Download Master in Finance Thesis Economic Nationalism

Master in Finance
Thesis
Economic Nationalism in Mergers and Acquisitions in Latin America
Dany Simon
ANR: 297568
Supervisor: Fabio Braggion
Acknowledgements
My sincere gratitude for:
Mom, dad and sister, no need for explanation.
Fabio, for making this possible.
Bernardo, for precious comments.
Joao, for motivating me and discussing with me each single topic of this thesis.
Victor, for helping me with the data.
2 Abstract
I study economic nationalism in mergers and acquisitions in Latin America from 1991
to 2013. The countries on the sample are Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela and I used the most relevant transactions according to the target’s
market capitalization. In this case, the economic nationalism means the government’s
preference for national bidders alternatively to foreign ones. Facing a takeover
attempt, the government has three possible reactions, namely to support, do
nothing/stay neutral and to oppose.
In accordance with available evidence for the European Union, there is evidence of
existence of economic nationalism in Latin America. Nevertheless, under certain
macroeconomic conditions, this preference might change. It was also found that if the
bidder is a foreigner, it is more likely that the merger attempt will be completed,
going against the findings mentioned previously.
Furthermore, if the government is supporting the transaction, the probability of it
being completed is higher, pointing out to the influence that those governments could
have on the successfulness of the deals. Moreover, if the government supports the bid,
the premium received will be smaller. This can be understood that the support is not
based on high premiums paid.
3 1. Introduction
Several countries in Latin America have been growing fast in the past years and also
have been taking an important role on global economy. Some nations, such as Brazil
and Mexico, the 7th and 14th wealthiest economies according to the 2013 GDP
disclosed by the IMF, are becoming increasingly competitive. Brazil is part of the
BRIC countries and Mexico is part of the MINT countries, neologisms created by Jim
O’Neil and Fidelity Investments, respectively, to designate fast growing economies.
As they are getting more relevant, they are becoming worthy of notice.
This study intends to analyze the presence of economic nationalism in mergers and
acquisitions in Latin America from 1991 to 2013 through government reactions to
merger attempts. Economic nationalism, for the present investigation, means the
government preference for local bidders rather than foreign ones.
The topic, the relationship between mergers and acquisitions and political issues is
very important and intriguing. Can a government influence the volume of transactions
of a country or its characteristics? If they could influence, how can they do it? Which
macroeconomics or political factors will make the government be more likely to
support or oppose a transaction? Which characteristics from both the bidder and the
target would also make them react positively or negatively?
My main finding is that there is evidence of the presence of economic nationalism in
Latin America, except under certain macroeconomic conditions. However, if the
bidder is a foreigner, it will be more likely that the transaction will be concluded.
Therefore, despite opposing to the deal, the government does not impose any
constraint for foreign bidders. Moreover, if the government supports the deal, it
completion will be more likely, as well as the premium received will be smaller.
My question will be addressed first giving a brief overview about the literature on the
topic and further explaining the institutional background in which those countries are
inserted. Hereafter, the full methodology will be described, as well as the data
collected, followed by the main outcomes from the regressions, together with its
explanation, when applicable.
4 2. Literature Review
The literature concerning mergers and acquisitions is very extensive and event studies
is a topic that has been extensively studied, despite not being exclusive for mergers
and acquisitions. Abnormal returns, that are the difference between a specific security
return and it benchmark, are calculated in order to investigate whether there has been
created value on the transaction either for the bidder or the target on the
announcement date.
Goergen and Renneboog (2004) examined short-term wealth effects within European
transactions, and found that abnormal returns are higher for target companies than for
the bidders. The main drivers for abnormal returns are the origin of the companies,
means of payment of the transaction and the book-to-market ratio. They also
discovered that synergies are the main reason for mergers and acquisitions.
Cross-border transactions have an important role on the present study and there is a
considerable literature about it. Shimizu, Hitt, Vaidyanath and Pisano (2004)
investigated about the theoretical foundations of cross-border mergers and
acquisitions. They argue that they work as an entry on an international market, it is a
dynamic way to learn an external culture and lastly, it is a value creating strategy.
Rossi and Volpin (2004) studied about cross-country determinants of mergers and
acquisitions. They found that the amount of transactions is higher in countries with
better accounting standards and superior shareholder protection. Moreover, on crossborder mergers and acquisitions, the target countries have poorer investment
protection than on the acquirers’, pointing out to the fact that the bidders might
improve the governance of acquired firms.
The number of cross-border mergers have been increasing in the recent years as
reported by Erel, Liao and Weisbach (2012) and about one third of the total
transactions combine companies from different nations, as the worldwide economy is
becoming more integrated. They observed that the main determinants for cross-border
mergers and acquisitions are geography, currency movements and stock market
5 performance. It is more likely that a company will acquire another one in a closer
country.
Moreover, companies in countries that had its currency recently appreciated are more
inclined to be acquirers, whereas nations who had their currency depreciated have
higher probability of having their firms as targets. Furthermore, countries with better
stock market performance usually buy companies on those with worse performance.
Nevertheless, cultural differences can emerge as a conflict for companies. K. R.
Ahern et al. (2012) studied it and discovered that culture has a high economic impact
on the volume of cross-border mergers, where the more distant culturally the
countries are, the smaller is the amount of transactions. Additionally, the closer
culturally the countries are, the higher will be the combined announcement returns.
