November 12 2012 - SIEDS · M&A announcements involving Latin American bidders were found in this study. From this ... Sarah Lee by Bimbo, Inco by Vale do Rio Doce, Wavin by Mexichem,

November 12 2012

Daniel Guardiola Fernández

MSc in Corporate Finance

Tutor: Professor Florencio Lopez de Silanes

« EDHEC Business School does not express approval or disapproval concerning the opinions given in this paper which are the sole responsibility of the author. »

Cross-Border M&A and the impact of cultural differences. The Latin American case.

November 12th 2012

2 Abstract | Beneficiario Colfuturo 2011

Abstract

Over the last decade, the Latin American Cross-Border M&A activity experienced a

significant increase in terms of volume, value, and complexity. Between 2002 and 2011, 1483

M&A announcements involving Latin American bidders were found in this study. From this

sample 344 were targeting companies in a foreign country. With the purpose of measuring to

what extent CB-M&A can be a catalyst of value creation or destruction for the bidder in the

short-term, the event study methodology was employed in a sample of 47 observations. I

found that on average, the market reaction is positive after the announcement, leading to the

short-term value creation for the Latin American acquirers. Regarding the allocation of

investments in terms of geographies, the outcome shows that bidders tend to favor countries

with similar cultural values and geographically close. The Hofstede’s cultural dimensions

along with additional factors such as language, legal origins, and religion were analyzed in

order to evaluate to what degree cultural differences affect cross-border acquisitions.

However much the results are not statistically significant, it appears that cultural differences

tend to have a negative effect on the bidder’s short-term performance.

Keywords: Cross-Border M&A, Latin America, and Culture.

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Beneficiario Colfuturo 2011 | Table of Content 3

Table of Content Abstract ................................................................................................................................................................................... 2

Table of Content................................................................................................................................................................... 3

1. Objectives and Background ......................................................................................................................................... 6

1.1 Introduction ............................................................................................................................................ 6

1.2 Research Questions .............................................................................................................................. 9

1.3 Expected Results ................................................................................................................................. 10

1.4 Related literature ................................................................................................................................. 11

1.4.1 Cross-Border M&A Literature .................................................................................................... 11

1.4.1.1 M&A drivers ................................................................................................................................. 11

1.4.1.2 M&A waves .................................................................................................................................. 12

1.4.1.3 M&A evolution in Latin America .......................................................................................... 14

1.4.1.4 Risks in Cross-Border Mergers and acquisitions ............................................................... 16

1.4.2 Cultural differences Literature .................................................................................................... 17

1.4.2.1 The Effect of Cultural distance in the Cross-Border M&A activity ............................. 17

1.4.2.2 How cultural values affect finance ......................................................................................... 19

1.4.2.3 Empirical evidence on cultural differences .......................................................................... 19

2. Data & Methodology .................................................................................................................................................. 24

2.1 Data Selection ...................................................................................................................................... 24

2.1.1 Selection criteria .............................................................................................................................. 26

2.2 Methodology ........................................................................................................................................ 30

2.2.1 Event Study Methodology ............................................................................................................ 31

2.2.2 Multi-variable Model - Regression analysis ........................................................................... 38

2.2.2.1 Cultural variables ......................................................................................................................... 39

2.2.2.2 Geographic variables .................................................................................................................. 45

2.2.2.3 Economic variables ..................................................................................................................... 45

3. Analyses of the Results & Interpretations ............................................................................................................ 48

3.1 Research question 1. Cross-Border M&A performance. ........................................................ 48

3.2 Research question 2. - Geographic distribution and volumes evolution ............................ 53

3.3 Research question 3 – Cultural distance effects ........................................................................ 60

4 Conclusions ..................................................................................................................................................................... 64

5 Limitations & Further Research ............................................................................................................................... 66

5.1 Limitations ............................................................................................................................................ 66

5.2 Further Research ................................................................................................................................. 67

Case Study - Sonda, IT Services in Latin America ................................................................................................ 68

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4 Table of Content | Beneficiario Colfuturo 2011

Company Overview................................................................................................................................... 68

Latin American IT Market ...................................................................................................................... 69

Regional Footprint ..................................................................................................................................... 70

Business Model .......................................................................................................................................... 71

International Expansion into neighboring geographies via M&A ............................................... 73

Risks involving the future international expansion via M&A ...................................................... 76

Conclusion ................................................................................................................................................... 77

References ........................................................................................................................................................................... 78

Academic articles & books ..................................................................................................................... 78

Banks & M&A boutiques - research articles ..................................................................................... 81

Internet Data ................................................................................................................................................ 81

Appendix ............................................................................................................................................................................. 82

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Beneficiario Colfuturo 2011 | Table of Content 5

List of Tables

Exhibit 1 Emerging Markets M&A Activity trend __________________________________________________________________ 7 Exhibit 2 M&A Waves in the U.S (Volume) - Proxy of worldwide evolution ___________________________________ 13 Exhibit 3 M&A Waves in South America (Value of deals) ______________________________________________________ 15 Exhibit 4 M&A Waves in Central America (value of deals) - including Mexico _________________________________ 16 Exhibit 5 Cross-Border Mergers & Acquisitions literature________________________________________________________ 17 Exhibit 6 Characteristics of the sample & M&A Industry in Latin America _____________________________________ 25 Exhibit 7 Latin American M&A and CB-M&A deals (2002-2022) _______________________________________________ 26 Exhibit 8 Sample of Cross-Border M&A Bidders _________________________________________________________________ 27 Exhibit 9 Filtered data & sample selection ________________________________________________________________________ 28 Exhibit 10 Distribution per sector of the sample __________________________________________________________________ 29 Exhibit 11 Event Study - Timeline _________________________________________________________________________________ 33 Exhibit 12 Market Efficiency ______________________________________________________________________________________ 36 Exhibit 13 Hofstede's cultural dimensions - Sample of countries _________________________________________________ 40 Exhibit 14 Hofstede Index - Statistics _____________________________________________________________________________ 41 Exhibit 15 Most similar and different countries in terms of cultures______________________________________________ 43 Exhibit 16. Gini Coefficient - Breakdown per country ____________________________________________________________ 47 Exhibit 17 AR's and CAR's evolution during the event window __________________________________________________ 48 Exhibit 18 Bidder's daily abnormal returns - Cross-Border M&A transactions___________________________________ 49 Exhibit 19 CAR's - Event Window (-5, +1) & (-10. +10) breakdown per geography ____________________________ 50 Exhibit 20 Bidder's daily abnormal returns - Cross-Border M&A transactions___________________________________ 52 Exhibit 21 Latin American CB-M&A deals (2002-2011) - Developed vs. Emerging Markets___________________ 53 Exhibit 22 Latin American CB-M&A deals (2002-2011) - Top 10 target countries ______________________________ 54 Exhibit 23 Hofstede's cultural dimensions between the United States and Latin America _______________________ 55 Exhibit 24 Total M&A deals in Latin America - Cross-Border vs. Local deals __________________________________ 56 Exhibit 25 Cross-Border M&A in Latin America - Breakdown by bidder's country _____________________________ 58 Exhibit 26 Cross-Border M&A - Developed vs. Emerging markets targets ______________________________________ 59 Exhibit 27 Cross-Border M&A in developed markets - Breakdown by bidder's country ________________________ 59 Exhibit 28 Cross-Sectional Regressions of CARs of Latin American firms ______________________________________ 61 Exhibit 29 Positive vs. Negative Market reactions ________________________________________________________________ 62 Exhibit 30 Coefficient of Correlation between the CAR's and the independent variables ________________________ 63 Exhibit 31 Sonda's ownership structure ___________________________________________________________________________ 68 Exhibit 32 Principal IT companies in Latin America ______________________________________________________________ 69 Exhibit 33 Sonda's EBITDA and Revenues breakdown ___________________________________________________________ 71 Exhibit 34 List of Sonda's last 5 years acquisitions ________________________________________________________________ 74 Exhibit 35 International presence of Sonda in Latin America - Revenues ________________________________________ 75 Exhibit 36 IT Market - Global spending per country vs. GDP size _______________________________________________ 76 Exhibit 37 Cross-Border M&A -Targets in developed countries _________________________________________________ 82 Exhibit 38 AR's and CAR's evolution during the E.W - Targets in developed countries _________________________ 82 Exhibit 39 Cross-Border M&A - Targets based in Latin America ________________________________________________ 83 Exhibit 40 AR's and CAR's evolution during the E.W. - Targets in Latin America ______________________________ 83 Exhibit 41 Hofstede's cultural dimensions _________________________________________________________________________ 84 Exhibit 42 Local M&A in Latin America - Breakdown by acquirer's home country _____________________________ 84 Exhibit 43 Latin American Cross-Border M&A - Observations __________________________________________________ 85

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6 1. Objectives and Background | Beneficiario Colfuturo 2011

1. Objectives and Background

1.1 Introduction

The BRICS are just a proof that a new Global order has emerged. A new system, in which

emerging economies will lead the worldwide future growth, will directly reshape the

corporate world. Emerging markets multinationals (Aybar et al. (2009)) are currently larger

and healthier than ever before. In this new geopolitical and economic scenario, the Latin

American companies are receiving financial advisory from global and regional investment

bankers, while expanding its operations into foreign countries and raising funds with

American, European, Asian and Latin American investors. The current world is not detached

in any aspect of life. On contrary, it is highly interrelated. According to an M&A survey

developed by Intralinks & Merger Market1 around 70% of the respondents were expecting a

significant increase in the Emerging market Cross-Border M&A for the following years,

especially in China and Latin America (Exhibit 1). The existence of high growth potential

combined with underpenetrated markets has become emerging countries companies’

attractive targets for regional corporations. In the same way, know-how, technology and

expertise are strong incentives for emerging corporations to expand into developed economies

via acquisitions.

The acquisition of Panamerican Beverages by Coca-Cola Femsa, John Labatt ltd. by

Ambev, Sarah Lee by Bimbo, Inco by Vale do Rio Doce, Wavin by Mexichem, Swift & Co

by JBS, Cimpor by Camargo Correa, Tablemac by Duratex, and Redecard by ITAU are just a

sample of M&A examples originated by Latin American bidders during the last decade. These

operations illustrate the diverse kind of transactions in which the new breed of Latin

1 Global M&A Survey, “An outlook on global M&A activity”, Intralinks & Merger Market, December 2011.

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Beneficiario Colfuturo 2011 | 1. Objectives and Background 7

American multinationals are engaging with the objective of consolidating its regional and

worldwide footprint through acquisitions. The strong growth in the home countries has been

used as an argument to increase their exposure to riskier geographies, sectors and markets.

Exhibit 12 Emerging Markets M&A Activity trend

Based on the current M&A trends it is possible to identify that Latin American

corporations going abroad are facing several unknown and new issues, which have increased

the complexity of these companies. Different language, cultural values, traditions, regulatory

frameworks, and legal enforcement are among the most significant challenges these

companies are starting to face. Currently many academics and financial journalists have

pointed out cultural clash issues and disparities among the key concerns regarding mergers

and acquisitions failures. The Daimler-Chrysler, case clearly illustrates this phenomenon.

Furthermore, it is remarkable to state that culture indeed plays a significant role in allocating

investment resources, determining short and long-term success and identifying suitable

2 Source: MergerMarket, “Press release, Merger Market M&A round-up for 1Q11”, April 2011.

Other EM (Value)

BRIC (Value)

EM M&A as % of global M&A

% o

f G

lob

al M

&A

Val

ue

of

dea

ls(U

SD B

n)

November 12th 2012


strategic targets. Although, managers are aware of the significance of completely

understanding the competitive environment in which the potential target operates when

developing their acquisition’s strategies, they tend to underestimate the potential effects on

integrations costs of cultural differences, leading to value destructive CB-M&A transactions

(Morossini et al (1998)).

The produced literature focused on addressing the impact of cultural differences in Latin

American Cross-Border M&A transactions is not very large. In this sense, this paper aims to

contribute to the M&A literature a multi-variable M&A analysis focused on the Latin

American region. That said, this study analyses the M&A dynamic and its trends in terms of

volume in Latin America while it determines if Cross-Border M&A transactions developed by

Latin American companies were able to either create or to destroy value in the short-term. In

addition this study analyses the effect of cultural distance with respect to M&A allocation and

the evolution of the CB-M&A transactions targeting firms established in developed

economies before and after the financial and economic crises experienced in the developed

countries (2008-2012).

Based on the fact that the CB-M&A, in Latin America, is a relatively new phenomenon

that started at the beginning of the XXI century (Casanova (2009)), until recently local

corporations hadn’t faced the costs and benefits coming from operating into different

geographies with different cultural environments. In this sense, this paper is not only targeting

academic researchers but also Latin American Investment Bankers, Investors, Management

teams, and Governments with the purpose of increasing the awareness of the potential effects

of cultural differences when Latin American companies decide to go abroad.

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1.2 Research Questions

Although, the existing M&A literature has widely analyzed the phenomenon of the Cross-

Border M&A activity around the globe, and to what extent diverse endogenous and

exogenous variables can impact this activity in terms of short and long-term performance,

volume evolution (amount of deals and value of deals), and integration processes among

others, the existing literature focused on analyzing this phenomenon in Latin America is not

very significant. In this sense, this study will focus on evaluating through empirical evidence

the following research questions:

Research question 1 – Cross-Border M&A performance: What is the bidder’s short-

term performance when publicly announcing to the market its intentions to acquire a

target located outside of the bidder’s home country (Emerging and developed Markets)?

Does the market perceive, in the short-term, Cross-border M&A operations as value

creative or value destructive?

Research question 2 – M&A Volumes: What is the impact of cultural distance regarding

the geographic distribution of Latin American Cross-Border M&A volume of deals?

What has been the evolution, in terms of volume of deals, of the Latin American firms

aiming to take over companies located in developed economies?

Research question 3 – Cultural distance effects: How are cultural similarities and

disparities affecting the Cross-border M&A Performance (short-term) of Latin

American companies acquiring targets located out of their home country?

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1.3 Expected Results

Throughout this research I’m expecting to find that the Latin American Cross-Border M&A

operations tend to favor countries relatively close in terms of geographic and cultural

components. The overall market perception and assessment of the integration challenges and

costs and the potential synergies and gains in scale should lead to a positive short-term

performance of the bidder after acquisition announcement. Moreover, cultural differences

could have a negative effect on the short-term performance of the bidders since market agents

tend to price the integration challenges and the possible overpayment into the stock price.

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1.4 Related literature

This paper will focus on two different categories of literature in order to try to address the

Hypothesis stated above: 1) Cross-Border M&A activity and the impact of cultural

differences regarding the bidder’s short term performance measured through an event study

methodology, and 2) Cultural differences among countries.

