The effect of mergers and acquisitions on companies’ fundamental values in emerging capital markets (the case of BRICS)

Abstract

Elena Moiseevna Rogova - National Research Institute "Higher School of Economics". E-mail: erogova@hse.ru

Daria Luzina - St. Petersburg School of Economics and Management.

The study is aimed at the assessment of the effect of mergers and acquisitions on the fundamental value of acquiring companies in the BRICS countries. One of the major concepts of the modern financial management is the focus of managerial decisions at value creation. Concerning mergers and acquisitions (M&A), following question may arise: does the present value of the deal financial benefits exceed costs of its implementation? If the answer to this question is positive, the fundamental value of a company is expected to increase as a result of the merger, thereby increasing shareholders’ wealth for the acquiring company.Emerging markets and, specially, BRICS seem to be one of the key drivers of M&A growth accelerating in recent years. According to the statistic data, every fourth deal involves companies from emerging markets. The inefficiency of financial markets, the lack of information for investors do not allow using market indicators to determine the companies’ value and require other techniques based on the analysis of both market value and financial reporting.In this paper, an approach based on the residual income model was applied. The pre-acquisition expected fundamental value of the acquiring company and its realized post acquisition fundamental value are compared, and their difference marks, whether the value is created or destroyed as the result of the deal. This approach has several benefits comparing to others, such as the abnormal earnings growth model or free cash flow model.The study is fulfilled on the sample of 366 M&A deals in BRICS countries, collected from Zephyr database, as well as Bloomberg and Thompson Reuters databases. Econometric modeling is applied to reveal factors causing the value creation or decrease, among which there was the company’s size, the mode of deal funding, the industrial specifics and the method of payment.The results of this study can be used for development of managerial recommendations for companies at the emerging markets that choose their growth strategies based upon mergers and acquisitions.