The main elements regarding the national culture that affects the mergers are trust,
hierarchy and individualism.
Dinc and Erel (2013) investigated about economic nationalism in mergers and
acquisitions in European Union countries. The term economic nationalism, in this
case, indicates the government preference for local companies as acquirers on merger
attempts, instead of foreign ones.
They found that there is clear evidence that governments prefer the companies to stay
domestically owned, rather than internationally. This is stronger when the far-right
parties are strong and the governments are weak. Moreover, this preference might not
only have an effect on the outcome of the transaction, but it also can prevent from
future bidders trying to buy companies on such country.
Those authors created a sample including 415 transactions from 1997 to 2006 with 15
European Union countries as targets. Each country has around 25 bids. They selected
the largest transactions of each nation according to the target’s market capitalization
(the most relevant ones). To each merger attempt, they searched on local newspapers
for the government reaction to each bid, and it could have been support, stay
neutral/do nothing or opposition.
6 Due to the relevance of their research in the field of mergers and acquisitions and to
the lack of studies of economic nationalism on other regions, I will replicate their
analysis based on transactions that took place on the most relevant (wealthiest)
countries in Latin America.
Regarding cross-border mergers and acquisitions in Latin America, Pablo (2009)
examined which were its main determinants from 1998 to 2004. He detected that both
macroeconomic and business factors have a strong impact on the decision of both
going abroad to buy and selling to a foreigner. Acquirers are usually from countries
with a favorable macroeconomic situation and good protection of investments.
Moreover, the bidders who are more inclined to go abroad are those with high
corporate market-to-book ratios.
Pablo (2013) looked at cross-border diversification through mergers and acquisitions
in Latin America for the same period aforementioned, from 1998 to 2004. The main
finding is that the cumulative abnormal returns are higher for the acquirer on
countries with less correlated GDPs. Likewise, there is a positive impact on the price
if the target comes from a country with a different legal system. Lastly, the market
reaction is also positive if the bidder is targeting a company on a nation with low
property rights protection and with a government with high degree of both
intervention and regulation.
According to Seligson (2007), there has been a trend towards the left in Latin
America. Argentina, Bolivia, Brazil, Chile, Ecuador, Guyana, Peru, Uruguay and
Venezuela are some examples of countries whose president had any degree of leftist
ideology. Among the presidents, there is a big variation on this leftist ideology,
whereas some of them uphold the free trade and the relationship with the United
States, some others have a very extreme socialist speech, frequently attacking
capitalism and also the United States. In some cases, this left turn can enhance the
nationalism sentiment, making the government more likely to interventions against
foreign companies.
7 3. Institutional Background
Latin American countries are inserted on a different society than European Union
ones regarding the institutional background. Most of them passed through
authoritarian regimes during the second half of the 20th century, and therefore their
democracies are recent. Moreover, the far right parties are not common as on Europe,
and there is a leftist trend.
Privatized Companies
The great part of Latin American countries has passed through a dictatorship period
during the second half of the 20th century. These regimes were very interventionists
and thence they made several companies become state-owned. When the countries
reestablished their democracy, in the late 70’s, the state had a huge presence on the
economy, and the economies were doing extremely badly.
According to Estache and Trujillo (2004), the first privatization experience happened
in Chile in 1974, followed by Mexico, eight years after, in 1982. The other countries
started in the late eighties. In total, around 1.500 companies became owned by the
private sector, closed or went bankrupted. Around 95% of the proceeds were
concentrated in six countries: Brazil (40%), Argentina (26%), Mexico (17%), Peru
(5%), Colombia (3,5%) and Venezuela (3,5%).
One of the main solutions for trying to improve the economy was to privatize those
state-owned companies, trying to increase the efficiency of those firms and raise
taxes. It means that the state, by means of an auction, sells some stake of its firms for
private companies or investors. There are a couple of requirements for participating
into the auction, and after the participants have been accepted to it, they should
submit the price they are willing to pay for the business and the company who
presents the highest price, wins the bid. Each country, however, has its own
regulation.
Once the company fulfills the minimum requirements for the auction, the one willing
to pay the best price would win. Hence, the government reaction would not make any
8 sense and it would not modify anything. For this reason, these types of transactions
were excluded from the sample.
Estache and Trujillo (2004) made an overview about the privatization experience on
Latin America. Chile had it first cycle from 1974 to 1978 and had 550 companies as a
goal. This neoliberal policy aimed economic and fiscal stability. The second cycle,
from 1984 to 1990 intended to privatize the remaining companies from the first cycle.
Mexico sold a huge number of companies and this had big importance on the public
sector reform. On Argentina, privatization also played an important role on the
country’s stability and was very popular among it citizens. Around 50% of the 23
billion of dollars raised between 1990 and 1997 went for debt payment.
On Brazil, this process started on 1991 and lasted for the next mandates. Between
1991 and 2002, 120 firms were privatized, and not all of them sold the control. Some
companies sold minority stakes. Most of the proceeds were also used to pay the public
debt.
Colombia quickened it privatization program in the early nineties and it contributed
for the economic stability between 1994 and 1998. After a strong crisis, Peru
launched it program, that had the best moment between 1994 and 1996, when 64
companies became privatized.