1.4.1 Cross-Border M&A Literature

1.4.1.1 M&A drivers

Within the Corporate Finance world, M&A activity has stood out as a result of its impact on

the wealth of countries, societies and industries across the globe. In this sense, academics

have produced a wide literature regarding this subject trying to analyze what drives the

dynamic of M&A deals, the performance of the acquirer and the target, and the integration

success among others subjects of research.

A vast amount of research has focused on determining the drivers of M&A deals in

terms of volumes and deals. Gaughan (2007) establishes that companies are willing to enter

into an M&A transaction with the purpose of expanding its businesses into other geographies

quicker and with a higher rate of success than through a greenfield operation. Berkovitsh et al.

(1993) identified that on average M&A operation are driven by the potential synergies,

agency issues, tax savings and managerial hubris among others. Overall synergies have been

observed as a potential mechanism to reach a higher level of efficiency by 1) decreasing fixed

costs, 2) gaining scale, 3) increasing the firm’s bargaining power with its providers, entering

into high restrictive markets in terms of regulations, 4) reducing the firm specific risk by

diversifying the revenue generation, and 5) acquiring know-how and new technology

(Shimizu et al (2008), Berger et al (2000), Steger (2007)).

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1.4.1.2 M&A waves

After having reviewed the main factors that drive M&A deals it is therefore necessary to

understand and analyze the relevant literature concerning the evolution over time of this

phenomenon and its cyclicality. Martynova et al (2008), and Gaughan (2007) have found that

M&A deals by volume and value tend to be driven by specific socio-economic events and

therefore the M&A activity is a cyclical phenomenon. Indeed they have been able to identify

5 major merger waves catalyzed by: 1) economic changes 2) changes in the regulatory and

legal environment and 3) changes in technology (Mitchel (1996), and Sauvant et al. (2008)).

Martynova et al (2008), Jensen et al (2000), and Gaughan (2007) have discovered that

the first M&A wave (Horizontal mergers) occurred in the 1895-1904 period and characterized

for being driven by the industrialization process in which large companies were trying to

dominate the entire sector in order to control the prices of the market while creating strong

barriers to entry. With the creation of anti-monopoly laws the first wave was erased and the

foundations of the second wave (1916-1929) were installed. This merger wave was basically

enhanced by the economic recovery following the end of the First World War. The end of the

Second World War marked the beginning of the third wave, in which companies focused on

diversifying its business lines and its firm-specific risk by creating large conglomerates.

During the decade of the 80s, deregulation in the markets led to the development of

new financial technologies (LBO’s) and the raise of new corporate players (Corporate

Riders). The large conglomerates were then dissolved during the fourth wave (via

divestitures) with the purpose of focusing on the core business of the companies. According

to Gaughan (2007) the end of the cold war, led to the creation of a more liberal world, brought

to the corporations the opportunity to enter into new and relatively underdeveloped markets

with a lower degree of competition. The fifth and the sixth M&A waves were not only

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enhanced by economic recovery and the creation of new technologies but also by the

opportunity to reach new markets and expand the firms operations into foreign countries by

developing Cross-Border Mergers & Acquisitions.

Exhibit 23 M&A Waves in the U.S (Volume) - Proxy of worldwide evolution

Under this scenario, managers started to experience a new challenge when integrating

foreign operations: cultural differences. Goergen et al (2004) have found that on average

local deals tend to be more value creative than foreign ones. This finding is based on the fact

that managers tend to over focus, during the due diligence, on the strategy they will

implement to materialize the potential synergies rather than measuring and avoiding the

potential impact of different cultural values (Morossini et al (1998)). During the early 2000s

the CB-M&A activity took off driven by the vast wave of privatizations in Eastern Europe,

Latin America and Asia.

3 Source: “Why Merger and Acquisition (M&A) Waves Reoccur - The Vicious Circle from Pressure to Failure”,

Ulrich Steger and Christopher Kummer, 2007.

1895-1904Horizontal Mergers

1916-1929Vertical Mergers

1960sConglomerates

1980sDivestments

1990-2000Strategic Mergers

2000s-2010sCross - Border

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The collapse of Lehman Brothers on September 2008 led to the end of the sixth wave,

specifically strengthened by the significant amount of liquidity in the market and the

consequent low cost of the money. The financial crisis and its worldwide consequences have

modified the geopolitical map in terms of economic growth and political influence. Under this

scenario, corporations from emerging markets have started to target companies located in

developed economies leading to the potential development of the seventh wave.

1.4.1.3 M&A evolution in Latin America

In Latin America the empirical evidence has also shown that the M&A phenomenon is a

cyclical activity that is highly correlated to major socio-economic events. In Exhibit 3 and

Exhibit 4 it is possible to observe the existence of a significant increase of deals by value

during the decade of the 90s. The “consensus of Washington” combined with the financial

cooperation of both the IMF and the World Bank (1990s) led to the establishment of free-

market oriented governments in the region (IDB). Under this scenario a massive privatization

of state-owned companies was developed, in regulated sector such as Utilities (CFE), Energy

(Petrobras), Telecoms (Telmex), Airlines (Aerolineas Argentinas), Mining (Vale do Rio

Doce) (Casanova (2009)). Indeed, according to the IDB in 1997 around 16% of the worldwide

M&A activities were produced in Latin America.

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Exhibit 34 M&A Waves in South America (Value of deals)

During the beginning of the XXI century, the combination of the Russian (1998) &

Asian crises (1997), along with the Internet bubble burst (2000) in the United States

negatively impacted the amount of deals in Latin America. In this sense, companies coming

from developed economies started to avoid the risks of carrying out an international

expansion and therefore the value of M&A deals fell to the levels experienced in 1995. “The

anxiety of global MNCs actually opened up opportunities for large-scale Latin American

firms, which were able to consolidate their position in local and regional markets by buying

up assets of foreign banks, oil companies, and telecom players that were nervously

withdrawing from the region”5 (IDB). It is therefore under this context that the “Global

Latinas” emerged.

4 Source: “Mergers, acquisitions, and corporate restructurings”, Patrick A. Gaughan, 2007. The data has been extracted from Thompson SDC 5 “From Multilatinas to Global Latinas, the New Latin American Multinationals”, International Development

Bank, Vice Presidency for Sectors and Knowledge Integration and Trade Sector, 2009.

70,000

60,000

50,000

40,000

30,000

20,000

10,000

1981 1985 1989 1993 1997 2001 2005

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Exhibit 46 M&A Waves in Central America (value of deals) - including Mexico

1.4.1.4 Risks in Cross-Border Mergers and acquisitions

The increasing amount of corporations expanding its operations out of their sovereign shores

with the aim of capturing growth opportunities in fast-growth international sectors has not

only led to new corporate worldwide strategies but also to the discussion and the production

of a vast amount of literature analyzing the potential risks of a Cross-Border M&A

transaction. Bakerma et al. (1996), Hitt et al. (2001) and Stulz (1990) have identified that

corporations with negative NPV M&A transactions tend to commit the following mistakes: 1)

Lack of experience and knowledge of the acquired firm’s country, 2) Poor due diligence

during the identification process and in the calculation of synergies, 3) Miscalculation of the

impact of cultural differences when integrating the operations leading to higher integrating

costs, and therefore to a lower creation of added value, and 4) Overpayment for risky assets.

6 Source: “Mergers, acquisitions, and corporate restructurings”, Patrick A. Gaughan, 2007. The data has been extracted from Thompson SDC

30,000

25,000

20,000

15,000

10,000

5,000

1981 1985 1989 1993 1997 2001 2003

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1.4.2 Cultural differences Literature

1.4.2.1 The Effect of Cultural distance in the Cross-Border M&A activity

Even though it exists a vast amount of empirical evidence and literature (Casanova (2009),

Reardon et al. (2002), Martinez et al. (2004), Pereiro (2001)) that has evaluated the M&A

world from diverse perspectives (Performance, integration processes, Impact on volume by

deal and by quantity) in Latin America, the amount of literature that focuses on analyzing the

impact of cultural differences is very limited not only in this region but in other geographies

as well (Middle East and Africa). In general, most studies have determined that indeed

cultural distance plays a significant role influencing the performance of the Cross-Border

Mergers and Acquisitions.

Exhibit 5 Cross-Border Mergers & Acquisitions literature

In the previous sections the M&A drivers and its risks were studied with the objective of

understanding the reasons why companies opt to acquire firms outside of its borders, and

Author Sample size BiddersSample

Period

CAR's

(Bidders)

Impact of Cultural

DifferencesComments

Aybar / Ficic 433Emerging

Markets1991 - 2004 -1,38% Positive N.A

Chakrabarti/ Jayaraman/Mukherjee 400 Worlwide 1991 - 2000 0.71% Positive N.A

Ahern /Daminelli /Fracassi 20893 Worlwide 1991 - 2008 N.A Negative

Culture difference

has a negative

effects on M&A

volume

Morosini /Shane / Singh 400 Italy 1987-1992 N.A PositiveItalian bidders going

abroad

Bruner 170 Worlwide 1971 - 2001 0% N.A

The sample makes

reference to 170

studies

Datta / Puia U.S 1978-1990 Negative N.A

Barkema N.A N.A N.A N.A Negative N.A

Weber / Shenkar / Rave 52 U.S 19 851 987 N.A NegativeSurvey - Managers

of Bidder firms

Kuipers / Miller / Pattel 138 Worlwide 1982-1991 -0,92% N.AForeign Bidders of

US companies

Lyroudi, Lazardis, Subeniotis 50 N.A 1989-1991 0,00% N.A

Cross-border

acquisitions by

Japanesse and

European

companies

Doukas & Travlos N.A N.A N.A N.A Positive N.A

Literature of Cross-Border M&A Activity

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therefore face challenging and uncertain legal, cultural and economic environments. Thus,

the critical aspect is to identify and determine if the expected synergies coming from a new

technology, a specific expertise, a competitive position are able to offset the costs related to

the integration of the operations.

On the one hand, Ahern et al (2011), Datta et al (1995), Barkema (2008), and Das (2003)

have concluded that cultural differences have a negative impact on M&A transactions, as a

result of the cultural clashes regarding the integration process, the high premium’s paid during

the acquisition, the poor due diligence in which cultural differences were not included in the

costs when valuing the price to pay for the target and the necessary logistics to materialize the

integration of business operations. On the other hand, Chakrabarti et al. (2005), Morosini et

al. (1998), Doukas et al. (2007), Brown et al. (1989) have found that cultural differences have

the capacity to generate a positive impact regarding the long-term performance of the

combined firm, based on the following reasons:

Bidders tend to be more rigorous during the deal selection criteria.

There’s greater diversity and autonomy, which leads to a greater degree of innovations

and the development of higher added value products and services.

The existence of “corporate culture” synergies.

However much the existing CBM&A literature on short-term returns suggests that the

targets tend to earn positive abnormal returns, when it comes to the bidder’s performance

abnormal returns there’s no consensus across the academics (Bruner (2002)). Based on the

Transnational M&A literature it is not possible to determine whether cultural differences

actually generate a positive or a negative effect on M&A activities, since most of them used a

significantly small sample, and others try to focus on a given economy, or industry.

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Nevertheless, these inconsistent results are not surprising due to the large amount of variables,

factors and specificities to which Cross-Border deals are exposed.

This study will focus and will try to determine the impact on the Latin Americans

acquirers’ stock price when announcing to the market its intentions to expand its operations

via inorganic growth into developed or emerging economies. Additionally, throughout this

study diverse cultural, geographic and economic variables will be analyzed in order to

determine to what degree cultural distance can lead to value creation or destruction for the

“Global Latinas”7 (Casanova (2009)).

1.4.2.2 How cultural values affect finance

The literature and the consequent results produced by different anthropologies, sociologies

and psychologies aiming at describing culture through values, institutions and behaviors have

been applied within the Financial field with the purpose of understanding to what extension

culture and finance are correlated. According to Stulz and Williamson (2003), culture

influences finance through the following factors: 1) The main values of a given group

determine the economic environment, 2) The creation of legal institutions is highly influenced

by cultural values, and 3) The allocation of resources and means of production is affected by

diverse cultural parameters. Even though, Stulz’s approach focuses on the foundations of

Finance, it is a very valuable source to understand how culture interacts and impacts different

financial developments.

1.4.2.3 Empirical evidence on cultural differences

Even though culture and cultural differences is a difficult topic to define and to quantify,

societies and communities tend to have specific features that distinguish them form other

groups, including race, language, religion, political system, legal origin, beliefs, values etc.

7 Extracted from Casanova, Lourdes. (2009). Global Latinas: Latin America’s Emerging Multinationals. Palgrave Macmillan, New York.

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The three most used resources of cultural values within the financial literature are the

following: 1) The World Value Survey, 2) Schwartz cultural values, and 3) Hofstede cultural

dimensions.

World Value Survey: The World Value Survey (WVS) measures values, beliefs and

traditions of around 90% of the world’s population with the purpose of understanding to what

extent these factors affect the political, economic and social environment. This survey offers

support to explain the impact of globalization, happiness, religion, political stability, and

immigration among others. In the article of Ahern, Daminelli, and Fracassi (2011) the

cultural variables used to measure its impact in the Cross Border M&A world were extracted

from the WVS as it allowed them to measure hierarchism and individualism separately and at

the same time it provided them the most recent data of cultural measures for over 100

countries.

Schwartz: The three cultural dimensions identified and measured by Schwartz8 (1994) asses

the following aspects: 1) Autonomy, 2) Hierarchy, and 3) Harmony. The first variable,

autonomy, makes reference to what extent a given population tends to be a more or less

individualistic. The Hierarchy dimension assesses the degree of equality of a given country.

The third parameter, Harmony, studies the degree of difficulty to adapt to a given

environment. These cultural dimensions were computed by using the data extracted from a

survey used in 44 countries targeting teachers and students in diverse teaching environments

(Elementary School, High School, College and University).

Hofstede: The Hofstede’s index is the combination of four different cultural values that have

been used to quantify and compare from different perspectives either cultural proximity or

8 “Are there universal aspects in the content and structure of values?”, Schwartz, S. H. (1994). Journal of Social Issues, 50, 19-45.

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distance among 76 countries (2001 edition). The data was collected from a survey to over

100.000 IBM employees in over more than 60 countries during the decade of 60s and 70s.

Throughout this survey Hofstede was able to identify four specific categories that characterize

countries in terms of cultural values: 1) Individualism (IDV), 2) Power to distance (PDI), 3)

Uncertainty avoidance (UAI) and 4) Masculinity (MAS). Therefore by simply comparing the

distance between one country and another it is possible to determine to what degree two

different countries tend to diverge or converge in terms of cultural values.

