National Research University

Higher School of Economics

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

Part 1. Introduction

Part 2. Discussion

Section 2.1 Overview of M&A market in Russia

Section 2.2 Literature review

11

Section 2.3 Methodology

22

Part 3. Conclusion

26

Bibliography

27

Additional materials

28

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 aspects.
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.

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
companys position in the sense of the economy of scale, gain in efficiency and improved market
visibility. In some cases the involved parties are looking for the gain in new technologies or goodwilllike 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 staffs considerations, meaning that its better for them
to accept the idea of a merger than a news about an acquisition.
When the M&A transaction takes place, therere several issues that should be addressed up to
the beginning of the procedure. One could sum it up to the 10 most important aspects of the deal /16./.
It includes such serious 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.
Therere 3 main options applicable for the M&A transactions structuring: stock purchasing, sale of the
assets and the merger itself. The type of the structure depends on the negotiation 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 consequences 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 targets point of view, cash is known as a mostly risk-less and quite liquid source of
the deals financing. The value of the deal is sustained to be constant in the sense that it doesnt vary
with the value of the stock. From the acquirers point of view, payment in cash can be easily conducted
with the excessive funds from either working capital or the unlimited credit line. However, these source
of financing may lead to the impairment 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 its partially or entirely state-controlled.

One would reasonably extend 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 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 sense that M&A deals
lead to the state control expansion through the corporate sector?

These questions will be addressed in the paper, using the quantitative and qualitative 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 1 with 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 substantial theories;

the impact of state ownership on the acquirers 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
comments and remarks.

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 historical 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. Its
convenient to assume that this kind of companies have the state as a shareholder with 50% or more
percent 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 subsidiary of the
state-owned company. This diversification will be important further. Additionally, one would treat the
companies as state-participated if theres 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 non-commercial 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 referred 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 further
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 average total 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 Petrolium which 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 Gazprom 1for 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 acquisition of TNK-BP by
1

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

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)

595

505

393
362

78

336

338
308

272

117

101

210
60

316

73

66

80

71

38

28

total value of mega deals (US$ bln)

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, theres a decline in the total value of deals (US$71 bln in 2014 versus US$115 bln 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
2 The deal of the century: Rosneft acquires TNK-BP. URL: http://smart-lab.ru/blog/83473.php
8

deals with the value of US$100 million or less. Thus, in 2014 there were 293 relatively small deals,
which is almost three times more than in the previous year (103 deals).
To build the forecast on 2015, one would take into account the historical 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 demonstrates 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 crucial that after the financial crisis in 2008.
The global M&A market demonstrates 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, according to the
statistics, each 4th M&A deal involves a company listed in BRIC region as a buyer or seller.
One would analyze why the BRICs companies do participate in M&A deals. Therere basically
3 main reasons. First of all, BRICs 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 economies, 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.

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

16537

16029
14646
13126

12388

12461

13282

13670

14215

9859

2428

3295

3670

2409

1711

2089

total value of deals (US$ bln)

2249

2295

2259

3259

total number of deals

Plot 2. Source: [8]

The latest research of BCG demonstrates 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 wellacquainted with the culture of a target, including the language, corporate culture and motivation of a
target. Due to this advantage the average abnormal 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, its not always true, especially if the acquirer from the mature economy has a
substantial 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
10

situation. The companies did slowdown in the overall M&A process the own growth rates. Such
cofactors as a drop in oil prices and depreciation of ruble defined the huge 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 analyze 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 investors 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 infrastructure
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 part
of the company. However, therere several other sectors where M&A activity presented. Its 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, theres a huge fall in M&A activity in metals and mining sector (decrease
in 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 analyzed. With
escalating the Ukrainian conflict, the total volume of outboard investments decreased significantly
(approximately 50% less then in the previous year, reaching the value of US$8,1 bln). Its 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 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
11

that Chinese companies are very strong in their negotiation position. Thats why the expectations of
both parties do not coincide quite often.
The activity of Russian companies outside of the country is also very interesting 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% (US$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 US$1,08 bln. The nice tendency
of import M&A activity is the shift from buying the energy and natural resourced 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 performed 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 state-controlled
companies, one would analyze its performance in detail. The next section is devoted to the review of
previous research in this field and some particular studies concerning the state-controlled companies in
Russia.

