Impact of corporate governance, financial and regulatory factors on firms’ acquisition ability
| Pages | 461-484 |
| DOI | https://doi.org/10.1108/CG-07-2019-0214 |
| Date | 18 March 2020 |
| Published date | 18 March 2020 |
| Author | Tahira Awan,Syed Zulfiqar Ali Shah,Muhammad Yar Khan,Anam Javeed |
| Subject Matter | Corporate governance,Strategy |
Impact of corporate governance,
financial and regulatory factors on firms’
acquisition ability
Tahira Awan, Syed Zulfiqar Ali Shah, Muhammad Yar Khan and Anam Javeed
Abstract
Purpose –The capital markets witness phenomenal shifts of corporate control. With the shift of world
economy into a global one,there has been a rapid increase in the volume of acquisitions. The previous
studies shedlight on the motives behind acquisition and impactof acquisition on both bidding and target
firms. The purpose of this study is to bridge a gap in literature by exploring the factors affecting the
acquisition ability (AA) of the firms. The study has analyzed the role of financial strength, corporate
governanceand regulatory influence on AA of acquiringfirm.
Design/methodology/approach –Cross-sectional data has been analyzed with respect to Pakistan
stock exchangefor a period of 2004-2017 by using logit regression.
Findings –Analysis indicatesthat firm-specific variablesare important determinants in firm’s decisionto
acquire. Chief Executive Officer duality and presence of institutional shareholders on the board
contributeto this important phenomenon in the life of the acquiring firms.Bidding firm’s financial strength
is also another important consideration while going for corporate control transfer transactions. The
empiricalresults indicate the better AA for firms characterizedby minimum capacity usage, lower level of
intangible assets,lower debt levels and lower advertising expenses.However, the regulatory factor has
no significant role in firms’ AA. The findings of the study are helpful for managers, regulators and
policymakers.
Originality/value –Analyzing the role of financial strength, corporate governance and regulatory
influenceon AA of acquiring firm is a rare study, especiallyin an emerging country such as Pakistan.
Keywords Acquisition ability, Corporate governance, Regulation, Market for corporate control
Paper type Research paper
1. Introduction
With the shift of world economy into a globalvillage, every sector of the economy is affected
at large. Internationalization and deregulatory framework led the government toward more
relaxed economic policies. Fierce competition and new market dynamics forced firms to
either merge or to gain more power through takeover attempts. Possible consequences of
shift in control of the firm can replace the existing management, elect new board of
directors and reap benefits of synergies or to combine the expertise level of both firms.
Corporate control can be defined as “the right to determine the management of corporate
resources –that is, the rights to hire, fire and set the compensation of top-level managers”
(Fama and Jensen, 1983).
The 1980s is famous for its wave of mergers and acquisitions and corporate restructuring.
Most of the cases in this era are examples of hostile takeover and are majorly financed by
leverage. Leveraged buyout is a name known to everyone in the industry (Mitchell and
Mulherin, 1996). The total investment in market of corporate control showed a 50 per cent
growth rate in 1998 as compared to previous year and almost double of investment in 1996
Tahira Awan and
Syed Zulfiqar Ali Shah are
both based at Faculty of
Management Sciences
International Islamic
University, Islamabad,
Pakistan.
Muhammad Yar Khan is
based at Department of
Management Sciences,
COMSATS University
Islamabad, Wah
Cantonment, Pakistan.
Anam Javeed is based at
Department of
Management Sciences,
University of Wah, Wah
Cantonment, Pakistan.
Received 18 July 2019
Revised 8 December 2019
1 February 2020
Accepted 13 February 2020
The authors would like to thank
Editor in Chief, Associate
Editor, and the anonymous
referees for their valuable
comments. We would also like
to take this opportunity to thank
International Islamic University,
Islamabad, COMSATS
University Islamabad, Wah
Campus and University of Wah,
Wah Cantonment, Pakistan for
sparing us to conduct this
valuable research.