Political Systems1
Subsequent to a military period, Argentina elected it civilian government in 1982, and
it most recent constitution is from 1994. Since 1982 all democratic institutions have
been strong, even during turmoil periods. The politics have been dominated by the
Kirchnerist faction, first with Nestor and then with his wife, Cristina, with a left wing
ideology.
1
Polity IV Country Reports 9 Brazil has reestablished its democratic regime as a federative republic on 1985, after a
military period that started in 1964, and its most recent constitution dates from 1988.
On 2002, the leftist workers party won the presidential elections and they are on
power since then.
Chile’s current constitution dates from 1981 and the first election, after the
dictatorship it passed across, happened on 1989. Due to the fact that the constitution
was written on the authoritarian period, the military still had some privileges, which
were withdrawn on 2005. Likewise, until this year, the executive was very powerful.
Their recent history show struggles between left and right wing parties.
The ultimate Colombian constitution is from 1991, and some powers from the
president have been removed. Differently from its neighbors, they have had a long
history of electoral democracy, with its last authoritarian period ending on 1958. In
2005, the reelection became possible and the right wing Alvaro Uribe got reelected.
Regarding the countries here presented, Mexico is the one with the oldest
constitution, dated from 1917. They had a ruling party, which won presidential
elections from 1929 to 1997, the PRI. After that, the system of political competition
became more regulated.
After winning it third 5-year mandate election on 2000, Alberto Fujimori faced strong
opposition and he was accused of corruption on Peru. After one year he resigned. He
had support from the military and therefore the executive was very powerful.
Hereafter, the political competition became widespread. Their last constitution
became effective on 1993.
Venezuela is the most atypical case within the analyzed countries. Their recent history
is closely attached to Hugo Chavez, who was the president from 1999 until his death,
in 2013. He made part into a left coalition and was characterized by populism. He
changed the constitution on 1999, in which gave him more control over the central
bank, the army and the legislative.
10 4. Methodology
The research plan consisted in first developing a new database with all variables
necessary for the investigation for further analyzing the data by statistical and
econometrics techniques, using Stata, based on both multinomial logit models and
logit models proposed by Dinc and Erel (2013).
The Latin American countries that ideally would make part of the sample are the 16
richest ones, based on their GDP. According to the International Monetary Fund as of
2013, they are Brazil, Mexico, Argentina, Venezuela, Colombia, Chile, Peru, Puerto
Rico, Ecuador, Dominican Republic, Guatemala, Uruguay, Costa Rica, Panama,
Bolivia and Paraguay.
The first step was to collect and identify all the mergers and acquisitions that took
place on the aforementioned 16 countries, as well as some characteristics of the bid
attempt, bidder and target, using the SDC Platinum database, available on Tilburg
University library.
In order to comply with the original study, only those transactions in which the bidder
tried to acquire control should stay on the sample. This means that only those
acquirers who cross either the 20% or the 50% ownership stake remained on the
sample. After sorting by this criterion, I excluded those bids without the relevant
financial information for the analysis, namely both the target’s market capitalization
and net income.
According to the collected transactions, the richer the countries are, according to their
GDP, the higher the number of transactions that took place on that country as a target,
as well as the number of publicly traded companies. Private owned firms have less
disclosed information than public ones. Thus, after having applied all the criteria
above described, some countries have been withdrawn from the sample. The ones that
stayed were Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
I defined that the maximum number of observations per country is 40, a little bit more
than the original study, due to the fact that this sample will have less countries. The
11 nations that do not have 40, I used as many observations as there were available.
Argentina, Brazil, Chile and Mexico have 40 observations. Colombia, Peru and
Venezuela have 26, 34 and 10 observations, respectively. The present sample is
smaller than the original, with 230 observations, compared to 415, and it is from 1991
to 2013. The transactions on the sample are the most relevant ones, those among the
targets with the biggest market capitalizations.
For gathering government reactions for each bid in local newspapers, I used the
Factiva database, also available on Tilburg University library. This variable was handcollected and definitively it was the most time consuming part of the present research.
For each transaction on the sample, I searched for relevant news about it and then,
according to what was found, I opted between support, neutral (do nothing) or
opposition.
In order to find relevant articles on the local newspapers on Factiva2, I used the same
keywords used by Dinc and Erel (2013), in English, Portuguese and Spanish, and they
were: government, minister, politic, national assembly, parliament, central bank,
nationalism, patriotism, protectionism, champion, industrial jewel, national jewel,
industrial symbol, national symbol, icon, national security, strategic interest, strategic
sector, strategic industry, public interest, national interest, municipal, state-owned,
and patriotic.
