Cross-Border Acquisitions and Shareholder Wealth: Evidence from the Energy and Industry in Central and Eastern Europe*

Article excerpt

We look at the wealth generated for shareholders of energy assets in Central and Eastern Europe (CEE) by the announcement of cross-border mergers or acquisitions involving a bidder from a Western industrialized country between 1995 and 2005. The impact on both the performance improvements at the firm level as well as on an industry and economic level of foreign ownership of the energy assets in CEE are discussed. The main driver behind the positive effect is the industrial relatedness in acquiring CEE energy assets, while bidder experience and the relative size of the acquired stake do not impact the results significantly.

Wir betrachten die Werteffekte nach Ankündigungen von grenzüberschreitenden Akquisitionen von Unternehmen der Energiewirtschaft in Mittel- und Osteuropa zwischen 1995 und 2005, bei denen jeweils ein westeuropäischer Bieter einbezogen war. Sowohl der Einfluss auf die Unternehmensperformance als auch auf den ausländischen Anteilsbesitz auf Branchenebene wird diskutiert. Als Haupttreiber des positiven Werteffekts kann die Branchenbeziehung ausgemacht werden, während M&A-Erfahrung und die relative Größe des Kaufobjekts keinen signifikanten Einfluss auf weisen.

Key words: cross-border mergers and acquisitions, capital market integration, corporate control, energy industry

(ProQuest: ... denotes formulae omitted.)

1. Introduction

To further catch up in economic development, Central and Eastern European (CEE) countries had to overcome the bottleneck of energy supply. The relative need for energy in CEE countries was far higher than that in other OECD countries. In 1996, Hungary, for instance, required four and Poland and the Czech Republic eight times as much primary energy production (measured in relation to GDP) as the reunified German economy. A major part of this need could be contributed to the energy sector itself. The economic incentives for efficiency were problematic. Remote from the market priced fuels and largely subsidized electricity tariffs for consumers were conditions which could not sustain in a market-base energy sector (Pesic/Ürge- Vorsatz 2001).

The search for efficiency gains involved substantial privatization programs. Despite the different privatization procedures applied, the CEE countries agreed on selling large stakes in the state-owned enterprises of the energy sector abroad, since it was seen as a strategic infrastructure for future growth, and domestically there was a lack of required capital sources to restructure the industry and to finance necessary capital expenditures. Consequently, there are a lot of utilities in CEE countries which were to a smaller degree privatized via IPOs (Ahnefeld et al. 2008) and then sold partly to exchange-listed Western companies. Beyond the generation of high transaction prices, the privatizations were also motivated by ecological aspects, which were easier to address for foreign acquirers. The local industry was regarded throughout the entire value chain as the largest polluter in CEE countries (Urge- Vorsatz et al. 2003). However, the upgrading process of the energy plants and infrastructure to EU standards and the implementation of ecological improvements took time and instant profits were unlikely (Kavanagh 2002).

Although reform of the energy industry is considered to be one of the major contemporary global industrial challenges (Joskow 1998), the restructuring exigency of the energy industry is particularly severe in CEE countries. The privatization of public utilities in developed Western economies started as early as the 1980s and has been followed by an ongoing consolidation through mergers and acquisitions (M&As). This process has created a few large private oligopolistic (or joint public-private) utility providers with considerable financial strength and geographical reach. When CEE economies started privatization programs in the energy sectors, firms based in Western countries took the opportunity to expand and invest in the newly privatized firms. …