Dr. Zeti in her speech in 2007, significant progress had been achieved in the .... 2
Paper that presented by Associate Professor Dr. Engku Rabiah Adawiah from ...
Payment Methods of Mergers and Acquisitions: A Trend Analysis of Top Leading Countries
Abstract Purpose: Merger and Acquisition (M&A) is an important corporate growth strategy and is widely accepted by each and every corporate bodies in the recent trends with remarkable numbers and values. The aim of this paper is to statistically analyze the trends of M&A payment methods, by taking top ten M&A leading country i.e. United States, United Kingdom, China, Canada, Japan, Germany, Australia, France, Russia, and India. It also shows the trend of payment methods in different industry wise in each country. Methodology: The study basically focuses on the secondary data collected from Bloomberg database from 1St Jan 2000 to 31st Dec 2015. The linear trend of M&A payment method of each country is taken to examine the stock, cash or mixed payment behaviour of transactions for the above sample period. Descriptive statistics along with histogram and pie chart are used for the analysis of trends in this study. Research limitations: The scope of this study is confined to trend analysis of payment methods of M&A only on top 10 leading M&A countries. Findings: The results of this statistical trend analysis indicate positively significant for cash payment methods during the sample period in top ten leading countries. The analysis of payment method in industry wise shows that financial industries companies are normally using cash mode of payment in M&A deal in most of the countries. Research Implications: This paper will provide a comprehensive understanding of payment methods on the worldwide M&A deals to the future researcher. This trend analysis would also help policymakers to understand the instability of different payment method of M&A in various countries so that they will frame a better policy for more advantages deal. Key Words: Acquisition, Merger, M&A leading country, Payment Method, Trend
Introduction Merger and Acquisition (M&A) is a key corporate growth strategy for expansion, diversification, and restructuring of business organizations. In the present modern era, it has become a significant tool in the development of financial and economic environment by playing an important role in responding the increased worldwide competition and the rapid growth of markets (Vyas, Narayanan, & Ramanathan, 2012). The trends of M&A have been increasing in terms of value and volumes over the years throughout worldwide. As per the M&A review of Thomson Reuters database, the volume of global M&A reached to US$4.7 trillion during 2015 which is 42 % higher than 2014. During the first six months of 2015, the worldwide M&A deal was around 20,500 which was 3% more than the last year. A vast number of studies have been done in this M&A field. Major of those were conducted on the motives of M&A deals in the late 1970s and focused on issues like market power hypothesis, economy of scale and scope, hubris hypothesis, short and long term performance of bidder and target, managerial hypothesis, merger waves, and choice of mode of payment (Chevalier & Redor, 2008). The studies similar to Vyas et al. (2012), Erdogan (2012) and Ismail et al. (2011) focus on the determinants of M&A and identify that, factors like company size, age of company, leverage, culture, profitability, management control, methods of payment, operating activities of company, tax implications and macroeconomic conditions affect the M&A performance. But there are some of the studies like Alshwer, Sibilkov and Zaiats (2011), Andre and Ben-Amar (2009), Dutta, Saadi, and Zhu (2013) and Boateng and Bi (2014) only focus on determinants of methods of payment and proclaim that choice of methods of payment significantly influence M&A performance. The choice of payment methods is an important risk management strategy. It is a very critical situation where the seller would always want the highest possible price for the deal while on the opposite side the buyer would want to pay the lower possible price. In this case, the deal can be only possible by satisfying both buyer and seller with appropriate purchase consideration and payment structure. Payment alternatives chosen in corporate acquisitions is a major decision making factor for both acquirer and target companies. Several past evidences indicate that most of the time conflict arises between the acquirer and the target regarding the payment option, which leads the deal towards the disaster. Both the acquirer and target try to accept the payment method as per their convenience from the existed payment methods like cash, stock, and mixed payment method. Without a perfect payment structure and its method, the deal remains incomplete. So for a perfect and successful deal, acceptance of a correct
payment method is badly necessary. As payment method is an important aspect of M&A, a remarkable number of studies were done on it. Many of them determined the advantages of different types of payment methods, their impact on the deals and their structures. In this paper, we have given an emphasis to determine the trends of payment methods by taking top ten M&A doing countries, out of which nine countries are developed from Asian, European, American and Australian continent along with India, which is an emerging economy of Asia. We have represented the trends of payment structure of M&A in all those countries graphically in this paper. After analyse the trends we found that there is substantial use for cash payment methods by companies during the sample period in top ten leading countries. The analysis of payment method of M&A deal in industry wise shows that financial industries companies are normally using cash mode of payment in M&A deal in most of the countries. The paper is based on as per the following sections. The first section of this paper contains the global scenario of M&A, in which we have discussed the worldwide M&A pictures in a number of transactions and value. The second section is constructed with the trends of payment method in the top ten global M&A destinations and here we have also mentioned the industry wise M&A payment structure. The third and last section of this paper we analyze the reasons behind the trends of payment method is mostly accepted by companies of top M&A leading countries in the past Sixteen years.
