Text

International College of Economics and Finance

Academic research paper

State ownership and the M&A deal structure

MSc 1st year student
Daria Volkova

Argument Consultant
PhD Keyong Hun Lee

Moscow, 2015

Contents
# of page
Abstract

3

Part 1. Introduction

4

Part 2. Discussion

6

Section 2.1 Overview of M&A market in Russia

10

Section 2.2Literature review

22

Section 2.3Methodology

23

Part 3. Conclusion

24

Bibliography

26

Additional materials

2

Abstract
This paper is an extended proposal of future research, which seeks to contribute to the
existing literature in the field of state ownership and the M&A deal structure. In the focus of
investigation one might find the Russian M&A market, which has a large share of the deals with
state-controlled companies involved. The influence of the government on the deal structure is
observed in two acpects. First one is the choice of the method of payment by the acquirer which
might be affected by the presence of political connections (low-cost loans, etc.). The second one
is a market performance of acquirer after the deal announced which might be relatively better
due to the presence of state control on board. These questions are widely theoretically described,
and the methodology of future research is provided.

3

Part 1. Introduction
Mergers and acquisitions constantly take place worldwide. The companies have many
incentives to contemplate such transactions. One can name the synergy effect, which improves
the company’s position in the sense of the economy of scale, gain in efficiency and improved
market visibility. In some cases the involed parties are looking for the gain in new technologies
or goodwill-like assets which come around during the time. In fact, true mergers are rarely
happened. In many cases talking about M&A one assumes the acquisition, even if the merger
took place. Quite often such thing happens because of the public perceptions and staff’s
considerations, meaning that it’s better for them to accept the idea of a merger than a news about
an acquisition.
When the M&A transaction takes place, there’re several issues that should be addressed
up to to the beginning of the procedure. One could sum it up to the 10 most important aspects of
the deal/16./. It includes such seriuos questions as the deal structure, cash versus equity issues,
the problem of working capital adjustment, earnout as a pricing structure, compensation for a
target, liabilities’ issue and the problem of non-solicitation. One can provide more details on the
deal structure question. There’re 3 main options applicable for the M&A transaction’s
structuring: stock purchasing, sale of the assets and the merger itself. The type of the structure
depends on the negitiation position and competing interests of both the acquirer and the target.
The chosen type leads to several consequences, which normally are taking into account till the
begging of the transactions. These concequences are the following: transferability of liability,
consents of the third party, shareholders’ approval and the taxation issues.
The second point which should be carefully addressed as one of the most important parts
of the M&A deal is the method of payment. Some companies choose to pay in cash, while others
prefer to pay in stock. From the target’s point of view, cash is known as a mostly riskless and
quite liquid source of the deal’s financing. The value of the deal is sustained to be constant in the
sense that it doesn’t vary with the value of the stock. From the acquirer’s point of view, payment
in cash can be easily conducted with the exessive funds from either working capital or the
unlimited credit line. However, these source of financing may lead to the impairement of the
credit ratios. On contrary, such mode of payment as an equity may enhance the credit rating of
the acquirer, which is inevitably good for the company. One may notice that issuing stock to the
holders of the target leads to the dilution, which may be unwilled by the shareholders of the
acquiring company, especially if it’s partially or entirely state-controlled.
One would reasonably extand the idea of state controlled enterprises and its participation
in the M&A process. This topic is extremely vital topic for the emerging economies. Most of
4

these countries had an experience of so-called privatization, which means the process of
transferring the ownership from the government to the private sector. However, in many
countries this process has not been completely finished: large part of the companies, which
operate as a solo entities,are partially or entirely owned by the state. While the previous research
was mostly concentrated on the other aspects of M&A market, one would rise a question of the
state-controlled companies as a participants of the M&A transactions. One would ask several
questions concerning the role of state-controlled companies in the M&A field:


What is the scale of participation in M&A deals by the state-controlled
companies?



What are the details of the M&A deals, in which the state-controlled companies
are involved?



Is there an evidence of the backward ownership transferring in the sence that
M&A deals lead to the state control expansion throug the corporate sector?

These questions will be addressed in the paper, using the quantitative and qualitatile approached
with respect to the Russian market of M&A deals. The rest of the paper would be organized as
follows. In the discussion part one would start section 1with a review of M&A market in Russia.
In the section 2 one would describe the previous research in three major directions related to the
topic:


the impact of state ownership on the M&A market in Russia;



the impact of state ownership in the context of the availability of financial resources on
the method of payment along with another substaintial theories;



theimpact of state ownership on the acquirer’s performance: the direct one and the
indirect one (via the method of payment).

In section 3 one would provide the methodology of own research. Then it follows the concluding
commets and remarks.

5

Part 2. Discussion
Section 2.1. Overview of M&A market in Russia
Before one can jump to the overview of previous research conducted in field of M&A
deal structure and the state ownership aspect, it needs to make a brief description of the current
market situation and give some hystorical statistics on the M&A in Russia. After a short
analytical note the rest of this part will be logically divided into 3 sections, each of them is
devoted to the literature review, methodology and the prospects of future research respectively.
First of all, one would be precise about the meaning of state-controlled companies. It’s
convenient to assume that this kind of companies have the state as a shareholder with 50% or
more percents of voting shares. It can also be the case when more than 50% of voting shares
belong to both the state and 100% state-owned companies. The last case which one can assume
is the subsidary of the state-owned company. This diversification will be important further.
Additionally, one would treat the companies as state-participated if there’s even a minority
interest of the state in the equity.This would be necessary when studying the method of payments
as an element of M&A deal structure. Moreover, one would rationally drop off the noncommercial state-owned companies which are functioning as an instrument of government
policy, fore example, Rosnano, Rosatom, etc. Russia is chosen as a sampling base due to the fact
that its economy can be reffered as an emerging. It has also went through the privatization period
which makes it highly representative.
The short statistics of M&A activity in Russia would be very useful in the light of futher
research /8./. Current information contains the particular data from 1997 up to nowadays. During
this period, one would point out several highlighted moments. During the period between 1997
and 2002 the averagetotal deals’ value per year was approximately US$5 bln, which can be
treated as a very slack period for the Russian M&A market.In 2003 there was a beginning of the
actual M&A activity in Russia with total deals’ value of US$18,5 bln (270% increase). This year
was marked with the largest merger (US$6,4 bln) of Tyumen oil company with British
Petroliumwhich resulted as joint company TNK-BP. Next years till 2007 the M&A market
continued to grow. Particularly, in 2005 the first mega deal – the acquisition of Sibneft by
Gazprom1for US$13,1 bln – was completed, which led to the two times increase in the average
total value of deals (US$40,5 bln). However, in 2008 there was a huge slowdown in M&A
activity due to the global financial crisis, inevitably influenced Russian economy. Same trend
was hold till 2012, when the second mega deal (US$56 bln)– the acquisiotion of TNK-BP by

1
Gazprom has finished the acquition of Sibneft. URL: http://quote.rbc.ru/news/merge/2005/10/21/5206887.html

6

Rosneft2– was completed. This deal came out the second largest deal in the world in 2012. Since
2013 up to 2015 there was a downward trend in M&A activity in Russia. The plot 1 provides the
details of M&A activity in Russia, including the data on the number of deals and its total value
per year.

