Determinant Factors of M&As in Emerging Economies: Comparison
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Please note this is a comparison between Version 2 by Camila Xu and Version 1 by George Marian Aevoae.

Mergers and acquisitions (M&As) is an umbrella term for many types of transactions in which one organisation or the assets of one organisation become a part of another organisation or two organisations become one.

  • minority acquisitions
  • dividends
  • Bucharest Stock Exchange
  • financial performance

1. Introduction

Researchers around the world have taken an interest in examining the external growth strategies of companies, focusing on mergers and acquisitions (M&As), with emphasis on those involving companies located in developed economies (Park 2019; Yang and Deng 2017; Lin et al. 2009; Cheng and Yang 2017; Caiazza et al. 2017). There are also studies that prove the choice for these types of economies that host the acquiring or the target companies involved (Lucas 1990; Aevoae et al. 2019). On the other hand, globalisation and rapid economic growth determined a new strategic approach for companies, which have started to search for investment opportunities in emerging economies. As a result, the volume and number of M&As involving companies located in emerging markets recorded a notable increase, becoming comparable with developed economies (Zhou et al. 2016).
As external growth strategies, M&As are usually discussed as a whole, without a difference between mergers and acquisitions being made, due to the fact that the perspectives from which they are studied impose a common approach (when they are seen from a macroeconomic or geographic perspective) or separate (when they are analysed from a managerial or accounting point of view). Mergers and acquisitions (M&As) is an umbrella term for many types of transactions in which one organisation or the assets of one organisation become a part of another organisation or two organisations become one. On the other hand, Valdone et al. (2020) distinguish between three types of deals related to M&As: acquisitions, which involve an acquirer that purchases at least 50% plus one shares in the target company; minority stakes, representing stakes that are purchased but lower than 50%; and development capital, where the specific type of minority stake investment typically involves venture capitals or private equity firms investing in early stage companies, providing new financial resources and managerial expertise with the aim of supporting their growth. When focusing on the acquisitions which do not lead to the control of the target companies, the motives that determine the acquirers to purchase stakes are related to sharing the profitability of the acquired company, sharing technology, or developing joint products (Nain and Wang 2018). Being used with the purpose of improving operating efficiency, the minority acquisitions may lead to reduced costs, to mitigation of the financial constraints, to dividends, to an increase in profitability, or to facilitation of innovative activities (Lee et al. 2006). Kabbach de Castro et al. (2021) discuss the impact of financial constraints in the increase in the number and value of minority acquisitions, especially in emerging economies, due to economic uncertainties and less developed capital markets. Other authors (Kengelbach et al. 2020) consider that minority deals are becoming more common, being driven by the emergence of large corporate ecosystems, in case of which the suspicion for takeover is limited or unlikely. As support for this opinion, it must be mentioned that, in 2020, this type of transaction represented 35% of all mergers and acquisitions (M&A), up from 20% in the 1990s (Macoris et al. 2023).
Hoskisson et al. (2000) identified, in their study, a list of 64 emergent economies, based on criteria related to GDP, GNP per capita, and inflation rate. Khanna and Palepu (2010) draw a line between emerging economies such as BRICS, which have had an economic growth higher than the one of the developed economies, and the emerging economies as a whole, characterised by cheap workforce and resources, but also by corruption, bureaucracy, the risk of receivables non-collection, poor infrastructure, and misevaluation of investment opportunities. As officials of the International Monetary Fund (henceforth FMI), Duttagupta and Pazarbasioglu (2021) assert that emerging economies are generally identified based on such attributes as sustained market access, progress in reaching middle-income levels, and greater global economic relevance. Nenu et al. (2018) and Haroon and Rizvi (2020) consider the dimension of a stock market as a determinant for emerging economies, described by indicators such as trades, volume, market capitalisation, and number of transactions. In this respect, emerging economies are mainly characterised by a rapid pace of economic development and by governments which have adopted market-based policies that favour economic liberalisation and the adoption of a free-market system.
As a result of more than 15 years history of being a functional market economy, Romania is considered by many authors (Albu et al. 2013; Albu and Albu 2012; Borlea et al. 2017; Poenaru 2021), as well as by financial institutions (International Monetary Fund 2019), as an emerging economy. Romania is a country that passed multiple stages to reach, in September 2020, the status of a secondary emerging market, granted by FTSE Russell (FTSE Russell 2020; Dicu et al. 2019), despite its controversial evolution, proven by the delay and the various methods of privatisation applied by the Romanian government, which ultimately boosted the market for corporate control as nowhere else in Central and Eastern Europe (Pop 2006).
GDP is one of the pillar stones which made it possible for Romania to achieve the emerging economy status (World Bank 2022). The 2000s were influenced by its membership in NATO in 2004, as well as its accession to the European Union in 2007, with both events leading to major increases in GDP per capita (11.06% and 11.14%, respectively). After a robust cumulative growth in GDP of 30.82% in 2000–2005, the effects of the global economic crisis also began to manifest in Romania, resulting in GDP declining in 2009 (5.52%) and again in 2010 (3.90%). After that, in the last years, the GDP of Romania recorded a constant growth, with the maximum being reached in 2017 (7.32%) (World Bank 2022). The year 2020 was a difficult year for Romania, with the pandemic leading to a decrease of 3.86% in GDP and of 3.43% in GDP per capita. Despite these data, Romania continues to have one the lowest minimum wages in the European Union (EUR 515 gross salary in 2022), being followed only by Bulgaria (Eurostat 2022).
The second pillar, the stock market, also played an important role that allowed Romania to increase its rank towards achieving the emerging economy status, mainly because this market is representative of the FTSE Russell criteria. The Bucharest Stock Exchange (henceforth, BSE) reopened on 21 April 1995. The first years (from 1995 until 2004) were characterised by slow growth, followed in 2004 by an increase of 316.76% in volume and of 280.20% in market capitalisation. Although the GDP of Romania recorded a significant decrease in 2009, the financial market reacted in 2008, anticipating the crisis with a decrease in market capitalisation of 46.84%. After the years of the financial crisis, in 2013, the market capitalisation recorded an excellent revival of 36.95%, and it has continued to constantly grow since then. In 2022, it reached a number of 83 listed companies on the main market; 278 listed on the alternative market AeRO (Alternative Exchange in Romania); and 14 companies listed on the SMT International, dedicated to financial instruments admitted to trading on a regulated market or an equivalent market with a regulated market in a third country (Bucharest Stock Exchange 2022).