In this paper I will use the Hofstede culture framework in order to analyze the cultural

distance among different countries with the aim of determining to what degree cultural

differences and similarities can affect the short-term performance of a Cross-Border Merger

& Acquisition. Moreover, each cultural dimension will be examined separately with the aim

of seeing which cultural parameters are more significant when acquiring a company abroad.

Individualism (IDV): This variable makes reference to the way people in a given country

tend to prefer living whether under an individualistic (immediate family) or a collectivistic

scheme. On the one hand, Individualist people are more oriented to reach their own

success rather than the success of the group. On the other hand, collectivist people prefer to

be part of a group (society, company etc.) and tend to admire loyalty (Hofstede (1980)).

This index ranges from 0 to 100, being 100 a measure of a high degree of individuality.

For example, Bell (1976) claimed that the individualistic mental-set of the United States of

America (91 Hofstede Index vs. China 23) explains the economic growth of this economy

during the 20th century. Nevertheless, it is important to mention that while the Chinese

economy has been one of the fastest growth economies in the world for the last 30 years it

has one of the lowest degrees of individuality.

November 12th 2012


Power to distance (PDI): This cultural dimension measures the to what extension the

individuals in a given country accept the existence of an established hierarchy of power. A

country with a high PDI (Iraq 95) tend to accept the fact that there’s a very strong

hierarchical order, do not tend to challenge the existing power distribution, and tend to

accept the “status quo”. On the contrary, in countries with low PDI (Denmark 18),

individuals tend to criticize governments and demand justification for the existing

inequality of the distribution of power (Hofstede (1980)).

Uncertainty avoidance (UAI): The UAI index determines the way individuals in a given

country tend to react towards uncertainty and to what extent they tolerate uncertainty and

ambiguity (Hofstede 1980). People on high UAI countries characterize for being more

risk-averse towards uncertain situations, whereas people in low UAI countries tend to be

willing to take higher risks, and accept more comfortably ambiguity and uncertainty

(Hofstede (1980)).

Masculinity (MAS): This factor measures masculinity as an indicator of competition and

femininity as a proxy of cooperation. That said a country with a high score in this

parameter (masculine – Japan 95) would tend to be highly competitive in terms of

achievement and personal success. On the other hand, a country with a low score (feminine

– Sweden 5) indicates that a given society will be inclined to achieve goals for the entire

society. In this kind of countries or societies, success is measured as general welfare rather

than individual success (Hofstede (1980)).

Baskerville (2003), Reimer (2005), and Jones (2007) have pointed out diverse limitations and

critics regarding the methodology and the results given by Hofstede’s study. All in all

Hofstede’s critics focuses on the fact that his research has a strong biased by exclusively

November 12th 2012


analyzing individuals under a good economic situation and out casting the vast majority of the

population. In addition, since Hofstede’s research was developed exclusively with IBM

employers, Reimer (2005) and Jones (2007) have stated that the results are widely biased by

1) IBM’s Corporate Culture, 2) The western way of thinking – the creation of the questions in

the survey, and 3) Cold war era dynamic – political influences in the interpretation of the

results. Furthermore, Jones (2007) criticizes Hofstede’s dimensions based on the fact that

culture and its values are dynamic rather than constant as a result of technology

(communications) and globalization among other factors.

Nevertheless, Hofstede cultural dimensions have been widely used in the financial

M&A literature (Aybar et al (2009), Chakrabarti et al (2005), Chui et al (2008), and Fischer et

al (2011)) with the purpose of measuring and determining the effect of cultural distance on

the short and long term performance of both acquirers and targets. The four dimensions along

with the Hofstede’s Index provide a simple and easy model to adapt to different

methodologies and subjects. In addition, since Hofstede’s study was developed with a similar

socio-economic worldwide sample (IBM worldwide employees), the four cultural dimensions

provide a comparable set of results among countries, by avoiding disruptions and noise from

having different academic backgrounds, socio-economic situations, and “corporate cultures”.

Nevertheless, and as mentioned before, when using Hofstede’s cultural dimensions as a proxy

of culture, it is necessary to keep in mind that the results obtained do not apply and do not

represent the total population of a given country.

November 12th 2012

24 2. Data & Methodology | Beneficiario Colfuturo 2011

2. Data & Methodology

2.1 Data Selection

The sample of Latin American Cross-Border M&A deals analyzed in this study was extracted

from Thomson Reuters and takes into consideration completed Cross-Border M&A deals

developed by publicly listed Brazilian, Mexican, Chilean, Colombian and Argentinian bidders

during the 10 year period 2002 - 2011. The necessary daily returns to develop an Event Study

of the sample were extracted from Bloomberg.

The reason why I decided to select the transactions coming from these 5 Latin

American countries is because they are the most influential and significant countries in terms

of population, Stock Exchanges development, size of the economy, and GDP per capita

within the region. Therefore they can be used as a proxy of the entire region. Furthermore, I

decided to select a 10-year period starting in January 1st 2002 and finishing in December 31

st

2011 in order to capture the evolution by volume of M&A transactions during a period

characterized for being a turning point in terms of geopolitical relationships and economic

activity. Indeed, this period of time can be classified into three different groups that represent

very clearly the fact that the M&A transactions seems to have a strong cyclical component

and are highly dependent on credit liquidity, interest rates, and GDP growth (Jensen (2000),

Gaughan (2007): 1) Political & Economic Crisis, 2) Economic Boom, 3) Worldwide Financial

Crisis, and 4) Slow-Recovery.

November 12th 2012

Beneficiario Colfuturo 2011 | 2. Data & Methodology 25

Exhibit 6 Characteristics of the sample & M&A Industry in Latin America

The first period, 2001-2003, characterizes for being very volatile and turbulent as a

result of the dot-com bubble burst along with the 9-11 consequences (War in Afghanistan and

Iraq). During 2004-2008, the world experienced a booming economy in which Emerging

markets, led by the BRICS (Brazil, India, China and Russia) consolidated its growth in per

capita income and were able to materialize this economic over performance into social

development and greater worldwide economic and political influence. The year 2007

registered the highest number of M&A deals by volume and by value in the world and in

Latin America as well and it represents a turning point for the M&A industry. The following

period, 2008-2011, brought once again turbulence to the markets, which translated into a

global economic slow-down. Nevertheless, it is important to mention that while the Emerging

markets were able to rapidly overcome this crisis and post very solid growth figures, the

recovery in the developed economies has taken longer and in some cases they are still

suffering the negative consequences of this major event (European sovereign debt crisis).

After collecting the sample of M&A transaction in Latin America for the 2002-2011

period I found a total amount of 1483 M&A transactions out of which 1139 (76,8%) are local

deals and 344 (23,2%) Cross-border deals. Next to that, I discovered that 103 (29,9%) of the

CB-M&A deals involved targets based in developed economies.

Country* Population -

Mll*GDP - Bn

*GDP Per

Capita

Total Amount

of deals

Cross-Border

deals

% of

total

Brazil 196,66 2 476,7 12 593,9 298 47 15,8%

Mexico 114,79 1 155,3 10 064,3 405 133 32,8%

Chile 17,27 248,6 14 394,4 297 48 16,2%

Colombia 46,93 331,7 7 067,4 230 57 24,8%

Argentina 40,76 446,0 10 940,6 253 41 16,2%

Total 416,41 4 658,2 55 060,7 1483 326 22,0%

* Figures in USD. The data has been extracted from the The World Bank web site and represents the

figures posted for the Full-year 2011

November 12th 2012


Exhibit 7 Latin American M&A and CB-M&A deals (2002-2022)

2.1.1 Selection criteria

The selection criteria used in this study was the following: 1) Brazilian, Mexican, Chilean,

Colombian, and Argentinian Bidders, 2) Foreign Targets, 3) Completed deals, 4) Cross-

Border deals over USD 100 Million in value, 5) Bidder is publicly listed in the Home country

Stock Exchange (avoid FX9 variations), 6) Bidder’s and target’s nation is known, and 7)

Compatibility of the data with the Event-Study methodology and the Cross-Sectional

Regression Analysis. In addition, and due to the fact that large multinationals tend to be very

active developing corporate finance operations, I filtered the sample for additional corporate

events surrounding the announcement date in order to control for “cofounding events” (Aybar

et al. (2009)) that could have had an impact on the value of the stock price of the bidder. After

filtering this data, I found a work-able sample, associated with 26 firms, of 47 Cross-Border

Mergers and Acquisitions announcements, of which 21 came from Brazil, 18 from Mexico, 5

from Chile, and 3 from Colombia, and none from Argentina.

9 FX = Foreign Exchange currency

76%24%

Local Cross-Border

November 12th 2012


Exhibit 8 Sample of Cross-Border M&A Bidders

Even though, during the covered time period, I registered a total amount 253 M&A

operations in Argentina of which 41 (16,2%) targeted foreign companies, none of them met

my criteria. The lack of Argentinian bidders in the sample can be explained as the

consequence of the Argentinian economic crisis of 1999-2002, which heavily impacted the

Argentinian companies through the lack of credit, the devaluation of the local currency (peso)

against the USD dollar and the high rates of unemployment. Under this scenario, it was very

expensive and difficult for the Argentinian firms to finance a potential inorganic expansion

abroad. In addition, the lack of clear rules for both international and national players has

erased the incentives for Argentinian firms to go public. Within the Argentinian stock

Company Country Stock exchange Sector

Petroleo Brasileiro S,A, Petrobras Brazil Bovespa Integrated Oil & Gas

Companhia Brasileira de Bebidas AMBEV Brazil Bovespa Brewers

Companhia Vale do Rio Doce Brazil Bovespa Mining

Gerdau SA Brazil Bovespa Steel

Banco Itau Holding Financeira SA Brazil Bovespa Financial Institutions

JBS SA Brazil Bovespa Packaged Foods & Meats

Marfrig Frigorificos e Comercio de Alimentos LtdaBrazil Bovespa Packaged Foods & Meats

Iochpe Maxion SA Brazil Bovespa Construction & Farm Machinery & Heavy Trucks

Banco do Brasil SA Brazil Bovespa Financial Institutions

Cemex SA de CV (MEX) Mexico Bolsa de Valores de Mexico Construction Materials

America Movil SA Mexico Bolsa de Valores de Mexico Wireless Telecommunication Services

Grupo Simec SA de CV [and others] Mexico Bolsa de Valores de Mexico Steel

Grupo Cementos de Chihuahua Mexico Bolsa de Valores de Mexico Construction Materials

Telefonos de Mexico SA de CV Mexico Bolsa de Valores de Mexico Wireless Telecommunication Services

Mexichem SA de CV Mexico Bolsa de Valores de Mexico Commodity Chemicals

Grupo Bimbo SAB de CV Mexico Bolsa de Valores de Mexico Packaged Foods & Meats

Grupo Financiero Banorte SAB De CV Mexico Bolsa de Valores de Mexico Financial Institutions

Sonda SA Chile Bolsa de Santiago IT Consulting & Other Services

Cencosud SA Chile Bolsa de Santiago Hypermarkets and Supercenters

Endesa Chile SA Chile Bolsa de Santiago Utilities

Empresas CMPC SA Chile Bolsa de Santiago Paper Products

Sigdo Koppers SA Chile Bolsa de Santiago Industrial Conglomerates

Cementos Argos SA Colombia Bolsa de Valores de Colombia Construction Materials

Inversiones Nacional de Chocolates SA (Nutresa)Colombia Bolsa de Valores de Colombia Packaged Foods & Meats

Almacenes Exito SA Colombia Bolsa de Valores de Colombia Hypermarkets and Supercenters

November 12th 2012


exchange only 42 firms are listed, of which 13 belong to the Merval10

index, and 6 have a

daily liquidity above USD 1 M.

Exhibit 9 Filtered data & sample selection

10 “Mercado de Valores de Buenos Aires”, Argentinian Stock Exchange

Country Argnetina Brazil Chile Colombia Mexico Total

Total Deals 253 298 297 230 405 1483

% of total 17,1% 20,1% 20,0% 15,5% 27,3% 100,0%

Local 212 251 231 173 272 1139

% of total 14,3% 16,9% 15,6% 11,7% 18,3% 76,8%

Cross Border 41 47 66 57 133 344

% of total 2,8% 3,2% 4,5% 3,8% 9,0% 23,2%

< USD 100 M 34 11 54 52 105 256

% of total 2,3% 0,7% 3,6% 3,5% 7,1% 17,3%

> USD 100 M 7 36 12 5 28 88

% of total 0,5% 2,4% 0,8% 0,3% 1,9% 5,9%

Listed - 21 5 3 18 47

% of total 0,0% 1,4% 0,3% 0,2% 1,2% 3,2%

Non Listed 7 15 7 2 10 41

% of total 0,5% 1,0% 0,5% 0,1% 0,7% 2,8%

Final Data - 21,00 5,00 3,00 18,00 47

Filter 1 - Cross Border M&A

Filter 2 - Deal above USD 100 M

Filter 3 - Acquirer is listed

November 12th 2012


Regarding the filtered results by sector, 21,3% of the transactions are accredited to Mining &

Steel firms, 19,2% to Telecom companies, 12,8% to Package food firms, and 8,5% to

Construction Materials enterprises. While 36,2% of the CB-M&A announcements involved

targets located in a neighbor country, 38,3% involved targets located in developed countries.

Exhibit 10 Distribution per sector of the sample

19,15%

12,77%

10,64%10,64%

8,51%

6,38%

6,38%

6,38%

4,26%4,26%

Wireless Telecommunication Services Packaged Foods & Meats

Mining Steel

Construction Materials Brewers

Financial Institutions Commodity Chemicals

Integrated Oil & Gas Hypermarkets and Supercenters

November 12th 2012


2.2 Methodology

With the purpose of analyzing how the market reacts when a company announces its

intentions to acquire a firm in a different country and therefore understand if the market

perceives the CBM&A transactions whether as positive or as bad news for the acquirer’s

business operations, I decided to employ the event study methodology. This technique has

been used in several studies of empirical finance with the purpose of both identifying and

assessing the effect of a given event or announcement on the valuation of a company (Share

Price).

Within the finance literature the event study methodology has been widely used to

identify the impact on the stock performance of specific corporate actions such as, M&A

operations, capital Increases, debt issuances, changes in the composition of the management

team, corporate Governance scandals, release of results, changes in the Board of Directors

and dividend pay-out policies among others. In the same way, through this methodology

finance researchers have been also able to capture the spill-over effect of an exogenous

variable (Macroeconomic data, Geopolitics, Industry specific news, etc.) within the company

valuation. In this sense it is significant to mention that in the financial literature the most

commonly used models to quantify the expected and the abnormal returns are the following:

Constant return model - : this model assumes the expected return as

the average stock return.

Market-adjusted return model - this model assumes that the

expected return of the firm is the average return of the market. Therefore, this

methodology takes into account that every firm should have the same expected return.