Global Scenario of M&A Respond to growing world competition and expansion of the global market, M&A is a widely accepted scheme for all corporate bodies. The trends of worldwide M&A activities have been increased significantly since the past two decades in terms of values and volumes. As per Thomson Routers database, M&A transactions reached at a peak level with a value of US$ 4.778 trillion over an approximate 44,000 number of deals in 2015. In addition, it was an increase of 42% and 0.2% in terms of value and volume respectively compared with the last year. The global M&A trend is basically enriched with M&A trend of developed countries. Both domestic and cross-border M&A deals have remarkable existence in the worldwide M&A trend figure. An average of 40-45% of the global volume of M&A comes from the cross-border deals. The worldwide M&A volume before the recession year 2008 was extremely impressive with an upward movement in the graph chart. Supporting to the above statement, it is seen that the value of M&A reached to US$ 4.346 trillion in 2007 from $ 1.345 trillion in 2003 (Mergerstate 2010). The deal value of US$ 4.961 trillion was a contribution of 40% from
developed European countries, 30% from the USA and rest 30% from Asian countries. Further, a cyclical increment of the M&A trend across the world was observed from 1992 with a deal value of US$ 0.73 trillion to US$ 2.65 trillion in 2010 and again it reached to $4.78 trillion in 2015 which is approximately double in 5years (Yılmaz & Tanyeri, 2016). Boston Consultant Group (BCG) determined that the year 2010 closed with approximately 23,000 deals globally which were 7.6 percent more in volume and 22.9 percent in value than the year 2009. Again, it is observed that the M&A activity rose 76.2 percent from the year 2009 and reached to US$ 0.806 trillion. Trends of M&A in 2015 was higher than 2007, which is called a year of the mega merger deal. The average worldwide volume of M&A deal is US$ 2.71 trillion within Sixteen years from 2000-2015. Analyzing the worldwide M&A trend, it is observed that the entire world M&A scenario is dominated by US acquirers and target firms with half of deal value and one-third number of deals. A considerable increment in the M&A activities has been noticed in the last two decades in developed countries like United States, United Kingdom, China and Canada possess an important role. The boom period of M&A in the United States started in 1980 and reached at approximate US$ 2.3 trillion in 2015 which is 64% more than the previous year (Thomson Reuters, 2015). The year 2015 was also a milestone in the history of M&A for Asia Pacific by announcing a value of US$ 1.1 trillion deals for the first time by crossing the earlier record of US$ 1.0 trillion. Table No: 1 Details of Worldwide M&A Value Place Deal Value (2015) Comparison of Deal Value of 2015 with 2014 North America US$ 2.4 trillion 58% Increase Asia Pacific US$ 1.2 trillion 63% Increase Europe US$ 921 billion 9% Increase Middle East and Africa US$ 80 billion 41% Increase Latin America US$ 94 billion 27% Decrease Source: (Global M&A Toolkit, 2016)
The above table represents a comparative information regarding the M&A deal value between the year 2014 and 2015 in different geographic continents of the world. In 2015, North America achieved a goal of total deal value US$ 2.4 trillion which was 58% more than the last year and almost half of the total global deal value. Asia Pacific saw 63% more deal value worth US$ 1.2 trillion in 2015 than 2014 and it is the second highest in the list of worldwide top M&A regions. European along with the Middle East and African countries achieved 9% and 41% value of more deals respectively in 2015 than the previous year. An exception was noticed
in the case of Latin America where the value of M&A deals in 2015 was decreased by 27% as compared 2014. We have arranged the number of M&A deal from 2000 to 2015 as per top M&A deal country wise but for this study, we have taken only top ten M&A leading countries. Figure: 1
Top Ten M&A Leading Countries 179732 180000 160000 140000 120000 100000 80000 60000 40000
59220
47351 42249 39572
32770 31503 31096
No. of deal 24310
17259
20000 0
(Source- M&A statistics data from The Institute for Mergers, Acquisitions and Alliances) The above Figure consists of the top ten countries of the world in its X-axis and the total number of M&A deals from 2000 to 2015 in the Y-axis. In this list, the United States obtains the top position with a total M&A deal of approximate 179732 from 2000 to 2015 whereas the United Kingdom comes next to it with nearly 59220 number of deals. This graph indicates that China, Canada, Japan, and Germany come in the third, fourth, fifth and sixth position respectively. Australia achieved the seventh position in this list with estimated 31503 number of deals whereas France saw roughly 31096 number of deals in this Sixteen years. Russia placed itself in the ninth position in the world M&A list with near about 24310 deals whereas India, which is a developing country is at the tenth position with approximately 17259 deals in this List. India achieved the second position in the Asia-Pacific region as per inbound M&A volume with US$ 23.4 billion in 2011, and United Kingdom was the top acquirer in India. Year to year the M&A transactions has been increasing in a tremendous manner among the corporate bodies throughout the globe with a significant volume. Apart from geographical regions, telecom, consumer, and retail industries have seen a tremendous increase in number and value of M&A in 2015.
Payment Method of M&A in Top Ten M&A Leading Countries
Over the last three decades, a number of studies have evidenced that the manner in which mergers and acquisitions (M&A) are financed (Hansen, 1987; Fishman, 1989; Eckbo et al., 1990; Chemmanur and Paeglis, 2003; Faccio and Masulis, 2005). However, this study has typically focused the trend of payment method of top M&A leading countries over a period of sixteen years from 2000 to 2015. Finalizing the Payment method is a challenging phase of the M&A transaction. It varies from transaction to transaction and as well as country to country. The deal may be discharged through various mode like cash, stock, debt, earn-out and mix of more than two payment mode. The decision of payment method of deal value is based on various factors like liquidity position, risk, leverage, ownership structure, cost of capital, capital structure, tax implication, dividend policy, premium value, market price of share, government rules and regulations, profit, free cash flow, equity flow, return on equity, market to book value, debt flow, transaction cost and target company willingness (Boateng & Bi, 2014; Kalinowska & Mielcarz, 2014; Barbopoulos & Sudarsanam, 2012). In M&A transaction Bayer always wants to execute the deal at a lesser price whereas the target wants the maximum price same as another difference arises when both the parties do not agree with the same payment method. Sometimes the acquirer wants to pay in cash whereas the target wants to receive in stock or vice versa. In this case, both the parties are not able to reach a common decision. Because of the importance of payment method in the entire M&A process, a research is necessary on the trends of payment method. In this context, an effort is given in this paper to determine the trends of payment method worldwide. We have taken the top ten M&A leading countries for analysis of payment method. Here, is a graphical representation of payment trends in the top ten M&A involved country.