DOI 10.1108/CG-07-2019-0214 VOL. 20 NO. 3 2020, pp. 461-484, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 461
(Gupta and Gerchak, 2002). Firms surviving from takeover were led toward corporate
restructuring as a tool to safeguard takeover threats. Later on in 1990s, corporate
governance mechanism was improved to decrease hostility and fierce threats of shift of
corporate controls (Holmstrom and Kaplan, 2001). Such activities may include more
bonding among shareholders and board of directors through giving stock options to top
management teams (Ibrahim et al., 2018).
Asian economies also witnessed a rapid growth in the merger and acquisition (M&A)
market. India witnessed a record number of such deals during first decade of 21st century.
Total volume of such transactions exceeded US$25.6bn on annual basis. This wave of
mergers and acquisition was a result of market confidence as per Reserve Bank of India
(Anderson and Gerbing, 1988;Holmstrom and Kaplan, 2001). Pakistani capital market has
also witnessed this phenomenon of acquisition since last decade of 20th century. Mergers
and acquisitions transactions are regulated by the competition regulation act 2007. These
corporate control markets grew up to 86 per cent in 2012 and almost 59 per cent of such
deals belong to the oil and gas, foodand beverages and financial sectors.
Traditionally, this wave of acquisition and control of corporation is considered as a tool to
gain monopoly or concentration of economic power. These twin problems have caught
much attention of academicians. However, financial regulations result in strict antitrust laws
to protect the issue of monopoly.Another long debated objective is the economies of scale.
Increase in a firm size may reduce the average fixed cost allocated to total units of
productions, so overall cost reduction is observed (Bittlingmayer, 1998). Other benefits
include the improvement in both operating as well as financial synergy, greater
diversifications, better strategic fit and realignment, higher efficiency levels and very
importantly a means of new entry for biddingfirms into industry (Weston et al.,2004).
Manne (1965) has focused on the role of mergers and acquisitions as a tool for improving
management performance. A firmmay go for mergers or direct purchase of shares or proxy
fight to gain control over target firm. He is convinced that “control of company” is itself a
valuable asset. Stigler (1950) researchis against the economies of scale motive for mergers
and acquisition. He proposed the “survivor principle.” He discusses that growth in capital
markets acts as a catalyst for monopoly power seekers so firms start to acquire or merge
with other firms. Another widely discussed negative motive of mergers and acquisitions
(M&As) is managers’ ego and hubris. Sometimes managers fall victim of managerialism,i.e.
managers maximize their utility by controlling large firms. So, they go for these transactions
for maximizing their personal utility even at the cost of ignoring the synergistic gains. Free
cash-flow theory (Jensen, 1986) indicates the chances of accepting lower or negative net
present value (NPV) projectsby companies with abundant cash resources available. Oneof
such projects can be acquisition of other firm. It is evident in oil and gas industry wave of
mergers and acquisition.
Basic theory lying at the base of mergers and acquisitionsis the theory of corporate control.
Bradley et al. (1988) discussed inter-firm tender offers to acquire stocks. Managers make
this offer in the best interest of their shareholders to shareholders of the target firm. If the
acquisition is successful, then all target shares will be exchanged for either cash or shares
of the acquiring firm. The consolidation of corporate control of firms resultsin a value-added
investment for shareholders of both firms. It increases shareholders wealth. Target
shareholders are better off due to capital gains irrespective of the result of offer or their
tendering of shares. They enjoy premium price offered in tender offer plus the increase in
share price. However, acquiring firm suffers a capital loss on purchased shares of target.
Another interesting fact is that the capital gain enjoyed by acquiring firms is not due to
appreciation of share price of target. The reason being that it has already paid at least
expected increase in market price of target as offer price otherwise the target firm’s
stockholders will not tender their shares. Whole profit comes from securing control of the
target resources, synergy or some other reason.
PAGE 462 jCORPORATE GOVERNANCE jVOL. 20 NO. 3 2020
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