Lamriui HichamLamriui Hicham

Sipei Zhang Sipei Zhang

Nihat Aktas, Jean-Gabriel Cousin, and Jun Yao (Chris)

Zhang

AprilApril 20122012

In response to currency exchange rate risk, firms often use derivatives to hedge against currency risk (Stulz, 2004; Bartram, Brown, and Fehle, 2009).

The hedging by the use of derivatives seems to be relatively modest and it's not always possible, especially against long-term exposures (even if it is possible it can be expensive due to rollover).

Therefore, firms tend to include other hedges, such as operating hedge.

Financial Vs. Operational Hedging Financial Vs. Operational Hedging

Kim, Mathur, and Nam (2006) investigate a sample of 424 U.S. firms and find that operational hedging increases firm value (as proxied by Tobin’s q ratio) by 4.8–17.9%.

Allayannis and Weston (2001) and Carter, Rogers, and Simkins (2006) document that it leads to a 5–10% increase in firm value.

Eckbo, and Thorburn, (2008) document an increase in cash flow uncertainty encourages U.S. firms to integrate vertically, which in turn suggests that vertical M&As represent operational hedging mechanisms that reduce the cost of increased uncertainty.

Value Creation of Value Creation of Operational HedgingOperational Hedging

If currency risk management is one of the drivers of the decision to implement a cross-border takeover, the value of the acquirer should be less sensitive to the fluctuations of a target currency after its cross-border deal.

General hypothesis General hypothesis

Sample constructionSample constructionPeriod: 1999 => 2010.

Source: Thomson Securities Data Companies M&A database.

Population: Listed French firms in SBF 250 in the period with available stock price in database.

Deal size: greater than 1 million euros and greater than 1% of the acquirer size.

% Control: less than 50% before the deal and 100% after the deal.

Target: Outside euro zone.

Size: 152 firms.

Computation of the Currency ExposureComputation of the Currency Exposure

Return for

acquirer

Return in stock

Market

Return foreign

exchange rate

Regression

residual

Exposure to the target

currency

Weekly stock price and exchange rate from Thomson Reuters

ESTIMATION WINDOW : From Week -52 to Week to -1

Interpretation of Regression Coefficients Interpretation of Regression Coefficients

B2 = 0 => if the firm has no currency risk either naturally or by financial and/or operational hedge.

B2 ≠ 0 => the firm is bearing currency risk.

Rfx < 0 => depreciation of the domestic currency in the last period => benefit to exporters.

Rfx > 0 => appreciation of the domestic currency in the last period => benefit to importers.

Interpretation of Regression Coefficients Interpretation of Regression Coefficients

Event study and Abnormal Stock PerformanceEvent study and Abnormal Stock Performance

Faction, McConnell, and Stolin (2006) report an average acquirer CAR of 1.13% in an international sample of cross border deals.Aktas, Cousin, and de Bodt (2011) document an average acquirer CAR of 2%.

How fare this value How fare this value creation is due to creation is due to the Operating the Operating hedge?hedge?

Difference-in-Differences Difference-in-Differences ApproachApproach

Two samples: control group & treated group.

β2,i,tp: exposure coefficient to the target currency.

ci & cy : control variable.

TP: Treated Period represents a time series dummy before and after the takeover announcement.

TG: Treated Group is a cross sectional dummy, 0 if control group , 1 if treated group.

α3: represents the D&D estimator so the real impact of the takeovers announcement on the risk.

α2: represents the cross-sectional currency risk difference.

α1: represents the unexplained currency variation after the treatment.

Statistical results : Impact on Currency Statistical results : Impact on Currency ExposureExposure

The exposure of currency risk computed:

DD framework with the equation:

Thus, an M&A announcements will reduce the risk exposure for the Net importers and the Net exporters (in

absolute value).That is consistent with the idea that the cross boarder transactions represent a hedging

method.

β>0=Net importers β<0=Net exporters

Before After Before After

0.498 0.262 -0.473 0.064

Coefficient Net importers

Net exporters

α2 (TP=0) 0.451 -0.449

α3 (TP=1) -0.301 0.546

The Treated Group is

more risky (|α2|

>0).

Statistical results : Value Event Statistical results : Value Event StudyStudy Dependent variable: CAR [-1;+1] around the announcement of M&A, for both net

importers and net exporters. Exogenous variables: Δ|β2|= absolute difference between the currency exposure before

and after the announcement .Other control variables like: deal size, relative size, dummy stock, etc.

Coefficient of Δ|β2|= -0.0168. So abnormal return is linked with a decrease of risk exposure.

The CARs increase when the currency exposure decrease (in absolute value) due to an announcement from a net exporters.

Why these takeovers impact net exporters solely?:

According to some authors, it is optimal for a multinational to realize operational hedge when exchange rate uncertainty and demand uncertainty are high..

The exporters have these two features, contrary to the importers!

Statistical results : Value Event Statistical results : Value Event StudyStudy

Control variable

Estimator

Significant?

Comments

Relative size Positive Yes The greater the target size is, The greater are the CARs.

Stock Negative Yes The payment by stock give lower CARs for the acquirers.

Private target Negative Yes Give a lower CARs than public target , because they seem to be more risky (lower information).

US target Positive Yes Like other countries, the US target have a positive impact on the acquirer wealth.

Statistical results : Value Event Statistical results : Value Event StudyStudy

ConclusionConclusionA Cross border Merger is an efficient tool A Cross border Merger is an efficient tool

used by French (or foreign) firms to hedge used by French (or foreign) firms to hedge against currency exposure;against currency exposure;

Acquirer firms seem to have higher Acquirer firms seem to have higher currency risk than the other firms;currency risk than the other firms;

The empirical study shows that there is a The empirical study shows that there is a significant decrease in risk exposure after significant decrease in risk exposure after the merger which is a value driver for the the merger which is a value driver for the acquirers;acquirers;

The value creation is stronger for net The value creation is stronger for net exporters due to reduction in demand exporters due to reduction in demand uncertainty and exchange rate uncertainty.uncertainty and exchange rate uncertainty.