Family Firms M&A Announcements and Their Effect on Stock Market Reactions

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Family Firms M&A Announcements and Their Effect on Stock Market Reactions



Abstract

This Bachelor's paper analyzes the performances of mergers and acquisitions of family firms in the period from 1997 to 2018, as well as the reaction of the securities market to this transaction. The sample consists of 1099 observations, among which there are both family-owned and non-family-owned enterprises, where the acquirer is a public American company, and the family-owned firm is private and the target for absorption. The factors explaining the announcement period abnormal returns are the nature of the transaction, the method of payment for the transaction, financial indicators, the relative size of the transaction and a variable explaining the 2007 financial crisis.

The results of the work clearly demonstrate that the fact that the company is a family has a positive effect on the variable being explained. All 8 models presented in this work show significance of the family variable. Moreover, it was proven that acquirer will choose to merge with the company from the same sector, despite the fact that conglomerate takeovers are more preferable to stakeholders due to lower cost of debt and portfolio diversification. Ideas presented in previous findings about Financial Crisis have been confirmed since it negatively affected the stock price. Finally, the results suggest that cross-border purchase is undesirable and guarantees decrease in announcement period abnormal returns for the all models presented.



Introduction

Currently, mergers and acquisitions are most often carried out with the aim of leveling the shortcomings of independent and independent work of enterprises. Today, M&A transactions are the main way to reorganize a business. Of particular interest is the study of the market of mergers and acquisitions in the United States, as the world leader in the number and volume of transactions.

M&A transactions in general have a number of specific advantages and disadvantages, and also are characterized by a high level of risk with a very low probability of achieving a successful result. Nonetheless the level of acquisition and merger deals steadily increases every year which means this is useful and profitable instrument. Such deals are inherent part of growth strategy, which can possibly give the company additional market power, increase the performance of internal and external resources, give an access to new resources, technologies and markets. The success of deal is important not only for the companies who merge, but also for all representatives of the companies and for the growth of the whole economy.

Family business is unique entity representing over 40% of the businesses in United States of America and Europe, which makes it a serious player in the market. Presenting a unique form of organization, which is sometimes alien to the classical definitions of management issues, attitudes towards investment and risk, family firms are of particular interest in the matter of mergers and acquisitions.

Taking into consideration the fact, that majority of M&A activities face financial problems and do not achieve desirable results, this paper aims to analyze the impact of acquiring the private family business on the announcement period abnormal return. In this paper, we begin by examining the characteristics of family-owned firms, touching on the question of the attitude of such companies to takeover, and also discussing issues related to management features. After the second part, where we will analyze mergers and acquisitions and their special connection with the desires of agents of family firms to diversify their portfolios, we will build econometric model.



Chapter 1. Related literature overview and development of hypotheses

1.1 Concepts, features and classification of family firms

Today, the development of the small and medium business sector is rightfully considered the basis of the welfare of any state. Crisis phenomena clearly showed: family businesses with greater mobility than substantial structures are able to respond faster to consumer demand fluctuations. This is vividly illustrated by the experience of America, Asia and European countries. A new firm can be created by people who, as a rule, have friendly relations or are well acquainted with each other. In this case, an enterprise created by companions on shares arises. However, most often a new business is organized by close or distant relatives who belong to the same family. Such firms in world terminology are called "family firms" or "family businesses."

Currently, the concept of family business can be divided into two large groups.

The first group involves the family business in a narrow sense. This is a company in which the main activities are carried out by members of one family and their closest relatives. Such firms in a number of countries, for example, in Canada or America, as, indeed, in the Russian Federation, constitute the majority of family-owned companies. These are, above all, various individual entrepreneurs. In such companies, as a rule, there are no clear subordinate authorities, no subordinate structures, and no hierarchical steps. Leadership belongs to the head of the family.

The second subclass is a business from several related families. As a rule, these are already grown “family” companies with an established organization and subordination structure, where family relations become “business”, and one has to take into account the fact that some relatives become managers, and some are subordinates.

The second type of family business is companies that are handed down from generation to generation and belong to whole family clans. This group, which forms foreign family capitalism, includes, as a rule, large and very large companies, such as international corporations with many subsidiaries. In this case, the “family” has only control over the company at the expense of a share in the family. In each country, the family must have a different percentage of shares in order to have the right to be called a family company. In Finland, at least 50%, in America and Germany it is enough to have about 25% of the shares in the hands of one family, provided that it is the most significant of all shares of this campaign, while the rest of the Shares are distributed among several small owners of small holdings. In addition, there is another way to maintain family control over the company - issuing shares of two classes with different votes for each share (shares in a family give, for example, the right to 10 votes, and shares with the right of 1 vote for each share go to the stock market, or only family shares retain the right to elect members of the board of directors so that you can retain control over the company and at the same time raise additional capital, which is so necessary for the development of any company.

