Tender offers in South America: are abnormal returns really high? *.
| Autor | Fuenzalida, Darcy |
ABSTRACT
Different studies in developed capital markets have found positive abnormal returns of at least 15% during the announcement date of a tender offer. Although there are almost no studies for South American stock markets, some studies reported positive abnormal returns, ranging from 25% to 50%, related to the announcement of the first tender offer. In this study one argues that estimated positive abnormal returns in emerging markets are high because studies have assumed a completely segmented capital market by applying the market model with a local stock market index. By allowing for partial integration among five South American emerging markets, one shows that there are in fact positive abnormal returns previously, during, and after the announcement date of the first tender offer. However, the positive abnormal return associated to the announcement date is in the order of 8%. A slightly higher abnormal return is obtained using a market model that accounts for partial integration and downside risk. These results prompt towards a lower positive abnormal return in the sample of South American firms studied.
KEY WORDS
Tender offer, abnormal return, emerging market.
JEL code: C12, C32 and G34
RESUMEN
Diferentes estudios realizados en mercados de capital desarrollados han revelado tasas de retorno positivas inusuales de por lo menos 15% durante la fecha de anuncio de la oferta pública de adquisición de acciones. Aunque casi no se han llevado a cabo estudios sobre los mercados bursátiles en Sudamérica, algunos estudios han reportado tasas de retorno positivas inusuales en un rango del 25% al 50%, las cuales están relacionadas con el anuncio de la primera oferta de adquisición. En el presente estudio, se argumenta que las tasas de retorno positivas inusuales estimadas en los mercados emergentes son altas porque los estudios se han basado en un mercado de capitales totalmente segmentado aplicando el modelo de mercado y utilizando un índice del mercado bursátil local. Al considerar la integración parcial entre los cinco mercados emergentes en Sudamérica, se demuestra que efectivamente existen tasas de retorno positivas inusuales antes, durante y después de la fecha de anuncio de la primera oferta de adquisición. Sin embargo, el retorno positivo inusual asociado a la fecha del anuncio se encuentra en el orden del 8%. Utilizando un modelo de mercado que considere la integración parcial y el riesgo a la baja, se obtiene una tasa de retorno inusual ligeramente mayor. Estos resultados señalan una menor tasa de retorno positiva inusual en la muestra de las empresas sudamericanas incluidas en el estudio.
PALABRAS CLAVE
Oferta de adquisición, retorno inusual, mercado emergente.
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INTRODUCTION
There have been numerous studies in the field of tender offers and on the necessary premia to get corporate control in the process of takeover in developed capital markets, but almost none for South American stock markets. International evidence, mainly in the United States, shows that there are high positive abnormal returns for the target company at the moment of announcing the tender offer.
The objective of this study is to show that positive abnormal returns related to the first tender offer are in fact lower than previous estimates if one allows capital markets to be partially integrated instead of completely segmented. Recently, Stulz (1999), and Bekaert and Harvey (2003) have shown that after financial liberalization in emerging markets, their expected returns must fall because their relative volatility with respect to the world volatility must be higher than their correlations with the world market returns. Stulz (1999) has shown that this is the necessary and sufficient condition for globalization to reduce to reduce the risk premium of an small country (in this case an emerging market). This is the case even when emerging markets are more sensitive to world events due to their financial liberalizations. (1) To the extent that local and world events play a meaningful role in explaining stock returns in emerging markets there will be less variation to explain and therefore abnormal returns must be lower than otherwise.