Figure: 2 Payment Method of M&A Deal in Top M&A Leading Countries USA
UK
13%
China
15%
12%
8%
13%
77%
74%
Canada
Germany 5%
0%
22%
48%
8%
78%
5%
Russia 16%
21%
19%
3%
60%
87%
India 24%
87%
Australia
France 8%
81%
Japan
22%
30%
7%
81%
Cash
4%
Stock 72%
Mixed
(Source: Compiled from Bloomberg Database) From 2000 to 2015, the whole world has seen a tremendous number of M&A activities, from which USA and UK top the list with the first and the second position respectively. From the above pie charts, it is clear that, in all the countries, cash payment method is mostly acceptable than stock and mixed payments. More than fifty percent transactions choose a cash for their payment method in all these top ten M&A leading countries. In the USA, almost 74%
of transactions went for cash payment in those Sixteen years whereas both the percentage of stock and mixed payment methods were equal to 13% each. Likely, the same scenario was seen in another developed country UK, where 77% of transactions registered through cash payment method from 2000 to 2015. The mixed payment method was almost double the percentage of the cash which were 15% and 8% respectively in this country. Nearly about 81% of M&A deals preferred to make payment through cash in China within 2000-2015 whereas 12% and 7% of transactions choose to stock and mixed payment method respectively for their payment. Canadian M&A market is very much exceptional from the other nine countries, where the cash payment technique did not cross fifty percent in those Sixteen years. But, individually cash payment method topped the list with 48% of transactions followed by stock (30%) and mixed (22%). Moreover, Canadian M&A world is not highly and individually dominated by any one payment technique. Japanese M&A transactions did not show much interest in the mixed payment method in these Sixteen years. A remarkable percentage (78%) of transactions in the Japanese M&A world recorded through cash and the rest 22% went for stock payment. A very less number of deals (even less than 1%) choose mixed payment method for their payment in a Japanese scenario. So, it was quite difficult to plot the same in the graph and pie chart. Germany and France which are two developed countries in the European continent, surprisingly have the same scenario of payment trend in those Sixteen years. Both possessed the highest number of transactions (87%) through cash, whereas the number of transactions through stock and mixed methods were 8% and 5% correspondingly. The stock (19%) and mixed (21%) payment trend in Australian M&A picture did not have too much of difference between them. Here, also the same payment trend was continued and like other countries, the cash payment method (60%) was highly acceptable by this country. Maximum Russian deals preferred to announce the payment through cash (81%) followed by stock (16%). Very negligible number of total deals i.e. 3% registered themselves for mixed payment method. India, one of the developing country of south Asia, listed 72% of its M&A deals through cash payment method within 2000 to 2015. Payment through stock came next to the cash payment with 24%. Like other countries, mixed payment method was also not so attractive for the bidder and target companies. Only 4% of M&A deals paid the deal value through mixed payment mechanism in India in those Sixteen years.
The scenario of payment of M&A deals in top 10 worldwide M&A countries is described below. United States of America (USA) United States of America has considered as the most sizeable nation for M&A activities in the globe. The most of the deals started from the 1980s and approximate 300000 M&A deals with value of US$ 31,500 billion have been announced in this country since 1985 and 2015. In 2015 M&A deal in the USA have established a new record in terms of transaction value (US$ 2380 billion) which is a 10% increase over 2014, Whereas the number of transactions decreased to 3.6% than the last year (Institute for Mergers, Acquisitions and Alliances, 2017). The compound annual growth rate (CAGR) for the number of deals within 1985 to 2015 was 4.63% and the value grew to 6.51%. From 1895, US M&A world has seen several cyclical situations. The table given below represents the trends of M&A waves in the USA. Table: 2 Period 1895-1904 1916-1929 1965-1969 1981-1989 1990-2000 2003-2008
Time Frame of M&A Waves in USA Types of Waves First Wave (Horizontal Mergers) Second Wave (Vertical Mergers) Third Wave (Diversified Conglomerate Mergers) Fourth Wave (Concentric Mergers) Fifth Wave (Cross-border Mergers) Sixth Wave (Private Equity, LBOs, Shareholder Activism) Source: Wikipedia
The trends and types of M&A in USA varies from time to time. But, a common trend is seen in the case of payment method. By evaluating the method of payment from 2000 to 2015, it is observed that, out of the total deals registered in the meantime, maximum of them preferred to adopt cash as a medium of payment for their transaction. In the year 2000, the highest number of M&A deals preferred to make payment in stock followed by cash and stock. After 2000, the scenario of payment method changed completely and payment through cash rather than stock and mixed payment method increased in 2001. From 2002, the popularity of cash payment method increased and it went upward in a continuous manner than the other two payment methods. 2006 and 2007 are considered as the most remarkable year for M&A and a record number of deals were registered in these years, out of which, more than nine thousand deals adopted cash payment method combined.
Figure: 3 Payment Method of M&A Deal in USA 6000 5000 4000 Cash
3000
Stock
2000
Mixed
1000 0
(Source: Compiled from Bloomberg Database) Though due to the recession and financial instability, the total number of M&A deals decreased in 2008-2009, the acceptability of cash payment method by them did not decrease. The scenario of 2006-2007 again repeated in 2014-2015 in the US M&A picture. Although, a maximum number of deals were registered for cash payment method, the importance of stock and mixed payment method in US scenario cannot be avoidable as more than 19000 deals were registered through those. By observing the stock and mixed payment scenario, it is seen that, from 20012003, the number of stock payment transactions were higher than the number of mixed payment transactions and the scenario changed to vice versa from 2004 to 2008. Though 2009-2010 saw more stock transactions than mixed, after that the mixed payment method bar crossed the stock payment method bar.