M&A dynamics in Russia (2005-2014)
650

160
595
140

550

505
120

450
393
362

338

336

350

80

316

308

117

272

101

60

210

250

150

100

80

78

28

73

66

60

71
56

20

38
13

40

21

13

14

50

0
2005

2006

2007

2008

2009

total value of mega deals (US$ bln)

2010

2011

2012

2013

2014

total value of medium deals (US$ bln)

total number of deals

Plot 1. Source: [8]
According to the latest statistics, in 2014 one can indicate the significant increase in the
total number of deals, which is 595 deals, while in 2013 there were only 316 deals. However, as
it was mentioned above, there’s a decline in the total value of deals (US$71 bln in 2014 versus
US$115 bilion in 2013). The lack of liquidity due to financial situation led to the decrease of the
number of very large deals. Here one considers the deal as a very large if its value is more than
US$2 bln. Based on the analysis of the whole period of M&A activity in Russia, one might
notice that normally only very large deals stimulated the M&A market to grow. Basically, in
2014 there were only 3 announcements about the very large deals, while in 2013 there were a
way more (14 announced deals). On the other hand, the one can indicate the significant increase
in total number of relatively small deals, which account for the deals with the value of US$100
million or less. Thus, in 2014 there were 293 relatively small deals, which is almost three times
2

The deal of the century: Rosneft acquires TNK-BP. URL: http://smart-lab.ru/blog/83473.php

7

more than in the previous year (103 deals).
To biuld the forecast on 2015, one would take into account the hystorical data on the
M&A activity in Russia. The comparison of 2009 and 2007 shows that the decline in post-crisis
period was almost 70%. Reasonably, one can assume that the decline in 2015 would be very
similar to this number. The decline of the M&A activity in 2014 was almost 50% comparing
with plentiful year 2012. Consequently, 2015 year would have the decrease in almost US$30 bln
of total value of deals. However, one should consider the common dynamics of the Russian
economy after the crises both in 2008 and nowadays. The data on the GDP growth demostrates
approximately 8% decline in 2009 after crisis year 2008, while nowadays one can forecast twice
less decline in the GDP growth. Thus, the decline in the M&A activity might be less crutial that
after the financial crisis in 2008.
The global M&A marketdemonstrates the positive trend to grow (plot 2). According to
the data, the total value of deals in 2014 grew up on 44,5%, reaching the value of US$3,26
trillion, which is quite lower than the total value of deals in 2007, preliminary year of financial
crisis. In this situation one may notice than emerging markets stand for the center of M&A
activity in the world. Using the “emerging markets” abbreviation one assumes such regions as
China, India, Middle East [Egypt, Morocco, Turkey, Saudi Arabia, UAE], Russia, Brazil.
Basically, the BRIC countries are the leaders in the number of M&A deals, absorbing up to 60%
of all transactions in the world. The buyers are attracted by a fast growing consumer sector in
this economic block. Moreover, accoding to the statistics, each 4th M&A deal involves a
company listed in BRIC region as a buyer or seller.
One would analyse why the BRIC’s companies do participate in M&A deals. There’re basically
3 main reasons. First of all, BRIC’s companies are looking for an access to the energy and
natural resources in order to stimulate the economic development of their own country.
Secondly, these companies try to meet the increasing demand on the consumer goods for the
middle class. Thirdly, the participation in M&A deals is a good way to obtain the modern
technologies and most up-to-date management techniques. Buying the assets in mature
econonies, the buyers from BRIC countries try to find such assets which may become a platform
for the global expansion of their business. One may also note that the companies from BRIC
block are more interested in modern business techniques rather than in new technologies. The
main point of acquiring the companies from mature economies is the transferring of business
experience and the access to the new markets.

8

M&A dynamics in the world (2005-2014)
4000

16537

16029
14646

3500
3000

13126

12388

12461

13282

13670

18000
16000

14215

14000
12000

2500

9859
10000

2000
8000
1500

6000

1000

4000

500

2000
2428

3295

3670

2409

1711

2089

2249

2295

2259

3259

0

0
2005

2006

2007

2008

2009

2010

total value of deals (US$ bln)

2011

2012

2013

2014

total number of deals

Plot 2. Source: [8]
The latest research of BCGdemonstrates that the buyers from mature economies which
develop M&A deals on emerging markets get lower profit that the buyers from emerging
markets doing the same at home. It can be explained by the fact that investors from emerging
economies are well-acquainted with the culture of a target, including the language, corporate
culture and motivation of a target. Due to this advantage the average abnornal returns to the
stock of acquirer from the mature economies are two times lower (1,1%) than the same indicator
for the buyers from emerging markets(2.05%). However, it’s not always true, especially if the
acquirer from the mature economy has a substaintial experience in development of M&A deals
on emerging markets (6 or more deals completed). In this case the average abnormal return
raises up to the given level of 2%.
Back to the case with Russian economy, one say cross-border M&A in Russia
significantly increased after the WTO accession due to the bureaucratic barriers’ easing. The
natural resources are no longer the most popular direction of M&A activity. It moved out by the
consumer companies from mature economies which are acquiring plenty of Russian companies.
However, this trend might be neglected in the future because of the Ukrainian crisis. One might
notice that most actively developing direction of M&A in Russia tends to be the domestic deals.
During several year the share of domestic deals constantly varies in 70-80% out of all deals
completed. Despite the fact that there was a positive statistics in 2014, the business environment
tends to decade due to the tight economic and political situatoin. The companies did slowdown
in the overall M&A process the own growth rates. Such cofactors as a drop in oil prices and
9

