Mathieu Luypaert European University College Brussels (EHSAL) Department of Accountancy, Finance and Insurance Katholieke Universiteit Leuven Nancy Huyghebaert∗ Department of Accountancy, Finance and Insurance Katholieke Universiteit Leuven
Abstract This paper empirically investigates the determinants of external growth through mergers and acquisitions (M&As) in a typical Continental European country, Belgium. For this purpose, we use data on 378 private and listed firms that engaged in 816 M&A transactions during 1997–2005, and match this sample with companies that did not pursue any external growth. By analyzing bidder characteristics, industry and aggregate market variables, we are able to determine what motives are important in the decision to acquire. Our results show that intangible capital, leverage and firm size significantly positively affect the decision to grow through M&As whereas the proportion of debt that consists of bank loans and ownership concentration have a negative impact. Furthermore, M&As are significantly more likely in industries that were recently deregulated, that are less concentrated and where industry incumbents are operating at a relatively low scale. Also, the data indicate that internal and external investments are independent growth strategies. The results further show that the determinants of the M&A decision differ significantly in low- versus highgrowth industries. Finally, investigating related versus diversifying M&As provides evidence supporting the market power and bankruptcy avoidance theory. Keywords: mergers and acquisitions, growth, motives, ownership, financing JEL: G32, G34 ∗
The authors thank Katrien Craninckx, Stefan Duchateau, Filip Roodhooft, Tom Van Caneghem, Cynthia Van Hulle, Christine Van Liedekerke and the participants at the 25th Erasmus Finance Day (Rotterdam) for useful comments on an earlier draft of this paper. They also gratefully acknowledge the help of Geert Gielens, Bureau Van Dijk, Graydon Belgium and ING in collecting the data. Corresponding author: Mathieu Luypaert, EHSAL, Stormstraat 2, 1000 Brussel, Belgium, tel.: 32-2-609-82-81, e-mail: firstname.lastname@example.org
1. Introduction Mergers and acquisitions (M&As) are a popular means of growth for companies. In 2005 alone, 29,585 deals were announced worldwide, accounting for an aggregate deal value of USD 1 trillion in the USA and USD 883 billion in Europe.1 There are various reasons why firms may choose to grow through M&A instead of expanding internally (e.g., Trautwein, 1990; Weston et al., 2001; Gaughan, 2002). Acquiring a target in a line of business in which the bidding company wants to enlarge is often a faster way to grow than via internal expansion because the target is an organization already in place, with its own production capacity, distribution network, and clientele. This also reduces the risk of investing for the growing company. Besides, growing through M&A may be a cheaper alternative than internal expansion, in particular when the replacement cost of assets is higher than the market value of target assets. Finally, and in contrast to organic growth, M&As can be (partly) paid for with stock. This may be interesting for firms that do not have enough cash reserves and/or have fully used their debt capacity. The finance literature to date has concluded that especially during booming stock markets, bidding companies tend to pay for M&As with stock (e.g., Martin, 1996; Faccio and Masulis, 2005). Yet, as M&As and internal growth are not mutually exclusive investment decisions, firms may consider them as complements rather than being substitutes. This paper investigates the determinants of bidder growth through M&A using logit regression analysis. More specially, we wish to determine what bidder characteristics, industry and aggregate market variables are relevant in a firm’s decision to expand...