However, at the same time, family-owned firms have a number of exceptional advantages, among which there are:

a) The possibility of more flexible and operational solutions. Compared to large corporations in the field of small business, management decision-making structures have been simplified, which allows them to quickly and flexibly respond to changes in the market, including by maneuvering capital during the transition from one activity to another;

b) Orientation of manufacturers mainly to the regional market. Family business is ideal for studying the wishes, preferences, customs, habits and other features of the local market;

c) Performance of auxiliary functions with respect to large manufacturers. Firms with a wider range of products decentralize the production process by transferring its phases to small businesses on a subcontract basis.

d) Low initial investment. Family businesses have reduced construction time. The small size allows you to retool them faster and cheaper, introduce new technologies and automate production, to achieve the optimal combination of machine and manual labor.

Until recently, family firms were believed to be nothing more than an antithesis for survival in the harsh conditions of the struggle of modern giants, however, the work of the last 10-15 years, aimed at studying the company's management motivation in M & A transactions, shows that the ownership structure is one of the key indicators success of the transaction. In addition, there is evidence that family-owned businesses represent the majority of both private and public companies worldwide. In a 2002 survey by Faccio and Lang, in a sample of 5232 companies in Western Europe, 44.29% were family controlled. R. Anderson and D. Reeb also conclude that family firms represent a large part of the global market, namely one third of the S&P 500 and account for almost 20% of outstanding equity. In addition, they found confirmation that family firms perform better than non-family, especially if the CEO is a member of the family.

1.2 Key features of mergers and acquisitions

At the moment, the concept of mergers and acquisitions is most relevant. In the conditions of tough competition, many companies do not have enough own funds to operate in the market and get a decent profit for it. As a result, similar companies unite or are absorbed by other more successful organizations. In this regard, the issue of mergers and acquisitions is of great importance. Let us consider them in more detail (Table 1). Thus, at present, the market of mergers and acquisitions has a high degree of development and is characterized by a number of advantages and disadvantages.



Table 1. Advantages and disadvantages of mergers and acquisitions

Advantages	Disadvantages
The possibility of achieving maximum results in the shortest possible time;	Large financial investments related to payments to shareholders and employees of additional premiums;
The possibility of the operational acquisition of strategically important assets, in particular, intangibles;	High probability of a company's risk if its activities are incorrectly assessed;
The possibility of the company entering new markets;	Complication of the integration process, in the event that companies operate in different areas;
Acquisition of streamlined marketing infrastructure;	After completion of the transaction there is a risk of possible problems with the staff of the acquired company.
	The presence of incompatibility of cultures in a transboundary merger.

Source: Kohers, N., & Kohers, T. (2000). The value creation potential of high-tech mergers. Financial Analysts Journal, 56(3), 40-51.

Mergers and acquisitions are an entrepreneurial tool aimed at improving and expanding on existing assets and resources (Table 2). However, despite how attractive such deals may seem, there is a high risk of default, since 50 to 70 percent of transactions (Cartwright, 2005; Cartwright and Schoenberg, 2006) remain unsuccessful in terms of financial gain, which in turn should push us to study the causes of such a default, as well as the determinants of success and failure of the transaction.

Table 2. Possible advantages of mergers and acquisitions

Organizational	saving on production scale stabilization due to vertical integration saving due to elimination of duplicating functions resource complementarity exchange of technologies strengthening of personnel potential
Market	increasing market share expanding the distribution network improving the image of the enterprise
Financial	reduction of financial risks due to diversification the possibility of attracting financial resources on more favorable terms increasing the profitability of shares of a takeover company tax optimization

Source: Kohers, N. & Kohers, T. (2001). Takeovers of technology firms: expectations vs. reality, Financial Management, 30, 35-54.

The additional value of shares of a takeover company is not created in all cases, which increases the likelihood of potential losses for investors. However, the uniqueness of each transaction, as well as the fact that several events can simultaneously affect the market, and the presence of insider information on it may indicate a possible change in the results in the long term.

Most of the works on M&A are trying to figure out managers 'incentives to undertake acquisitions but underestimated the role of the social context of large shareholders. A study by D. Miller in 2009 shows that among the Fortune 1000, family attitudes toward risk, as well as their preferences, directly affect the volume of the transaction and its nature. In such transactions, the laws of agency theorists are often violated, since very often managers and CEOs pursue the same goal, often related to maintaining control over their firms for offspring and that their wealth should be concentrated. Thus, the higher the family share among shareholders, the lower the dollar amount of the transaction.