depeciation of ruble defined the terrifical decrease in M&A activity till US$6,6 bln in the 4th
quarter of the year (the minimal total value of deals through 5 years).
One might analyse the structure of domestic M&A activity in Russia and highlight the
most active sectors of the economy which were involved in the M&A activity. The most
dynamic one was the real estate and reconstruction (153 versus 63 deals). The total share of this
sector in the overall number of deals was 25%. The state-controlled companies had a significant
impact on the dynamics in this sector: they have participated in 43% of all deals completed in the
real estate and reconstruction sector. Such dynamics can be explained by the fact that inverstors
appreciate the real estate as a sustainable asset which will not depreciate in time, especially if the
state-controlled companies sell out their assets. One more reason of such popularity of this sector
is the fact that infrustructure development attracts the financial support from the state. Not
surprisingly, there was a quite huge deal of acquiring the 43,9% of Stroygazconsulting
(construction holding) by the private investor Ruslan Baysarov [9]. One would treat it as
acquisition because actually the strategic investor acquires the the part of the company.
However, there’re several other sectors where M&A activity presented. It’s consumer sector,
banking and insurance, telecommunications, media and innovations. Moreover, one would treat
the situation around all the sectors as not very stable, meaning that some of them performed to
the less extent that the others. Thus, there’s a huge fall in M&A activity in metals and mining
sector (decreasein 68,9% compared with 2013 year). The more details on the largest deals in
2014 are collected in the table 1 in the Additional materials section.
Later on the cross-border M&A activity in and out of Russia should be analysed. With
escalating the Ukrainian conflict, the total volume of outboard investments decreased
significantly (aprroximately 50% less then in the previous year, reaching the value of USUS$8,1
bln). It’s the greatest shortcut since 2009, which was basically the post-crisis year. The buyers
from Europe and USA competed more than 2/3 of all cross-board deals with ½ of total value of
all cross-border deals. Surprisingly, the buyers from the countries of Asia Pacific region
demonstrated a very little interest in completing the deals through the period of 2010-2014. The
share of such deals during given period was only 8,1% out of total selling assets to foreign
acquirers. Even more astonishing results are provided by 2014 year, when the share of such deals
reduced in 97%. The Chinese companies were assumed to be mostly interested in the buying of
the assets of Russian companies. However, there were only 2 deals completed in 2014 between
Chinese and Russian companies with non-disclosed value of the deal. One can assume that one
of the reasons of low transaction activity between China and Russia can be the fact that Chinese
companies are very strong in their negotiation position. That’s why the expectations of both
parties do not concide quite often.
10

The activity of Russian companies outside of the country is also very intersting point.
As it was mentioned above, in 2014 the Russian economy has a shock of depreciation of
domestic currency. One would forecast the negative effect of this event on the willingness of
Russian companies to participate in acquisition of foreign companies. However, the tendency
was the opposite. The total value of deals in buying foreign assets by Russian companies
increased on almost 50% (USUS$7,1 bln) with an equivalent increase in the total number of
deals (80 deals in 2014 versus 40 deals in 2013). Russian companies mostly targeted European
and Former USSR countries - 65% out of total value of deals where Russian companies bought
some assets from abroad and almost same share these deals took out of the total number of deals.
The largest deal in this import M&A activity was the acquisition of gold producer Altynamas
Gold by Polymetal with the deal value of USUS$1,08 bln. The nice tendency of import M&A
activity is the shift from buying the energy and natural resoursed companies only to the
companies out of wider range of sectors. Namely, in 2013 almost 80% of total value of all
import M&A deals were related to the energy and natural resources sector, while in 2014 it was
only 25%. Comparing the number of deals, in 2013 there was each four out of five deals related
to the energy and natural resources sector, while in 2014 each 1st out of 5 deals were related to
this sector. The diagram shows that some sectors perforemed incredibly high in 2014 such as
banking and insurance, consumer products, innovations, real estate and reconstruction.
Since a wide review of Russian M&A market leaves an open question about the statecontrolled companies, one would analyse its performance in detail. The next section is devoted
to the review of previous research in this field and some particular studies concerning the statecontrolled companies in Russia.

Section2.2. Literature review
 Addressing the question on the impact of state ownership on the M&A market in Russia
One would start with a paper of Russian economist Alexey Lyakin(2010) /9./. This paper
mostly addresses to the problem of privatization in Russia. The author points out that the size of
the private and government sector in Russia constantly changes. One of the channels of these
changes is mergers and acquisiotions, where both corporate and state-controlled companies
participate. This process began after 1990th, when huge reforms in the Russian economy were
done. The author is particularly interested in the scale and dynamics of this process of changing
the size of corporare sector by the means of M&A.
This paper provides very interesting data on the M&A activity of state-controlled
companies during the period 2003-2009 yrs. The tabel 2 presents the data on the total value of
11

the deals for a given period. The estimates of this indicator are quite different from the ones
given by KPMG due to methodological issues. However, the levels approximately coincide. So,
from this tabel one may conclude that the state-controlled companies are more ofter the acquirers
than the targets. This is true with any total value of the deals with state-controlled companies
involved. This indicator varies quite well, from 18,3 up to 57,8% in some years. One might see
that within the mechanism of M&A the state-controlled ownership significantly expands. One
more interesting point in this table is the following: the overall surplus of assets bought from
corporate sector to the assest sold noticeably varies with the minimum value in 2003 (US$33
mln) and the maximum value in 2007 (US$20,2 bln). There was also extremely large surplus in
post-crisis 2009 (US$16,1 bln).
The structure of M&A deals with state-controlled companies involved (2003-2009)
#

Values

2003 2004 2005 2006 2007

Total value of all deals
1 completed (US$ bln)

2008 2009

sum

8,8

22,9

33

39

121

73

54,7

352,4

1,6
18%

12,4
54%

15,4
47%

6,1
16%

70
58%

19,2
26%

18,6
34%

143,3
41%

between state-controlled
3 companies (US$mln)
Share out of [1]

825 1762
9%
8%

20
0%

selling from statecontrolled to purely private
4 companies (US$mln)

377

984

Share out of [1]

4%

4%

3%

3%

14%

8%

1%

8%

selling from purely private
companies to state5 controlled (US$bln)
Share out of [1]

0,41
5%

9,7
42%

14,4
44%

4,5
12%

37
31%

9,2
13%

16,8
31%

92,01
26%

Total value of deals with
state-controlled companies
2 (US$ bln)
Share out of [1]
Using [2], total value of the
deals:

569 15921 3808
1%
13%
5%

1120 24025
2%
7%

971 1030 16779 6201

655 26997

12

Table 2. Source: [9]
One might also note the peculiar dynamics of this process. The most active buy-side
M&A activity of state-controlled companies was hold in 2004-2005 and 2007 yrs. Once again
one might take into account that when the state-controlled company acquires some pure
corporate company, basically the state transfers back the ownership. It’s like backward
privatization // nationalisation. The given period is directly linked to the expansion of statecontrolled corporations in the oil/gas sector. However, in 2008-2009 one might notice the
significant change in the way of M&A activity of state-controlled corporations. During this
period most deals were completed between the large state-controlled banks and the industrial
producers. Basically, the state-controlled banks used the budget funds to acquire purely private
companies, while the targets used the payment for their assets to repay the debts. The common
observer could treat it as a realisation of anti-crisis program stated by the government. As an
example of such deals one might consider the acquisition of Angstrem Group – the producer of
intergated circuits – by the state-controlled Vnesheconombank for US$1,2 bln. With the similar
scheme the 30% of stock of Rostelecom - national telecommunication’s operator – was
transferred under state control 3 . Same happened with the IzhAvto, the national automobile
producer, due to the bankruptcy4.
Share of mega deals with state-controlled companies involved on Russian
M&A market
#