United Kingdom (UK) An active merger movement started in the UK from the 1960s. Both the first and second wave started in 1968 and 1972 respectively in the UK were horizontal in nature and completely different from USA scenario (Sudi, 2003). From the past M&A activities, it is observed that in Europe, UK was the top most leading country by doing M&A whereas it comes to the second position after the US, when the worldwide M&A scenario is taken into account.
Figure: 4 Payment Method of M&A Deal in UK 1800 1600 1400 1200 1000
Cash
800
Stock
600
Mixed
400 200 0
(Source: Compiled from Bloomberg Database) The M&A scenario in 2014-2015 was also remarkable in the UK. By analyzing the payment structure of UK, it is seen that like the USA, cash payment method plays an important role. Starting from 2000 to 2015, in all these years, cash payment method always remained the most preferred payment technique than stock and mixed payment method in the UK. As per our collected information, the total number of deals registered for the stock payment method was approximately half than the total number of deals registered for mixed payment method.
China China is one of the developed economies in the Asian continent. With its high population, China has been one of the favored destination for investment, though M&A in China requires more rules, regulations and time constraints than other countries. The success rate of M&A in China is very less and the number of inbound deals than the number of outbound deals in this country is high. The number of inbound M&A deals in China increased 39% from 2010 to 2015 along with the increase of total approximate deal value 141%. Evidence indicates that the domestic deals in China were 89.5% and the foreign outbound and inbound deals were 8.2% and 2.3% respectively of the total transactions in 2015 (Devonshire, et al., 2011). There is some restriction in rules and regulations for payment options in Chinese M&A deals. If the payment is done in terms of securities, the acquirer has to provide its last three year’s audited financial accounting reports and have to cooperate with the due diligence investigation team appointed by the target company. When the payment is done in terms of debentures in a listed exchange, in this case, the debentures should be tradable for no less than
one month. In another case, when the payment is done in securities, which are not listed and traded on a stock exchange, the acquirer provides cash option to the target company’s shareholders. Not less than 20% of the price must be deposited with a bank at the time of cash payment method. Figure: 5 Payment Method of M&A Deal in China 1600 1400 1200 1000
Cash
800
Stock
600
Mixed
400 200 0
(Source: Compiled from Bloomberg Database)
In the year 2000 and 2001, the M&A transactions in China were very less. The increase in the transaction started from 2002. Due to financial crisis perhaps the number of transactions decreased in 2009, 2012 and 2013. Cash has been a preferable payment method for China consistently from 2000. According to the collected information, within Sixteen years approximate 81% of deals accepted cash for their mode of transaction. After cash, stock was the second preferable transaction mode in Chinese M&A market till 2013. Though mixed payment method, has its value in the Chinese M&A world, it leads very less number of transactions in the past scenario. But surprisingly, payment through mixed method started increasing from 2014. In the last two years i.e. 2014 and 2015, mixed payment method achieved the second position in the bar graph by crossing the bar of stock payment method. In the upcoming years, more payment through mixed payment method in the China market cannot be avoidable.
Canada Canada, one of the developed country in the American region possessed a notable number of M&A deals from 2000 to 2015. All those M&A deals happened in the above Sixteen
years in Canada has followed all the three payment mechanisms to complete their payment structure. The scenario of payment method in Canada is quite dissimilar with other countries. Unlike other European and Asian countries payment structure in Canada is not at all dominated by cash payment mechanism. Figure: 6 Payment Method of M&A Deal in Canada 900 800 700 600 500
Cash
400
Stock
300
Mixed
200 100 0
(Source: Compiled from Bloomberg Database) More than fifty percent of total M&A deals paid through both stock and mixed payment method together in our selected sample period. From 2000 to 2002, payment through stock was highly accepted in Canadian M&A environment followed by mixed payment method. In these years even less than fifty percent of deals selected the cash option for their payment. From 2003, a drastic change noticed and it is seen that the bar of cash payment mechanism increased and the similar situation continued till 2015. Though in the starting of the twenty-first century, payment through stock was high after 2002, it went to the second position of the bar graph after cash. Mixed payment method always remained in the third position except in the year 2007, in which the payment status crossed the stock payment mechanism.
Japan: Japan, which is one of the developed countries in the Asian economy, has been involved in M&A activities actively since a long and the deal makers get new opportunities due to frequent corporate restructuring and divestiture activities. Japanese companies are participating both in outbound and inbound deals actively. It placed at the fifth position in the list of M&A hub by considering the total worldwide deals of the last Sixteen years. The year 2015 was one of the most important periods for M&A deals and in this year 55.5% of deals increased than the
previous year. Along with 40 large scale deals (valued more than US$ 1 billion), Japanese market did a remarkable number of transactions with a totaled deal value of US$195.2 billion. Before 2015, another strongest year in the M&A history of Japan was 1999. In this year, the worth value of US$ 242.4 billion deals was done. 2007 was also another remarkable year in the M&A scenario of the country (Thomson Reuters, 2015). Japan is a country where biggest deals with the considerable amount of deal values are taking place and surprisingly only two types of payment method have their importance in the Japanese M&A scenario. Figure: 7 Payment Method of M&A Deal in Japan 1400 1200 1000 800
Cash
600
Stock
400
Mixed
200 0
(Source: Compiled from Bloomberg Database) From the above bar graph, it is clear that, in the early of 2000, payment through cash was not so popular among the Japanese corporate bodies. They were preferring stock for their transaction the more. From 2000 to 2004, the payment through stock than cash was more acceptable by commercial entities during M&A. After 2005, a drastic change noticed in the Japanese M&A world, where the importance of cash payment method increased than the stock payment method. It is also noticed that the arrow for stock payment method is not in a constant position and it fluctuated up and down in this Sixteen years. Mixed payment method has a little importance in the Japanese M&A world in all these years.
