs increase, they may be convinced that, they are in a good position to acquire larger targets because they now have the needed resources to do so. In addition, managers of these emerging market firms become motivated following the improvements in their firms’ performances and may want to acquire larger- sized firms instead of smaller ones in the form of empire-building purposes to increase resources under their control to benefit from managerial incentives and other perks associated with it. Statistically, as shown in Table 5.4, ROAs (proxy for profitability) is 1% less likely to influence these acquirers’ decisions on sizes of targets they pursue. This appears contrary to the position espoused by Frick and Torres (2002) that, the average size of target company has a significant impact on acquirers’ financial returns for their shareholders which makes acquirers take into account the sizes of firms they become interested in when undertaking acquisition transactions. This result again runs contrary to views expressed by Audretsch and Elston (2002) that, the size of a firm has a great impact on growth of firms’ profitability levels and should therefore be considered as a tool for measuring the ability of a firm to grow and become profitable.
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Further, results of the study show a marginal effect coefficient of negative and statistically significant at 5% for financial leverage of the firms indicating that, financial leverage is less likely to encourage their decisions to target smaller-sized firms in M&A deals. Table 5.4 above indicates that, financial leverage of these acquirer firms is 7.4% less likely to influence their decisions about the sizes of targets they pursue in acquisitions deals. The negative sign of the financial leverage coefficient confirms that, an increase of it will potentially not motivate these acquirers’ decisions to target smaller-sized firms in acquisition transactions.
The reason could be that these acquirer firms whose leverage levels are high may want to merge with targets of similar sizes to validate what the literature suggests that M&A transactions where both firms are of similar sizes usually succeed. They may also desire for a merger transaction with larger-sized firms who have unused debt capacity to improve on their leverage positions and ultimately create value for themselves. By way of policy implication, this finding suggests that, managers of emerging market firms should take into consideration the sizes of firms they combine with in merger deals since additional debt could attract interest and limit free cash flow (Harrison et al., 2014; Sharma & Ho, 2002) which may affect their future growth. As well, as Nazarian (2017) also suggests, pursuing a bigger target than the acquiring company’s size has a negative impact on the possibility of success for the acquirer firm, therefore, it is incumbent on firms planning acquisition deals to properly weigh their options regarding sizes of target firms they go in for in M&A transactions.
Additionally, the marginal effect coefficient for the Tobin’s q (which is the proxy for the firms’ growth opportunities) is positive but statistically insignificant, implying that, the firms’
abilities to grow or expand are not dependent on the sizes of targets they acquire in acquisitions. The Tobin’s q coefficient carrying a positive sign means that, as more options for growth and expansion become available to these firms, they are less likely to settle on the acquisition of smaller-sized firms for growth. The results as presented in Table 5.4 indicates that, any additional improvement in the acquirer firms’ ability to grow or expand is 3% less likely to be as a result of the acquisition of smaller-sized firms. This result is in line with Thanos and Papadakis (2012)’s view that, firms’ growth through M&As is mainly due to their desire for corporate growth and other corporate objectives and not based on factors such as the sizes of firms they acquire in deals. This might suggest that, acquirer firms from the emerging markets that are desirous of expanding to other locations through M&A route may have to adopt other strategies to achieve their objectives rather than the size of firms they acquire.
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Lastly, the marginal effect coefficient for total debt is positive but statistically insignificant, suggesting a lower possibility of it to motivate these firms to acquire particular sizes of firms in M&A transactions.