November 12th 2012


Market model - : This methodology takes into

account both the firm specific risk and the market trends.

CAPM - : this model assumes the market

risk, the firm specific risk and the effect of the risk free rate.

In this study I used the market model to capture the effect of the event (announcement of an

acquisition) on the share price of the target.

2.2.1 Event Study Methodology

The following are the steps involved in the methodology explained above: First of all, and

after identifying the sample of firms, the stock prices of the observations were collected 100

days prior to the announcement and 10 days after the announcement, being t=0 the

announcement date. Secondly, the stock returns were computed. In this sense, there are two

different mechanisms to calculate this metric: Discrete Returns, and Logarithmic returns.

Discrete Returns

Logarithmic Returns

Where:

P is the price of a given security at time t.

P is the price of a given security at time t + 1.

Ln is natural logarithm

November 12th 2012


In this research logarithmic returns were used since they “are more likely to be

normally distributed, more likely to be precise and easier to accumulate”11

. Once the actual

returns of the observations founds during the data stage are calculated it is necessary to

compute the return of the Market portfolio by using the logarithmic returns. Since this study

evaluates the impact of the CB-M&A transactions of bidders located in Argentina, Brazil,

Chile, Colombia, and Mexico, the return of the market portfolio corresponds to the return at

time t of the MERVAL Index, IBOV Index, IPSA Index, IGBC Index, and MEXBOL Index

respectively.

The following step is to calculate the Market model. According to the market model,

the return of a specific security is based on the assumption that there is a linear relationship

between the performance of the market and the return of a given security. In this sense, this

model takes into consideration both the existence of the systematic risk by using the market

return and the impact of the industry specific risk via the statistical parameters Beta and

Alpha. That said, by using this methodology it is possible to identify to what extent the actual

return experienced during the announcement date diverged from the expected return, given by

the following formula:

(Equation 1)

Where:

: is the expected return of a security i at time t

: Alpha is the market model parameter

: Beta is the market model parameter.

11 Meziane Lasfer, “Research & Methodologies lecturer slides”, EDHEC Business School, 2012.

November 12th 2012


: is the return for the market portfolio at time t. The market portfolio used in this

study is the following per country: Ibov Index-Brazil, Mexbol Index-Mexico, IPSA

Index-Chile, IGBC Index-Colombia and Merval Index-Argentina.

: is the random error of a security i at time t.

The expected return is used to calculate the theoretical return of the stock during the event day

if the announcement of a Cross-Border Merger & Acquisitions had not happened. This way,

by using the market model it is possible to both identify to what extent the actual return

experienced during the announcement date is not in line with the expected return and to

measure the impact on the stock price of the additional information (event) without

considering the effect of the evolution of the market.

Exhibit 11 Event Study - Timeline

The estimation period is used to compute the value of the statistical parameters of the

market model, and . In this sense it is significant to mention

that the greater the number of observations, the greater the statistically significance of the

market model parameter. However, it is important to mention that betas are subject to

significant variations over time (Fernandez et al. (2009) as a consequence of short-term

volatility generated either by macroeconomic data or by firm specific speculations and

T-0 T-1 T-20 time

Annoucement Date

Estimation Period Event Window

-10-100 +10

November 12th 2012


rumors. In effect some researchers (Fisher et al. (2011)) have used a Beta of one arguing that

in the long-term the firm specific risk is in line with the market risk, meaning that the beta

tends to reverse to the mean.

Nevertheless, since this study focuses on analyzing the short-term impact on the value of the

bidder it is necessary to capture the firm-specific risk through the short-term beta. The

coefficients used in Equation 1 are computed for every company by using a 89 days

estimation period from T -100 to T-11, considering as T 0 the announcement date.

The abnormal returns are then calculated with the aim of identifying to what extent the

experienced return on the event day diverged from the expected return, and therefore

conclude what was the impact of the announcement of the intention to acquire a company

abroad on the value of the bidder. Therefore the Abnormal return is the difference between

the actual return on time t and the expected return on time t. The abnormal returns are

therefore calculated for every firm and for every period in the event window (-10: +10) by

using the following formula:

(Equation 2)

Where:

: is the Abnormal return of a security i at time t.

is the actual return.

: Alpha is the market model parameter.

: Beta is the market model parameter.

is the actual return of the market.

November 12th 2012


After computing the abnormal returns (AR) for each firm and for each period, it is necessary

to calculate the average abnormal returns. This result is computed by using the following

formula:

(Equation 3)

Where:

: Is the average abnormal return at time t.

Is the amount of observations (firms)

: Is the sum of the Abnormal returns of all the observations (firms) at time t

The Latin American companies characterize for being familiar and highly dependent on the

banking sector to finance its operations rather than using intensively the capital markets

(Pinheiro Machado (2002)). This is one of the reasons why today the Latin American Stock

Exchanges are still in the process of implementing stronger regulations and more

sophisticated processes of control, in order to attract a much wider amount of both

international and national investors and further develop its liquidity and volume. In this sense,

the efficiency of the market is still under a development stage (Semi-efficient Markets) in

which prices tend to gradually digest the incorporation of additional information into the

stock value, leaving space to set up arbitrage strategies. That said most Latin American stock

Exchanges characterize for having a Semi-Strong and Weak form of efficiency degree

(Gonzales-Vega (2001)).

Based on the previous information, the impact of the announcement of a CB-M&A

transaction on the bidder’s stock price might take longer than one day to reach the intrinsic

value. Moreover, the existence of leaks of information before the announcement date can also

November 12th 2012


lead to the incorporation of this information into the stock price before the announcement is

publicly released. As a consequence of these market imperfections most event studies tend to

analyze the abnormal returns during the event window (Aybar et al. (2009), Chakrabarti et al.

(2005)). This study examines the abnormal returns 10 days prior to the event and 10 days

after the announcement, with the purpose of capturing the total variation of the stock price as

a result of the incorporation of the additional information into the stock price (Bruner (2002)).

Exhibit 1212 Market Efficiency

The Cumulative abnormal returns (CAR) are then computed using the results found in

Equation 2 for each firm during the event window. Through this metric it is possible to

compare the existence divergence or convergence between the actual returns over a given

period of time and the expected returns. CAR’s are calculated by using the following formula:

(Equation 4)

12 Elaborated by the author based on the Efficiency Market theory of Eugene Fama

time

Efficient Market

T 0 - Event

Inefficient Market

*Overreaction

Inefficient Market

*Delayed

November 12th 2012


Where:

: Is the Cumulative Abnormal return of a security I at time t.

Is the abnormal return of security I at time t.

During this study, I used 8 different CAR’s (CAR (-1, 0), CAR (0, +1), CAR (-1, +1), CAR (-

2, +1), CAR (-5, +1), CAR (-5, +5), CAR (-10, +5), CAR (-10, +10)) with the aim of

detecting the total effect of the event on the value of the firm. The formula used to compute

the CAR’s on a specific period of time during the event window is the following:

(Equation 5)

Where:

: Is the Cumulative Abnormal return of a security I during the period T2-

T1.

EW: is the event window.

After having computed both the abnormal returns (AR) and the Cumulative abnormal returns

(CAR) it is necessary to establish statistical tests in order to verify the statistical significance

of the results. First of all, the parameter Z is calculated and therefore the T-tests can be

computed. The following are the formulas used to test if the deviation of the AR’s and CAR’s

is significant in a 1%, 5%, and 10% level:

(Equation 6)

November 12th 2012


Where:

With the purpose of measuring if different cultural, economic and political variables affect the

short-term performance of a company when it announces that it will acquire another firm

abroad, the CARs computed for the periods mentioned before have been used as the

dependent variable into the multi-variable regression analyses.

2.2.2 Multi-variable Model - Regression analysis

The effect of a given event or announcement on a given stock depends on both firm-specific

and exogenous variables. More specifically, with respect to the Cross-Border M&A

transactions, it is necessary to consider to what extent the integration of both operations might

generate positive or negative results to the bidder (acquirer). This section focuses on

determining to what extent diverse cultural, social, and economic variables can explain the

experienced variation in the Cumulative Abnormal Returns, computed in the previous section,

by developing a multi-variable regression analyses.

(Equation 8)

November 12th 2012


Where:

PDI: power to distance – Hofstede’s index dimension

IDV: individuality – Hofstede’s index dimension

MAS: masculinity – Hofstede’s index dimension

UAI: uncertainty avoidance Index – Hofstede’s index dimension

2.2.2.1 Cultural variables

In this research, cultural distance (difference and similarities) is measured by using the

Hofstede cultural model (4 dimensions) and additional cultural factors such as language, legal

origins and religion as a proxy of the cultural distance between two different countries.

First of all and regarding Hofstede’s cultural dimensions this study focuses on testing

separately the impact of every cultural dimension of this index regarding the short term

performance of a CB-M&A transaction. This data was retrieved on June 15 2012 from the

following website: http://geert-hofstede.com/dimensions.html. In Exhibit 13, it is possible to

observe that the Hofstede Index in the countries studied is very similar, which determines that

the 5 countries studied in this research have similar cultures. Nevertheless, when looking to

each cultural dimension separately it is possible to observe significant differences principally

in terms of hierarchy acceptance (PDI - Power to Distance) and individuality. While

Argentinians have a lower acceptance of the existing hierarchy and are more willing to

challenge it, Mexicans are more likely to accept it rather than challenge it. In the same way,

while Colombians appear to be more oriented to belong to groups, Argentinians have the

higher level of individuality in the region 0,4. Nonetheless, Argentina is still far from being an

individualistic country like the United States with an IDV score of 0,91.

http://geert-hofstede.com/dimensions.html

November 12th 2012


Exhibit 1313 Hofstede's cultural dimensions - Sample of countries

With the purpose of measuring the effect of cultural differences it is necessary to compute the

variation of these factors among the country of the bidder and the country of the target. The

differences of Hofstede’s cultural dimensions are calculated by using the Euclidian distances

with the purposes of avoiding both the effect of having negative or positive values and the

direction effect. Chakrabarti et al (2005) used the same methodology, due to the fact that the

total effect of this variable is used to determine to what extent it affects the value of a given

stock at a specific date. Therefore the formula used to compute the differences between the

PDI, IDV, MAS, and UAI, is the following:

(Equation 9)

Finally the Hofstede Index is computed by combining the total effect of the 4 different

cultural dimension mentioned before. This parameter ranges between 0 and 1. While a result

close to 0 implies very significant similarities between both cultures, a result closer to 1

13 Elaborated by the author. The data was extracted from Hofstede website: http://geert-

hofstede.com/dimensions.html.

0

0,2

0,4

0,6

0,8

1

PDI IDV MAS UAI Hofstede Index

Argentina Brazil Chile Colombia Mexico



November 12th 2012


suggests important differences. Within the sample used in this research the average Hofstede

distance is 0.12. This value is statistically significant at the 99% level and implies that overall

most of the companies involved in the CB-M&A transactions developed by Latin American

bidders during the last 10 years share relatively similar cultures (Maximum 0,22 – Minimum

0,04). Putting these figures in perspective it is possible to visualize that the existing

Hofstede’s cultural distance between Netherlands-Japan, Australia-Malaysia, and New

Zealand-Malaysia is 0.43, 0.40, and 0.39 respectively.

Exhibit 14 Hofstede Index - Statistics

Moreover, this parameter is used to capture, from a multi-variable perspective, to what extent

two given populations tend to diverge or converge in terms of cultural values and behaviors.

The formula used to calculate this variable is the following:

(Equation 10)

Where:

Dai: represents the score of the acquirer on dimension i

Hofstede Index

Mean 0,115

Standard Error 0,008

Median 0,091

Standard Deviation 0,057

Minimum 0,039

Maximum 0,223

T-Statistic of the mean 13,958

Number of observations 47,000

November 12th 2012


Dti: represents the score of the target on dimension i

Regarding the results shown in Exhibit 15, it is significant to highlight the fact that

even though Mexico and the United States are ranked as the top 2 pair of countries with the

greatest cultural distances, the amount of deals amounts to 33% of the total Mexican

observations. In addition, the market tends to react positively to the fact that a Mexican

company is announcing its intentions to acquire a firm based in the United States. These

discrepancies in the results can be explained by the following factors:

1. Most of Mexican’s Management teams have either an academic or a professional

background in the United States, which allows them to understand the cultural values of

the acquired company and to avoid potential cultural clashes.

2. Many Mexican firms acquiring companies in the U.S focus on satisfying the needs of

the current Mexican population living in the U.S (Largest immigrant population in the

US, according to Samuel Huntington (2004)14

). Moreover, the integration process can

be easier based on the fact that many workers have a Mexican origin, sharing the same

cultural values of the acquirer.

3. Geographical proximity. This factor can be a very significant variable considering the

materialization of synergies, and the existing knowledge of business practices in both

countries.

4. Acquisition of knowledge and know-how, which might lead to an improvement in

efficiency and profitability.

14 According to Samuel Huntignton in Texas. New México, Arizona and California over 25% of the population

has Hispanic origins.

November 12th 2012


Exhibit 15 Most similar and different countries in terms of cultures

Additionally, this study evaluates cultural distance through specific cultural characteristics,

with the purpose of determining to what degree these similarities or differences can either

enhance or weakened the integration process. As this study focuses on the bidder’s short-term

performance, the cultural variables will measure the short-term perception of the market. As

additional cultural proxies I used the legal origins, the language and the religion. Once the

data is collected, a dummy variable is used (Aguilera et al (2004), Chakrabarti et al (2005),

and Aybar et al (2009)), for every factor, to run the regression analyses. If the acquirer and the

bidder have exactly the same value, this variable takes the value of 1, and 0 otherwise.

Legal origins: The legal origins’ data was collected from La Porta et al. (1998), with the

purpose of measuring the impact of acquiring a company in a country with a different

legal origin. An unknown legal system represents an additional challenge to the bidder,

which can lead to higher integration costs. According to La Porta et al. the legal origin of

a given country legal system can determine to what extent investors are effectively

protected in that country. In this study the legal origin classification takes into account

22,32 1 -1,416% 1,509% -1,267%

20,54 6 0,297% 1,888% 1,885%

17,17 5 -0,907% -0,339% -0,873%

16,89 1 -1,10% 0,29% -0,30%

16,73 1 0,55% -2,83% -1,33%

3,93 2 1,667% 3,695% 4,367%

4,26 1 -2,078% -3,092% -4,179%

5,67 2 5,150% 9,649% 10,497%

6,19 5 -0,46% -1,00% -1,63%

6,34 2 -1,18% 0,25% -0,39%Mexico Brazil

Chile Peru

Brazil Paraguay

CAR (0,+1)Hofstede

distance

No of

transactionsCAR (-1,0)

Bidder TargetCAR (-1,+1)

Brazil Argentina

No of

transactionsCAR (-1,0) CAR (0,+1) CAR (-1,+1)

Mexico

Brazil

United States

United States

Top 5 countries - most different cultures

Mexico Colombia

Top 5 countries - most similar cultures

Bidder Target

Hofstede

distance

Brazil

Brazil

Australia

Netherlands

Colombia United States

November 12th 2012


the existing differences between the French Civil Law, Common Law, Scandinavian

Civil Law, and German Civil Law. In the case both companies’ countries share the same

legal origin the dummy variable assumes the value of 1 and 0 otherwise.

