Controlling minority shareholders' effect on value creation in M&A transactions

Sammanfattning: We examine the effect of having a controlling minority shareholder (CMS controller) - who holds a large fraction of a firm's voting rights without a proportional investment in the cash flow rights - on the extent of value creation from M&A transactions in Sweden. The data sample consists of 263 M&A transactions between 2003 and 2013, of which 109 were undertaken by firms with a CMS controller. Whether value is created or destroyed through M&A transactions ultimately depends upon whether the CMS controller uses its control to ascertain value creating M&A transactions or misuses its control to extract private benefits at the expense of minority shareholders. Value creation is measured by examining aggregated abnormal return of the acquiring firm, both in the short run and in the long run. Results suggest that investors initially expect that the transaction is value-destructive. The initial expectation seems to reflect the actual long run performance of the acquiring firm, as we also document a negative effect from the level of separation on long run aggregated abnormal return. However, our results show that it is not separation per se that causes inferior acquiring firm performance, as the negative effect only results from high levels of separation, suggesting that the negative entrenchment effect of CMS controllers arises first when the level of separation is high. Furthermore, we document a positive effect on acquiring firm performance from having other large shareholders - blockholders - present in the ownership structure. The result suggests that blockholders in Sweden adhere to a monitoring role and thereby are able to discipline the CMS controller from making acquisitions motivated by private benefits.