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‘Global Financial Crisis’, originated in the U.S. is treated as one of the most
devastating economic downturns. In history, the United States of America have experienced
several financial crises, such as the Great Depression in the 1930s or the
Dot-com bubble in during 2000-2002 (McGowan, 1971). Generally speaking, a financial
crisis may take different forms in different lifecycle stages, ranging from
banking- and currency crises up to speculative bubbles or even sovereign
default, leading to negative spillover effects. In terms of negative
externalities, also known as contagions, the diversification of financial
institutions plays a vital role for the magnitude of systemic crises. Banks may
reduce their idiosyncratic risk by diversifying into global assets, yet it
involves a cost (Wagner, 2010). By adjusting for the similarity of
international institutions the systematic risk increases, as well. Within the
1990s the correlation between domestic stock prices and those of foreign
financial institutions rose by over 30 percent, increasing the effects of
contagions (de Nicolo & Kwast, 2002).

research argued about the impact of a financial crises on macroeconomic
factors, such as the national trade balance, unemployment and gross domestic
product (GDP) rates or interest rates. Taking the government bond yield for
example into account shows the governments perception of the future economic
expectations. Low interest rates indicate a positive anticipation about the
future, hence offering affordable debt and stimulating investments. In
contrast, the impact of a financial crisis on mergers and acquisitions is far
more complex since, besides previous stated market factors, further corporate
factors and conditions influence the probability to engage in M&A deals.
Patterns of merger waves are not fully in line with economic booms, as rational
executives attempt to take advantage of mispriced securities benefiting from
arbitrary deals (Harford, 2005). Some papers have tried to explain the
frequency of deals with reference to the neoclassical- and behavioral model
which are discussed in this paper.    

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bachelor thesis investigates to what extend the ‘Global Financial Crisis’
affected the M&A returns in the U.S., as well as the frequency of closing
domestic- and cross border deals in absolute terms. The paper examines the US
dollar values of M&A transactions from 1997 until 2016, incorporating the
‘Dot-com Bubble’ and the ‘Global Financial Crisis’, yet focusing on the latter.
In order to analyze the relation between market fluctuations and the corresponding
effect on M&A deals, three different U.S. market portfolios are used to
represent the U.S market. To assure a significant correlation with a reliable
portfolio representing the market, the Fama- French three-factor model is used
to regress its coefficients against the market indices. Furthermore, the
influence of exchange rate fluctuations analyses the corporates likelihood to
engage in deals.

paper is structured as follows. Firstly, the literature review gives a clear
explanation of existing knowledge about M&As and the Global Financial
Crisis and further explains their relationship to establish the hypothesis.
Secondly, the methodology is discussed, including the collected data for the
research. Thirdly, the results of the test are analyzed and interpreted.
Finally, the discussion and future outlook of the topic are given and a
conclusion on the findings of the paper is derived.

2.    Literature Review

2.1. M&A in general

Mergers & Acquisitions play a vital role in
today’s world of corporate finance, strategic dealing, globalization and management.
First one must distinguish a merger from an acquisition. While a merger occurs
as one corporation is combined and vanishes into another, also known as a conglomeration
or consolidation, a corporate acquisition is the transfer of equity, hence
ownership, by which assets or stocks are purchased by a new buyer (Reed, Lajoux
& Nesvold, 2007). An acquisition may also be unfriendly known as a hostile
takeover, meaning the target company does not want to be taken over. Referring
to the motivation of engaging in M transactions, synergies are of
importance which relate to cost leadership or differentiation. Several benefits
arise, such as reaching economies of scale and scope, obtaining access to new
technology, reducing staff and optimizing the human resources or even accessing
new markets. Especially nowadays globalization has forced entities to enter new
geographies to sustain globally competitive. Synergies are seen as a medium for
bridging the gap between financial and strategic perspectives (Larsson &
Finkelstein, 1999).   