As part of the family business, M & A provides an opportunity to successfully exit the market in the event of a change of generations, or vice versa, to help the company grow faster. However, due to the peculiarities of the power of ownership, M & A erodes the share of family capital, which can harm the financial independence and autonomy of the family in business. Despite all aspects of the deal, analysis of Family Capital in 2015 shows that the family business is an active player in such transactions.

The roots of the creation of the first companies through mergers and acquisitions are attributed to the end of the 19th century, when all companies merged according to one simple principle - horizontal integration, but there are still a number of classification types of mergers and acquisitions. All mergers and acquisitions can be divided according to the following criteria:

a) Horizontal merger - the merger of two or more companies belonging to the same industry and located at the same stage of the production cycle (merger of two or more competitive organizations).

b) Vertical merger is a combination of a number of companies, one of which is a supplier of raw materials for another, in which the company buyer expands its presence in the technological chain up to sources of raw materials or down to marketing products to the final consumer. Then the cost of production is rapidly reduced, and there is a rapid increase in profits.

C) Generic mergers - are an association of companies that produce interrelated products. In particular, the company that manufactures cameras, combines with the company that produces photographic film or chemicals in order to take photographs;

On the other hand, Hillier, Grinblatt and Titman (2008) identify 3 other main motives for mergers and acquisitions. The first motive is financial mergers, aimed at obtaining financial benefits of acquirer by absorbing an undervalued firm, applying strategies for their improvement and subsequent sale at a profit. Strategic mergers strive to achieve a number of different goals, including gaining access to technology or resources, attracting new additional customers, creating or removing barriers to entry, taking advantage of economies of scale and scope in production. Conglomerate mergers, being the most implicit, are aimed at diversifying production and assets, which in turn reduces the risk and makes their portfolios more attractive. However, it is the latter that will be given a special role in my model.

This work considers it necessary to explain in more detail what a conglomerate merger is, because, based on previous studies, such transactions have a special role in the performance of family-owned firms. More details about the newly introduced variable same_ind that I included in the work, and its role for my econometric model will be described in detail in Section 2.

Conglomerate mergers - an association of several companies operating in different industries, in other words, a merger of this type is a merger of a company of one industry with a company of another industry, which is neither a supplier, a consumer, nor a competitor. Within the framework of the conglomerate, the combined companies do not have any technological or targeted unity with the main field of activity of the integrator company. In turn, there are three types of conglomerate mergers:

1) Mergers with product line extension mergers, i.e. a combination of uncompetitive products, sales channels and the production process, which are similar to each other. An example is the acquisition of Clorox, a manufacturer of products for the bleaching of linen with Procter & Gamble, a leading manufacturer of detergents.

2) Mergers with market expansion mergers, i.e. involving the purchase of additional sales channels for products, for example, supermarkets, in geographic areas that have not previously been served.

3) Pure conglomerate mergers that do not share any common features.

Diversification helps to stabilize the flow of income, which is beneficial both for employees of this company, and for suppliers and consumers by expanding the range of goods and services.

Naturally, making a merger and acquisition transaction, the company receives a certain profit, expressed in an increase in capital inflows. The main theory explaining the reasons for this increase is the emergence of a synergistic effect as a result of the implementation of integration and subsequent joint activity.

The basic principle underlying the theory is synergy, which is a joint activity of two or more objects and leading to the effect / result of their interaction in addition to the results already obtained by each individual; In relation to mergers and acquisitions, a synergistic effect may represent an additional effect from assets of two or several parties, as well as a cumulative effect exceeding the sum of the effects of individual projects of these parties.

The synergistic effect is very rare. The ability to identify its occurrence is a greater success, and secondly, it gives a signal for immediate action on the transaction. Within the framework of the classical synergetic theory, integration can create synergies in the form of growing or additional market value (capitalization) of an integrated production entity, its management and ownership.

Mergers can improve the efficiency of joint ventures, but they can also worsen the results of current production activities and increase the bureaucratic effect. Most often, it is very difficult to estimate in advance how large changes can be caused by mergers or acquisitions. According to Mergers & Asquisitions Journal, 61% of all mergers and acquisitions of companies do not pay back the money invested in them. A study of 300 mergers conducted by Price Waterhouse showed that 57% of companies formed as a result of mergers and acquisitions are lagging behind in terms of their development from other similar representatives of this market and are forced again to be divided into independent corporate units.

One of the most common approaches to the analysis of the effectiveness of mergers and acquisitions in the scientific literature is the analysis of changes in the company's stock returns in the short term at the time of the announcement of the transaction. The prevalence of this method is explained, firstly, by the fact that it allows you to directly measure the change in the welfare of shareholders as a result of the transaction, secondly, the data for efficiency analysis in this case are available to all public companies.