I looked for either direct or indirect actions taken by the government. Direct actions
could have been a quote from a president, prime minister, cabinet minister or some
spokesperson from the government, even without taking any action. Attitudes have
also been taken into consideration. Indirect actions could have been, for instance, a
state-owned bank giving some kind of financing for the bidder. The scope of the study
The most searched newspapers and sources were the following: Reuters, Financial Times, Dow Jones, Associated Press, The
Wall Street Journal, HIS Global Insight, El Mundo, La Vanguardia, Iberonews, Business News Americas, Canada Stockwatch,
Agencia EFE, M&A Navigator, PR Newswire, Agence France Presse (general), El Cronista, Noticias Financieras, Expansion,
Agencia Diario y Noticias (Argentina), Folha de Sao Paulo, Valor Economico, O Estado de Sao Paulo, Gazeta Mercantil,
Marketwired, Jornal do Comemercio do Rio de Janeiro, Gazeta do Povo, Latin America News Digest, Inside Satellite TV, RIA
Oreanda, MarketWatch, O Globo (Brazil), Expansion, La Gaceta, NF News, El Mercurio, Estrategia, Cinco Dias (Chile),
Portafolio, SeeNews Latin America, La Republica, NF, M2 Banking & Credit News (Colombia), El Financiero, El Economista
Europa Press, Expansion, Metal Bulletin, Novedades, LatinFinance, Servicio Universal de Noticias, Corporate Mexico, M2
Presswire, Gaceta de los Negocios, Business Wire, The Orange County Register (Mexico), Cinco Dias, Platts Commodity News,
Diario Financiero Online, Europa Press, El Comercio, Esmerk Norwegian News, News Bites, The Business Times, Semana
Economica, International Resource News, Canada Stockwatch, Peru21, The Toronto Star (Peru), El Norte, Reforma, El
Nacional, El Mundo, Business Wire (Venezuela)
2
12 does not take into consideration regulatory issues. Any measure taken by the
anticompetition jurisdiction is out of this purpose.
According to Dinc and Erel (2013), there are many ways by which governments can
express their reactions. Differently from Europe, in Latin America there is no central
authority for the region, as the European Commission, with its Merger Regulation.
Therefore, there are reactions that are exclusive for European governments and cannot
be found in Latin America, such as “prudential rules for financial companies” and
“public interest”.
However, there are several common ways for the government to react. “Moral
persuasion” happens when the government announces it opposition publicly, mainly
on the rumor stage. This is a threat, with no effective power. In case the merger would
take place, the bidder would have to deal with a hostile government.
“Golden shares in privatized companies” is when the government has to right to veto
big changes. This could be applied in a merger attempt.
“Playing for time” happens when there is a need for approval from the stock market
regulator, or even when there is a need for any commission to approve the merger.
During this period, the government could try to find a friendly bidder.
“Providing financing for domestic bidders” appears when either any state-owned bank
or public pension fund provide funds for the national company to make the
acquisition. The money never comes from the government budget.
“Finding white knights” is very effective and arises when the government tries to find
a friendly acquirer while gaining time by using some other method.
Lastly, “creating national champions” happens when there is support for national
mergers in order to create a domestic company that is so big, that foreign firms cannot
acquire it.
13 Likewise, I used the news in order to create variables with characteristics from the
transaction, such as the competitiveness of the bid, if there were more than one bidder
and also whether it was a hostile takeover, being an unsolicited bid.
From the SDC Platinum, some other variables have also been created, such as
whether the transaction was completed, target’s market capitalization and net income,
bidder’s market capitalization, net income, share price and premium.
The political variables, such as the durability of the regimes, level of democracy and
authoritarian characteristics, were extracted from The Center for Systemic Peace
(CSP) website, from the Polity IV Individual Country Regime Trends 1946-2013
section.
The macroeconomics variables, such as GDP growth and unemployment rate, as a
percentage of total labor force, were extracted from the World Bank website.
14 5. Data
According to Table I, on the transactions with a foreign bidder, the countries with the
highest number of merger attempts are United States, with 32 attempts, and Spain,
with 27. All other countries have less than 10 bids. From the Latin American
countries, Chile and Mexico are the ones with more bids, each one has 7, and right
after them, there is Brazil and Argentina, with 5 each one. Other is composed by
nations with only one bid.
Table I
Foreign Bids in Latin America
This table presents the nation of the bidder and the amount of bids by country in all merger attempts with a foreign
acquirer. The sample has maximum 40 bids per country as a target, sorted by market capitalization. The countries
are the richest ones in Latin America, as of 2013, and those ones who remained after some criteria was applied are
Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. The sample period is from 1991 to 2013.
Bidder Nation
Number of Bids
United States
32
Spain
27
Mexico
7
Canada
7
Chile
7
Argentina
5
Brazil
5
France
5
Netherlands
4
Luxembourg
4
United Kingdom
4
Ireland-Rep
2
Belgium
2
Singapore
2
Other
8
Total
121
It was found fewer government reactions to merger attempts when compared to Dinc
and Erel (2013). In the Latin American case, there were government reactions other
than neutral in 12% of the transactions, compared to 19% in the European case.
The number of government oppositions in the database was extremely small,
especially when compared to the original study, as shown on Figure 1. Likewise, it is
possible to check that the government reacts more when the bidder is a foreigner, and
also in this case they show more support than opposition.
15 Figure 1. Government support/opposition for domestic and foreign acquisition attempts. This figure shows
the reaction of governments to merger attempts, either support or opposition. The sample has maximum 40 bids
per country as a target, sorted by market capitalization. The countries are the richest ones in Latin America, as of
2013, and those ones who remained after some criteria was applied are Argentina, Brazil, Chile, Colombia,
Mexico, Peru and Venezuela. The sample period is from 1991 to 2013.
14
12
10
8
Opposition
6
Support
4
2
0
Domestic Bids
Foreign Bids
Table II provides more elements about reactions. On the majority of the transactions,
there is no reaction from the government and therefore it is considered neutral. This
also happened on the original investigation. Besides, the number of domestic bids it is
close to those who have a foreign bidder. Pearson’s Chi-squared p-value is testing the
equality of the distributions and it is statistically significant at the 1% level.