Values

2004

2005

2006

2007

2008

2009

89%

84%

59%

64%

44%

88%

89%

84%

59%

43%

5%
28%

13%

Total share of mega deals
1 with SC companies involved

3
4

Out of [1], the sectors
involved
Oil & Gas
Financial sector

-

-

-

Energy & Natural resources

-

-

-

Telecommunications

-

-

-

-

-

39%

Real estate & Reconstruction

-

-

-

-

-

13%

Information technologies

-

-

-

-

-

6%

21%

11%

17%

http://top.rbc.ru/finances/10/06/2010/419402.shtml
http://top.rbc.ru/economics/23/11/2011/626416.shtml

13

Table 3. Source: [9]
However, the author says that the scale of nationalization through M&A didn’t reach the
same extent as it was demostrated by the European countries. During the crisis period the
activity of Russian state-controlled companies in M&A process was significantly slack. Most of
the deals completed during the crisis period were supposed to cover national interests in
prevailing in several key industries (financial sector, oil and gas, telecommunications). The other
part of the deals was completed due to the natural reasons, such as the probability of bankruptcy,
etc. In other words, the companies sold out their assets in order to repay the growing debts,
which is quite natural for the period of recession. One may conclude that the share of statecontrolled companies extended through M&A process during the good times in the market and
shortened in the bad times. As it was said above, the deals in 2009 were completed due to
financial problems of the companies or the pursueing of state’s interests in technological
problems’ solving. As an examples of the second point, one might use the acquisition of drilling
companies by the state-controlled oil producer Transneft or the acquiring of ferry businesses by
the state-controlled Russian Railways RZD.
The industrial structure of the acquisition by the state-controlled companies is very
interesting. From this table 3 one might follow the main interests of the state in the limited
number of industries. The state-controlled companies were not involved in any mega deals
during given period. The only exception is oil and gas industry, where several mega deals were
completed in the period 2004-2006. One of the possible explainations can be the fact that
according to the Russian law any mega deal should be confirmed by the board of directors and
common shareholders’ meeting. Consequently, these kind of deals should be also verified by the
special government parties (ministries, etc.) with a written announcements from the company
about the voters’ decision taken by the directors and shareholders.
The very last point mentioned by the author of this paper was the comparision of M&A
activity in Russia with and without state-controlled companies’ patricipation. According to the
author’s estimation, oil and gas sector takes the leadership in M&A activity in Russia, even
without state-controlled companies’ participation. However, the financinal sector has almost the
same share of the total value of deals in the section of pure private companies through the period
as it has metals sector with the leadership to the last. There’re quite few companies in metals
sector which are state-controlled, meaning that most of the companies in this sector are pure
corporate. However, these sector most actively participates in M&A in Russia.


Addressing the question of the impact of state ownership in the context of the
availability of financial resources on the method of payment along with another
substaintial theories
14

There’re many theories which attempt to explain the difference in financing the deals.
One would try to cover some of them which are mostly relevant to the problem of state
ownership and M&A deal structure. First, it’s necessary to address the question of the deal
structure. There’re many aspects which belong to this concepts but here and longer we would be
searching into the area of M&A deal financing. As it was covered in the introduction, there’re
two ways of deal financing: either cash or equity payment. If the company has correctly chosen
the mode of payment, it has at least three advantages: lower costs on capital, increased
diversification of risks and the increase in the well-being of the shareholders from the acquirer’s
side. Although the research in the field of state ownership and the deal structure leads to some
theoretical insides like the deep understanding of the state policy functioning through the M&A
process, one would also note that the studying of this topic gives food for thought to the
management of the company. It gives the opportunity to choose more correctly the way of
financing the deals, because the consequences of each of the cases are widely examined.
One would take into consideration the fact that the emerging markets are obviously
functioning in a different way, rather than the mature economies. It has such particularities as the
deep information asymmetry and relatively weakly developed markets of debt and equity. It’s
true also for the Russian M&A market. As it was noted earlier, most of the emerging economies
have the great share of state-controlled companies. One may conclude that in these
circumstances the deal struture would be different from the one studied in the most of the
previous papers because the management can probably have another motives which should be
considered addressing the question of M&A deal financing.
Since we already widely covered the state ownership issue on the Russian M&A market,
one would like to address the question of the deal financing more detailed. It would be shortsighted to assume that only state ownership determines the mwthod of payment chosen by
acquirer. Thus, on may note the necessity to observe the main theories which which attempt to
explain the different M&A financing are developing during the last 20 years. Most of these
papers are examing the mature economies, since historically it has the largest share of M&A
delas completed in value and the number of deals, as well as the information available for the
research. In the following parts one would describe the most relevant theories which were
developed to explain the difference in the method of payment.

The information asymmetry
This theory intitially was introduced by Stewart Mayers and Nicholas Majluf /11./. The authors
use the microfoundationed approach to address the question of the method of payment.
Basically, the authors assume that the acquirer and the other parties may have the different
15

information about the actual perspectives of the acquirer. It’s an example of information
asymmetry in practice. Thus, if the acquirer perceives its stock as undervalued, it would
probably tend to use cash as a method of payment. On contrary, if for some reason the acquirer
values its stock higher than the market, it would use equity to finance the deal. This ideas are
provided as an equilibrium solution for the developed model which describes the issue-invest
decisions. The model also gives the rational explaination of some particular behaviour of the
acquirer, such as the usage of the internal financial sources and the preference of debt increase in
case of needed external financing. Interestingly, the same result was later on obtained
empirically by many authors, for example, by Alberta Di Giuli /3./ We will introduce this
research in the following sections, but it's necessary to note that findings of the article prove the
influence of market misvaluation on the choice of the mode of payment. It's often the case that
the market has very positive expectations about the future performance of the acquirer, and
consequently it overvalues the stock of the acquirer. While there's an information asymmetry, the
M&A deals are paid in stock.
Another aspect that was covered in the paper of Mayers and Majluf is the effect of the
information asymmetry regarding the target. Basically, it says that if the acquirer is not sure
about the fair value of the target, it prefers to use the stock by means of payment. In case if the
target was estimated incorrectly, the market would immediately value it less, than before. It's
equivalent to the decrease in the value of the stock of the acquiere right after the deal announced.
The new shareholders (former target owners) would get less paid in this case.
One more interesting paper which describes the problem of information asymmetry in the
context of M&A deal financing is the actricle of Robert Hansen /7./. This paper also uses mostly
theoretical approach to address the question. However, some empirical estimation of 106 deals in
the USA during 1976-1978 is also provided, which prove the theoretical results. In this paper the
author uses the special terminology as «medium of exchange», which basically means the
method of payment chosen by acquirer. It shows that if there's an information asymmetry about
the fair value of the target, the acquirer tends to minimize the risk of valuation by chosing the
proper medium of exchange. The authors refer to the standard game theory approach, which says
that the target would take the cash payments only in the case if it is larger than its private
valuation. Otherwise it rejects and the deal will not be completed. Thus, in case of cash
payments there's a substaintial probability of adverse selection and exessive payment, while in
case of stock payment the target shareholders have the same incentives as the acquirer to prevent
misvaluation by the market.
The interesting development of this topic can be applied to the emerging markets, most of
which suffered from the political and economic transformation in the recent years. Thus, many
16