Section 2.2. 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 acquisitions, 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
12

particularly interested in the scale and dynamics of this process of changing the size of corporate 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 table 2 presents the data on the total value of 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 table one may
conclude that the state-controlled companies are more often 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 assets 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)
200 20
20
20
200 20
200
Values
3
04
05
06
7
08
9
sum

Total value of all deals

1 completed (US$ bln)

Total value of deals

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

between statecontrolled companies

3 (US$mln)
Share out of [1]

8,8

22,
9

33

39

121

1,6
18
%

12,
4
54
%

15,
4
47
%

6,1
16
%

70
58%

825
9%

176
2
8%

20
0%

569
1%

159
21
13%

73 54,7

19,
2 18,6
26
34
%
%

380
8
5%

352,
4

143,
3
41%

112 2402
0
5
2%
7%

13

selling from statecontrolled to purely

private companies
4 (US$mln)
Share out of [1]
selling from purely
private companies to
state-controlled
5 (US$bln)
Share out of [1]

377
4%

0,4
1
5%

984
4%

971
3%

9,7
42
%

14,
4
44
%

103
0
3%

4,5
12
%

167
79
14%

37
31%

620
1
8%

2699
655
7
1%
8%

9,2 16,8
13
31
%
%

92,0
1
26%

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. Its like backward privatization // nationalization. The given
period is directly linked to the expansion of state-controlled 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 realization 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
integrated circuits by the state-controlled Vnesheconombank for US$1,2 bln. With the similar scheme
the 30% of stock of Rostelecom - national telecommunications operator was transferred under state
control3. 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
200 200 200 200 200 200
Values
4
5
6
7
8
9

3 http://top.rbc.ru/finances/10/06/2010/419402.shtml
4 http://top.rbc.ru/economics/23/11/2011/626416.shtml
14

Total share of mega

deals with SC
1 companies involved

89% 84% 59% 64% 44% 88%

Out of [1], the

sectors involved
Oil & Gas
Financial sector

89% 84% 59% 43%

5% 13%
28% -

Energy & Natural

resources

21% 11% 17%

Telecommunications

39%

Real estate &

Reconstruction

13%

6%

Information
technologies
Table 3. Source: [9]

However, the author says that the scale of nationalization through M&A didnt reach the same
extent as it was demonstrated 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 state-controlled 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 pursuing of states
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.
15

One of the possible explanations 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 comparison of M&A activity
in Russia with and without state-controlled companies participation. According to the authors
estimation, oil and gas sector takes the leadership in M&A activity in Russia, even without statecontrolled companies participation. However, the financial 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. Therere quite few companies in metals sector which are statecontrolled, 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 substantial theories
Therere 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, its necessary to address the question of the deal structure. Therere 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, therere 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 acquirers 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. Its true also for the Russian
M&A market. As it was noted earlier, most of the emerging economies have the great share of statecontrolled companies. One may conclude that in these circumstances the deal structure would be
different from the one studied in the most of the previous papers because the management can probably
16

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 short-sighted to
assume that only state ownership determines the method of payment chosen by acquirer. Thus, on may
note the necessity to observe the main theories which attempt to explain the different M&A financing
are developing during the last 20 years. Most of these papers examine the mature economies, since
historically it has the largest share of M&A deals 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 initially was introduced by Stewart Mayers and Nicholas Majluf /11./. The authors use the
microfounded 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 information about the actual
perspectives of the acquirer. Its 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 explanation of some particular
behavior 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 acquirer right after the deal announced. The new shareholders (former
target owners) would get less paid in this case.
17