Germany: The leading financially developed European country Germany basically do M&As for R&D in automotive, chemical, telecommunication, computer, and pharmaceutical sectors. The research expenditure of Germany is highest in Europe and it ranked the 4th position among 140 countries in the most competitive business location of the world. Due to its stability in the
political, economic, financial and legal environment, Germany has been a most important M&A target countries for foreign investors in the European Union. Germany mostly involves in cross-border M&A transactions and it is also noticed that 57% of its transactions in 2014 were from across the border (Germany Trade and Invest, 2016). Germany legislation does not have any specific rule for the M&A transactions. Though transactions in Germany accepts all the three types of payment methods, the transactions through cash are very much famous. More than 85% of transactions choose cash as the payment option. For cash payment option in Germany, the bidder must give a confirmation in written regarding the availability of sufficient cash for payment to the shareholders of the target company. In the case of stock payment, the bidder must prove near a regulatory authority that, it has shares to settle the offer. Figure: 8 Payment Method of M&A Deal in Germany 450 400 350 300 250
Cash
200
Stock
150
Mixed
100 50 0
(Source: Compiled from Bloomberg Database)
Analyzing the trend of payment method in Germany, cash payment method has been possessing its importance always. In 2000-01, stock and mixed payment methods had some value in the M&A transactions. After 2002, the importance of these two methods went down. The condition of mixed payment method was very poor in those Sixteen years. Though stock payment method did not achieve something remarkable, it came to the second positon after cash by considering all the payment options from 2000 to 2015. According to our collected information, till 2007, after cash more number of deals preferred to make payment through stock than mixed payment method. In 2008, we found minor changes in the scenario and the arrow for mixed payment method slightly went upward than the stock payment method. Again, in 2009, stock payment method came back to its previous position and crossed the bar of mixed
payment method. Till 2010, the same situation lasted and again payment through mixed payment mechanism increased and went to the second position in the bar graph after cash. In 2013 and 2014, we observed an increment in the stock payment method than the mixed payment method which changed in 2015. Moreover, we noticed a continuous up and downward situation between stock and mixed payment method from 2000 to 2015, while cash has always remained as the first choice for making payment for M&A transactions. Australia: Australia, one of the developed continent itself has listed more than ten thousand M&A deals in our mentioned time period. Though approximate sixty percent of M&A deals picked out cash to make payment for their deals, stock and mixed payment method did not lose their existence. It is also noticed that a handsome number of M&A deals preferred to choose stock and mixed payment mechanism to complete the entire M&A procedure. Figure: 9 Payment Method of M&A Deal in Australia 1200 1000 800 Cash
600
Stock 400
Mixed
200 0
(Source: Compiled from Bloomberg Database)
By analyzing the past Sixteen years availed data, we noticed that there were frequent upward and downward of the bar in the graph of stock and mixed payment method. In 2000 mixed payment method was in the highest position but it changed just after the mentioned year and cash went to that position and the same scenario continued till 2015. Further, we have noticed that between stock and mixed payment method, they just exchanged their position within the second and third place of the bar graph from year to year. From 2002 to 2008, registering deals through mixed payment method were higher than stock payment method. Except 2011, from
2009 to 2015, more deals choose to go for stock payment method than the mixed payment method whereas in all those years the most desired payment medium for companies was cash. France France, one of the leading economy of the European economy has been participating in the M&A transactions actively and the deals in this country are primarily regulated by the provisions of the French Commercial Code, the French Monetary and Financial Code and the General Regulation of the French Financial Markets Authority. These regulatory bodies play an important role throughout the deal process in France. M&A transactions in France are based on three structures i.e. a straight public tender offer, the acquisition of a controlling block of shares followed by a tender offer and a statutory merger. From the above three types of deal structures, the statutory mergers are considered friendlier other than the two and it needs a twothirds majority of the shareholders’ vote. Straight public tender offer is considered as a simple structure rather more uncertain as it is subjected to the shareholders’ percentage who will participate in the tender with their shares. The acquisition of the controlling block of shares is more certain than the straight tender offer in terms of the outcome of the whole transaction but unfortunately, it is not possible all the time because of the shareholding structure of the target. France also follows some restrictions during the payment period of M&A transactions. If the bidding party has acquired 5% shares or the voting rights of the target during the twelve-month time period preceding the filing of the offer, the payment for the offer must include cash or a cash alternative. If the offered securities in the exchange offer perspective are considered as not liquid, the offer must be comprising with a cash alternative. Figure: 10 Payment Method of M&A Deal in France 500 450 400 350 300 250 200 150 100 50 0
Cash Stock Mixed
(Source: Compiled from Bloomberg Database)
Figure: 10 indicates the payment scenario of M&A transactions in France between the years 2000 to 2015. Like other parts of the world, payment through cash has been most popular than stock and mixed payment method in this European country. Though payment through stock and mixed payment methods were not so popular in France within the above sample period, still there were more than five hundred deals together accepted these payment types to complete their transaction process. According to our collected information, after cash, the stock is the second favorable method for payment in M&A deals and besides the year 2005, 2011 and 2012, in rest of the years, transactions through stock payment method were more than the mixed payment method.
