Mergers and Acquisitions in Recession Periods

Silva, Vinicius Augusto Brunassi; Gallucci Netto, Humberto

Vinicius Augusto Brunassi Silva

FECAP University Center, Department of Finance, São Paulo, SP, Brazil

https://orcid.org/0000-0002-1299-321X

Humberto Gallucci Netto

Federal University of São Paulo, Department of Actuarial Sciences, Osasco, SP, Brazil

https://orcid.org/0000-0001-7905-1879

Responsible editor: Prof. João Mauricio Boaventura Evaluation process: Double Blind Review Reviewers: Jordana Marques Kneipp; Felipe Marques This article is open data

Conflicts of interest:

The authors have no conflict of interest to declare.

1. Vinicius Augusto Brunassi Silva, PhD, EAESP-FGV, São Paulo, Brazil.

E-mail: vinicius.brunassi@fecap.br

2. Humberto Gallucci Netto, PhD, EAESP-FGV, São Paulo, Brazil.

E-mail: humberto.gallucci@unifesp.br

Authors' contributions:

1^st author: Definition of research problem; Development of hypotheses or research questions (empirical studies); Development of theoretical propositions (theoretical work); Definition of methodological procedures; Literature review; Analysis and interpretation of data; Critical revision of the manuscript; Manuscript writing. 2^nd author: Definition of research problem; Development of hypotheses or research questions (empirical studies); Development of theoretical propositions (theoretical work); Definition of methodological procedures; Data collection; Statistical analysis; Analysis and interpretation of data; Critical revision of the manuscript.

Total number of mergers and acquisitions from 2003 to 2017	1,796
Exclusions from sample:
Acquiring firm is not listed on the B3	1,431
Mergers and acquisitions in the financial sector	70
There is insufficient daily return data from the acquiring firm to calculate the cumulative return	16
Total	279

	Full M&A Data (no exclusions)		M&A Sample
Year	Number of transactions	Total amount (R$ billion)	Number of transactions	Total amount (R$ billion)
2002	24	27.57	6	13.00
2003	33	23.53	4	2.17
2004	41	103.20	12	5.16
2005	53	44.64	12	11.76
2006	77	131.70	18	70.79
2007	147	129.13	31	48.55
2008	103	220.31	26	21.32
2009	97	117.97	29	48.59
2010	146	184.84	26	58.99
2011	179	142.72	11	41.66
2012	179	122.52	26	15.99
2013	178	164.60	22	57.46
2014	146	192.71	12	33.01
2015	111	109.55	11	8.13
2016	137	179.09	12	10.70
2017	144	138.40	21	22.21
Total	1795	2032.47	279	469

Transaction	Industry	Amount (R$ billion)	Year
Merger between Itaú and Unibanco	Financial	106.92	2008
Merger between Ambev and Interbrew	Food and beverage	80.22	2004
Acquisition of Inco by Vale do Rio Doce	Steel	42.56	2006
Merger between BM&F and Bovespa	Financial	34.26	2008
Acquisition of Banco Real by Santander	Financial	31.41	2007
Incorporation of Portugal Telecom by Oi	Technology/Telecoms	28.70	2013
Acquisition of Portugal Telecom assets by Altice	Technology/Telecoms	23.86	2014
Acquisition of GVT by Telefônica	Technology/Telecoms	23.50	2014
Telemar's corporate restructuring	Technology/Telecoms	20.75	2011
Acquisition of Brasilcel by Telefônica	Technology/Telecoms	18.18	2010
Largest transactions in crisis years
Merger between Itaú and Unibanco	Financial	106.92	2008
Merger between BM&F and Bovespa	Financial	34.26	2008
Acquisition of Portugal Telecom assets by Altice	Technology/Telecoms	23.86	2014
Acquisition of GVT by Telefônica	Technology/Telecoms	23.50	2014
Acquisition of HSBC by Bradesco	Financial	17.85	2015
Acquisition of Nova Transportadora do Sudeste by Brookfield Asset Management	Oil and Gas	16.73	2016
Acquisition of control of OGX by creditors	Oil and Gas	13.80	2014
Merger between ALL and Rumo	Transportation and logistics	13.53	2014
Merger between Cetip and BM&FBovespa	Financial	11.96	2016
Acquisition of Bertin by JBS	Food and beverage	11.58	2009