Language: During this study a variable that determines and measures the effect of

language differences between the acquirer’s country and the target’s country is

introduced. The data was collected from O’Grady et al. (1996) and Stulz et al. (2003). In

addition, this data has been crosschecked with the results published on the CIA World

Factbook 2011. The dummy variable takes the value of 1 if the bidder and the target are

based in countries were the official language is the same, and 0 otherwise.

Religion: An alternative proxy of cultural distance is the religion. This information was

extracted from Stulz et al. (2003) and verified with the CIA World Factbook 2011. 41,7%

(Catholicism) of the sample of deals in this study shares the same primary religion.

According to Stulz et al. (2003) the countries in which the Catholicism is the primary

religion tend to have weaker creditor rights, and a relatively weak enforcement of the

law. In this sense, the market and the shareholders might perceive acquiring a firm in a

Catholic country as an additional risk to the firm, which might lead to sell the stock and

therefore drive the price down after having announced the acquisition. Nonetheless, it is

necessary to take into account that in this study all the bidders are coming from Catholic

countries, so this risk is already priced into the stock price. To quantify this variable into

the regression analyses, a dummy variable is used, taking either the value of 1 or 0. If the

primary religion in the country of the bidder is exactly the same than the one in the

country of the target, this parameter will assume the value of 1, and 0 otherwise.

November 12th 2012


2.2.2.2 Geographic variables

Type: This factor measures if the acquirer is targeting to buy a company based in a

different industry. Aybar et al. (2009) used this variable with the purpose of determining

the potential impact of acquiring a firm based in a different industry where the target does

not have the necessary expertise and know-how to rapidly and successfully overcome

potential issues related to this industry. Nevertheless, acquiring a firm in a different

sector can also be valued as positive if both sectors can generate operational synergies. In

the sample, 87% of the CB-M&A transactions are developed with related industries,

reflecting the fact that Management teams tend to acquire firms located in industries they

understand in order to consolidate its competitive position and its market share. The data

has been strived from Thomson Reuters. To measure this factor, a dummy variable is

used. It assumes the value of 1 if the acquirer and the target are in related industries and 0

otherwise.

Geographic proximity: This parameter is used to determine to what degree the

geographical distance between two companies can affect the market perception of an

M&A transaction. This factor is measured with a dummy variable, which takes the value

of 1 if the country of the bidder and the country of the target are neighbor countries, and

0 otherwise.

2.2.2.3 Economic variables

GDP per capita difference: Economic differences among countries are analyzed with

the purpose of understanding what is the impact on the share value of the announcement

of acquiring a firm located in a different economic environment, not only in terms of

November 12th 2012


economic size (GDP), but also per capita income (GDP per capita). Chakrabarti et al

(2005) used the per capita income as a parameter capable of capturing “major socio-

economic differences between countries”15

.

Therefore, by computing the difference between the bidder’s country GDP per capita and

the target’s country GDP per capita it is possible to determine the economic distance

among countries. The data has been extracted from the World Bank web site on August

18 2012 (http://data.worldbank.org/) and represents the figures posted for the Full-year

2011.

(Equation 11)

Gini Index: An additional factor used to quantify the economic distance between two

firms is the Gini Coefficient. This is an income distribution proxy that computes to what

extension the existing income and consumption is equally distributed in a given

economy. The values of this parameter range from 1 to 0. The greater the Gini Index the

greater the income distribution inequality and vice versa. Regarding the accuracy of this

measure, it is significant to highlight that it will highly depend on the quality of the GDP

estimations that each country produces. The data has been extracted from the World Bank

15 Rajesh Chakrabarti et Al, “Mars-Venus Marriages: Culture and Cross-Border M&A”, page 15, 2005

http://data.worldbank.org/

November 12th 2012


web site16

on August 18 2012 and represents the figures posted for the Full-year 2009.

The Gini Index differences were calculated by using the following formula:

(Equation 12)

Exhibit 1617. Gini Coefficient - Breakdown per country

16

World Bank Website: http://data.worldbank.org/ 17

Source: CIA World Factbook 2009


November 12th 2012

48 3. Analyses of the Results & Interpretations | Beneficiario Colfuturo 2011

3. Analyses of the Results & Interpretations

During this research study the Cross-Border M&A activity in Latin America has been

evaluated through the employment of the event study methodology and the generation of

cross regression analyses. By using these methodologies the Abnormal returns (CARs) have

been calculated for a diverse range of event windows and the significance of diverse cultural

variables has been measured in order to determine to what extent the CB-M&A performance

is influenced by different cultural parameters.

3.1 Research question 1. Cross-Border M&A performance.

Abnormal and Cumulative Abnormal returns were calculated for a sample of 47 observations

of Cross-Border M&A operations in Latin America. Exhibit 17 shows that on average Cross-

Border M&A operations have a positive impact for the acquirer during the announcement

date. The Abnormal return on day 1 (AR 1), after the announcement of the acquisition went

public is 0,84% and it is significant at the 10% level. In line with this result, the CAR (0, +1)

is 1,38% and statistically significant at the 10% level.

Exhibit 17 AR's and CAR's evolution during the event window

-0,75%

-0,25%

0,25%

0,75%

1,25%

1,75%

2,25%

2,75%

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

AR's CAR's

November 12th 2012

Beneficiario Colfuturo 2011 | 3. Analyses of the Results & Interpretations 49

Based on Exhibit 17 it is important to mention that on average from day -10 to day -6

the abnormal returns experience an increase in volatility with a Maximum abnormal return of

AR-8= 0,55%, and a minimum of AR-7= -0,57%. In addition, Exhibit 17 shows that on

average 5 days before the announcement the price steady increases for three consecutive days,

which could be explained as the effect of a leak of information (rumors). Nevertheless two

days before the announcement the share trades relatively flat as the market is still pricing the

veracity of the previous rally of 1,12% between -5 and -3. On average it takes around 3 days

for the price to digest the entire consequences on the acquirer of having announced its

intention to acquire a firm based out of its home country. The existence of this gap is related

to the semi-efficiency form of the Latin American markets, previously explained, leaving

space for arbitrage.

Exhibit 18 Bidder's daily abnormal returns - Cross-Border M&A transactions

Days

Average Abnormal

return -

Mkt Model

T - StatisticTotal No of

transactionsPositive Negative

Positive:

Negative

Positive Market

reaction

- 10,00 -0,30% - 1,016 47 17 30 17:30 36,17%

- 9,00 -0,10% - 0,560 47 20 27 20:27 42,55%

- 8,00 0.55% * 1,882 47 26 21 26:21 55,32%

- 7,00 -0,57% - 1,590 47 18 29 18:29 38,30%

- 6,00 -0,11% - 0,546 47 19 28 19:28 40,43%

- 5,00 0,24% 0,590 47 23 24 23:24 48,94%

- 4,00 0,47% 1,425 47 28 19 28:19 59,57%

- 3,00 0,41% 1,517 47 26 21 26:21 55,32%

- 2,00 -0,04% - 0,098 47 21 26 21:26 44,68%

- 1,00 -0,02% - 0,057 47 21 26 21:26 44,68%

- 0,55% 1,297 47 22 25 22:25 46,81%

1,00 0.84% * 2,004 47 30 17 30:17 63,83%

2,00 0,16% 0,576 47 26 21 26:21 55,32%

3,00 -0,18% - 0,703 47 20 27 20:27 42,55%

4,00 0,02% 0,070 47 23 24 23:24 48,94%

5,00 0,00% - 0,011 47 20 27 20:27 42,55%

6,00 -0,26% - 1,000 47 17 30 17:30 36,17%

7,00 0,31% 1,035 47 25 22 25:22 53,19%

8,00 0,25% 1,588 47 25 22 25:22 53,19%

9,00 0,25% 0,938 47 20 27 20:27 42,55%

10,00 0,39% 1,620 47 33 14 33:14 70,21%

***,**,* represent statistical significance at the 1,5,10% levels, respectively. This table represents the daily abnormal

returns using the market model of 47 Cross Boder M&A expansion announcements by Latin American companies over

the period 01/01/2002-31/12/2011

November 12th 2012


Although on average the abnormal return is positive after the “announcement date” it

is significant to take into consideration that during the “announcement date 46,8% of the

samples experienced a positive impact, while the other 53,2% registered negative abnormal

returns. Therefore, it is possible to infer that the positive average return during the

announcement date and after the same might be influenced by a specific observation.

Nevertheless, in day +1 63,8% of the observations experienced a positive abnormal return.

This result is confirmed with the CARi (0, +1) of 1,38%, which is significant at the 10%

level.

While these results contradict the previous conclusions of Aybar et al. (2009) (CB-

M&A performance -1,38%) and Kupiers et al. (2003) (CB-M&A performance -0,92%) who

had found that Cross-Border M&A was perceived by the markets as a value destructive event,

they are in line with the findings of Chakrabarti et al. (2005) (CB M&A performance CAR (-

1, +1) of +0,71% and statistically significant at the 1% level).

Exhibit 19 CAR's - Event Window (-5, +1) & (-10. +10) breakdown per geography

2,45% 2,86%2,07%

3,98%

2,32%1,73%

8,30% 8,15%

-3,89%

-7,11%

-5,+1 -10,+10 -5,+1 -10,+10 -5,+1 -10,+10 -5,+1 -10,+10 -5,+1 -10,+10

Latin America Brazil Mexico Chile Colombia

November 12th 2012


Exhibit 19 provides a breakdown of the Cumulative abnormal returns, CAR (-5, +1),

and CAR (-10, +10) per country for two different event windows surrounding the

announcement date. While on average the existing difference between both results is very low

meaning that the market is able to incorporate most of the new information into the price

during the first two days (0, +1), in Colombia there is a very significant difference between

the CAR (-5, +1), and CAR (-10, +10). This gap indicates that on average the Colombian

Capital Market takes 5 days after the announcement to fully incorporate the new information

into the stock price, leaving space for arbitrage operations. This phenomenon is the combined

consequence of an illiquid market with a semi-weak efficiency form. Furthermore, it seems

that the Chilean market tends to positively overreact to the announcement of a Cross-Border

acquisition by 529 bps above the results found in Latin America. Nevertheless it is difficult to

provide conclusion regarding the Chilean and the Colombian markets as there are only 5 and

3 observations in the sample respectively.

November 12th 2012


Exhibit 20 Bidder's daily abnormal returns - Cross-Border M&A transactions

IntervalCummulative Abnormal

Returns T - Statistic

Total No of

transactionsPositive Negative Positive: Negative

Positive

Market

reaction

CAR (-1,0) 0,53% 0,88 47 21 26 21:26 44,68%

CAR (0,+1) 1.38% * 1,83 47 24 23 24:23 51,06%

CAR (-1,+1) 1,37% 1,50 47 24 23 24:23 51,06%

CAR (-2,+1) 1,33% 1,21 47 23 24 23:24 48,94%

CAR (-5,+1) 2.45% * 1,75 47 23 24 23:24 48,94%

CAR (-5,+5) 2,44% 1,52 47 26 21 26:21 55,32%

CAR (-10,+5) 1,92% 0,98 47 24 23 24:23 51,06%

CAR (-10,+10) 2,86% 1,26 47 23 24 23:24 48,94%

CAR (-1,0) 0,16% 0,18 21 10 11 10:11 47,62%

CAR (0,+1) 0,02% 0,03 21 9 12 9:12 42,86%

CAR (-1,+1) 0,10% 0,10 21 10 11 10:11 47,62%

CAR (-2,+1) 0,22% 0,13 21 9 12 9:12 42,86%

CAR (-5,+1) 2,07% 0,84 21 12 9 12:9 57,14%

CAR (-5,+5) 2,00% 0,66 21 11 10 11:10 52,38%

CAR (-10,+5) 2,78% 0,76 21 11 10 11:10 52,38%

CAR (-10,+10) 3,98% 0,97 21 11 10 11:10 52,38%

CAR (-1,0) 0,67% 0,66 18 8 10 8:10 44,44%

CAR (0,+1) 2,38% 1,63 18 9 9 9:9 50,00%

CAR (-1,+1) 2,39% 1,38 18 9 9 9:9 50,00%

CAR (-2,+1) 2,16% 1,18 18 9 9 9:9 50,00%

CAR (-5,+1) 2,32% 1,31 18 8 10 8:10 44,44%

CAR (-5,+5) 2,31% 1,24 18 10 8 10:8 55,56%

CAR (-10,+5) 0,81% 0,33 18 8 10 8:10 44,44%

CAR (-10,+10) 1,73% 0,55 18 7 11 7:11 38,89%

CAR (-1,0) 2,99% 1,46 5 3 2 3:2 60,00%

CAR (0,+1) 4,87% 2,02 5 4 1 4:1 80,00%

CAR (-1,+1) 5,31% 1,74 5 4 1 4:1 80,00%

CAR (-2,+1) 5,44% 1,86 5 4 1 4:1 80,00%

CAR (-5,+1) 8,30% 1,81 5 3 2 3:2 60,00%

CAR (-5,+5) 8.92% ** 2,85 5 4 1 4:1 80,00%

CAR (-10,+5) 7.65% * 2,52 5 4 1 4:1 80,00%

CAR (-10,+10) 8.15% * 2,20 5 4 1 4:1 80,00%

CAR (-1,0) -1,81% - 2,57 3 0 3 0:3 0,00%

CAR (0,+1) -0,94% - 0,34 3 2 1 2:1 66,67%

CAR (-1,+1) -2,54% - 1,20 3 1 2 1:2 33,33%

CAR (-2,+1) -2,71% - 1,44 3 1 2 1:2 33,33%

CAR (-5,+1) -3,89% - 2,08 3 0 3 0:3 0,00%

CAR (-5,+5) -4,46% - 0,96 3 1 2 1:2 33,33%

CAR (-10,+5) -7,07% - 1,47 3 1 2 1:2 33,33%

CAR (-10,+10) -7,11% - 0,94 3 1 2 1:2 33,33%

***,**,* represent statistical significance at the 1,5,10% levels, respectively. This table represents the daily and cummulative abnormal

returns using the market model of 47 Cross Boder M&A expansion announcements by Latin American companies over the period

01/01/2002-31/12/2011

Pannel A Latin American Companies

Pannel B Brazilian Companies

Pannel C Mexican Companies

Pannel C Chilean Companies

Pannel C Colombian Companies

November 12th 2012


3.2 Research question 2. - Geographic distribution and volumes evolution

3.2.1 Geographic Distribution: During the period 2002-2011 357 CB-M&A transactions

were developed by Latin American corporations with the aim of expanding its operations in a

foreign country through an inorganic expansion rather than through a Greenfield project.