Regarding the level of interventionism, Brazil and Mexico are the countries with the
highest number of supports, 8 each one. Peru had 3, Chile 2, Argentina and Venezuela
1. Colombia didn’t have any support in the sample. Peru had the highest number of
oppositions, 2, and Argentina, Brazil and Chile 1 each one.
16 Table II
Government Reaction to Domestic and Foreign Merger Bids
This table presents the target’s government reaction to merger attempts. The sample has the largest merger targets
according to their market capitalization in the richest Latin American countries based on their GDP disclosed by
the IMF, as of 2013. Each country has the maximum of 40 transactions that complies with the requirements
aforesaid. The nations are Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. The time period is
from 1991 to 2013. Pearson Chi-squared tests the equality of distributions between domestic bids and foreign bids
across government reactions.
Panel A on Table III gives the statistics for Market Cap. (Mil of Dollars), Net
Income/Market Cap and Hostile/Unsolicited Bid, according to the bidder’s
nationality. There is no statistical significant difference of means for the referred
variables on whether the bidder is either domestic or foreign. The domestic bidders
are bigger than the foreign ones, based on the market capitalization and the hostile
takeovers are more likely to be done by foreign companies.
Panel B gives the statistics for the same variables plus Foreign Bid Dummy, but
according to the government’s reaction, that can be opposition, neutral or support.
Hostile/Unsolicited Bid Dummy is statistically significant at the 5% level. The
government is more inclined to either support or oppose if the company is bigger
(relevant). Hostile takeovers are the ones with the highest opposition and if the
government is opposed to the deal, it is more likely that the bidder is a foreigner.
17 Table III
Sample Statistics for Merger Bids
The table presents the summary statistics for the variables. On Panel A it is sorted by the acquirer’s nationality and
Panel B by the government’s reaction. The sample has maximum 40 transactions by country, which are Argentina,
Brazil, Chile, Colombia, Mexico, Peru and Venezuela, from 1991 to 2013. Market Cap is the target’s market
capitalization as of 4 weeks before the bid. Net Income/Market Cap represents this ratio, as of the last fiscal year
before the bid. Hostile/Unsolicited Bid Dummy equals one if it was a hostile takeover, and zero otherwise. Foreign
Bid Dummy equals one if the bidder’s country differs from the target’s, and zero otherwise. The p-values come
from the Wilcoxon rank-sum test for medians and mean difference. The symbols *, ** and *** represents
statistical significance at the 10%, 5% and 1% level, respectively.
Market Cap. (Mil of Dollars)
Net Income/Market Cap
Hostile/Unsolicited Bid Dummy
Market Cap. (Mil of Dollars)
Net Income/Market Cap
Hostile/Unsolicited Bid Dummy
Foreign Bid Dummy
Statistic
Median
Median
Mean
N
Statistic
Median
Median
Mean
Mean
N
Panel A: Nationality of the Acquirer
Domestic Bidder Foreign Bidder
p-Value
1,379.58
768.11
0.730
4.1%
4.7%
0.556
0.9%
2.6%
0.198
109
121
Opposition
2171.21
3.4%
20.0%
80.0%
5
Panel B: Government Reaction
Support p-Value
Neutral
2224.23 0.453
617.71
5.8%
0.418
4.6%
0.0%
0.029**
3.5%
56.5%
0.348
51.5%
23
202
All
729.27
4.6%
3.5%
230
All
729.27
4.6%
3.5%
52.6%
230
18 6. Results
Specification
In order to investigate the economic nationalism on the government reactions to
merger attempts, it was used a discrete-choice model that calculated the likelihood of
the specific government reaction to the merger attempt. The reactions can be support,
neutral/do nothing or opposition.
The main regressions consist on multinomial logits, where the Government Reaction
is the dependent variable and the main variable of interest is Foreign Acquirer
Dummy, showing if the bidder is a foreign company. Some other controls were
added, such as characteristics of the target, of the bid and of the target’s country, as
well as interactions between some variables.
The first regression on Table IV is without the variable of interest (Foreign Acquirer
Dummy) and sets the benchmark. The statistically significant variables are Ln(Market
Cap), at the 5% level, Competing Bid Dummy, at the 10% level and
Hostile/Unsolicited Bid Dummy, at the 1% level.
A 1% increase on the target’s market capitalization increases the probability of
support in 0,015 percentage points. If it is a competing bid, the probability of support
increases 0,051 percentage points. Both of these findings were also verified by Dinc
and Erel (2013).
In case there was a hostile takeover, the probability of support decreases by 0,090
percentage points. It means that the government tends to support less the companies
who makes an offer straight to the target’s shareholders, bypassing the management.
Dinc and Erel (2013) found that if there was an unsolicited bid, it is more likely that
the government will oppose the bid.
On the second regression, when the government supports the bid, the statistically
significant variables are the same than the previous regression, Ln(Market Cap),
19 Competing Bid Dummy and Hostile/Unsolicited Bid Dummy, at the 5%, 10% and 1%
levels, respectively.
When the government is opposed to the deal, the only statistically significant variable
is the main variable of interest, Foreign Acquirer Dummy, at the 5% level. This is an
evidence of economic nationalism. If the bidder is a foreigner, there probability of
opposition increases 0,018 percentage points.