Usually, researchers study the real profitability of the buyer's shares for the period preceding the announcement of the transaction and compare it with the “normal profit” for a certain period. The results of empirical studies using changes in the company's stock returns in the short-term show that the shareholders of the target company receive a large, relatively “normal” return as a result of a transaction announcement, which is a consequence of high premiums to the stock price.

As for the results for the shareholders of the company-buyer, there are no definitive conclusions about the effectiveness of transactions. Researchers note significant negative results or minor positive results in the event window. Buying and maintaining abnormal returns (BHAR) is another measure used in long-term analysis. BHAR uses the long-term stock price, based on one or two years after the announcement, as an indicator of the change in the value of the buyer's company.

It is important to note that the use of data on stock prices in the long run has a number of certain disadvantages. The key problem is that most often there are other factors that can affect the stock price within a certain period of time between the announcement of the acquisition of a company and the end of the event. Most often, in modern studies of international mergers and acquisitions of family companies, the method of short-term stock returns is used. In this case, data on the daily stock returns in the short term are used. This method has such advantages as improving the accuracy of the market response; secondly, minimizing the possible impact of other uncorrelated events.

Empirical studies show that shareholders of target companies most often get super-profits when announcing an international merger and acquisition transaction. The profitability of the target companies varies depending on the country, industry and exchange rates. For purchasing companies, some articles indicate a positive excess return, some authors find negative or zero return during the period of the announcement of the transaction. This is due to the fact that the conclusion of international mergers and acquisitions deals with certain risks, namely the economic, political and cultural gap between the countries of the companies involved in the transaction, differences in the corporate culture of the companies, differences in the tax regimes of the countries. It should also be noted that in conducting international mergers and acquisitions transactions, there are certain difficulties in assessing the future synergistic effects of this transaction. In addition, the level of economic development of countries, the level of liquidity and information asymmetry at the enterprise level affect the effectiveness of international mergers and acquisitions. The effectiveness of international transactions in developed markets. Among the determining factors that have a positive effect on the efficiency of transactions, we can distinguish access to foreign sales markets, the management company of the buyer and the target company in the same industry. That is why in this work we will use Browns and Warner (1985) model in order to calculate short term stock abnormal return

1.3 Summary of literature review

Summarizing the above, we can distinguish several key points regarding the mergers and acquisitions in terms of short-term gains in the financial market.

First, family-owned firms have a unique form of government that strikes with huge advantages, such as simplified communication between stockholders, CEO and management, and better knowledge and understanding of the local market. However, until the second half of the 00's it was believed that the family business is a player born to failure.

Works whose purpose was to explain the nature of mergers and acquisitions often ignored the connection between the special behavior of the family business management, but the accuracy of the investments, the irrational long-term investments of business owners and the desire to minimize any possible risks are those key aspects of the family business that not only attract shareholders, but they are also able to directly affect the short-term performance on the stock market.

Later in the paper, I will build an econometric model and try to prove with the help of it the importance of understanding that business is family-based. In addition, I will introduce several explanatory variables, as well as the theory and findings of previous studies, indirectly explaining the nature of their behavior.

1.4 Research questions and hypotheses

In most cases, firms go bankrupt not because of a lack of capital or inefficient technologies, because of a lack of management knowledge. In the US, polls are conducted regularly, which often cite the main reasons for failures:

1) incompetence, unbalanced experience (for example, an experienced engineer, but an inexperienced trader), lack of experience in trade, finance, supplies, production and management;

2) insignificant sales volumes

3) competition

4) too high operating costs

However, companies most often die from unresolved management problems, not from a lack of capital or investment. At the same time, the number of family-owned firms is increasing every year.

In this paper, we will study the impact of the fact that the family business on the market reaction after the M&A transaction. The acquirer will be various public US firms from 1997 to 2018, while the target will be both family and non-family private firms. There also will be some other explanatory variables which according to previous theories can affect market reaction, but the main question how they will act in case when the target firm is the family one. These variables are some financial indicators, dummy variables describing the aspects of the deal, relative comparison of the sizes, and, finally, never used before Crisis dummy, which potentially can somehow affect the M&A process. The Crisis dummy reflects Financial Crisis of 2006-2007 and, according to Dr. Krishnamurthy Ravichandran (2009) will positively affect the volume of M&A activity, but negatively affect the abnormal returns.

Nonetheless, the question to which this work is trying to answer is: how does the market react to the announcement of what is a family firm? Are FCFs, cross-border deals, diversification purposes and relative size of the purchase are important determinants of a successful deal.