In this research, one shows that accounting for partial integration among five South American stock markets yields positive abnormal returns, which are lower than the ones estimated by previous studies. In order to show this, one uses 17 tender offers that have been accomplished during the period 1998-2002 across five South American stock markets (Argentina, Brazil, Chile, Peru and Venezuela). In particular, one is interested in answering the following research questions: Do target South American firms offer positive abnormal returns around the announcement date of their first tender offer in a situation of partial integration? Does one find evidence of information leakage during the days previous to the announcement date of the first tender offer? Is there evidence of stock market overreaction? (2)
In particular, an hybrid multifactor Capital Asset Pricing Model (CAPM) is used as a market model. This is in fact just one way to represent a situation of partial integration. As pointed by Bodnar et al. (2003), a situation of partial integration is very difficult to represent because in this situation every investor has access to an incomplete but well-defined list of stocks. In order to specify this situation one needs information about all individuals and available securities for them. Hence, it may be possible that a situation of partial integration does not correspond to the hybrid multifactor CAPM. However, since the hybrid multifactor CAPM is a strange mix of the full-integration and the full-segmentation CAPM, it may be taken as a first approximation to a situation of partial integration.
The paper has been divided into six sections. The next section discusses the existing empirical evidence concerning tender offers, while the third section reviews the main aspects related to event studies. The sample criteria and data description appears in the fourth section, while the methodology and results are discussed in the fifth section. The last section concludes the paper.
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TENDER OFFERS: EMPIRICAL EVIDENCE
A takeover refers to transfer of control of a firm from one group of shareholders to another group of shareholders. The controlling shareholders of the bidder company wish to acquire the company to the controlling shareholders of a target company. This change in the controlling interest of a corporation can be accomplished either through a friendly acquisition or an unfriendly, hostile, bid. A hostile takeover (with the aim of replacing current existing management) is usually attempted through a public tender offer (Harvey and Mongerson, 2006).
A tender offer is a general offer made publicly and directly to a firm's shareholders to buy their stock at a price well above the current value market price (Harvey and Mongerson, 2006).
The empirical evidence concerning tender offers is vast, so this section summarizes the most relevant studies for the purposes of this research.
Dodd and Ruback conducted one of the earliest studies concerning tender offers in (1977). These authors studied 172 companies traded at the New York Stock Exchange (NYSE) covering the period between 1958 and 1976. The objective of their study was to analyze the premium obtained by target companies on the announcement date of a tender offer and whether this premium was different for successful and unsuccessful bids. Using the market model, these authors found that abnormal returns of target companies acquired via successful bids was about 21%, while it was 19% for the case of unsuccessful bids. Later on, Jensen and Ruback (1983) conducted several studies between 1977 and 1983 and concluded that takeover in their sample have offered positive abnormal returns ranging between 16% and 30%.
Through the years several authors have found similar results for the NYSE and the NASDAQ. In this sense, Bredley et al. (1983) reported a premium ranging between 23% and 60% for target companies at the NYSE. Jarrel et al. (1988) studied 663 cases of successful tender offers between 1962 and 1985 and came to the conclusion that positive abnormal returns for target companies averaged 30%. Furthermore, Asquith (1988) found a positive abnormal return of 19% on NASDAQ target companies 10 days prior to a tender offer announcement, result that prompts to information leakage.
Zingales (2000) studied the magnitude of the average premium paid for voting shares in countries where such information is available. Such average premium varies enormously from country to country. In most of them it ranges between 10% and 25%, with Israel (45%) and Italy (82%) as the main exceptions. This variation can be explained by the characteristics of each country, with a probable effect on the ability to derive private gains from company control. Zingales concludes that as both local legislation and supervision improve, the premia on controlling stock will tend to be lower. Another interesting result was obtained by Moloney (2002) who found that, on average, the bidder company rewards the target company between 15% and 50% over the market price of the target company prior to the announcement of the tender offer. He concluded that there is a high positive abnormal return in the case of hostile bids and that there is a low positive abnormal return when ownership is highly concentrated and absorbed.
Although there are almost no studies for South American emerging markets, an interesting piece of evidence was offered by Fuenzalida and Nash (2003) whom studied 14 Chilean companies during the years 1995 and 2002. They conclude that there is evidence of positive abnormal returns on the announcement date of a tender offer of about 26%. Besides, these positive abnormal returns are lower in the case of public companies operating under the Tender Offer Law in Chile. (3)
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