From the total amount of CB-M&A deals, 254 transactions targeted companies based in

emerging economies, whereas 103 were developed between an acquirer based on an emerging

economy and a target located within a developed market. At first sight it is possible to

observe that Latin American acquirers tend to prefer to buy targets located in Emerging

Markets since the competitive environment, business practices, and cultural values are

relatively close. Nevertheless, it is significant to take this analysis deeper in order to clearly

identify which countries the Latin American CB-M&A activity tends to favor in terms of

volume of deals.

Exhibit 21 Latin American CB-M&A deals (2002-2011) - Developed vs. Emerging

Markets

Based on Exhibit 22, from the total transactions registered during the 10-year period studied

in this research 18% of the total CB-M&A operations and 61% of the transactions targeting a

firm based in a developed economy were developed with targets located in the United States.

29%

71%

Developed world Emerging Markets

November 12th 2012


Although there is a clear preference for executing Cross-Border operations with American

firms, it is important to mention the relevance of cultural, and geographic proximity when

bidders select their targets. In this sense, 52% of the total Cross-Border Mergers &

Acquisitions were developed between a Latin American buyer and a Latin American target,

evidencing the importance of proximity not only in terms of culture but also in terms of

geographic distance.

Exhibit 22 Latin American CB-M&A deals (2002-2011) - Top 10 target countries

With respect to the specific case of the United States, although the cultural differences with

the Latin American culture are significant in terms of Hostede’s cultural dimensions (IDV,

and PDI), the existing geographic proximity has played a significant role in the development

of Cross-Border M&A transactions. Indeed, the amount of operation between the two

neighbor countries, Mexico – United States (41 CB-M&A), represents 11,5% of the total

amount of CB-M&A operations and 39,8% of the total deals involving a company operating

in a developed economy.

18%

10%

9%

9%8%

6%4%

4%2%

2%

28%

United States Argentina Peru Brazil Colombia Chile

Panama Mexico Canada Uruguay Others

November 12th 2012


Exhibit 23 18 Hofstede's cultural dimensions between the United States and Latin

America

The top 5 most targeted countries within the developed world are the following: United States

– 63 deals (61,2%), Canada – 8 (7,8%), United Kingdom – 7 (6,8%), Australia – 4 (3,9%),

and Spain – 3 (2,9%). It is significant to mention that the deals coming from these countries

represent 82,5% of the Latin American CB-M&A deals (103) targeting firms based in

developed economies. This phenomenon indicates that Latin American countries tend to favor

firms based in English and Spanish speaking countries. The specific case of the United States

can be explained for the geographical proximity with the region, specifically with Mexico.

Out of a total of 63 acquisitions in the United States, Mexican acquirers account for 41

(65,1%).

3.2.2 Volumes Evolution: In line with the previous M&A patterns explained in section 1, the

Latin American M&A activity appears to follow a cyclical evolution, highly dependent on

18

Elaborated by the author. The data was extracted from Hofstede website: http://geert-

hofstede.com/dimensions.html

0

0,2

0,4

0,6

0,8

1

PDI IDV MAS UAI Hofstede Index

Latin America United States



November 12th 2012


credit liquidity, interest rates, and GDP growth (Gaughan (2007)). In accordance with the

global M&A waves, in 2007 the Latin American M&A and CB-M&A reached its peak with

330 and 79 deals respectively. After the 2008 financial crisis which led to a worldwide credit

crunch, the M&A dynamic in the region decreased by 70%. After a hard landing in 2009, the

following years, 2010, and 2011 have experienced a significant increase in deals. From full

year 2009 to full year 2011, the total amount of deals and the Cross-Border operations have

increased by 77%, and 108% respectively. This findings support the fact that the Cross-

Border M&A activity in the region is increasing at a faster pace than the local deals. This

phenomenon can be explained as a consequence of the potential opportunities derived from

the financial crisis (cheap valuations) and from the current worldwide economic situation in

which competitors coming from developed countries have reduced its operations in Latin

America leaving space for local Corporations to consolidate its regional footprint.

Exhibit 2419 Total M&A deals in Latin America - Cross-Border vs. Local deals

19 Elaborated by the author. The data was extracted from Thomson Reuters.

1539

122148

182

330

237

98118

174

12 24

101 118 136

251

191

74 75

124

3 15

21 30

46

79

46

24 43

50

-

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Local deals Cross - Border deals

November 12th 2012


In 2007, year in which the historical high of M&A volumes has been recorded, the

transactions led by Brazilian corporations represented 27,8% of the total amount of local

deals, but only 12,6% of the CB-M&A deals. The Brazilian case tends to have specific

peculiarities. First of all, the Brazilian economy, USD 2476 Bn economy with 196 Million of

habitants, is still in several sectors such as telecommunications, building material, consumer

staples, consumer discretionary, infrastructure, and personal care a highly under penetrated

market, with high growth potential. Secondly, Brazil is the only country in the region in

which the official language is Portuguese rather than Spanish. This factor creates an

additional challenge for Brazilian firm when expanding its operations within the region. That

said the low volume of Cross-Border M&A deals registered in Brazil is the result of the

existing high incentives and opportunities to keep consolidating their local market and the

existing cultural differences with the other countries in the region in terms of language.

On the other hand, the Mexican situation is the complete opposite of the Brazilian

M&A dynamic. While the total amount of M&A deals generated by Mexican companies in

2007 represented 21,5% of the total in the region, they accounted for 40% of the total CB-

M&A operations. The common language and cultural background with the rest of the Latin

American countries along with the geographic proximity with the United States have created

the necessary incentives for Mexican management teams to favor international expansions

rather than local ones. In addition, the Mexican market is a market that characterizes for being

highly concentrated and relatively more penetrated that the average in Latin America.

With regards to the new phenomenon of Latin American firms aiming to take over

companies located in developed countries, Exhibit 25, and 27 show the 10-year evolution in

terms of volumes with a breakdown by acquirer’s home country. On average, during the last 5

November 12th 2012


years, from the total Latin American Cross-Border M&A transactions 25% have involved

targets based in a developed economy.

Exhibit 2520 Cross-Border M&A in Latin America - Breakdown by bidder's country

After the financial crisis of 2008, the amount of Latin American firms looking to

expand its operations into developed economies significantly decreased (2007-2009 = - 80%)

as a result of the lack of credit and the lack of incentives to increase the exposure to an

economy either in recession or with low economic growth. However, the rapid economic

recovery in the Latin American countries combined with the slow recovery in the developed

economies has led to significant increase (2009-2011 = +275%) in the amount of CB-M&A

transactions involving targets established in developed countries. Indeed these kinds of deals

have increase almost three times faster than the CB-M&A operations targeting firms located

in emerging economies.

20 Elaborated by the author. The data was extracted from Thomson Reuters.

-

10

20

30

40

50

60

70

80

90

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Brazil Mexico Chile Colombia Argentina

3

1521

30

46

79

46

24

43

50

November 12th 2012


Exhibit 2621 Cross-Border M&A - Developed vs. Emerging markets targets

Exhibit 2722 Cross-Border M&A in developed markets - Breakdown by bidder's country

21 Elaborated by the author. The data was extracted from Thomson Reuters. 22 Ibid.

2 9

16 19 28

59

34

20

32 35

1

6

5

11

18

20

12

4

11 15

-

10

20

30

40

50

60

70

80

90

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Emerging economies Developed Countires

3

1521

30

46

79

46

24

4350

-

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


1

65

11

18

20

12

4

11

15

November 12th 2012


3.3 Research question 3 – Cultural distance effects

During this section, this study evaluated to what extent cultural distance affects the Cross-

border M&A Performance (short-term) of Latin American companies acquiring targets

located out of their home country. The multi-variable model used to calculate the existing

relationships between the CARs (dependent variable) and different cultural, geographic and

economic factors demonstrates that the variables selected for this regression analyses were

able to explain between 41,2% - CAR (-2, +1) and 57,19% - CAR (-10, +10) of the variations.

Based on this information it is possible to determine that exogenous factors such as culture,

geographic proximity, and economic have the capacity to explain 49,3% of the variations of

the Cumulative Abnormal Returns. The findings of this study are therefore in line with Ahern

et al. (2011). The results discovered by Ahern et al. (2011), using a large sample of 20,893

worldwide CB-M&A operations during a 17 years period (1991-2008) demonstrated that

indeed cultural variables play a significant role explaining the performance of bidders and

acquirers and the volume of the CB-M&A activity.

3.3.1 Cultural & Geographic Proximity: The cultural & geographic proximity was

measured by using Hofstede’s cultural dimensions and specific cultural factors, such as

language, legal origins, and religion.

Since Hofstede’s cultural dimensions are highly correlated23

with Hofstede’s index, it

is possible to assume that Hofstede’s index can be used as a good proxy of the combined

cultural dimensions. Regarding the Hofstede index, the regression analyses presented in

Exhibit 28, demonstrates that for small event windows is not possible to evidence a

relationship between the CARs and the Hofstede Index, but for larger event windows, CAR (-

10, +5), and CAR (-10, +10), there is. Nonetheless, it is not possible to conclude to what

23 PDI 0.81, IDV 0.92, MAS -0.18, UAI 0.88

November 12th 2012


extent the cultural dimensions employed in the Hofstede index impact the evolution of the

abnormal returns due to the fact that the results are highly volatile (CAR (-10, +5) = -1,09;

CAR (-10, +10) = 0,68) and they are not statistically significant in any event window.

Exhibit 28 Cross-Sectional Regressions of CARs of Latin American firms

With respect to Hofstede’s cultural dimensions it is possible to determine that the

results found in the cross-section analyses are highly volatile across the different event

windows. Considering larger event windows, such as CAR (-10, +5), and CAR (-10, +10) it is

possible to observe that while PDI has a positive relationship with the Abnormal returns,

IDV, MAS, and UAI have a very strong negative relationship inferring that cultural

differences might have a negative impact. During the event window (0, +1) it is possible to

see that the market reaction (Exhibit 29) favors deals targeting firms in developed economies,

which could mean that indeed cultural differences can have a positive impact on abnormal

Dependent Variable CAR (-1,0)CAR

(0,+1)CAR (-1,+1) CAR (-2,+1) CAR (-5,+1) CAR (-5,+5) CAR (-10,+5) CAR (-10,+10)

Independent Variable

Intercept -0,0303 0,0462 0,0288 0,0280 -0,0490 -0,0497 -0,1367 -0,1904

Determination Coefficient 0,4694 0,4803 0,4419 0,4120 0,4855 0,5196 0,5470 0,5719

PDI Diference -0,0187 -0,0551 -0,0484 -0,0760 -0,0320 0,0496 0,3463 0,3086

IDV Difference 0,1683 0,0546 0,1256 0,0485 0,2152 0,0768 0,1252 -0,0580

MAS Difference -0,0261 -0,2025 -0,1770 -0,2330 0,1835 0,0448 -0,0157 -0,4661

UAI Difference -0,0615 -0,3301 -0,3031 -0,3130 -0,3810 -0,4392 -0,2268 -0,4696

Hofstede Index -0,3925 0,3654 0,0981 0,2763 -0,6874 -0,3429 -1,0988 0,6848

Type 0,0236 0,0243 0,0267 0,0390 0.0853* 0.1070** 0,0890 0,1048

Geographic Proximity 0,0015 -0,0156 -0,0101 -0,0120 0,0405 0,0250 0,0097 -0,0347

Language 0,0209 0,0181 0,0263 0,0322 0,0126 0,0006 0,0103 -0,0141

Legal Origins -0,0091 -0,0218 -0,0122 -0,0131 -0,2120 -0,2730 -0,2350 -0,1640

Religion 0,0184 -0,0027 -0,0058 -0,0156 0,1548 0,2240 0,2794 0,2837

Per Capita Difference 0,0114 0,0019 0,0087 0,0107 0,0139 -0,0089 -0,0218 0,0378

Gini Difference 0,2157 0,0165 0,1080 0,2412 0,8662 0,8281 1,0878 1,0586

***,**,* represent statistical significance ar the 1,5,10% levels, respectively. This table represents the daily and cummulative abnormal returns

using the market model of 47 Cross Boder M&A expansion announcements by Latin American companies over the period 01/01/2002-31/12/2011

November 12th 2012


returns. Nevertheless and in line with the findings of the multi-variable model, in bigger event

windows, (-5, +5) (-10, +5) and (-10, +10) the amount of positive reactions is greater when

the target operates in Emerging Markets, inferring that cultural disparities tend to have a

negative effect on abnormal returns. Additionally, while the average of positive reactions of

CB-M&A with Emerging Market’s targets is 48,8%, the same figure for the deals involving

targets in developed countries is 46,1%.

Exhibit 29 Positive vs. Negative Market reactions

The variable (Type) that analyses the effect of acquiring firms in related industries is

statistically significant in the following event windows: CAR (-5, +1) and CAR (-5, +5). This

finding implies that acquiring firms in similar or related industries tends to have a positive

impact on the abnormal returns. These results are validated with the data presented in Exhibit

30 (Coefficient of correlations).

The results of the geographic proximity, language, legal origins and religion

parameters are mixed and relatively low, exposing the fact that its impact on the abnormal

returns is very low. In addition in every event window the results are statistically

insignificant.

Positive:

Negative

Positive

Market

reaction

Positive:

Negative

Positive

Market

reaction

Positive:

Negative

Positive

Market

reaction

CAR (-1,0) 0,53% 0,88 21:26 44,68% 11:20 35,48% 8:8 50,00%

CAR (0,+1) 1.38% * 1,83 24:23 51,06% 12:19 38,71% 9:7 56,25%

CAR (-1,+1) 1,37% 1,50 24:23 51,06% 13:18 41,94% 8:8 50,00%

CAR (-2,+1) 1,33% 1,21 23:24 48,94% 13:18 41,94% 7:9 43,75%

CAR (-5,+1) 2.45% * 1,75 23:24 48,94% 12:19 38,71% 8:8 50,00%

CAR (-5,+5) 2,44% 1,52 26:21 55,32% 16:15 51,61% 7:9 43,75%

CAR (-10,+5) 1,92% 0,98 24:23 51,06% 15:16 48,39% 6:10 37,50%

CAR (-10,+10) 2,86% 1,26 23:24 48,94% 14:17 45,16% 6:10 37,50%

***,**,* represent statistical significance ar the 1,5,10% levels, respectively. This table represents the daily and cummulative

abnormal returns using the market model of 47 Cross Boder M&A expansion announcements by Latin American companies over

the period 01/01/2002-31/12/2011

Interval

Cummulative

Abnormal

Returns

T -

Statistic

Total No of transactions Emerging Markets Developed Economies

Latin American Companies

November 12th 2012


3.3.2 Economic factors: The GDP per Capita has been used as a proxy of economic size, in

order to evaluate if the difference between the economic wealth in different countries can

actually affect the short-term performance of the acquirers. Since the results are very small

and none of them is statistically significant it is not possible to conclude what’s the effect of

this variable on the CARs. Furthermore, the Gini Index was also used as an additional factor

to measure economic differences. As previously mentioned this Index measures to what

extent wealth in a given economy is fairly distributed. The results obtained in the regression

analyses show that it seems to be a positive relationship between greater economic differences

in terms of distribution and greater abnormal returns. Nonetheless, these results are not

statistically significant in any event window.

