Mergers and Acquisitions in Sin Industries

Abstract

Ph. D. ThesisMergers and acquisitions (M&A) have the potential to generate value for firms and their shareholders by gaining synergy from targets. However, the empirical evidence suggests M&A destroy firms’ value and shareholders’ wealth instead. The reason is that the acquirers are overwhelmingly motivated by value-decreasing motives (e.g., market-timing, empire building). The sin industries (e.g., tobacco, alcohol, and casino) are different from other industries due to their harmfulness and devastative consequences to society. Because of this characteristic, sin industries are stigmatized and neglected by society and investors. This negative attitude towards sin industries poses a significant negative impact on sin businesses (e.g., elevating the cost of capital, see Hong and Kacperczyk, 2009). Accordingly, it is essential for sin firms to improve their images. Shedding light on this behaviour, this thesis examines performance and motives of sin M&As in the G20 countries from 1993 to 2017. We show that sin firms try to improve their images by making value-increasing acquisitions. In relative terms, the sin acquirer market returns are more favourable than non-sin acquirer returns. Moreover, prior literature shows evidence that societal attitudes towards sin industries differ across countries. Classifying the G20 sample into high and low social norm countries, we extended prior literature by examining how social norms impact sin and non-sin firm M&As. We explore three angles of sin mergers and acquisitions: short-term market reaction to M&A announcements, long-term performance after acquisitions, and the motives behind M&A decisions. In the first empirical chapter, we find that the sin acquirer cumulative abnormal returns (CAR) at M&A announcements are more favourable than non-sin acquirer CARs. The difference in CARs across sin and non-sin acquirers is further elevated in high relative to lowsocial-norm countries, where people are less concerned about the negative consequences of sin industries than other countries. In the second empirical chapter, we find that the long-term operating performance of sin acquirers are not improved. However, the sin acquirer’s shareholders gain significantly positive returns in the long-term after acquisitions. Moreover, the sin acquirer returns are more favourable than non-sin acquirer returns. Interestingly, the difference in returns across sin and non-sin acquirers is further elevated in high relative to low-social-norm countries. In the last empirical chapter, we find that sin acquirers are inspired by market-timing and synergy motives. However, sin acquirers are less motivated by market-timing than non-sin acquirers. The difference in market-timing motive between sin acquirers and non-sin acquirers iii is greater in high-social-norm countries, where people are more concerned about the negative effect of the sin industries In conclusion, we find evidence that the sin firms improve their image by involving in better M&A deals than non-sin acquirers. As a result, the market reactions to M&A announcements of sin acquirers are more favourable than for non-sin acquirers. As there is no differential impact on operating performance, the more favourable return of sin acquirers likely derives from their better motives (i.e., less market-timing). Interestingly, the difference in market performance and motives across sin and non-sin acquirers is further elevated in high relative to low-social norm countries