Chinese authors address the issue of the presence of information asymmetry due to the lack of
accounting transparency. Particularly, Boateng and Bi pointed out that there's still a problem of
accounting conversion from Soviet-style to the Westen-style (IFRS). This financial reporting
transformation leads to the increase of information asymmetry. Despite the fact that it should be
only temporary issue, in many emerging economies it leads to the great information asymmetry
between the parties involved in the M&A process.
A substaintial coverage of the theory of information asymmetry let us to move to the
theory of investment opportunities.

The investment opportunities
Initially, this topic was introduced by Stewart Mayers /10./. The author proposed the
following idea about the deal financing. Basically, the acquirer may have several investment
opportunities, where M&A deal is only one of them. Consecquently, if the acquiere foresees tha
future investments, it would prefer to safe the cash in order to pay by cash in the future, while it
chooses to finance the M&A deal by means of stock. Such strategy lets the acquirer to prevent
the incsease in credit ratios, which is essential for easy borrowing in different financial
institutions. After Mayers, many researchers tend to find the evidence of this theory in empirical
studies. However, this is quite hard to make the difference in conclusions for both information
asymmetry theory and the theory of other investment opportunities, because the empirical
research requiers to use almost the same explainatory variables for both theories’ proof. These
variables are Book-to-market value, Tobin’s Q, etc. For the case of investment opportunities,
these variables should increase after the deal completion.
However, in quite recent papers the authors found the solution for the indentification
problem. We already mentions the paper of Di Giuli (2007), but now it is the time to provide
more details. Basically, the author proposes to separate the proxy variables for two different
theories. For the investment opportunities motive she offers to use the indicator of actual capital
investments in the period of 4 years after the M&A deal completion, while for the asymmetry of
information aspect she prefers to use the indicator of Book-to-market value. The last one
supposed to indicate the present of misvaluation. In more recent studies there was a valid
theoretical explaination of why the data on actual capital investments can be used as a proxy for
the presence of other investment opportunity for the company. Then Di Giuli empirically tested
the effect of post-merger investments on the chioce of the mode of payment. She collected the
data on 1642 M&A deals in USA during the period of 16 years (1984-2000) and found that
actually the large posr-merger investments positively influence on the choice of stock as a
method of payment. In more recent paper /4./, Di Guili studied this question again, with another
17

sample in 1187 deals during 15 years (1990-2005). Again, she found that the presence of
investment opportunities lead to the deal financing through the equity. One interesting extention
which one can notice in this paper is clarified incentives of the target to be sold to the overvalued
acquirer. Basically, the estimation showed that target managers are very interested in the longterm performance of the acquirer and perceive the high quality of the deal. Due to these reasons,
the target agrees to the deal with overpriced counterparty.
After analysing these two theories in the previous literature, one might move to another
theory, which are even more vital for the emerging markets - the theory of financial resources’
availability.

Availability of financial resources
This theory bases on the assumption that quite often many companies have a limited
number of financial resources, and it should form the financing approach according to its
abilities. For example, the cash can be obtained by either larger revenue or by the means of a
loan from the bank. Thus, the amount of cash depends on many factors, which is difficult to
manage. The company can not suddenly increase the revenue. It also can not get a huge loan
with quite low interest rates without the special treatment from the bank. Thus, one may
conclude that most often the amount of available cash is very limited. Consecuently, the
companies have to borrow the funds from the bank. Nowadays, many companies see no reason
to increase the debt ratio. Another reason is the lack of administrative resource to get a loan on
good terms. Due to these reasons the acquirer may prefer to pay in stock for a target.
However, the companies differ by the ratio of total cash to total assets. So, the size of this
ratio may influence the choice of the method of payments. Another indicator which should be
carefully treated when checking this hypothesis is the level of diversification of the company.
It’s most likely that well-diversified company may aggregate more free cash due to easier access
to the debt market. The empirical studies in this field suggested the following results. In the
paper of Faccio and Massulis /6./ one might find the evidence of positive link which was tracked
between the size of the assets and the payment in cash for a target. In line with this result, the
author found the negative influence of high debt ratio on the payment in cash. Despite the fact
that the sample of the authors contained only European countries for 3 years (1997-2000), one
might pay attantion to the one interesting finding of the authors, which also can be addressed to
the emerging markets. Basically, the authors say that a privileged access to the cheap financing
increases the probability of equity financing. The authors point out that privileged access is
oftenly available to the state-controlled companies with the government on board.
These theories can be used in line with the idea of state ownership when we study the
18

M&A deal structure in the context of the method of payments.


Addressing the question of theimpact of state ownership on the acquirer’s performance:
the direct one and the indirect one (via the method of payment)
o the indirect impact of state ownership of the acquirer’s performance
The paper one would like to view in detail is the article of Agyenim Boatengand

XiaoGang Bi/1./. It's necessary to say that the Chinese economy is also related to the emerging
markets. Moreover, it's political and economic sittuation was very close to the former USSR. In
the previous decade, the Russian economy had a lot of substaitial reforms, same as the Chinese
one. So, most of the studies conducted for the Chinese M&A market can be used as a plentiful
base for the studies around Russian M&A market. Particularly, the authors of this paper studied
the mode of payments in M&A deals in two different aspects. First, they studied the difference in
the abnormal returns of the acquirer’s stock in case of paying in cash and stock using the
indicator of “buy and hold returns”. At the second stage, when the major effect of the method of
payments on the stock returns was clear, the authors studied the effects of the characteristics of
an acquiring companies on the mode of payment used to finance the acquisition.
The motivation of this research is quite interesting and very practical. During almost 30
years the scholars all over the world investigate the effect of different method of payment on the
acquirer's stock returns. Many of the researchers tend to exploit the hypothesis of asymmetric
information,which are hold by the acquirer and the target concerning the value of the company,
in order to explain the duality of choice in payment method (cash or stock). But most of these
studies cover the mature economies, while the emerging markets are still not studies enough. It
should be the case that M&A on emerging markets are quite different from the ones in mature
economies in the sense of impediments such as various government policies. It may be the
reason of financial segmentation, which let to the incorrect pricing of the target. Despite the fact
that Chinese government has undertaken many reforms, the financial insitutions remain
imperfet.It also grows fast: since 1998 untill 2011 there were almost 23 750 deals completed in
China.
The researchers hypothesised that the choice of the method of payment should depend on
the objective and subjective factors. We already addressed several hypotheses, which attempt to
the quiestion of choosing cash or stock as a method of payment. This paper would be considered
as an empirical research which continues and developes the theoretical studies. The authors
assumed that it can be determined by such explanatory variables as the Tobin's Q, the size of the
leverage, the market value of the acquiring company, the presense of partial ownership of the
company by the state and some other finanical indicators. For some of the factors there was an
objective evidence. For example, from the previous research in this field it's known that the
19