ACAR	Cumulative abnormal return for the three-day, five-day, and seven-day windows.
Crisis	Dummy equaling 1 for acquisitions made in crisis years and 0 otherwise. The crisis years are 2003, 2008, 2009, 2014, 2015 and 2016.
ln(transaction)	Logarithm of the transaction amount.
ln(assets)	Logarithm of the book value of assets.
Book-to-market	Book value of assets divided by market value.
Leverage	Total debt divided by asset value.
Cash	Current assets minus inventory divided by asset value.
ROA	Net income divided by total assets.
CAPEX/assets	CAPEX divided by asset value.
PPE/assets	Fixed assets divided by asset value.
Sales growth	Change in net operating income between two years.
Governance level	Dummy equaling 1 if the firm is listed on the Novo Mercado or Level 2 and 0 otherwise.
ADR	Dummy equaling 1 if the firm share is traded in the US and 0 otherwise.
Sector dummy	Binary variables that group firms from the same sector. We use the NAICS sector classification.
Firm dummy	Dummy variable for each firm.
CEO Characteristics
Graduate	Dummy equaling 1 if the CEO of the acquiring company has a graduate degree and 0 otherwise.
Finance degree	Dummy equaling 1 if the CEO of the acquiring company has a degree in a business-related course or engineering and 0 otherwise.
Male	Dummy equaling 1 if the CEO of the acquiring company is male and 0 otherwise.
Chairman of the board of directors	Dummy equaling 1 if the CEO of the acquiring company is the chairman of the board of directors and 0 otherwise.
Government	Dummy equaling 1 if the CEO of the acquiring company has worked in the government and 0 otherwise.
Entrepreneur	Dummy equaling 1 if the CEO of the acquiring company is an entrepreneur and 0 otherwise.
CEO age	Age in years of the firm's CEO at the date of acquisition.
CEO tenure	The number of years the CEO has been in the position.

Panel A
Variables	Mean	Median	SD	Minimum	Maximum
Transaction value (R$ millions)	1762.34	527.36	4134.24	20.00	42561.5
Assets (R$ millions)	35.46	12.43	72.59	0.19	615.96
Book-to-market	1.92	1.33	2.01	0.09	19.89
Leverage	0.08	0.06	0.07	0	0.37
Cash	0.31	0.28	0.16	0.07	0.87
ROA	0.05	0.05	0.08	-0.27	0.73
CAPEX/assets	0.09	0.08	0.08	-0.39	0.55
PPE/assets	0.33	0.34	0.21	0.00	0.80
Sales growth	0.28	0.15	0.87	-3.90	10.06
Graduate	0.47	0.00	0.49	0.00	1.00
Finance degree	0.80	1.00	0.44	0.00	1.00
Male	0.98	1.00	0.13	0.00	1.00
Chairman of the board of directors	0.25	0.00	0.43	0.00	1.00
Government	0.61	1.00	0.48	0.00	1.00
Entrepreneur	0.08	0.00	0.28	0.00	1.00
CEO age	52.48	52.27	10.27	33.00	83.01
CEO tenure	3.72	2.28	3.97	0.83	31.00
Panel B
Correlation Matrix
	ln (transaction)	ln (assets)	Book-to-market	Leverage	Cash	ROA	CAPEX/ assets	PPE/ assets	Sales growth	Governance level
ln (assets)	0.21
	0.00
Book-to-market	0.05	0.09
	-0.35	-0.11
Leverage	0.00	-0.14	0.35
	-0.95	-0.02	0.00
Cash	-0.09	-0.10	-0.02	-0.09
	-0.11	-0.08	-0.65	-0.11
ROA	0.07	0.08	-0.39	-0.28	0.04
	-0.18	-0.15	0.00	0.00	-0.45
CAPEX/assets	-0.02	0.10	-0.22	-0.05	-0.04	0.00
	-0.70	-0.09	0.00	-0.38	-0.47	-0.96
PPE/assets	0.09	0.28	-0.09	0.08	-0.52	0.09	0.22
	-0.13	0.00	-0.12	-0.14	0.00	-0.11	0.00
Sales growth	-0.07	-0.10	-0.08	-0.05	0.09	-0.03	0.52	-0.07
	-0.20	-0.07	-0.17	-0.40	-0.11	-0.56	0.00	-0.19
Governance level	0.05	0.02	-0.01	-0.10	-0.01	0.04	-0.01	0.12	0.02
	-0.39	-0.67	-0.76	-0.07	-0.77	-0.43	-0.43	-0.04	-0.64
ADR	0.02	0.12	0.01	-0.05	0.04	-0.09	-0.01	0.12	0.07	0.45
	-0.70	-0.03	-0.76	-0.38	-0.44	-0.13	(0.13	-0.04	-0.20	0.00