There are mainly five types of mergers which differ
in terms of transaction style, economic purpose and relationship. The most
common one is the conglomerate where the parties are active in unrelated
business activities. Pure conglomerates mostly have no product or service in
common, while mixed ones have a relation to a certain extent and aiming for a
product/ or market extension or even penetration. The horizontal- and vertical
merger are also well known nowadays. The former refers to entities in the same
industry often gaining through the merger more market power, sometimes
achieving monopolistic characteristics. The latter is used to optimize a supply
chain, hence colluding up- or downstream and therefore decreasing the
bargaining power of other suppliers or buyers. Horizontal colluding may also
lead to the formation of cartels, indicating these rather form in countries
with les government intervention. Nations with governmental antitrust policies
induced rather make use of vertical instead of horizontal expanding of MNE’s
(Schleifer & Vishny, 1991). The market extension merger regards two
partners dealing with the same product or service but in different markets.
Increasing the client base and getting access to a larger market is here the
main purpose. In contrast, the product extension merger deals with two
companies having different products, though operating in the same market.


2.2. Merger Waves

The commonly seen economic cycles are related to the
historically merger waves, having the first one occurred in the ending of the
nineteenth century. Merger waves occur in combination with the known bull
markets, which are identified by constantly rising financial welfare,
increasing stock prices, an aggressive investor behavior and a general recovery
from recessions (L. Gonzalez et al., 2005). Merger Waves may last several
years, even a decade, while in economic history there have officially been
seven waves recorded. The first one, also known as the “Great Merger Movement”
in the US was based on horizontal mergers with the aim of the majority of firms
to establish monopolistic markets. The second wave was rather described by
vertical mergers with the few larger companies being more efficiency oriented
than, leading to an oligopolistic competition. In the 1950’s, entities were
seeking more for expansion and the diversification of products and services via
mergers, mainly to reduce the systematic risk. In comparison, the rather recent
wave of the early twenty first century is dominated by the abundant liquidity,
and the risen importance of globalization and private equity. Furthermore,
Leveraged Buyout’s once were made use of to finance larger stakes of ownership
by partly financing a target with debt issuance, next to the invested equity.
The determinants of this wave lie in the availability of excess liquidity which
is in line with the neoclassical model (Alexandridis, Mavrovitis & Travlos,


2.3. Risk of M&A’s

The most well-known risk within a company is the
agency theory which states that the principle hires his agent to manage a business
unit, though the agent will engage in projects which are in his self-interest.
In terms of M transactions, “agency theory of overvalued equity predicts
that the overvalued firms are likely to engage in income increasing earnings
management in order to meet the unrealistic performance expectations
incorporated in the stock prices” (Kothari, Loutskina & Nikolaev, 2006). In
particular, undervalued stock, hence potential ownership stake, may seem quite
attractive for management when it comes to thoughts of a possible market or
geographic expansion. The term ’empire building’ may also be appointed to a
manager’s behavior if differences of opinions between executives and the board
of directors, which represent the investors, arise in combination with a
shortcoming of observability of corporate actions (Dominguez-Martinez, Swank
& Visser, 2006). Despite the fact of the downsides from the lemons model,
there are prospects to mitigate the adverse selection of takeovers and projects
of acquirers. By engaging in an initial public offering (IPO) the information
asymmetries can be reduced and a firm may feature more transparency, hence
IPO’s intense effects on the efficiency of M deals (Reuer &
Ragozzino, 2006). Furthermore, the compensation scheme of managers can be
adjusted, for example, instead of receiving bonuses a manager could be partly
remunerated with own call options, motivating the agent to engage in alliances
or deals which increase the stock price.  


2.4. Review of Empirical Research based on
Theoretical Models  

Generally speaking, there are two views of M
transactions, the behavioral and the neoclassical one. The behavioral view is
concerned with market valuations and imperfect markets and information.
Acquirers or vendors with an overvalued stock price take advantage of potential
targets with undervalued stock prices and purchase an ownership stake with
their inexpensive equity (Schleifer & Vishny, 1991). In a perfect market
the systematic-, as well as the idiosyncratic information would be reflected
immediately in a company’s stock price. The time series analysis within the
twentieth century indicates a strong correlation of stock prices differences
and M&A transactions (Golbe & White, 1988). During a financial crisis, the
stock market tends to fall rapidly and often may not reflect the corporates
real stock value, generating an incentive to engage in deals in times of a
downturn in the economy, hence, the behavioral economy partly supports an
increase in M&A deals during a crisis.