Chinese companies normaly have quite low debt ratio, which allows them easy borrowing for the
deal financing.This situation naturally stimulates the companies to pay in cash. But the other
indicators’ influence is much less obvious. For example, the state ownership may have an impact
on the decision on the method of payment. The authors provide the statistics concerning the size
of state-controlled sector in China. Despite the financial reforms that were done in the previous
decade, there’re 80.1% of Chinese companies which have are partially or completely owned by
the state. One may reasonably assume that the close link to the government may result in the low
cost borrowing from the state-controlled banks. Unlike the Russian trend to nationalization, the
Chinese government tends to expand the influence of Chinese companies outside the country,
saving the control under these MNC. This is closely coincides with an idea of “national
champions” in China. Consequently, such companies would offer the cash much more often than
stock as a means of payment in order to prevent the dilution. Finally, the regression analysis
done by the authors showed that such factors as Tobin's Q, the size of the leverage, acquirer's
market value, the presense of state ownership positively relates on the cash as a deal's financing
offer.
Due to the second part of the authors research, one may consider the comprehensive
approach of analyzing the M&A performance dependent on the method of payment. It's very
important to estimate the long-term performance of the stock of the acquirer during the period
after the bid. This approach assumes the using of buy and hold abnormal return method along
with calendar time approach. The authors collected the data set which contains the bids of the
deals completed by Chinese based companies particularly in the mainland China during 1998 –
2007 yrs. Thus, the total sample contained 23 311 domestic M&A transactions. Moreover, this
data set contained the information on the deals' details, such as the date of announcment, the date
of completion and the chosen method of payment.
Th authors estimated so-called buy and hold abnormal returns variable (BHAR) for each
acquiring company, applying the different benchmarks to the reference portfolios.
Difference in Buy and Hold abnormal returns (BHAR)
due to the method of payment
All

Cash

Share

Benchmark 1
BHAR
Benchmark 2
BHAR
Benchmark 3
BHAR
Table 4.Source: [1]

12,21%

14,24%

8,85%

13,28%

15,31%

8,47%

6,12%

6,50%

29,37%

20

The results obtained by the authors suggest that for the period before the bid the BHAR is higher
for the companies which finance the acquisition through the stock than the cash. Since the
authors investigated the different length of pre-bid period (1 and 3 years before the bid), the
results are found for both of these peroids. In both cases the companies which have equity
financing do outperform the companies which finance the deals through cash, which can be seen
from the table 5. The authors found the proof of the hypothesis that the companies prefer to
finance the deals by the stock in the presence of high asymmetry of information since there’s a
few disclosure on financial markets. The same can not be said for the post-event period – there’s
no absolute proof.
 The direct impact of state ownership on the acquirer’s performance
The very important note should be provided here, which was stated by the authors of the
previous research. They suggested to extend the research by adding more governance variables
to this model in order to clarify the reasons, which can motivate the companies to finance the
deals by either cash or the stock. That’s what exactly can be done in this paper in the context of
future research. In the Methodology section one will construct the similar research plan with the
only one difference: the influence of the state ownership will be directly included in the
estimation of M&A performance. The good motivation of such variation was provided in the
paper of Min Du and Agyenim Boateng /5./ along with Bilei Zhou et al. /15./. Parlicularly, in
these papers, the authors mainly address the question about influence of state ownership on
domestc and cross-border M&A. Both authors emphasize the importance of this studying since
it’s poorly covered in the world literature on the topic of M&A in emerging markets.
Following by Du and Boateng, one may consider the reasons why is it interesting to
investigate the effects of state ownership along with another institutional variables on the stock
returns of the acquirer. This is an application of an institutional theory in the M&A field of
research. As in any theory, there are both pros and cons for the participation of the government
in the ownership of the company.
Some researchers consider the state-controlled companies as inefficient comparing to the
private companies because the government may try to pursue the political rather than economic
purposes when ruling the company (for example, it seeks to support full emplyment, rather than
maximize the profit). Another reason why the company can be inefficient under the state
ownership is the fact that such companies ususally have the high level of bureaucracy, which
leads to the problem of information asymmetry. We already saw the negative consequences of
severe information asymmetry. However, there’re another point of view on state-controlled
companies. Back to the M&A discussion, one might note that the government tends to help
owned companies by inducing the tax rebates, financial assistance and soft lending. From
21

empirical research of 20000 Chinese-listed companies one may note that state-owned companies
faces a fewer financial constraints. It can be easily concluded that the market perceives such
companies as the ones with economic and political anvantages, which is therefore reflected in
the price of stock of the acquirer. Nevertheless, the effect of state ownership on the acquirer’s
performance is still controversial and should be studied for particular market in a greater detail.

22

Section2.3. Methodology
That is the time to move to the empirical research on the question of the state ownership
and M&A deal structure. The empirical part will be organized in the following way. It will
consist the two separate parts, each of them addresses the impact of state ownership on various
aspects on the deal structure.
1.

one will examine the effect of state ownership on the choice of payment method
along with another variables, which are the important indicators for another theories.
This part has very close methodology to Boatend and Bi (2014).