Year	Mean	Median	SD	Minimum	Maximum	Number of transactions
2002	-0.001	-0.018	0.066	-0.061	0.111	6
2003	0.047	0.066	0.087	-0.075	0.132	4
2004	-0.011	0.000	0.044	-0.093	0.052	12
2005	0.004	-0.011	0.053	-0.108	0.075	12
2006	-0.016	-0.012	0.044	-0.096	0.069	18
2007	0.003	-0.006	0.057	-0.115	0.188	31
2008	0.042**	0.022	0.091	-0.079	0.342	24
2009	0.024	0.011	0.093	-0.083	0.381	27
2010	-0.003	-0.005	0.041	-0.106	0.071	28
2011	-0.036	-0.006	0.107	-0.348	0.051	12
2012	0.006	0.004	0.040	-0.072	0.062	27
2013	-0.005	0.001	0.065	-0.183	0.106	22
2014	0.005	0.006	0.042	-0.078	0.097	12
2015	0.006	0.005	0.040	-0.086	0.061	12
2016	0.022	0.015	0.055	-0.040	0.135	12
2017	-0.003	0.000	0.031	-0.052	0.073	20
Years of crisis	0.024***	0.010	0.076	-0.086	0.381	91
Years of expansion	-0.004	-0.002	0.055	-0.348	0.188	188

Results
	ACAR – 3 days	ACAR – 3 days	ACAR – 5 days	ACAR – 5 days	ACAR – 7 days	ACAR – 7 days
Crisis	0.023**	0.018**	0.033***	0.029***	0.023**	0.026*
	(0.010)	(0.009)	(0.010)	(0.011)	(0.010)	(0.013)
ln(transaction)	0.001	-0.000	0.002	0.001	-0.001	-0.003
	(0.003)	(0.003)	(0.003)	(0.004)	(0.003)	(0.004)
ln(assets)	-0.002	-0.005	-0.005	-0.016**	-0.005	-0.013
	(0.003)	(0.007)	(0.003)	(0.008)	(0.004)	(0.010)
Book-to-market	0.002	0.001	0.006**	0.006	0.010**	0.008*
	(0.003)	(0.003)	(0.003)	(0.004)	(0.004)	(0.004)
Leverage	-0.015	0.024	-0.000	-0.067	-0.036	-0.077
	(0.071)	(0.100)	(0.078)	(0.166)	(0.087)	(0.193)
Cash	0.003	0.009	0.025	0.035	0.023	0.032
	(0.024)	(0.060)	(0.018)	(0.066)	(0.022)	(0.065)
ROA	-0.005	0.005	0.075	0.007	0.109**	0.086
	(0.053)	(0.084)	(0.057)	(0.130)	(0.052)	(0.153)
CAPEX/assets	0.081	0.102	0.081	0.137*	0.065	0.092
	(0.068)	(0.080)	(0.068)	(0.080)	(0.075)	(0.087)
PPE/assets	0.013	0.036	0.020	0.031	0.025	0.052
	(0.017)	(0.037)	(0.020)	(0.041)	(0.022)	(0.045)
Sales growth	-0.008	-0.009	-0.009*	-0.015*	-0.012**	-0.015*
	(0.005)	(0.008)	(0.005)	(0.008)	(0.006)	(0.007)
Governance level	-0.010	0.046*	-0.005	0.034	-0.009	0.037
	(0.009)	(0.023)	(0.012)	(0.031)	(0.010)	(0.039)
ADR	-0.006	-0.000	0.009	0.022	0.005	0.019
	(0.005)	(0.018)	(0.007)	(0.024)	(0.014)	(0.035)
Constant	-0.002	0.021	0.017	0.128	0.084	0.146
	(0.059)	(0.099)	(0.071)	(0.113)	(0.059)	(0.163)
Sector
fixed effects	Yes	No	Yes	No	Yes	No
Firm fixed effects	No	Yes	No	Yes	No	Yes
Observations	266	266	277	277	279	279
Prob > F	0.00	0.00	0.00	0.00	0.00	0.00
Adjusted R²	0.11	0.31	0.13	0.21	0.11	0.17

Results
	ACAR – 3 days	ACAR – 3 days	ACAR – 5 days	ACAR – 5 days	ACAR – 7 days	ACAR – 7 days
Crisis*Graduate	0.032**	0.022	0.040***	0.042***	0.045***	0.054***
	(0.013)	(0.015)	(0.012)	(0.013)	(0.012)	(0.014)
Crisis*Finance_degree	-0.031	-0.063	-0.029	-0.059	-0.065	-0.070
	(0.049)	(0.061)	(0.051)	(0.064)	(0.042)	(0.062)
Crisis*Male	0.048**	0.014	0.068***	0.037	0.088***	0.071**
	(0.023)	(0.034)	(0.024)	(0.033)	(0.022)	(0.033)
Crisis*Chairman of the board of directors	0.001	0.007	0.020	0.021	0.020	0.027
	(0.021)	(0.024)	(0.015)	(0.021)	(0.015)	(0.022)
Crisis*Government	-0.001	0.010	-0.010	-0.017	-0.009	-0.013
	(0.015)	(0.016)	(0.013)	(0.022)	(0.012)	(0.026)
Crisis*Entrepreneur	0.035	-0.023	-0.015	-0.045	-0.069	-0.076
	(0.063)	(0.052)	(0.053)	(0.055)	(0.044)	(0.054)
Crisis*CEO age	0.000	0.001	-0.000	0.001	0.000	0.001
	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
Crisis*CEO tenure	-0.005**	-0.002	-0.005***	-0.004**	-0.006***	-0.006**
	(0.002)	(0.002)	(0.002)	(0.002)	(0.002)	(0.002)
Control variables	Yes	Yes	Yes	Yes	Yes	Yes
Sector
fixed effects	Yes	No	Yes	No	Yes	No
Firm
fixed effects	No	Yes	No	Yes	No	Yes
Observations	266	266	277	277	279	279
Prob > F	0.00	0.00	0.00	0.00	0.00	0.00
Adjusted R²	0.18	0.31	0.16	0.22	0.16	0.20