Exhibit 30 Coefficient of Correlation between the CAR's and the independent variables

CAR (-1,0) CAR (0,+1) CAR (-1,+1)CAR (-2,+1)CAR (-5,+1) CAR (-5,+5) CAR (-10,+5)CAR (-10,+10)

PDI Diference 0,10 - 0,02 - 0,05 - 0,04 - 0,08 - 0,00 - 0,04 0,01

IDV Difference 0,09 0,08 0,07 0,03 0,00 0,01 - 0,06 - 0,09 -

MAS Difference 0,13 - 0,13 - 0,13 - 0,11 - 0,07 - 0,11 - 0,16 - 0,17 -

UAI Difference 0,08 - 0,12 - 0,11 - 0,10 - 0,12 - 0,10 - 0,14 - 0,17 -

Hofstede Index 0,03 - 0,01 - 0,03 - 0,04 - 0,06 - 0,05 - 0,09 - 0,13 -

Type 0,13 0,13 0,10 0,13 0,19 0,23 0,14 0,17

Geographic Proximity 0,11 - 0,13 - 0,10 - 0,15 - 0,13 - 0,13 - 0,13 - 0,13 -

Language 0,06 0,13 0,11 0,10 0,02 0,01 0,00 - 0,00

Legal Origins 0,04 0,01 0,02 0,02 0,05 0,02 0,07 0,11

Religion 0,04 0,04 0,04 0,03 0,07 0,07 0,10 0,15

Per Capita Difference 0,04 - 0,07 - 0,04 - 0,04 - 0,07 - 0,11 - 0,12 - 0,06 -

Gini Difference 0,18 0,08 0,10 0,16 0,21 0,20 0,27 0,24

November 12th 2012

64 4 Conclusions | Beneficiario Colfuturo 2011

4 Conclusions

This study investigates and analyses Cross-Border Mergers & Acquisitions developed by

Latin American bidders during the ten-year period, January 1st 2002 – December 31

st 2011.

During this time horizon 1483 operations were announced to the market. After filtering this

data in order to meet the criteria, this study evaluated 47 observations of CB-M&A in

Argentina, Brazil, Chile, Colombia, and Mexico. I discovered that on average the market

perceives as positive news in the short-term the fact that a Latin American firm is planning to

acquire a firm based in a different country. Indeed, the abnormal return obtained during the

announcement date is +0,55% (Positive market reaction 46,81%) and +0,84% (Positive

market reaction 63,83%) the day after the announcement. The cumulative abnormal return for

the event window (0, +1) is +1,38%. Both results are statistically significant at the 10% level.

Moreover, abnormal returns surrounding the “announcement date” confirm this positive

market reaction.

Throughout this study I also found that CB-M&A allocation is strongly influenced by

cultural and geographic proximity. In this sense, 78% of the total Cross-Border-M&A deals

registered during the time frame used in this study were close whether in terms of geographic

distance or in terms of cultural values. In addition, the rapid economic recovery experienced

by the Emerging economies with respect to the developed countries after the 2008 financial

crisis, has driven a significant increase in Cross-Border deals involving targets with

operations in developed economies. Indeed, after the hard landing of 2009 this kind of deals

have increased by +275% in two years (2009-2011).

The multi-variable model used in this research demonstrated that exogenous factors

such as culture, geographic proximity, and economic size have a significant impact on the

outcome experienced during the announcement date of the bidder’s stock value. Regarding

November 12th 2012

Beneficiario Colfuturo 2011 | 4 Conclusions 65

the effect of cultural differences, it appears that they tend to have a negative effect on

abnormal returns, but the results are not statistically significant.

In conclusion, from a value perspective, the market positively prices, in the short-term,

CB-M&A deals developed by Latin American bidders. These findings are in accordance with

previous studies. Nevertheless, when analyzing short-term performance of M&A operations it

is also significant to keep in mind the fact that highly complex integration processes may not

be correctly understood by the market (Aybar et al. (2009)) leading to biased and unfair

market valuations. That’s the reason why this study focuses on determining the market

perception and it does not intend to provide any kind of evidence with respect to M&A

valuation.

November 12th 2012

66 5 Limitations & Further Research | Beneficiario Colfuturo 2011

5 Limitations & Further Research

5.1 Limitations

Geographic concentration: this factor represented a significant limitation for this study

since it limited the amount of CB-M&A operations to study. This research limited to study

the potential value creation or destruction, for the bidders, in a region where CB-M&A is

still a relatively recent phenomenon, which represents a constraint for the robustness of the

results.

Methodology: The Event-Study Methodology determines to what extent the actual return of

a given stock diverge from the expected result given by the market model. The market

model expected returns is calculated by using different statistic parameters between the

stock and the market return. That said if the market form of efficiency is semi-strong or

weak, and the daily liquidity is highly volatile, the results obtained by the market model

might be exposed to an unjustified high volatility. In this study this is a limitation since the

Latin American stock exchanges characterize for having a semi-strong and weak form

efficiency. Under this scenario, the calculation of the ARs and the CARs may not effectively

and fully capture the effect of the announcement of a Cross-Border M&A operation into the

stock price of a given firm.

Short-term valuations: When a company announces its intentions to acquire another firm

based in a foreign country the market players will rapidly start to price the effect of the

announcement on the valuation of the acquirer. Nonetheless, in many cases the market

players do not entirely understand the strategy behind the announcement nor the costs and

financial structure planned to execute these transactions. This lack of understanding can lead

to a misprice of the stock, which affects the results obtained by abnormal returns.

November 12th 2012

Beneficiario Colfuturo 2011 | 5 Limitations & Further Research 67

5.2 Further Research

Since this study exclusively focuses on analyzing the potential value creation or destruction

on the Latin American bidders in a 20 days time frame surrounding the announcement of a

CB-M&A operation, a suggestion for further research will be to broaden the analysis by

evaluating the impact on the target’s stock price as well. By doing this it would be possible to

know if the total effect of the operation was either positive or negative for a given economic

environment. Moreover, since I only used 5 countries as a proxy of Latin America, it could be

possible to extent this study to all the CB-M&A operations developed in the 21 Latin

American countries, during a longer time frame (20 years). Finally, with the purpose of fairly

measuring the total effect of executing Cross-Border acquisitions I will suggest to develop an

analysis of the long-term results for both the acquirer and the target by assessing the long-

term evolution of different profitability and sustainability metrics that can be found in the

financial statements.

November 12th 2012

68 Case Study - Sonda, IT Services in Latin America | Beneficiario Colfuturo 2011

Case Study - Sonda, IT Services in Latin America

Company Overview

Founded in 1974 in Chile and present in 9 Latin American countries, Sonda is the leading

local provider of technology in LATAM in terms of revenues. The firm offers IT services,

software applications, and hardware platforms to large companies (client base 5.000). Since

2006, when the company went public (USD 215 M), it has acquired 10 firms (USD 450 M –

EV/Sales 0.68x vs Sonda’s 1.6x), EBITDA has been growing at a CAGR of 15.8%, and new

contracts have tripled.

Exhibit 3124 Sonda's ownership structure

As previously mentioned since 2006 Sonda’s shares are listed in the Chilean Stock Exchange

after having raised USD 215 M in equity. The Navarro Haeussler family (53.6%) controls the

firm. In addition, it is also held by pension funds (14.1%) and international mutual funds (4%

- Aberdeen, FTIF Sicav, Santander, Ishares). The current Free Float represents 218 million of

shares and USD 594 Bn (28%).

24 Data extracted from the firm’s 2011 Annual Report.

54%28%

14%4%

Hausser Navarro Family Free Float Pension Funds Mutual Funds

November 12th 2012

Beneficiario Colfuturo 2011 | Case Study - Sonda, IT Services in Latin America 69

Latin American IT Market

The Latin American IT industry (USD 83 Bn/year – CAGR 10% 2011-15) characterizes for

being a highly competitive and fragmented sector with relatively strong barriers to entry

(long-term contracts). Since IT investments are costly, time consuming, difficult in terms of

adaptation (learning curve) and require firms to share critical knowledge regarding industrial

processes, strategies and operations with its IT provider, once a company has successfully

installed its IT Infrastructure it is very unlikely it will change its provider (short-mid-term) as

this would mean a new similar investment in time, efficiency and money.

Within the IT services industry Sonda’s competitors can be classified into 3 different groups:

1) Small firms highly specialized in a niche without scale or regional footprint, 2)

International tier 1 players, such as IBM, HP, and Accenture, who offer highly standardized

worldwide solutions to large companies, and 3) Asian and Indian firms with a relatively weak

local presence.

Exhibit 3225 Principal IT companies in Latin America

25

Sonda’s Initiation report developed by ITAU, “Unique IT Growth Vehicle in LatAm” Gustavo Fingeret &

Susana Salaru; March 19 2012.

Strategic Consulting

IT Consulting

BPO/ASP

Systems Integration

IT infrastructure

Business Solutions

Software Engineering

Application Maintenance

Application Development

Product Engineering

November 12th 2012


Regional Footprint

Chile is Sonda’s primary market, generating 42% of new contracts and contributing to 41%

and 74% of Revenues and EBITDA growth respectively in 2011. With a 22% market share

(IBM 16%), Sonda is the leading IT provider and it is well positioned to capture the expected

annual growth in IT spending (CAGR12-15 12.6%). Sonda’s main clients in Chile include

regional retailers (Cencosud, Walmart, Carrefour), financial institutions (Santander, BBVA,

Banco de Chile), and global manufacturers (Bayer, Unilever, Nestle).

The Brazilian market is Sonda’s second earner generator and is expected to grow at a

CAGR 12-15 of 13.8%. The firm entered into this market in 2003 and since then it has

acquired and successfully integrated into its operations 7 IT firms (USD 300 M) and captured

highly integrated IT contracts with large Brazilian corporations, such as: Petrobras, Embraer,

Bradesco, Oi, and Tim among others. As of Dec/11, Sonda held 3% of the total Market Share

(IBM 8%).

In 2004 Sonda entered into the Mexican market through the acquisition of three local IT

firms which brought expertise of the local market and a solid client base (Telmex, Banamex,

Grupo Mexico, and PWC) an currently it holds a 3% of the Market Share. Even though IT

spending is expected to grow at a CAGR 12-15 of 9.2%, it is significant to mention that the

Mexican operations do not represent a very important growth driver since the IT industry in

Mexico is a very competitive market, mainly dominated by tier 1 firms (IBM, and HP).

November 12th 2012


Business Model

Sonda has a vertical and integrated business model which enables it to resell and install

own/third-party software/hardware, maintains its clients IT infrastructure, and implement

ERP solutions in a regional scale for large companies. Even though Sonda’s prices are in line

with the competition, its highly diversified portfolio along with its ability to package tailor-

made & interconnected services, rather than sell standardized and separated products makes

its vertical structure attractive to its clients and its business model hard to replicate. In

addition, most of Sonda’s contracts range from 3-6 years and involve interconnected IT

products (even stronger barriers to entry).

Exhibit 3326 Sonda's EBITDA and Revenues breakdown

1) Platforms: Through this business line Sonda resells physical infrastructure (Hardware -

storage equipment, switches, routers, PC, printers etc.) through several partnership and

exclusive agreements with the industry’s principal vendors (Oracle, IBM, Cisco, Sap, Intel,

and HP). Even though this is a low-margin business, it is used as a platform to cross-sell IT

services by creating needs for technical support and increasing client base.

26

Source: Sonda’s Initiation report developed by ITAU, “Unique IT Growth Vehicle in Latam”, Gustavo

Fingeret & Susana Salaru, March 19 2012.

Platforms IT Services Applications

43%

34%

12%

11%

100%

54%23%

9%6%

Chile

Brazil

Mexico

LatinAmerica

November 12th 2012


2) IT Services - Core Business: After the installation of the IT equipment, the next step is the

necessary support and maintenance of the network. This is when the IT services division, with

healthier margins and faster growth rates, comes in by offering I) IT outsourcing, II)

Infrastructure support & Data Storage, and III) IT Consulting.

Since Sonda’s clients core business is very rarely maintaining a High Tech digital network,

most of the times they decide to outsource this activity to Sonda in order to avoid business

disruptions and maximize the potential of their IT infrastructure. Additionally, the company

offers infrastructure support services (Hardware and Software) such as, storage of proprietary

data and cloud computing services (1st local player). Even though Cloud Computing only

accounts for 5%-6% of total revenues, the firm is a regional leader and it is well positioned to

capture the growth opportunities of a market that is “expected to triple in the next five years”

(IDC). Nevertheless, demand for cloud computing in Latin America should remain relatively

low (in the short term) as the region is still working on virtualizing servers, automating

datacenters and increasing broadband penetration (key prerequisite for successful cloud

computing). Lastly, Sonda’s knowledge of its clients platforms and IT departments allows it

to offer IT consulting services (Help Desks services).

3) Applications: This business unit focuses on supporting and enhancing clients’ businesses

by implementing Sonda’s ERP solutions, in Chile, and third-party software solutions (SAP,

and Oracle), abroad, whether for general purposes or for an specific industry. In addition,

Sonda recently announced an exclusive agreement with SAP (BusinessOne) that aims to

market SAP/SONDA ERP solutions to Mid-caps with much lower licenses and

implementations costs. However much this division does not represent a significant top-line

growth driver, a successful partnership with SAP could increase Sonda’s profitability.

November 12th 2012


International Expansion into neighboring geographies via M&A

Sonda is a pure Latin American player with presence in most important Latin American

geographies and detailed knowledge about different sectors, specific niches, and large Latin

American Corporations. The capacity to offer highly customized and integrated solutions has

been the result of Sonda’s international expansion outside its home country Chile. During the

previous 20 years the firm has acquired and successfully integrated over 30 Latin American

SM&E’s with the purpose of gaining scale, acquiring knowledge (technology), and above all

consolidating a fragmented sector in which regional scale is a competitive advantage.