1.4.1 Family firm hypothesis

From the theory of corporate finance, we know that according to Jensen and Meckling (1976), agency cost arises because of different interests of company owners and managers, the latter of whom often pursue their own benefits, aimed at receiving increased compensation and private benefits, unlike inattentive shareholders. Interest alignment hypothesis tells us that ownership concentration reduces the costs associated with management, which in turn should increase the value of the company. In addition, if a family-owned firm, according to Shleifer and Vishny (1997), the major shareholder is more focused on his business, which means he is more aware of the company's performance and management. Often the company's CEO itself is a major investor, or most family members have a chairperson position. Such involvement gives the family firm-specific knowledge, and directly affects the accuracy of making any investment decisions, often more long-term and less risky. Chen and Hsu 2009 found out that family firms nurture loyalty, altruism and commitment in their subordinates. The accuracy and long-term investment of such companies is explained by the desire of the shareholder to transfer his creation to the next generations (James 1999). Thus, family firms represent a more valuable resource for aquirer in terms of mergers and acquisitions.

However, the features of such a management structure also carry with them some controversial aspects. Thus, greater concentration in the family means sometimes illogical, controversial investments, often pursuing personal motives rather than those that generate income. Family management is not always a profit maximizing one, including because managers of such firms are relatively less prepared for risky investments. This fact explains the slower development of such firms that are not ready to invest in new, sometimes even revolutionary technologies. Any activity that increases the risk of a family will often be rejected. This was confirmed by Chen and Hsu in 2009, revealing a negative relationship between the R&D investments. In addition, in 2010, a study of the Taiwanese market conducted by Chang showed a negative relationship between market reaction and family control of companies that conducted innovative investments. Although the agency's problem mentioned above is declining, such investment decisions generate conflicts between family shareholders and the rest of the portfolio holders. It is important to remember that most of the family's personal funds are invested in the company, which in turn affects financial risk. In addition, the holders of family stocks are not able to diversify their portfolios without weakening their right to vote and their social and emotional wealth gained from the control of the family company.

Thus, the first hypothesis:

H1: Family ownership has a positive effect on the stock market reaction to M&A deals

1.4.2 Cross-Border hypothesis

A number of researchers study the impact of the level of economic development of the purchasing country and the target company on the effectiveness of international transactions and come to the conclusion that transactions in which companies from developed countries enter into international mergers and acquisitions for the most effective are purchases of companies from developed countries. The study considers informational asymmetry and the need for liquidity as potential factors affecting the efficiency of transactions. On a sample of US companies, it is possible to show a significant positive influence of the cross-border merger factor on the efficiency of short-term market profits.

H2: Cross-Border M&A transactions positively affects the announcement period abnormal returns.

Studies aimed at studying the effect of family ownership on firm performance were divided every time. Part of the work asserts that the active participation of the family in the firm leads to a comparatively higher income of the company and a higher valuation of the company, associated primarily with high shareholder protection (Maury 2006). The same idea is confirmed by R. Andreson and D. Reeb. However, some works criticize the form of management of such companies, which, according to them, are deprived of the possibility of a better performance due to the pursuit of private goals, as well as not covering the costs of using a family member as a manager, compared with the often more qualified manager hired from outside (B .Villalongaa, R. Amitb 2008).

1.4.3 Conglomerate hypothesis

Conglomerate takeovers are crucial deals for the family businesses. By diversifying shareholders portfolio and by creating synergies, acquirer can decrease financial risk and, therefore, provide safer ground for the family business which aims to avoid bankruptcy using any possible scenarios. Moreover, conglomerate takeovers can generate higher outcome for the new projects by decreasing the cost of debt. Nonetheless, it is still can negatively affect the abnormal returns on short-term basis since family business faces its own unique agency problems. So, the third hypothesis:

H3: The merger of companies from the same fields of activity negatively affect short-term announcement market over-profit.



Chapter 2. Methodology: Data and Model Development

2.1 Sample

I downloaded the data from the Bloomberg Terminal and the Thomson Financial Securities SDC PlatinumTM Worldwide Mergers & Acquisitions Database (SDC database). Sample of Bloomberg Terminal meets the following criteria:

Deal status: completed M&A (100% purchase)

Acquirer is Public Company from United States

Target is a private firm (sample contain deals of 18 countries including US)

Deal size >50mln doll. (paid cash, debt and stock)

All types of industries (12 industries available: technology, industrial, financial, utilities, communication, energy and other types)

Nature of bid is hostile or friendly

financial data available via Bloomberg database.

Sample period from 1997 to 2019

Initially 13363 deals satisfying following criteria were downloaded, but because of unavailability of some information about bidders and targets, the sample was cut to 3600 deals. By eliminating outliers and observations with missed data about actual returns of the companies, the sample was created using 1099 M&A deals in United States between 22-year-period starting at 1997.