Russia Russia one of the large and emerging economy of the world has been actively participating in the M&A transactions from 2001. Before 2006, a very less number of deals were registered under Russian corporate environment. The scenario changed in the year 2007 and 2008 and an attractive number of M&A deals occurred in Russia. From 2009, the number of M&A transactions again decreased and till 2015 the exact situation sustained. Moreover, it is observed that a number of M&A transactions in Russia is not as more as other M&A leading countries. M&A in Russia follows several rules and regulations and the payment structure in M&A transactions also includes many guidelines. The M&A transaction process itself in Russia is not subjective to the type of consideration. It is an occasional exception that, if the M&A transaction is completed by an additional share issue, the board of directors should approve the non-cash payment. The Russian regulations also advise choosing the consideration types from the tax perspective. Though the M&A involved party are usually provided freedom to select the payment type as per their choice, still there is a rule that, if the M&A is registered with the additional release of shares, the law may declare a limited time (which may vary from two months to one year) to pay up the shares.
Figure: 11 Payment Method of M&A Deal in Russia 250 200 150
Cash Stock
100
Mixed 50 0
(Source: Compiled from Bloomberg Database) When we observed the last Sixteen years’ payment method of Russian M&A transactions, it is noticed that cash always has been the most accepted payment method for a maximum number of deals. Payment through stock is the secondly acknowledged payment mechanism followed by mixed payment structure. The status of mixed payment method is not at all attractive (only 3%) in those Sixteen years in Russian M&A scenario. India India, one of the rapidly developing country among all the south Asian countries, has been actively participating in both inbound and outbound M&A deals after the liberalization and globalization periods. India has also acquired a special position in doing M&A among the BRIC (Brazil, Russia, India & China) countries. Figure: 12 Payment Method of M&A Deal in India 300 250 200 Cash
150
Stock
100
Mixed
50 0
(Source: Compiled from Bloomberg Database)
In India, pharmaceutical, information technology, telecommunication, energy and healthcare industries are registering a remarkable number of M&A deals in each and every year. The rapidly growing Indian population, non-critical and favorable business environment and the fast-moving and emerging Indian corporate culture invite more companies to enter into Indian market through several modes like FDI and M&A. As a result, every year hundreds of deals are registering in different Indian sectors. All the M&A transactions in India are registered through cash, stock, and mixed payment method. Analyzing the past Sixteen years Indian M&A history, it is observed that, the supreme number of deals desired to go for cash payment rather than choosing stock or mixed payment method. After 2004, the number of M&A transactions in India started increasing but in 2009 and 2012 it went quite downward due to worldwide financial instabilities. The weight of mixed payment method was very low from 2000 to 2015. As per our gathered information, in 2000, an equal number of deals paid the deal amount through cash and stock and approximate half the number of cash or stock paid deals to choose to pay through mixed payment mechanism. From 2001 to 2006 mixed payment method was in a very poor situation and not at all accepted by corporate bodies. From 2007 the situation changed marginally but it did not continue for a long period of time. In 2015, we noticed again some rise in the mixed payment method. Though payment scenario through stock was not very attractive in number, approximately one-fourth of the total number of deals choose this mechanism in our selected sample period and stayed in the second position of the bar graph. Cash payment method was the most accepted payment method and topped the list within 2000 to 2015.
Payment Method of Industry Wise M&A Deals in Top Countries of the World We have taken ten industries such as basic materials, communications, consumer cyclical, consumer non-cyclical, diversified, energy, financial, industrial, technology and utilities of top ten M&A leading countries and defined their payment structure within our selected sample period. This payment structure analysis defines the scenario of payment types in different industries of the top ten M&A hubs of the world. In the previous section, we have only defined the country wise M&A payment structure whereas this section analyses the industry wise payment structure of M&A in all those country.
United States of America (USA) United States of America possesses the highest number of M&A deals in the worldwide
and also completed its maximum number of deals through cash. So Industry wise payment through cash is more popular than stock and mixed payment method. Figure: 13 Payment Method of Industry wise M&A Deal in USA 30000 25000 20000 15000 10000
Cash
5000
Stock Mixed
0
(Source: Compiled from Bloomberg Database) The maximum number of cash deals have occurred in financial sector followed by consumer, non-cyclical. In the case of the financial sector, more than ninety percent of M&A payment was done through cash within 2000 to 2015. Approximately sixty percent more deals were registered through cash payment than both stock and mixed in the consumer non-cyclical industry. The payment through stock is comparatively more in communications industries than others whereas payment through mixed payment method is high in the financial sector. Industries like utilities, diversified and basic materials had declared less number of deals and also the payment through stock and mixed method in these industries are very less.
United Kingdom (UK) The leading economy of European continent makes most of its payment through cash. This country has its maximum number of deals in the financial, consumer non-cyclical and industrial sectors.
Figure: 14 Payment Method of Industry wise M&A Deal in UK 6000 5000 4000 3000 Cash
2000
Stock
1000
Mixed
0
(Source: Compiled from Bloomberg Database) Each and every industry made payment of their maximum number of M&A deals through cash. The basic material industry is the only area where payment through stock in M&A deals is more than payment through mixed method. In the technology industry, the payment through mixed method was approximately fifty percent of the payment through cash. China China, the booming economy of Asian continent has registered maximum number of its M&A deals by paying cash. After cash, payment through stock comes in the second position in the Chinese economy in each and every industry. Figure: 15 Payment Method of Industry wise M&A Deal in China 2500 2000 1500 1000
Cash
500
Stock Mixed
0
(Source: Compiled from Bloomberg Database)
Utilities, energy, and diversified industries have very less number of deals those made their payment through mixed method. The above-mentioned industries also registered less number of M&A deals in all those Sixteen years. In communication industry, the combination of stock and mixed payment method is almost equal to the cash payment method.