2. It would be interesting to track the influence of the deal structure on the M&A
performance, how it was done in paper of Boateng and Bi (2014), but one would
prefer to study the direct impact of state ownership on the M&A performance in the
context of short-term and long-term. Such turn will be guided by thepaper of Du and
Boateng (2015), where the methodology is very close to the one which will be
developed here.
 Part 1: the determinants of the method of payment
First of all, one should determine the explanatory variables and hypothesize about its
possible influence on acquirer’s choice of payment method. Following the theories which can
explain the difference in payment method discussed earlier, one would introduce several control
variables, which should be included into the model in order to prevent the biasness of the results.
The note is that all the following variables are assumed to be calculated for the acquirer, if
nothing other is said.
The main explainatory variable one would have a special attention is the state ownership.
Since it is already said that the government participation in fact can create an advantage for the
acquirer by means of low-cost loan and many other indirect assistant services, following the
theory of availabilty of financial resources, one would included this variable in the model,
measured as a percentage of shares owned by the government (either federal, refional or local).
There’s list of the ministries published in an open government electronic resource which
contains the information on the state departments which has a shares in the particular (named)
companies. This information can be added to the list of all M&A deals which meet the
requirements described later on.
H1: The greater the share of the of the state in the corporate ownership structure
positively related to the payment in stock.
Due to the information asymmetry, one would use the Tobin’s Q ratio. The particular
definition is provided in the table. In fact, the Tobin’s Q ratio reflects the market valuation of the
23

company. In the previous research it was revealed that the company with higher Tobin’s Q ratio
more often pay in stock than in cash. This suggestion forms the first hypothesis:
H2: The company with higher Tobin’s Q will be more likely to pay in stock for a target.
Following the theory of insvestment opportunities, one might choose the amount of the capital
investment in post-merger period as an indicator of for this aspect. The data on the capital
expenditures in the following period should be manually collected for the necessary companies.
The period is cut up to 2 years. Otherwise it can be the case that the management of an acquirer
would have enough time to recover after the M&A deal in order to invest in something else.
H3: The acquirers which have alternative investment opportunities more likely pay in
stock.

Short label of Full

name

the variables

variables

StateOwn

State ownership

Leverage

TobQ

CapEx
LnRelatSize
Diversif
LnAssets

of

the Description

Theory
referenced

𝑡𝑕𝑒 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑠𝑕𝑎𝑟𝑒𝑠 𝑜𝑤𝑛𝑒𝑑
𝑏𝑦 𝑡𝑕𝑒 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡

Availability
of financial
resources
(𝑙𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡)
Leverage
Availability
of financial
𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
resources
(𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡) Asymmetry
Tobin’s Q ratio
of
𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
information
Capital investment
Investment
𝑡𝑕𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑠𝑝𝑒𝑛𝑡 𝑎𝑠 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
opportunities
𝑖𝑛 𝑡𝑕𝑒 𝑝𝑜𝑠𝑡 − 𝑚𝑒𝑟𝑔𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 (𝑖𝑛 2 𝑦𝑒𝑎𝑟𝑠)
𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑎𝑙
Logarithm of Relative Size
Controls
ln
𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 1 𝑓𝑖𝑠𝑐𝑎𝑙 𝑦𝑒𝑎𝑟 𝑎𝑔𝑜
Diversified deal
Controls
1, 𝑓𝑟𝑜𝑚 𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑒𝑠
0, 𝑜𝑡𝑕𝑒𝑟𝑤𝑖𝑠𝑒
Logarithm of Assets
𝑡𝑕𝑒 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 𝑖𝑛 𝑡𝑕𝑒 𝑙𝑎𝑠𝑡 𝑓𝑖𝑠𝑐𝑎𝑙 𝑦𝑒𝑎𝑟 Controls
𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑕𝑒 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛
The dependent variable is obviously the method of payment – the binary variable which
is equal to 1 if the payment was in stock, otherwise 0. Thus, the regression model which will be
estimated looks as follows:
𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 𝛽0 + 𝛽1 𝑆𝑡𝑎𝑡𝑒𝑂𝑤𝑛 + 𝛽2 𝑇𝑜𝑏𝑄 + 𝛽3 𝐶𝑎𝑝𝐸𝑥 + 𝛽4 𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑓 + 𝛽5 𝐿𝑛𝑅𝑒𝑙𝑎𝑡𝑆𝑖𝑧𝑒
+ 𝛽6 𝐿𝑛𝐴𝑠𝑠𝑒𝑡𝑠 + 𝜀
The population will be obtained from the database of the M&A deals with Russian-listed
companies Zephyr (Bureau Van Dijk). For the second part the empirical section one essentially
24

needs the data on the stock returns. This data can be obtained from the Bloomberg database or,
even better, the Thomson Reuters database (SDC). The sample should be carefully sorted out
from the population following the restrictions mentioned therein:
1. The data about the company should contain the information about the price of the stock
and some financial (acconting) reports.
2. The acquirer should be involved in one deal process only. The multiple acquisitions must
be excluded. Otherwise one would not be able to separate the effects of different
acquisitions.
3. The data should contain the information about the date of announcement and the date of
completion. The information about the bid should be available.
The period of sample will be 12 years (2002-2014). We expect to obtain the sample of the
size approximately 1500 observations. First, one will prepare the descriptive statistics, analyse it.
Then one will use probit class of models and also check for robustness.
 Part 2: the impact of state ownership on M&A performance
One may note that this approach is power-driven and it needs to use the powerful
statistical software. BHAR basically is the actual returns during the event window, which
includes the period of 36 months after the bid minus the benchmark portfolio return. One would
refer to the previous research in this field to address the issue of the measurement of investors’
investment experience by using the BHAR indicator.
The return of the company after the merging:
𝑠+𝑇

𝑅𝑖,𝑇 =

1 + 𝑅𝑖,𝑡 − 1
𝑡=𝑠

𝑅𝑖,𝑡 - the return of stock i in month t
The benchmark reference portfolio return:
𝑛𝑠

𝑅𝑟𝑒𝑓 ,𝑇 =
𝑖=1

𝑠+𝑇
𝑡=𝑠

1 + 𝑅𝑖,𝑡
𝑛𝑠

−1

𝑛𝑠 – the number of stocks in the portfolio in the beginning of the month s.
T – the length of the period of holding the stock (36 month)
𝑠+𝑇

𝐵𝐻𝐴𝑅𝑖 =

1 + 𝑅𝑖,𝑡 − 𝑅𝑟𝑒𝑓 ,𝑇 − 1
𝑡=𝑠

𝐵𝐻𝐴𝑅𝑖 - buy and hold abnormal returns during 3 years after M&A deal.
The next step was to construct and estimate the benchmark portfolios, which were
complied in a special way. There were three kinds of the benchmark portfolios: the size decile
25