2. Determinant Factors of M&As in Emerging Economies

In Garzella and Fiorentino’s (2017) opinion, when companies are involved in M&As, they are looking to gain synergy as an increase in future economic benefits. Thus, the performance of the target company before, during, and after the transaction is closed is a significant factor in assessing the synergistic success of M&As (Rozen-Bakher 2017; Rozen-Bakher 2018). Beyond this objective, minority acquisitions, which refer to acquisitions of equity stakes where acquirers purchase less than 50 percent of target companies’ shares (Pinelli et al. 2020; Bostan and Spătăreanu 2018; Contractor et al. 2014; Ouimet 2013), have the purpose of pursuing value creation opportunities in order to grant a certain degree of influence over the target company’s decisions (Stepanov 2019) or to access assets or innovation (Gao et al. 2019; Lee et al. 2006). Thus, the concept of minority acquisitions is subject to discussion, given the fact that, in practice, there can be particularities, mostly related to the volume of shares purchased by acquirers in target companies, which may allow a specific extent of the influence (or lack thereof) of the acquiring company. Also, Contractor et al. (2014) consider minority acquisitions preferable in the cases of lower institutional distance between the nations of the involved companies and in the case of high cultural distance. In other words, when the institutional environment in the two countries is similar, but the local culture is not, the acquirers do not want to control target companies. The reasons for an acquirer to purchase a minority stake are multiple and quite different, ranging from solving financing constrains to issues related to the access of the target companies to the capital market. According to Liao (2014), there are three motives that lead to purchasing minority stakes in target companies, motives that can be related to both acquirers and target companies: contracting, financing, and governance motives. The contracting motive is related to the relationship between supplier and customer and the way it can be improved or cover some shortcomings, mitigating incomplete contracts and facilitating cooperation between two independent companies (Lee et al. 2006). In the case of a financially constrained target company (financing motive), the results are mixed. There is evidence that the minority acquisitions work like a guarantee for the capital market or for financial institutions (Hertzel and Smith 1993), while there is research which proves that non-controlling acquisitions do not seem to alleviate these financial constraints (Urzúa 2012). Kang and Kim (2008) consider corporate blockholders (owners of stock of shares) as monitors of large shareholders, with whom they share control, a fact that gives them a governance motive to purchase minority acquisitions. Ouimet (2013) considers that minority acquisitions are more likely when the target’s valuation is especially uncertain; integrating internal capital markets will be costly; and consolidating earnings will lower earnings per share. In search of purchasing shares in a target company, an acquirer has to answer several questions: In what type of companies does it intend to invest? Is it interested in the profit or loss of the target? Should it belong to a specific sector? The deal value that is paid in an M&A depends on both target and acquirer, but the latter is the one who pays the price, and the acquired company should be the one that provides enough motives to be chosen. In this context, the target company accounting figures may justify the opportunity of an investment in terms of profitability and revenues that reflect the M&A success (Rozen-Bakher 2017; Sirower and Lipin 2003). Seeing the synergy success in terms of revenue increase is more of a managerial approach than an accounting one, given the fact that the decrease in costs may also lead to profitability in terms of accounting statements, but the revenue increasing may be connected to increase in market share (Bauer and Matzler 2013) or in innovation (Wubben et al. 2016; Aevoae et al. 2019). Also, the success of an M&A can be assessed through the degree in which the financial targets are met in a time frame, established during the pre-acquisition phase, in terms of expected returns and costs (Dilshad 2012). Also, the acquirer has to decide if these investments are strategic or tactical (Payne 1987), depending on the outcome it expects: to take over the target company or to gain financial revenues, under the form of dividends. Considered by Urzúa (2012) non-controlling blocks, the first type of acquisitions allows for the acquirers to purchase a significant stake in the target company, which allow, in the long run, the takeover of the target company through repetitive acquisitions. Between 1995 and 2015, almost 20% of the world M&As were two-stage acquisitions, in which the acquirer first purchased a minority stake, followed by a majority stake (Vansteenkiste 2020).

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