2.2 Variables Definition and Methodology

Dependent Variable:

Announcement period abnormal returns (Abn_return)

I used the same methodology that Browns and Warner proposed in 1985 to explain the changes in wealth of an absorptive firm on dates close to the announcement. The process of calculating normal returns crucially depends on the concept of efficient market hypothesis. According to this theory, stock prices should fully and efficiently reflect all available information (Fama, 1970). Normal returns are the expected returns based on a broad market index, for which the S&P500 is used in this paper. We set R_jT as actual return and ER_jT as expected return for stock i at day T. Using Capital Asset Pricing Model, we will compute expected return on stock i at day T and then subtract the actual one to get the abnormal return. From the OLS regression of market returns with stock returns during an estimation period from span-day T-362 to day T+3, where day T-0 indicates the event day on which the merger was first announced, we will use model AR_jT= R_jT -( в_i + ^в_i R_jT) (2.1), where в_i and ^в_i were obtained from the calculations. Moreover, we will use daily returns from S&P500 broad market composite index as a proxy for market returns. Abnormal returns will be calculated over 1 day around the announcement period. Below I will present calculations example for the CNC US Equity (Ticker Name) merger with private firm made at 1st May 2019.

1) We will start with Acquirers stock price ratio at time T-361 and T-360. (58/58 - 1 = 0%)

2) S & P500 ratio of broad market index benchmark at T-361 and T-362 (2263/2262 - 1 = 1%)

3) Do this for all dates on the interval [T + 3; T-362]

4) Using the Covariance command, find the covariance of the percentage change between the acquirer and the S & P500 for the entire time span. (Cov for given deal equal 0.007%)

5) Find Variance using the command Disp. B also for the entire time interval (Var equal 0.016%)

6) Then calculate the Beta of our ticker by dividing covariance on variance (^в_i equal 0,46)

7) The Risk-Free rate was obtained using the united states 10-years bond Yield for each day since January 1, 1997 (even up to the time it became constant on 09/18/2009)

At given date Rick Free rate was equal to 0.3469%

8) Market return at T-0 was equal -0.75021%

9) Using equation (1.1) we get our expected return which is equal to -0.16%

10) Compare it with the actual return also unloaded from the terminal Bloomberg. The difference between actual (-3.5%) and expected return called abnormal return and approximately equal to -3.34%

11) The resulting difference is the announcement period abnormal return [T-362; T+3]

12) Then the same procedure was made with all other 1099 deals in the sample.

So, the regression will look like:

(2.2)

Next step, is to define variables in derived sample, estimate the model and do significance tests.

Independent Variables:

Family Ownership Dummy (Family)

(2.3)

The definition of what a family company differs from author to author, however, I will be based on the study of Smith and Amoako-Adu (1999), which defines a family company as the company in which the company's founder or relative, descendant, spouse is the owner of the largest company, both individually and in a group with their relatives. The minimum percentage set by Washington, defining the company as a family is 10% of all shares. Thus, this variable is dummy, which defines a private company as 1, if it is a family company and 0 otherwise.

Free Cash Flow to Book Value (FCF_to_Book)

I used this variable because there is a theory that in a company where this accounting indicator is high, managers often conduct non-value acquisitions (Jensen 1986). Free cash flows theory can predict whether M&A will destroy or create value. Acquisitions are the only way managers can spend cash instead of making payments to shareholders. Thus, the theory predicts that the probably of value-destroying or low-benefit mergers is higher for the company with large FCF The effect of FCF, expected to arise on announcement of M&A should be associated with high FCF, is an unforeseen element of FCF improper spending, which otherwise could be spent on more important areas, such as an increase in dividend payments or share repurchases. It is this unexpected element of shock that is explored in the study of Lang, Stulz and Walking (1991).

By summarizing all above, we assume that FCF will negatively affect the abnormal return.

Relative size (Relative_size)

It is logical that the greater the value of equity and assets of a bidding company, the bigger the buying power of stock which will appreciate. However, the evidence for that is mixed. The first reason for that is that the larger the target, the larger potential gains from synergy.

Secondly, merged institution can have benefits from being to large to work properly. However, the management of the firm may ask for a higher compensation since acquisition increases the size of the firm. Possible revaluation loss will be too high for bidder in comparison to the aquired company. The research of European M&A performance made by D. Filipoviж in 2010 showed that the smaller the relative ratio of the size of the target company compared to the acquirer, the better performance of acquired firm in the next 3-5 years. Moreover, K. Ho?gholm work about Finnish market brought a positive relationship between the relative size of transaction and bidder's shareholders abnormal returns. The price run-up the week prior the announcement was found.

The findings of Travlos, Alexandridis, Fuller and Terhaar (2013) argue that larger the deal value, the smaller premium will be offered. The same time, what is surprising, when large target is acquired the greater value of acquiring shareholders is destructed. So, the smaller the relative size, the smaller probability of successful merge.