Canada The payment scenario in all the industries of Canada is not at all dominated by cash payment mechanism. In basic materials industry payment through cash is less than payment through stock followed by mixed payment method. Figure: 16 Payment Method of Industry wise M&A Deal in Canada 3000 2500 2000 1500 Cash
1000
Stock
500
Mixed
0
(Source: Compiled from Bloomberg Database) Payment through stock is higher than the mixed payment method in all the industries except industrial and utility industries. The financial industry is the only industry where payment through cash was maximum than the other two payment methods. In the communication industries, there is a very less difference between the cash and stock payment mechanism. Japan Through M&A activities, Japanese companies are shedding non-core and underperforming businesses to become leaner, more efficient companies. In this developed Asian country, payment through mixed method did not have so much importance in all most every industry.
Figure: 17 Payment Method of Industry wise M&A Deal in Japan 3000 2500 2000 1500 Cash 1000
Stock
500
Mixed
0
(Source: Compiled from Bloomberg Database) According to our collected information, both utility, energy and diversified industries have nil number of deals happened. The importance of mixed payment method is very negligible in all the industries comparing with the cash and stock payment method. In all the industries, cash payment method possesses the highest number of deals followed by the stock payment method. Germany From 2000 to 2015, payment through cash in all the industries of Germany was most preferable. Payment through both stock and mixed mechanism varied from industry to industry in all those Sixteen years. Figure: 18 Payment Method of Industry wise M&A Deal in Germany 1600 1400 1200 1000 800 600
Cash
400
Stock
200
Mixed
0
(Source: Compiled from Bloomberg Database)
No industry took the lead in stock and mixed payment method. Payment in stock in basic material and diversified industries were very much disappointing whereas the similar situation in mixed payment method was seen in diversified, utilities, energy and basic material industries. Payment through cash was highest in each and every industry. Besides basic material and consumer cyclical industries, payment through stock comes just after the cash payment method. In the above two industries, mixed payment method comes after the cash payment method within 2000 to 2015. Australia The industry wise payment structure in Australia is completely different from industry to industry. Though payment through cash is higher in each and every industry, there is a fluctuating scenario between stock and mixed payment method within industries. Almost equal number of deals made payment through stock and mixed payment method in the utilities and diversified industries. Figure: 19 Payment Method of Industry wise M&A Deal in Australia 2500 2000 1500 1000
Cash Stock
500
Mixed 0
(Source: Compiled from Bloomberg Database) Payment through stock is higher in the industries like basic materials and energy. Communication, consumer cyclical, consumer non-cyclical, financial, industrial and technology industries preferred to make payment more in mixed payment method than the stock payment method followed by cash within our mentioned sample period.
France Like the other European and Asian countries, France also registered its significant number of deals in every industry for cash payment method. A similar situation like Australia is seen in the industry wise payment method analysis of France, where payment through stock and mixed method fluctuates from industry to industry. Figure: 20 Payment Method of Industry wise M&A Deal in Australia 1400 1200 1000 800 600
Cash
400
Stock
200
Mixed
0
(Source: Compiled from Bloomberg Database) We found an almost equal number of M&A deals registered through cash and mixed payment method in basic materials, energy, technology, and utility industries. There was a very negligible difference between the stock and mixed payment method in the industrial and diversified industries where as a stock payment method is more in the diversified industry than the mixed payment method and vice versa in case of the industrial sector. In communication, financial, consumer cyclical and consumer non-cyclical industries stock payment method comes in the second position followed by the cash payment method.
Russia Though the M&A payment structure in Russia is not completely different from other countries, there were some differences noticed during the industry wise payment method analysis within 2000 to 2015.
Figure: 21 Payment Method of Industry wise M&A Deal in Russia 250 200 150 Cash
100
Stock
50
Mixed 0
(Source: Compiled from Bloomberg Database) Utility industry was an exception among all the Russian industries, where payment through stock is more than payment through cash. All other industries accepted cash as their principal payment mechanism. Analyzing the industry wise payment structure derives that, payment through mixed method has a very little importance in the Russian M&A picture. Industries like consumer cyclical, consumer non-cyclical, diversified and technology also did not have much importance of stock payment method within our proposed sample period.
India India, the top most developing country in the Asian continent also registered its maximum number of deals through cash payment method in different industries within the Sixteen years’ sample periods. After cash, stock was the second most preferable medium for M&A payment in all the Indian industries. Mixed payment method did not have so much importance in the specified Indian industries in all those years.