Table IV
Nationalism in Mergers and Acquisitions: Main Regressions
The table shows the marginal effects for the multinomial logit model. The dependent variable is the government
reaction, that can be support, neutral/do nothing and opposition. Foreign Acquirer Dummy equals one if the
bidder’s country differs from the target’s, and zero otherwise. Ln(Market Cap) in the natural logarithm of the
target’s market capitalization. Net Income/Market Cap represents this ratio, as of the last fiscal year before the bid.
Competing Bid Dummy equals one if there was more than one bidder and zero otherwise. Hostile/Unsolicited Bid
Dummy equals one if it was a hostile takeover, and zero otherwise. Standard errors in parentheses have been
clustered at the country level and are robust. The symbols *, ** and *** represents statistical significance at the
10%, 5% and 1% level, respectively.
Government Reaction
(1)
Opposition Support
Foreign Acquirer
Dummy
Ln (Market Cap)
Net Income/Market
Cap
Competing Bid
Dummy
Hostile/Unsolicited
Bid Dummy
0.000
(0.003)
0.000
(0.000)
0.067
(0.060)
0.115
(0.101)
0.015**
(0.007)
0.000
(0.000)
0.051*
(0.029)
-0.090***
(0.027)
230
0.070
(2)
Opposition Support
0.018**
0.010
(0.008)
(0.028)
0.000
0.015**
(0.003)
(0.006)
0.000
0.000
(0.000)
(0.000)
0.053
0.050*
(0.048)
(0.030)
0.083
-0.090***
(0.073)
(0.026)
230
0.076
20 Political Variables3
Table V adds a political variable and an interaction to the main regression. It can be
Durable, that is the regime durability, the years since the last regime change.
Democracy is an indicator that shows if the citizens have institutions that allows them
to express their preferences, if there are constraints for the executive power and if
there are civil liberties. Autocracy is a scale measuring how authoritarian is the
country. Autocracy and Democracy do not have common categories. On the first
regression, Durable is statistically significant at the 5% level. On the second, the main
variable of interest, Foreign Acquirer Dummy is statistically significant at the 1%
level. On the third, the interaction between Foreign Acquirer Dummy and Autocracy
is statistically significant at the 1% level.
The first regression points out that if the durability of the regime increases in one
year, the probability of support decreases 0,002 percentage points. This can be
understood as governments in a stable regime (durable) have less political pressure to
display economic interventionism in comparison to saying neutral.
According to the second regression, if the bidder is a foreigner, the probability of
opposition by the government increases in 0,894 percentage points.
The third regression shows that if the bidder is a foreigner and the autocracy scale
increase in one point, on average, the probability of support decreases by 0,271
percentage points. The more authoritarian the country is, the more likely it will be to
oppose deals.
Regressions 2 and 3 bring more evidence of the presence of economic nationalism in
mergers and acquisitions in Latin America.
3
Dinc and Erel (2013) used a variable with the share of votes gained by far-right parties. Nevertheless, it is very tricky to label
parties as leftist or rightist and it could bring misconceptions to the present analysis.
21 Table V
Nationalism in Mergers and Acquisitions: Political Variables
The table shows the marginal effects for the multinomial logit model. The dependent variable is the government
reaction, that can be support, neutral/do nothing and opposition. Foreign Acquirer Dummy equals one if the
bidder’s country differs from the target’s, and zero otherwise. Durable is the regime durability, the years since the
last regime change. Democracy measures the democratic level. Autocracy measures how authoritarian is the
country. The variables Ln(Market Cap), Net Income/Market Cap, Competing Bid Dummy and Hostile/Unsolicited
Bid Dummy are present on the regression but are not reported. Standard errors in parentheses have been clustered
at the country level and are robust. The symbols *, ** and *** represents statistical significance at the 10%, 5%
and 1% level, respectively.
Foreign Acquirer
Dummy
Durable
Foreign Acquirer Dummy
* Durable
Democracy
Opposition
0.003
(0.005)
-0.001
(0.001)
0.001
(0.000)
(1)
Support
0.022
(0.029)
-0.002**
(0.001)
-0.002
(0.002)
Government Reaction
(2)
Opposition Support
0.894***
-0.093
(0.215)
(0.100)
0.010
(0.007)
-0.014
(0.010)
Foreign Acquirer Dummy
* Democracy
Autocracy
Opposition
0.007
(0.009)
-0.006
(0.007)
0.009
(0.015)
-0.062
(0.048)
0.075
(0.057)
Foreign Acquirer Dummy
* Autocracy
230
0.1255
(3)
Support
0.008
(0.019)
227
0.0933
0.016
(0.013)
-0.271***
(0.087)
227
0.0945
Robustness
Some robustness checks also were performed. A few macroeconomics variables have
been used, such as GDP growth and unemployment rate, as a percentage of total labor
force. On the original study, it also has been used some bid characteristics, such as
means of payment, and bidder’s characteristics, such as net income and market
capitalization, but there was lack of information.
On Table VI, the main variable of interest, Foreign Acquirer Dummy, is statistically
significant on both regressions, at the 5% level on the first and at the 10% level on the
second. No other variables are statistically significant.