The variable is calculated as the ratio of bidder's market capitalization of the bidder prior the acquisition to deal value and assumed to positively affect the dependent variable.

Hostile Dummy (Hostile)

At family enterprises, the buyer and the seller may have different approaches to the assessment of the enterprise. Family owners may not use generally accepted valuation techniques or may be overly optimistic about the value of the company. In addition, the family may have a base selling price needed to achieve retirement goals or financial planning, but this price may not correspond to the current company profile. In some cases, the family business may receive an estimate from other professionals or trusted consultants involved in the sales process, such as investment bankers, accountants, or appraisal firms. This may take extra time and effort with the family if the proposed sale price does not match these other business valuations.

Depending on how management personnel regard this or that transaction, they are distinguished: friendly mergers, when the heads of the organization and shareholders are completely satisfied with the terms of the transaction and hostile takeovers is the process when the target company's management is unwilling to merge, rejects the offer, but the acquirer still pursue it. the management of any of the companies against the proposed transaction and taking in order to avoid its number of anti-seizure measures. In this case, the company that carries out the acquisition has to conduct active actions in the securities market against the target in order to acquire it. Acquirer makes a public offer at a price which is fixed and above the market one. Usually the majority of shareholders are influenced by promises of a change in management and possible future financial benefits from a takeover.

It is also important to remember that hostile deals are almost all the time financed be the cash. Cash has a defined worth, nonetheless, hostile bidders usually fire previous management. In case when the managers of the target hold a dominate share of equity, the acceptance of M&A will be hard work for the bidder. Target firm agrees for the acquisition only in case which meet the needs of stockholders, which most often means keeping the current management. Thus, when the transaction is completed, the remaining management not only continues to retain power in the company, but also has the advantage of forming such a supreme board, which will be beneficial to them.

Nonetheless, the Bloomberg terminal can separate type of the deal, and it is initially assumed that this factor will negatively affect the short-term market abnormal return.

Cash payment Dummy (Paid_cash)

(2.4)

Cash more likely does not have valuations and liquidity problems, in comparison to securities or debt. However, throughout a history, cash payments were at their peak in 1988 and 2005. However, their number significantly dropped two times in 1992 and 2007. Companies performed better in late 80s and first middle of 00's, so cash holdings were significantly higher than previous. From S&P 500 companies cash holdings, it can be seen that they slowed in 1992 and year before but rose significantly years after. The cash payment of M&A also rised in this period, so cash flows pay important role in determining the method of payment. This is one more reason why I used Crisis dummy in my model.

Acquiring company's managers who have control over M&A deal will prefer cash payments, since stock purchase deal may dilute their control (A. Yakov, L. Baruch). Thus, it is reasonable to assume that managers of the target company may prefer stock over the cash payment. This is because it is more tax-effective for selling shareholders (taxes from capital gains adjourned to the moment when stock received from M&A is sold). Moreover, stock purchase is preferable to target company since it enables shareholders to participate in the future potential appreciation of shares.

There was found strong and positive relationship between the manager's ownership in target firm and likelihood of acquisition. Moreover, Ghosh and Ruland, found that empirically, there is higher chance for manager of the target firm to safe his position in case of stock payment.

Martynova and Renneboog (2009) suggest that the method of payment affects the short-term market reaction to M&A announcement, which in case of cash in comparison to stock will create higher returns to all shareholders.

From the Graph 1 we can see that the cash payment method of M&A deals made to acquire family firms is the prevailing one. Moreover, the peak is observed in 2014 when the number of cash deals was 157 transactions. These results contradict with Boone et al. (2015) observation argued that mixed or stock payment increasing significantly every year. Moreover, we can observe that for the 22 years sample only 7 deals were paid by debt, so this method was combined with the mixed group.



Graph 1. Number of USA Family Firm M&A deals

Source: Author's calculations

Summing everything above, I came to the conclusion that the method of payment is almost the key indicator of the success of the transaction, which predetermines the market response to the merger. In my model cash method is dummy variable, which is equal 1 in case of cash payment and 0 in case of other types of payment.

Same industry Dummy (Same_ind)

(2.5)

Conglomerate takeovers aimed to diversify shareholders portfolio creates financial and operational synergies, which will decrease the financial risk and therefore the probability of the company to face bankruptcy, which is essential in family firms' case. Such M&A can also drop the cost of debt of the firm and therefore will generate a higher value from the new projects. On the other hand, different industry mergers always create agency problem and hence lower the returns from takeover.

Family owners unable to diversify their portfolios without losing some part of their voting rights and socio-emotional wealth created by the control of the family firm. Miller (2009) argues, that the only way the family members may diversify their investment portfolios only by creating mergers of outside industry. The same research also shows positive relationship between family ownership and desire to diversify portfolios.