Figure: 22 Payment Method of Industry wise M&A Deal in India 450 400 350 300 250 200 150 100 50 0
Cash Stock Mixed
(Source: Compiled from Bloomberg Database) A very less number of deals were registered through mixed payment method in the consumer cyclical, basic materials, energy, industrial and financial industries. Besides the above, the utility and the diversified industries registered almost zero number of deals for mixed payment mechanism. Analysis of Different Payment Methods It is observed that cash payment method is the best-accepted payment method by both the acquirers and the targets in all the top ten M&A leading countries. Here is some information provided, which contains the advantages and disadvantages of different payment structure. Paying Through Cash Accepting the payment through cash is mostly preferred by the shareholders of the acquiree. The cash payment method is particularly appreciated by the shareholders, who are unable to sell their stock by other means, and this scenario is basically seen in privately owned companies. The future performance of the company determines the value of stock and by accepting payment through cash, the shareholders no longer have to worry about the future performance of their company. The degree to which cash is preferred is indicated by the extent to which sellers are generally willing to accept a smaller amount of cash rather than a larger payment in stock or debt. Cash payment also determines that; the selling shareholders must pay income taxes on any gain. From acquirer’s perspective, cash payment method has both its pros and cons. For example, in a competitive bidding situation, the willingness of a buyer to pay in cash is more likely to be accepted by the seller is considered as an advantage of the cash payment method. Another advantage of not paying in stock is, if any future upside performance
generated by the acquisition, accrues solely to the existing shareholders of the acquirer. Cash payment method is highly appreciated as compared to other methods because it always follows an instant transaction in nature. Once the cash is paid, the transaction is completely over. Abnormal return is high in the initial days after the announcement period and asset acquisitions are more likely to be financed in cash payment method. Payment through cash is less time taking to complete the deal and the return on assets in the post-transaction period is significantly higher. Cash consideration is also required when an acquirer makes a general offer for the purpose of the delisting of a listed company. Though cash payment method is very popular among corporate bodies and widely accepted by M&A world, it does not possess a positive impact on profitability and the instant taxability makes cash payment method costlier than any other payment method. Paying Through Stock In a stock-for-stock exchange, the shareholders of the selling entity swap their shares with the shares of the acquirer. It is suitable for the shareholders of the seller when they do not want to pay any tax at instant instead of paying the tax at the time of selling the shares. The tax is applicable on the amount generated by deducting the stock price of the acquiree and the selling price of the stock of the acquirer. This means the shareholders do not have liquid investment positions in the short term. In this type of transactions, the risk is shared with both the seller and the acquirer, so that the benefits of the acquisition are not appreciated properly. In this case, if the acquirer does not achieve the estimated synergy gains or profits, there is a possibility of the falling of the share price in the market. If the seller’s shareholders now own some of those shares, the value of the payment to them will decline. Stock payment method is mostly preferred by companies with over valuation. If the bidder company has the higher investment opportunities, financing through stock increases and also there is a possibility of the positive and significant gain of the bidder company. Due to the stock payment method, the investors of the bidder companies become unsatisfied as it creates negative long-term abnormal returns. The transaction cost in the stock payment method is also very high. Because of the above-mentioned reasons, the stock payment method may not have so much popularity among the corporate entities at the time of M&A transactions. Paying Through Debt Besides cash and stock payment methods, debt can be another option for the acquirer to make the payment of the deal amount to the target. This option can be an advantage for the shareholders of the sellers as they will pay the income tax only after they receive the debt
payment, not before that. Before adopting such type of payment structure, the seller should enquire about the financial status of the buyer. The future poor financial instability of the buyer may put the seller into financial difficulties in the case of debt payment method. By placing the debt holders in the most senior positions of all the debt holders, the seller can mitigate the risk at some level. It is not possible every time, as many companies already have assigned the positions to other lenders. Payment through debt is comparatively easier than the payment through cash. It is also more flexible at the time of repayment procedure. In another side, payment through debt is very expensive. Perhaps because of the above reasons, debt payment method is not at all popular among corporate bodies in the M&A world. Paying Through Mixed Payment Method The payment through a mixture of cash and non-cash elements in the M&A transaction is known as the mixed payment method. The non-cash elements may be the stock or debt. Hence, the payment can be done by the acquirer to the target through combining cash, stock, and debt. According to Scheuering (2015), the abnormal returns of both bidder and target company are different from all cash and stock payment methods adopted deals. Abnormal returns are positive and significantly higher in mixed payment method (Eckbo et al., 1989). Modern M&A world is accepting mixed payment method than earlier. It is not only different from the traditional stock and cash payment method but also it combines both of them. This type of payment method gives higher abnormal return to the bidder company than other two payment method and mostly large M&A deals prefer to choose this type of payment method. In Eastern European M&A deal scenario, the average return on assets in mixed payment method is lower than the other two payment options. The abnormal return of the target company is lower in this type of payment method than the cash option. When the stock price of the acquirer is remarkably high, the acquirer is more tend to adopt the stock payment option and at this time, it offers a less number of shares to pay for the acquisition and the vice versa. In the case of the seller, if it finds the acquirer’s stock is going to be sold at too high, the share price goes down. If the acquirer finalized the deal in a low price, it never is interested to make payment with its stock. If so happens, the stock price increases and it will become a boon for the shareholders of the seller. In this situation, the acquirer gives more importance to pay in cash.
Whether, the payment is in cash or stock or mixed, before going for the entire procedure, some rules and regulations should be followed. However, some factors like the possible presence of other bidders, the willingness of the target to sell and the preference of the payment style, tax implications, transaction costs have their impact on the types of payment method. The decision on the choice of payment method should be taken by analyzing all these factors along with the choice of the bidder and the target for a successful deal. Conclusion Corporate restructuring activities have been acting as the best weapon for the surviving of business entities in this extremely competitive era. M&A as a corporate restructuring activity has been the most acceptable choice for the corporate bodies from decades. The last Sixteen years (2000-2015) has notified a remarkable number of M&A deals not only in India but also in worldwide. Payment structure takes an important role in the entire deal process. A wrong payment decision can create the worst situation for both the buyer and the seller. By analyzing the last Sixteen years’ trend of the world’s most emerging M&A destinations, it is clear that most of the deals accept cash as their payment method of the deal and also observed stock and mixed payment method did not have much existence, even if these methods have some advantages. Most of the countries have less than 10% of the stock and mixed payment methods. After analysing the M&A payment method of top ten M&A countries we found that cash payment method is more acceptable payment method for M&A leading countries. It also noticed that financial industries companies are normally using cash mode of payment in M&A deal in most of the countries. Cash payment method is popular because of its characteristics like less time consuming and risks free factor. Though payment through cash is the best option for companies in the corporate world at present, one cannot overcome the possibility of the increasing of the popularity of stock and mixed payment method. Payment method has become the reason of failure in case of some deals. So choosing the best payment option is very much necessary. This paper will provide a comprehensive understanding of payment methods on the worldwide M&A deals to the future researcher.
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