On the first regression, if the bidder is foreigner, the probability of opposition
increases in 0,012 percentage points. This goes on the same direction as the results
22 mentioned previously. However, on the second regression, if the bidder is a foreigner,
there is an increase of 0,062 percentage points on the probability of support, and this
goes against the evidences found about the presence of economic nationalism.
Depending on the set of controls used, the outcomes can vary. As Table VI shows,
when controlling the government reaction for unemployment factors and given the
negative sign of the interaction Foreign Acquirer Dummy * Unemployment Rate, it is
possible to infer that governments tends to oppose foreign bids in high unemployment
environment. Hence, if the majority of merger bids occur in those conditions, then it
is plausible that the government will tend to oppose foreign bids, explaining in this
way the difference in outcomes found among different regression specifications.
Table VI
Nationalism in Mergers and Acquisitions: Robustness
The table shows the marginal effects for the multinomial logit model. The dependent variable is the government
reaction, that can be support, neutral/do nothing and opposition. Foreign Acquirer Dummy equals one if the
bidder’s country differs from the target’s, and zero otherwise. The macroeconomics controls are GDP Growth Rate
Unemployment Rate. The variables Ln(Market Cap), Net Income/Market Cap, Competing Bid Dummy and
Hostile/Unsolicited Bid Dummy are present on the regression but are not reported. Standard errors in parentheses
have been clustered at the country level and are robust. The symbols *, ** and *** represents statistical
significance at the 10%, 5% and 1% level, respectively.
Robustness to Macroeconomic Factors
Government Reaction
(1)
(2)
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.012**
0.010
-0.033
0.062*
(0.005)
(0.015)
(0.040)
(0.034)
GDP Growth Rate
-0.003
-0.007
(0.002)
(0.007)
Foreign Acquirer * GDP Growth
0.002
0.001
(0.002)
(0.005)
Unemployment Rate
-0.004
0.000
(0.004)
(0.004)
Foreign Acquirer * Unemployment
0.005
-0.007
(0.004)
(0.006)
Observations
230
230
Pseudo-R^2
0.099
0.101
23 Direct Impact of Nationalism
In order to analyze if there has been direct impact of nationalism, the successful bids’
characteristics were examined. Whenever the government reacts, what is the final
outcome?
Table VII brings what was the government’s reaction when the bid was either
successful or failed. It is possible to state that when the government supports the deal,
there are a higher number of successful bids comparing to when it opposes. Pearson’s
Chi-squared p-value is testing the equality of the distributions and it is statistically
significant at the 1% level.
Table VII
Impact of Nationalism on Merger Outcomes: Univariate Analysis
The table shows whether the bids were well succeeded, either fail or successful, as well as the government’s
reaction, that can be support, neutral/ do nothing and opposition. The sample has the largest merger targets
according to their market capitalization in the richest Latin American countries based on their GDP disclosed by
the IMF, as of 2013. Each country has the maximum of 40 transactions that complies with the requirements
aforesaid. The nations are Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. The time period is
from 1991 to 2013. Pearson Chi-squared tests the equality of distributions between failed bids and successful bids
across the government reactions.
The regressions on Table VIII are investigating if there is any impact of nationalism
on merger outcomes. The dependent variable is whether the merger was successful,
and the independent are the bid and target’s characteristics.
On the first regression, the only statistically significant variable is Foreign Acquirer
Bidder, at the 5% level. On the second, Government Support is statistically significant
at the 1% level, Foreign Acquirer Dummy at the 5% level and Competing Bid
Dummy also the 5% level.
24 On regression 1, if the acquirer is a foreigner, the probability of the bid being
successful increases in 0,093 percentage points. On regression 2, the probability
increases in 0,091 percentage points.
The countries on the sample are all emerging nations that faced difficult economic
situations in the past decades. Mexico had it financial crisis on 1994-1995. Brazil also
had it financial crisis on 1999. Lastly, Argentina had a crisis on 2001-2002.
The hypothesis is that there have been created some business opportunities throughout
those critical periods. Observing weak economies, foreign countries might have seen
favorable circumstances in order to invest in such countries. Absent from national
investors, these nations have not created any barrier for the international companies,
that took advantage of that.
As found previously, there is some evidence of the presence of economic nationalism
in Latin America. If the bidder is a foreigner, the government is more likely to oppose
it. However, if the bidder is also a foreigner, it is more likely that the deal will
succeed. Hence, despite being opposed, the government does not create any constraint
for foreign bidders.
On regression 2, if the government supports the transaction, the probability of it being
completed increases in 0,120 percentage points. Based on that it is possible to infer
that the government reaction has some power to influence the completion of the deal,
as well it could be expected, and indeed Dinc and Erel (2013) also came to this
conclusion.
25 Table VIII
Impact of Nationalism on Merger Outcomes
The table shows the marginal effects for the multinomial logit model. The dependent variable is a dummy variable
showing whether the bid was successful, one if the deal was completed and zero otherwise. Government
Opposition equals to one if the government was opposed to the deal and zero otherwise. Government Support
equals to one if the government supported the deal and zero otherwise. Foreign Acquirer Dummy equals one if the
bidder’s country differs from the target’s, and zero otherwise. Ln(Market Cap) in the natural logarithm of the
target’s market capitalization. Net Income/Market Cap represents this ratio, as of the last fiscal year before the bid.