reference portfolios, 50 size/ Book-to-Market value reference portfolios and the most
complicated one – the size, Book-to-Market value and Industry control portfolio. One may
require the particular way of constructing these benchmarks, since it was created in a detailed
and accurate methodolody. One might provide a step-by-step explaination of the construction
method in order to use it in the future own research.
The size decile reference portfolios:
1. Download the data on the market capitalisation of the tradable companies from the
sample.
2. For the beginning of each year range the companies by the market capitalisation in the
decending order to form 10 size deciles, where the first decile has the companies with the
largest capitalisation and the last decile represents the companies with the smallest
capitalisation.
3. Calculate the return of each company from each decile for each year during the period of
(-36 month, + 60 month) from the January of the particular year (for example, 2006).
4. Combine the sample of reference portfolios and the sample with actual returns during the
event window (-36 month, +36 month) starting from the month of event window for
actual returns and finally calculate the buy and hold abnormal returns.
Quite similar procedure is used for construction of 50 size/ Book-to-Market value reference
portfolios. The companies are now ranked by quintiles in acsending order by the indicator of
Book-to-Market value, starting from the most “glamorous” companies, which have the lowest
BTMV ratio. Combining this ranking with the ranking by the size of market capitalisation, one
would get (10 deciles * 5 quintiles) 50 size/ Book-to-Market value reference portfolios. Then
again one combines whis modified sample with the actual returns in the event window, starting
36 month before date of the bid. The last type of the benchmarking - the size, Book-to-Market
value and Industry control portfolio – is the mix of the second benchmark portfolio with
additional requirement for the companies to belong to the same industry group.
Finally, the one would presend the regression model:
𝐵𝐻𝐴𝑅𝑠 = 𝛽0 + 𝛽1 𝑆𝑡𝑎𝑡𝑒𝐶𝑜𝑛𝑡𝑟𝐴𝑐𝑞 + 𝛽2 𝑆𝑡𝑎𝑡𝑒𝐶𝑜𝑛𝑡𝑟𝑇𝑎𝑟𝑔 + 𝛽3 𝐶𝑎𝑠𝑕 + 𝛽4 𝑆𝑡𝑜𝑐𝑘
+ 𝛽5 𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑓 + 𝛽6 𝐿𝑛𝑅𝑒𝑙𝑎𝑡𝑆𝑖𝑧𝑒 + 𝛽7 𝐿𝑛𝐴𝑠𝑠𝑒𝑡𝑠 + 𝛽8 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒
+

𝛾𝑖 𝑆𝑒𝑐𝑡𝑜𝑟𝐷𝑢𝑚𝑚𝑦 +

𝜃𝑖 𝑆𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝐷𝑢𝑚𝑚𝑦 + 𝜀

where StateContrAcq is the dummy, which equals to 1, if the acquirer is state-controlled
company and analogically StateConrtTarg is the dummy, which equals to 1, if the target is statecontrolled company.

26

27

Part3. Conclusion
In this extended proposal one analyzed the impact of state ownership on the M&A deal
structure.The particular example of the political connections and corporate governance can be
seen in Russia. Like in many other emerging economies, there’s a strong influence of the state on
the investment decisions taken by the “private” companies. In many cases such state-controlled
firms drive the M&A market in its sector. This behaviour is twofold. On one hand, it moves
economic activity in the country. On the other hand, it lead to the expansion of state control over
the pure private sector. More formally, such actions demonstrate nationalization motives.
However, one would be interested in the details of the deals with state-controlled
companies involved. There’re several issues that should be addressed by the management of the
company before the procedure of merger has started. One would be more precise about the
method of payment chosen by the company. According to the theory of availability of financial
resources, the state ownership might have a significant impact on the preference over cash as a
payment method. However, there’re another theories that should be considered when doing
empirical estimation, such as the theory of information asemmetry and the theory of investment
opportunities.
Another characteristic of the M&A deals is the performance of the acquirer after the deal
announced. This section found a great coverage in the world literature around M&A topic. The
most relevant examples can be taken from the M&A practice in China, since its political
situation has a lot of similarities to the Russian economy in the sense that it was pure socialistic
in the past. One might estimate the long-term performance of the acquirer by the buy and hold
abnormal returns. The regression analysis would indicate the effect of state control on the
performance of the acquirer.
Following the methodology presented earlier, one would expect the positive effect of
state control on the choice of cash as a method of payments. It coincides with the results of many
authors who did empirical research both on the mature and developing markets. One would also
expect to find the significant difference in the abnormal returns on acquirer’s stock for the pure
private and state-controlled companies. The sign of the relationship is difficult to predict at the
moment.
Finally, the completed research after this proposal should necessary contain carefull data
mining, sample collection and strong econometric techniques. The results of estimation should
be verified by the tests on typical econometric problems like heteroskedastisity and
multicollinearity. Overall, this research will be very useful both for the scholars and the

28

managers, since it reveals the actual particularities of M&A deals in the presence of a state
controll.

29

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30

10 largerst M&A deals in 2014
#

The object of
transaction

Sector

Type of the
deal

Acquired
Share

(US$
mln)

1

"NNK-Aktiv"

Oil & Gas

Alliance
Group/"NNK"

joint
company
60:40

6000

horizonal
integration +
economy of
scale

2

"Stroygazkonsulting"

Private investor
Ruslan Baysarov

Private investor
Zyad Manasir

44%

5000

strategic
investment

3

acquisition

"NNK"

Alliance Group

60%

4200

horizonal
integration +
economy of
scale

Energy & Utilities

acquisition

Volzhskaya TGK

KS-Holding

n/a

1844

Reorganization,
vertical
integration

USM Holdings Ltd

Metals & Mining

acquisition

Management of
USM

Private investor
Alysher Usmanov

10%

1800

strategic
investment

UgraGazPererabotka

Oil & Gas

acquisition

SIBUR Holding

Rosneft

49%

1600

Rosneft sold
secondary
manufacturing

Acquirer

Target

merger

Alliance
Group/"NNK"

Transport &
Infrastructure

acquisition

"NNK-Aktiv"

Oil & Gas

4

"TGK-9"

5
6

Comments

2

7

Polyus Gold
International Ltd

Metals & Mining

acquisition

Private investor
Oleg Mkrtchan

Halyard Global Ltd

19%

1584

strategic
investment

8

Vkontakte

Media &
Telecommunications

acquisition

Mail.ru Group Ltd

United Capital
Partners Advisory

48%

1470

Diversification
motives

9

Altimo

Media &
Telecommunications

acquisition

LetterOne Group

Private investor
Gleb Fetisov

14%

1150

strategic
investment

10

AltynAlmaz Gold Ltd

Metals & Mining

acquisition

Polymetal
International plc

Sumeru Gold BV;
Sumeru LLP

100%

1119

extension of
resourse base

Note: the largest deal of 2014 was basically the series of M&A deals between 2 companies - NNK and Alliance group.
Initially, NNK acquired 60% of Alliance Oil, the subsidary of Alliance Group.
Then NNK merged with partially owned Alliance Group to create a joint company.
Table 1. Own calculations.

3

Total value of deals in different industries (US$ bln)
Other sectors
Agriculture
Innovations & Technologies
Banking & Insurance
Consumer sector
Media & Telecommunications
Metals & Mining
Energy & Utilities
Transport & Infrastructure
Real estate & Reconstruction
Oil & Gas
0

5

10

15

20

25

30

US$ bln
2014

2013

Plot 3. Source [8]

2