	Crisis	Expansion
	Mean	Mean	Difference	t-stat	ATT	t-stat
Variables
ACAR – 3 days	0.021	-0.003	0.024	3.88***	0.023	2.66**
ACAR – 5 days	0.031	-0.004	0.035	4.59***	0.032	3.06***
ACAR – 7 days	0.025	-0.004	0.029	3.56***	0.019	1.70*
ln(transaction)	20.02	20.13	-0.11	0.59
ln(assets)	15.97	16.30	-0.33	1.62
Book-to-market	2.20	1.78	0.42	1.63
Leverage	0.08	0.07	0.01	1.31
Cash	0.33	0.30	0.03	1.16
ROA	0.04	0.06	-0.02	2.16**
CAPEX/assets	0.09	0.09	0.00	0.41
PPE/assets	0.29	0.35	-0.06	2.16**
Sales growth	0.30	0.28	0.02	0.18
Governance level	0.20	0.29	-0.09	1.69*
ADR	0.05	0.10	-0.05	1.28
CEO Characteristics
Graduate	0.44	0.48	-0.04	0.69	-0.06	0.74
Finance degree	0.78	0.81	-0.03	0.68	0.06	0.74
Male	0.97	0.99	-0.02	1.31	-0.02	0.82
Chairman of the board of directors	0.29	0.23	0.05	0.93	0.03	0.42
Government	0.68	0.59	0.09	1.55	0.06	0.77
Entrepreneur	0.17	0.05	0.12	3.31***	0.05	0.93
CEO age	52.67	52.40	0.27	0.19	1.45	0.80
CEO tenure	4.18	3.51	0.67	1.32	1.28	2.37**
Observations	91	188

	Positive	Negative
	Mean	Mean	Difference	t-stat
Variables
ln(transaction)	20.02	20.01	0.01	0.03
ln(assets)	15.88	16.08	-0.19	0.72
Book-to-market	2.63	1.57	1.06	1.98*
Leverage	0.08	0.09	0.00	0.41
Cash	0.34	0.31	0.02	0.67
ROA	0.04	0.04	0.00	0.02
CAPEX/assets	0.07	0.11	-0.04	1.80*
PPE/assets	0.29	0.29	0.00	0.02
Sales growth	0.20	0.44	-0.25	0.94
Governance level	0.22	0.16	0.06	0.70
ADR	0.07	0.03	0.05	0.96
CEO Characteristics
Graduate	0.53	0.30	0.23	2.30**
Finance degree	0.81	0.73	0.08	0.85
Man	0.94	1.00	-0.06	1.46
Chairman of the board of directors	0.26	0.32	-0.06	0.66
Government	0.63	0.75	-0.12	1.27
Entrepreneur	0.12	0.21	0.08	1.08
CEO age	52.36	53.11	-0.75	0.32
CEO tenure	3.53	5.11	-1.58	1.70*
Observations	54	37

\begin{array}{l} C A R_{i} = β_{0} + β_{1} C r i s i s^{*} G r a d u a t e_{i} + β_{2} C r i s i s^{*} F i n a n c e_d e g r e e_{i} \\ + β_{3} C r i s i s^{*} M a n_{i} + β_{4} C r i s i s^{*} C h a i r m a n_B o a r d_{i} + β_{5} C r i s i s^{*} G o v e r n m e n t_{i} + \\ β_{6} C r i s i s^{*} E n t r e p r e n e u r_{i} + β_{7} C r i s i s^{*} A g e_{i} \\ + β_{8} C r i s i s^{*} T e n u r e_{i} + δ_{i} + γ_{j} + ε_{i} \end{array}

[1] Responsible editor: Prof. João Mauricio Boaventura Evaluation process: Double Blind Review Reviewers: Jordana Marques Kneipp; Felipe Marques This article is open data

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Mergers and Acquisitions in Recession Periods

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