One more interesting paper which describes the problem of information asymmetry in the
context of M&A deal financing is the article 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 choosing 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 substantial probability of adverse selection
and excessive 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 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 Western-style (IFRS). This financial reporting transformation leads
to the increase of information asymmetry. Despite the fact that it should be only temporary issue, many
emerging economies have this problem.
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. Consequently, if the acquirer foresees that 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 increase 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 requires to use almost the same explanatory variables for both theories
proof. These variables are Book-to-market value, Tobins 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 identification problem.
18

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
misevaluation. In more recent studies there was a valid theoretical explanation 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 choice 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 post-merger investments positively influence on the
choice of stock as a method of payment. In more recent paper /4./, Di Giuli studied this question again,
with another 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 extension 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 long-term performance
of the acquirer and perceive the high quality of the deal. Due to these reasons, the target agrees to the
deal with overpriced acquirer.
After analyzing 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. Consequently, 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
19

treated when checking this hypothesis is the level of diversification of the company. Its 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 attention 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 often 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 M&A
deal structure in the context of the method of payments.

Addressing the question of the impact of state ownership on the acquirers performance: the
direct one and the indirect one (via the method of payment)
o the indirect impact of state ownership of the acquirers performance
The paper one would like to view in detail is the article of Agyenim Boateng and 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 situation was very close to the former USSR. In the previous decade, the
Russian economy had a lot of substantial 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 acquirers 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
20

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 institutions remain imperfect. It also grows fast: since 1998 untill 2011 there were almost
23 750 deals completed in China.
The researchers hypothesized 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
question of choosing cash or stock as a method of payment. This paper would be considered as an
empirical research which continues and develops 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 financial 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 Chinese companies normally 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, therere 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
presence 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
21

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 announcement, 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
12,21
14,24
BHAR
%
% 8,85%
Benchmark 2
13,28
15,31
BHAR
%
% 8,47%
Benchmark 3
29,37
BHAR
6,12% 6,50%
%
Table 4. Source: [1]
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 periods. 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 theres a few disclosure on financial markets. The same can not
be said for the post-event period theres no absolute proof.
The direct impact of state ownership on the acquirers 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. Thats 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
22

good motivation of such variation was provided in the paper of Min Du and Agyenim Boateng /5./
along with Bilei Zhou et al. /15./. Particularly, in these papers, the authors mainly address the question
about influence of state ownership on domestic and cross-border M&A. Both authors emphasize the
importance of this studying since its 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 employment, rather than
maximize the profit). Another reason why the company can be inefficient under the state ownership is
the fact that such companies usually 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, therere 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 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 advantages, which is
therefore reflected in the price of stock of the acquirer. Nevertheless, the effect of state ownership on
the acquirers performance is still controversial and should be studied for particular market in a greater
detail.

23

Section 2.3. 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 longterm. Such turn will be guided by the paper 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 acquirers 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 explanatory 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 availability of
financial resources, one would included this variable in the model, measured as a percentage of shares
owned by the government (either federal, regional or local). Theres 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 Tobins Q ratio. The particular definition
is provided in the table. In fact, the Tobins Q ratio reflects the market valuation of the company. In the
24

previous research it was revealed that the company with higher Tobins Q ratio more often pay in stock
than in cash. This suggestion forms the first hypothesis:
H2: The company with higher Tobins Q will be more likely to pay in stock for a target.
Following the theory of investment 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.

t label of Full

ariables
Own

age

name

of

the Description

variables
State ownership

the percentage of shares owned

by the government

Leverage

(longterm book value of debt )

book value of total assets

Tobins Q ratio

(market value of equity+ book value of debt)

book value of total assets

Capital investment

latSize

sif

Logarithm of
Size
Diversified deal

sets

Logarithm of Assets

the amount spent as capital investment

the postmerger period ( 2 years)
transaction value of deal
ln
book value of total assets 1 fiscal year ago

1,industries

{{ 0, otherwise
the book value of assetsthelast fiscal year
before the acquisition

Relative

Theory
referenced
Availability
of financial
resources
Availability
of financial
resources
Asymmetry
of
information
Investment
opportunities
Controls
Controls

Controls

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= 0 + 1 StateOwn+ 2 TobQ+ 3 CapEx+ 4 Diversif + 5 LnRelatSize+ 6 LnAssets+