Competing Bid Dummy equals one if there was more than one bidder and zero otherwise. Hostile/Unsolicited Bid
Dummy equals one if it was a hostile takeover, and zero otherwise. Standard errors in parentheses have been
clustered at the country level and are robust. The symbols *, ** and *** represents statistical significance at the
10%, 5% and 1% level, respectively.
Government Opposition
Government Support
Foreign Acquirer Dummy
Ln(Market Cap)
Net Income/Market Cap.
Competing Bid Dummy
Hostile/Unsolicited Bid Dummy
Observations
Pseudo-R^2
Successful Bid
(1)
(2)
0.029
(0.166)
0.120***
(0.039)
0.093**
0.091**
(0.044)
(0.042)
0.003
0.001
(0.010)
(0.010)
0.002
0.002
(0.002)
(0.002)
-0.125
-0.149**
(0.080)
(0.075)
-0.236
-0.216
(0.164)
(0.177)
230
0.026
230
0.037
Impact of Nationalism on Premium Offered
The last check made was to test if there is any impact of nationalism on the premium
offered by the bidder. According to Panel A on Table IX, the median premium
offered is higher if the government supports the transaction or if it is neutral. As
reported on Panel B, the median premium offered is higher when the deal was
successful.
26 Table IX
Impact of Nationalism on Premium Offered: Univariate Analysis
This table presents the statistics for the premium offered and the government reaction on Panel A and for the
premium offered and the successfulness of the transaction on Panel B. The premium offered is calculated by
dividing the premium by the share price, one week before the announcement date. The symbols *, ** and ***
represents statistical significance at the 10%, 5% and 1% level, respectively.
Opposition
Support
Neutral
p-Value from Mean Difference Test
(Opposition vs. Support)
p-Value from Wilcoxon Rank-Sum Test
(Opposition vs. Support)
Panel A: Government Reaction
Premium Offered (%)
Observations
Mean
Median
2
0.06%
0.06%
10
16.51%
3.56%
73
54.48%
3.20%
0.577
Std Dev.
3.23%
38.85%
400.78%
0.197
Panel B: Merger Outcome
Premium Offered (%)
Observations
Mean
Median
Failed Bids
24
-60.55%
0.78%
Successful Bids
61
91.73%
3.36%
p-Value from Mean Difference Test
0.089
p-Value from Wilcoxon Rank-Sum Test
0.181
Std Dev.
254.32%
402.27%
On Panel A from Table X, the dependent variable is the premium offered one day
before the announcement date. None of the variables are statistically significant,
including the main variable of interest, Foreign Acquirer Dummy.
On Panel B, the dependent variable is the premium received in case the transaction is
completed. The statistically significant variables are Support and Ln(Market Cap), at
the 5% and 10% level, respectively. Foreign Acquirer Dummy is again not
statistically significant.
If the government supports the transactions, the premium received will be 0,639
percentage points smaller. It is possible to infer that the government support is not
based on high premiums offered.
In case the target’s market cap is 1% bigger, the premium received will increase 0,215
percentage points. This means that the bigger is the target, the higher is the premium
received by them, pointing out the fact that they will have more bargain power,
leading to a higher price required for the transaction.
27 Table X
Impact of Nationalism on Premiums
This table presents the results of the regressions with the premium (premium divided by the share price) one day
before the announcement date as the dependent variable. Panel A has the premium offered as dependent variable
and Panel B has the premium received as dependent variable. Standard errors in parentheses have been clustered at
the country level and are robust. The symbols *, ** and *** represents statistical significance at the 10%, 5% and
1% level, respectively.
Opposition
Support
Foreign Acquirer Dummy
Ln(MarketCap)
Net Income/Market Cap
Competing Bid Dummy
Hostile/Unsolic. Bid Dummy
Observations
R^2
Panel A: Premium Offered
Premium
0.010
(0.271)
-0.212
(0.357)
0.046
(0.520)
0.131
(0.096)
0.004
(0.003)
-0.021
(0.193)
-0.388
(0.575)
Panel B: Premium Received
Premium
-0.089
(0.333)
-0.639**
(0.258)
0.009
(0.388)
0.215*
(0.099)
0.005
(0.003)
-0.266
(0.174)
-0.671
(0.437)
87
0.015
87
0.064
28 7. Conclusion
According to was found on Dinc and Erel (2013), I found evidences of the presence
of economic nationalism in mergers and acquisitions in Latin America. Nevertheless,
under certain macroeconomic conditions, this preference can change.
Unlike Dinc and Erel (2013), I found that if the bidder is a foreigner, it is more likely
that the deal will be successful. Hence, Latin American countries show a different
behavior than those from the European Union. Despite the government opposition to
foreign bidders, this preference is not observable on the completion of deals and the
government does not create any constraint for foreign bidders.
In addition, if the government supports the deal, it is more likely that the transaction
will be completed, pointing out the fact that the government can have an influence on
the completion of the bids in Latin America, what could be expected and was also
found on the original study.
Lastly, if the government supports the transaction, the premium paid will be smaller.
Hence, the support is not based on the payment of high premiums.
This study presented, however, some limitations. The amount of disclosed
information about the companies and the transactions was smaller than those who
took place on Europe, reducing the quantity of analysis that could have been done.
Likewise, the effect of economic nationalism can be underestimated. If a country is
known to often oppose deals, this reaction can prevent new bidders.
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