If the M&A is made with the family firm in order to maximize firms' value in the long term, especially when family aimed to transfer wealth to future generations, there should be positive return around the market reaction to announcement of M&A.

Cross-border transactions Dummy (Cross)

(2.6)

Cross-border deals are always followed by a benefit for both acquirer's shareholders and target's management since if merger is successful and forward looking, merged firm can take the advantage of outside market imperfections. New markets and consumers will increase deal volume. Moreover, the most popular reasons for such deal are need for portfolio diversification, favorable foreign regulatory environment, lower repatriation costs, new technologies (Deloitte). However, problems connected with integration costs, political instability, cultural issues can undermine those advantages.

Empirically, results are mixed. Faccio et al. (2006) found a positive relationship between the acquisition of foreign targets and aquirers returns in EU region M&A. Ben-Amar (2006) confirmed previous findings and deduced that cross-border transactions made by Canadian firms create higher returns in comparison to domestic ones. However, Moeller (2005) was able to reveal the fact that cross-border targets experience lower abnormal returns because of legal features protecting shareholders. Cross-Border dummy assumed to positively affect the abnormal returns, however, possibility that Moeller's approach will be true is not rejected.

It is important to note that in the implementation of the evaluation of the effectiveness of M & A transactions may also have their advantages and disadvantages. For example, mergers and acquisitions, in which return on assets (ROA) is used as an indicator of efficiency, certain difficulties may arise. This is due to the fact that accounting standards of countries may vary, and the use of accounting analysis data creates a risk of biased estimates, especially in inter-country sample studies.

Crisis Dummy (Crisis)

Subprime mortgage crisis arised in 2007 due to uncontrolled investments in financial derivatives. Beltratti and Paladino (2013) argue, that this crisis has significant effect on volume of M&A and its returns. The question which arises immediately is how financial instability and anticipated drop in stock prices affected M&A announcement period abnormal returns during crisis in USA. Paper of Thedo Linssen (2017) states that the companies who made M&A deals during 2007-2008 crisis benefit significantly in terms of higher cumulative returns (CAR's). This increase was 20% higher in comparison to other years. However, shareholders of acquiring companies on average suffer faced lower returns during those years. We will use dummy Crisis in order to show the impact of financial instability on abnormal returns of family business M&A.

(2.6)



Chapter 3. Discussion of results

3.1 Descriptive statistics

This chapter aims to present estimation results of the model described in previous chapters. The first step is to report descriptive statistics on independent variables. Sample consists of 1099 deals in period from 1997 to 2019 with an annual average value of US $350 million which is smaller, than information found in previous studies of Benou and Madura (2005). The peak of deals was in 2007, right before the Financial Crisis Bubble, with 275 deals 174 billion dollars. Most acquired firms were from the financial companies.

It can be seen from the Table 3 that on average, relative size of the target form is 5 times smaller, than the acquirer's one. Moreover, the same industry deals are for only 65% of the sample, which is means that close to 35% of all deals are diversifying acquisitions involving two companies of unrelated industries. Average abnormal return is equal 0,01% per share which is positive number. We can see that 88% of deals in sample were paid exclusively by cash or cash equivalent. Only 12% of private firms are family firms and close to one quarter of all deals involve cross-border transaction. Over 22-year period, 10% of deals were made during crisis 2007.

Table 3. Descriptive statistics

	Obs.	Mean	Var	s.d.	Min	Max
Abn_return	1099	0,01	0,01	0,09	-0,33	2,31
Cross	1099	0,25	0,19	0,43	0	1
Hostile	1099	0,18	0,15	0,39	0	1
Relative_size	1099	0,22	0,32	0,56	0,00	4,89
Same_ind	1099	0,65	0,23	0,48	0	1
Paid_cash	1099	0,88	0,11	0,33	0	1
FCF_to_Book	1099	0,02	13,27	3,64	-73,43	45,87
Crisis	1099	0,10	0,09	0,30	0	1
Family	1099	0,12	0,11	0,32	0	1

Source: Author's calculations

From the correlation Table 4 it can be inferred that relative size of the deal negatively affects the probability of deal being paid by cash. Moreover, abnormal returns during announcement period and cash payment method have weak negative correlation, which contradicts findings of Martynova and Renneboog (2009) in which they concluded a strong negative relationship between stock payment and probability of achieving positive abnormal returns. There is also weak positive relationship between achieving abnormal returns and relative size of the deal. It supports idea of D. Filipoviж who conjecture the better performance of acquired firm in the next 3-5 years in case when the relative ratio of the size of the target company compared to the acquirer is small.

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