The neoclassical model relates M&A transactions
to macroeconomic and industry shocks, such as regulatory influences, economic
shocks and technological improvements (Harford, 2005). Regulatory preferences
with microeconomic preferences may be, for example, corporate- or income tax
advantages and further governmental legal support. Other incentives for direct
investments may be lower labor costs, less auditing of annual reports, or the
diminution of importance of shareholder meetings, giving the management more
control. These Foreign direct investments (FDI) or acquisitions have been
increasing in volumes and transactions since the 1980’s in the emerging
economies, hence decreasing the amount of domestic U.S. deals. Especially in a
post- crisis period the undervaluation of target companies in developing
countries lead to “Fire- sale FDI’s” (Stoddard & Noy, 2015). Economic
shocks, on the other hand, refer to a possibility for restructuring corporate
and financial assets, giving the acquirer local advantages. Nevertheless,
compared to FDI’s, according to the neoclassical model the magnitude of deals
should have been decreasing in the U.S. during the financial crisis in 2007,
especially to transactions involving larger capital for investments. This is
due to the fact that nominal interest rates rise in times of financial
instability, hence the cost of capital of companies for discounting projected
investments. Due to a low rate of liquidity or even solvency of financial
institutions, long- and short-term debt issuance decreased by almost 50 percent
to large corporates (Ivashina & Scharfstein, 2009).

In a study of Zhan & Ozawa (2001) cross- border
M&As were analyzed during the Asian crisis of 1997 and it was found that
regional take-over targets in the manufacturing sector would have had a high
probability of bankruptcy if the national government regimes would not have had
been adjusted to attract foreign acquisitions from industrialized.

mentioned all above, there is a confirmation how several papers conclude variously,
regarding the impact of some recessions on M&A activities in both
industrialized- and emerging economies. By reasoning of the continuous debate
of how an economic recession affects M&A deals, the Dow Jones Industrial
Average Index, Standard & Poor’s Index, as well as the NASDAQ Index are
used to examine the following propositions.


H1a: A financial crisis has a positive
effect on the total value of monthly domestic M deals.

H1b: A financial crisis has a negative
effect on the total value of monthly domestic M deals.



H2a: A financial crisis has a positive
effect on the total number of monthly domestic M deals.

H1b: A financial crisis has a negative
effect on the total number of monthly domestic M deals.



from taking the ‘Global Financial Crisis’ into account, the impact of a
specified currency crisis is analyzed to explain the relationship between
specific components of a crisis with M deals. Whether the nominal
exchange rate is experiencing a depreciation or appreciation affects the
attractiveness of potential target firms.


H3a: A currency crisis has a positive
effect on the total value of monthly domestic M deals.

H3b: A currency crisis has a negative
effect on the total value of monthly domestic M deals.



3. Methodology

3.1. Analysis of underlying Market Models

This paper examines the influence of a sharp
downturn of the economy on an executives’ incentive to engage in a takeover in
the United States. The two contrasting views, neoclassical and behavioral,
which advocate different reasoning for mergers & acquisitions in the literature
review, are derived from economic theories of capital structure. Since large
acquisitions are often accompanied by debt issuance, the possibility external
financing is of importance for acquirers.

Costs of financial distress and the advantage of
tax shields are the main opponents in the ‘Tradeoff Model’, hence entities are
continuously adjusting their capital structure to the optimal debt ratio
(Shyam-Sunder & Myers, 1999). Ismail & Eldomiaty (2004) show that several
determinants are to be included for evaluating the optimal capital structure,
e.g. sales growth, expense ratio or the market – book ratio. A financial crisis
decreases the liquidity of financial services, lowers the credit ratings of
firms and increases the cost of debt. Consequently, according to the tradeoff
model takeovers should decrease in crises, which can be related to the
neoclassical model. Contrary, the ‘Market Timing Theory’, also known as the
‘Window of Opportunities’, comprises the existence of information asymmetries
between the market participants where the equilibrium of priced securities can
be altered (Merton, 1981). This study on taking opportunities in the market,
supports the arbitrary behavioral model of benefiting from undervalued, listed
stock in times of a crisis.


3.2. Selection of M&A Data

examine the fluctuation of takeovers, data was extracted from the ‘Institute
for Mergers, Acquisitions and alliances’ (IMAA) database. The time series
incorporates the number of deals, as well as the absolute value in US dollar. To
serve a reliable interval including economic recessions and recoveries, the
output ranges from 1997 until 2016 on a monthly basis, absorbing the effects of
the dot-com bubble and the global financial crisis. Figure 1 illustrates the
relationship between economic cycles and the absolute yearly values of M&A
deals and the corresponding amount, nevertheless the data is extracted on a
monthly basis to increase the sample size, hence it’s reliability.

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