25

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 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 (accounting) 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, analyze 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:

(
[

s+T

ns

Rref ,T =

t =s

i=1

1+ Ri ,t ) 1
ns

n s 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

BHAR i= ( 1+ Ri ,t )Rref , T 1
t =s

26

BHAR i - 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 reference portfolios, 50
size/ Book-to-Market value reference portfolios and the most complicated one the size, Book-toMarket value and Industry control portfolio. One may require the particular way of constructing these
benchmarks, since it was created in a detailed and accurate methodology. One might provide a step-bystep explanation 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 capitalization of the tradable companies from the sample.
2. For the beginning of each year range the companies by the market capitalization in the
descending order to form 10 size deciles, where the first decile has the companies with the
largest capitalization and the last decile represents the companies with the smallest
capitalization.
3. Calculate the return of each company from each decile for each year during the period of (-36
4.

month, + 60 month) from the January of the particular year (for example, 2006).
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 ascending 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 capitalization, one would get (10 deciles * 5
quintiles) 50 size/ Book-to-Market value reference portfolios. Then again one combines this 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 present the regression model:

BHAR s= 0 + 1 StateContrAcq+ 2 StateContrTarg+ 3 Cash+ 4 Stock + 5 Diversif + 6 LnRelatSize+ 7 LnAssets+

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 state-controlled company.

27

28

Part 3. 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, theres 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 behavior 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. Therere 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, therere
another theories that should be considered when doing empirical estimation, such as the theory of
information asymmetry 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 acquirers stock for the pure private and statecontrolled companies. The sign of the relationship is difficult to predict at the moment.
Finally, the completed research after this proposal should necessary contain careful 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 managers, since it reveals the actual
particularities of M&A deals in the presence of a state control.
29

30

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2.

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4.
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6.
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10 largerst M&A deals in 2014

31

The object
of
transactio
n

Sector

Typ
e of
the
deal

Acquirer

1 "NNK-Aktiv"

Oil & Gas

"Stroygazk
2 onsulting"

Transport &
Infrastructu
re

Alliance
Group/"N
M NK"
Private
investor
Ruslan
A Baysarov

3 "NNK-Aktiv"

Oil & Gas

A "NNK"

4 "TGK-9"

Energy &
Utilities

Volzhskay
A a TGK

USM
Holdings
5 Ltd

Metals &
Mining

Managem
ent of
A USM

UgraGazPer
6 erabotka
Oil & Gas
Polyus Gold
Internation
7 al Ltd

Metals &
Mining

SIBUR
A Holding
Private
investor
Oleg
A Mkrtchan

Target

Alliance
Group/"N
NK"
Private
investor
Zyad
Manasir

Alliance
Group

KSHolding
Private
investor
Alysher
Usmanov

Rosneft
Halyard
Global Ltd

Acq
uire
d
Shar
e

joint
comp
any,
60:4
0

De
al
val
ue
(U
S$
bl
n)

horizona
l
integrati
on +
econom
y of
6 scale

44%

60%

4,2

n/a

Comme
nts

1,8
4

strategic
investm
ent
horizona
l
integrati
on +
econom
y of
scale
Reorgani
zation,
vertical
integrati
on

49%

strategic
investm
1,8 ent
Rosneft
sold
seconda
ry
manufac
1,6 turing

19%

strategic
investm
1,5 ent

10%

32

10
Not
e

United
Media &
Capital
Diversif
Telecommu
Mail.ru
Partners
cation
Vkontakte
nications
A Group Ltd Advisory
48% 1,4 motives
Private
Media &
investor
strategic
Telecommu
LetterOne Gleb
1,1 investm
Altimo
nications
A Group
Fetisov
14%
5 ent
Sumeru
extensio
Polymetal Gold BV;
n of
AltynAlmaz Metals &
Internatio Sumeru
100
resourse
Gold Ltd
Mining
A nal plc
LLP
% 1,1 base
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. Source:
own research.

Total value of deals in different industries (US$ bln)

2013

Plot 3. Source [8]

2014