As mentioned before, after an era of high flows of FDI into Latin America, the

empirical evidence has shown that the amount of Latin American corporations expanding into

foreign countries its been rapidly increasing, creating large and regional corporations with

operations in different sectors such as Power & Energy, Consumer Staples, Utilities, Mining,

Telecommunications, and Building Materials among others. The increase in the amount of

Cross-Border M&A deals has lead to the creation of the “Global Latinas” (Casanova 2009).

Under this economic scenario, Sonda’s strategy is a clear example of a company focused on

offering to its clients the possibility to not only improve its diverse process by introducing

technology but also to help its clients when going abroad by providing regional and tailor

made services for each geography (cultural difference understanding) with the aim of

facilitating the integration process.

In 1984 Sonda started its international expansion into Peru, basically driven by the

geographic proximity not only in terms of distance but also in terms of culture. Later on, the

firm decided to increase its regional footprint in the region by acquiring small local IT players

November 12th 2012


in Argentina - 1986, Ecuador – 1990, Uruguay – 1994, Colombia – 2000, Brazil – 2002,

Costa Rica – 2003, and in Mexico – 1994 (Goldman Sachs Initiation Report).

Exhibit 3427 List of Sonda's last 5 years acquisitions

In Exhibit 35 it is possible to visualize the latest acquisitions. Through this aggressive

expansion plan Sonda has been able to diversify its revenue’s generation in terms of

geography, sectors and amount of clients. Even though Chile is still the main generator of

revenues, Brazil has been rapidly increasing its significance, and according to the guidance

delivered by Sonda’s management team they are expecting Brazil to become Sonda’s first

earnings generator in 2013 as a result of the expected materialization of the existing growth

drivers in the region and specifically in Brazil. In this sense, the firm announced a (August

2012) USD 700 M CAPEX for 2013-15 (USD 500 M for inorganic growth in Brazil &

Colombia) with the aim of consolidating its regional footprint. Company guidance suggests

27Source: The data has been collected from the Goldman Sachs, Santander and Itau’s Initiation Report, and from

Sonda’s Annual Report, legal fillings and corporate releases.

Date Company Country EV USD MAnnual

Revenues CLP M

Annual

Revenues USD MEV/Sales Ownership

June-07 Procw ork Brazil 118,0 72 950,5 151,8 0,8 100%

March-08 Red Colombia Colombia 11,6 12 975,4 27,0 0,4 100%

April-10 Telsinc Brazil 38,0 29 795,3 62,0 0,6 100%

April-10 Softteam Brazil 8,5 4 325,1 9,0 0,9 100%

June-10 Kaizen Brazil 6,7 7 208,6 15,0 0,4 100%

September-10 NexitiraOne Mexico 27,0 14 176,8 29,5 0,9 100%

November-10 Ceitech Argentina 6,7 7 208,6 15,0 0,4 100%

September-11 Quintec

Chile

Colombia

Argentina

Peru

117,4 88 472,9 184,1 0,6 99%

March-12 Pars Brazil 55,0 37 003,9 77,0 0,7 100%

May-12 Elucid Brazil 64,0 31 275,2 65,1 1,0 100%

TOTAL 452,9 305 392,3 635,5 0,7

Sonda's Acquisition Strategy

November 12th 2012


the financial resources for this plan will come from internal generation, and an equity

issuance of USD 312 M expected for 2H12 - 1H13 in Brazil through the form of a BDR. This

is a perfect example of a regional company that is not only capturing revenues in the region

but also diversifying its financial resources. The main drivers of the potential equity issuance

in the Bovespa are the following: 1) increasing the firm’s visibility, 2) using these new shares

as acquisition currency in order to finance future acquisitions in the region, and 3) entering

into a market with greater liquidity, with the purpose of ensuring future liquidity needs.

Exhibit 3528 International presence of Sonda in Latin America - Revenues

With respect to the upcoming growth drivers of Sonda and the reasons why the company has

decided to deepen its exposure in foreign countries, this study focuses on the following

factors: 1) Under penetrated markets & Low spending, and 2) Brazilian spending in IT. First

of all, and as the Latin American economies continue to consolidate its solid growth in per

capita income, large companies, and governments have started to intensify their investments

in IT whether to increase their competitiveness (Oil & Gas, Mining, Retail) or to meet

legal obligations (Financial Sector, Telecoms – stronger regulation). That said, according

to the IDC Investments in IT are expected to grow 2.1 times faster (CAGR 10% - IDC) in

28

Source: Goldman Sachs - Sonda’s Initiation Report, “The one-stop-shop for IT services in Latam – initiate

Sonda at Buy”, Lucio Aldworth & Carolina Yoshimoto, July 10 2012.

Brazil 34%

Chile 43%

Mexico 12%

Rest of Latin America 12%

November 12th 2012


Latin America than in the rest of the world from 2012 to 2015. Additionally the region

continues to be an underpenetrated market in terms of IT investments as a percentage of GDP

(1.5% Latin America vs. 2.5% World).

Exhibit 3629 IT Market - Global spending per country vs. GDP size

Furthermore, Brazil is the other axis of growth for the firm. Brazil is the largest IT market in

the region, with an annual spending of approximately USD 50 Bn, and an expected annual

growth rate of 13.8% over the 2012-15 period. This attractive growth potential is mainly

based on the following axis: 1) World-class events: World Cup 2014, Olympic Games 2016,

2) Lack of IT infrastructure and low broadband penetration of Brazil, and 3) stronger

legislation, forcing firms in the financial and telecom sectors to reinforce its IT infrastructure.

Risks involving the future international expansion via M&A

Regarding the expansion plan via M&A transactions the more significant risks are the

following: 1) Sonda might become a victim of its expansion plan by overpaying for inorganic

growth and increasing its risk profile (higher leverage). 2) Difficulties on successfully

executing the investment plan for the 2013-15 (lack of potential targets).

29Source: Sonda’s Initiation report developed by ITAU, “Unique IT Growth Vehicle in Latam”, Gustavo

Fingeret & Susana Salaru, March 19 2012.

November 12th 2012


On the other hand, 3) increasing competition from new players (Asian IT firms) and from

existing ones (IBM, Accenture, HP, and Infosys) could lead to higher pressure on margins.

Moreover, 4) the lack of highly qualified human resources in the region might impact the firm

in terms of both profitability (higher labor costs) and could limit growth opportunities

(constraints in terms of capacity). Lastly, the firm is highly exposed to a 5) foreign exchange

risk (57% of Revenues are abroad) regarding the reported figures (CHL Peso).

Conclusion

All in all Sonda is good example of what the local corporations and the M&A activity in the

Latin America has been experiencing during the last 20 years. Sonda started in 1970s as

privately owned company exclusively providing IT services to Chilean clients and financing

its operations through financial debt and equity capital coming from the reinvestment of

earnings. During the 1980s, in line with the 4th

worldwide global merger Sonda started to

expand its operations in Latin America via Cross-Border Mergers & Acquisitions. In this

sense, it is significant to mention that this firm started its process to become a “global latina”

(Casanova (2009)) one decade before the Latin American “Blue Chips”. As mentioned in a

previous section this firms started to consolidate a regional exposure as a results of the

“Bubble Burst” and its effect on the developed world companies who pushed them to sell a

portion of its strategic assets in Latin American to local buyers at attractive valuations. The

fact that Sonda already had a regional presence when the large Latin American corporations

started to perform CB-M&A transaction was a key growth driver for the firm, first mover

advantage, since it enabled it to offer services and products adapted to every geography to this

new type of client who was starting to experience the challenges of implementing the same

business model in a different cultural environment.

November 12th 2012

78 References | Beneficiario Colfuturo 2011

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November 12th 2012

82 Appendix | Beneficiario Colfuturo 2011

Appendix

Exhibit 37 Cross-Border M&A -Targets in developed countries

Exhibit 38 AR's and CAR's evolution during the E.W - Targets in developed countries

Days

Average Abnormal

return -

Mkt Model



Positive:

Negative

Positive Market

reaction

- 10,00 -0,19% - 0,310 16 8 8 8:8 50,00%

- 9,00 -0,35% - 1,305 16 6 10 6:10 37,50%

- 8,00 0,56% 0,815 16 10 6 10:6 62,50%

- 7,00 -1,42% - 1,632 16 6 10 6:10 37,50%

- 6,00 0,12% 0,336 16 8 8 8:8 50,00%

- 5,00 -0,22% - 0,742 16 8 8 8:8 50,00%

- 4,00 -0,16% - 0,372 16 6 10 6:10 37,50%

- 3,00 0,74% 1,415 16 10 6 10:6 62,50%

- 2,00 -0,03% - 0,034 16 6 10 6:10 37,50%

- 1,00 -0,10% - 0,157 16 7 9 7:9 43,75%

- 0,60% 0,777 16 9 7 9:7 56,25%

1,00 0,73% 1,503 16 11 5 11:5 68,75%

2,00 0.75% * - 1,864 16 6 10 6:10 37,50%

3,00 0,30% 0,658 16 9 7 9:7 56,25%

4,00 0,19% 0,292 16 10 6 10:6 62,50%

5,00 0,44% 1,705 16 11 5 11:5 68,75%

6,00 -0,44% - 0,896 16 7 9 7:9 43,75%

7,00 0,01% 0,020 16 7 9 7:9 43,75%

8,00 -0,02% - 0,094 16 8 8 8:8 50,00%

9,00 -0,57% - 1,529 16 4 12 4:12 25,00%

10,00 0,48% 0,939 16 12 4 12:4 75,00%



the period 01/01/2002-31/12/2011

-2,00%

-1,50%

-1,00%

-0,50%

0,00%

0,50%

1,00%

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

AR's CAR's

November 12th 2012

Beneficiario Colfuturo 2011 | Appendix 83

Exhibit 39 Cross-Border M&A - Targets based in Latin America

Exhibit 40 AR's and CAR's evolution during the E.W. - Targets in Latin America

Days

Average Abnormal

return -

Mkt Model



Positive:

Negative

Positive Market

reaction

- 10,00 -0,53% - 2,419 27 6 21 6:21 22,22%

- 9,00 -0,07% - 0,256 27 11 16 11:16 40,74%

- 8,00 0,56% ** 2,084 27 14 13 14:13 51,85%

- 7,00 -0,0041* - 1,888 27 9 18 9:18 33,33%

- 6,00 -0,21% - 0,839 27 10 17 10:17 37,04%

- 5,00 0,30% 0,446 27 12 15 12:15 44,44%

- 4,00 0,33% 1,179 27 18 9 18:9 66,67%

- 3,00 0,29% 1,107 27 14 13 14:13 51,85%

- 2,00 -0,16% - 0,823 27 13 14 13:14 48,15%

- 1,00 -0,12% - 0,462 27 11 16 11:16 40,74%

- 0,82% 1,233 27 11 16 11:16 40,74%

1,00 0,71% * 2,004 27 16 11 16:11 59,26%

2,00 -0,47% - 1,383 27 18 9 18:9 66,67%

3,00 -0,10% - 0,272 27 10 17 10:17 37,04%

4,00 -0,28% - 0,865 27 12 15 12:15 44,44%

5,00 -0,27% - 0,816 27 8 19 8:19 29,63%

6,00 0,43% 1,202 27 8 19 8:19 29,63%

7,00 0,27% 1,271 27 16 11 16:11 59,26%

8,00 0,58% 1,550 27 14 13 14:13 51,85%

9,00 0,24% 0,828 27 12 15 12:15 44,44%

10,00 0,48% 0,939 27 17 10 17:10 62,96%



the period 01/01/2002-31/12/2011

-1,00%

-0,50%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

AR's CAR's

November 12th 2012

84 Appendix | Beneficiario Colfuturo 2011

Exhibit 4130

Hofstede's cultural dimensions

Exhibit 4231 Local M&A in Latin America - Breakdown by acquirer's home country

30 Elaborated by the author. The data was extracted from Hofstede website: http://geert-

hofstede.com/dimensions.html. 31 Elaborated by the author. The data was extracted from Thomson Reuters.

PDI IDV MAS UAI PDI IDV MAS UAI

Score Score Score Score Score Score Score Score

Argentina 0,49 0,46 0,56 0,86 New Zealand 0,22 0,79 0,58 0,49

Australia 0,36 0,9 0,61 0,51 Norway 0,31 0,69 0,08 0,5

Austria 0,11 0,55 0,79 0,7 Peru 0,64 0,16 0,42 0,87

Belgium 0,65 0,75 0,54 0,94 Philippines 0,94 0,32 0,64 0,44

Brazil 0,69 0,38 0,49 0,76 Portugal 0,63 0,27 0,31 1,04

Canada 0,39 0,8 0,52 0,48 Singapore 0,74 0,2 0,48 0,08

Chile 0,63 0,23 0,28 0,86 South Africa 0,49 0,65 0,63 0,49

Colombia 0,67 0,13 0,64 0,8 South Korea 0,6 0,18 0,39 0,85

Denmark 0,18 0,74 0,16 0,23 Spain 0,57 0,51 0,42 0,86

Egypt 0,8 0,38 0,52 0,68 Sweden 0,31 0,71 0,05 0,29

Finland 0,33 0,63 0,26 0,59 Switzerland 0,34 0,68 0,7 0,58

France 0,68 0,71 0,43 0,86 Taiwan 0,58 0,17 0,45 0,69

Germany 0,35 0,67 0,66 0,65 Thailand 0,64 0,2 0,34 0,64

Greece 0,6 0,35 0,57 1,12 United Kingdom 0,35 0,89 0,66 0,35

Hong Kong 0,68 0,25 0,57 0,29 United States 0,4 0,91 0,62 0,46

India 0,77 0,48 0,56 0,4 Costa Rica 0,35 0,15 0,21 0,86

Indonesia 0,78 0,14 0,46 0,48 China 0,8 0,2 0,66 0,3

Ireland-Rep 0,28 0,7 0,68 0,35 Paraguay 0 0 0 0

Israel 0,13 0,54 0,47 0,81 Luxembourg 0,4 0,6 0,5 0,7

Italy 0,5 0,76 0,7 0,75 El Salvador 0,66 0,19 0,4 0,94

Japan 0,54 0,46 0,95 0,92 Panama 0,95 0,11 0,44 0,86

Malaysia 1,04 0,26 0,5 0,36 Uruguay 0,61 0,36 0,38 1

Mexico 0,81 0,3 0,69 0,82 V enezuela 0,81 0,12 0,73 0,76

Netherlands 0,38 0,8 0,14 0,53 Latin America 0,63 0,24 0,42 0,79

Hofstede`s cultural dimensions

Country Country

-

50

100

150

200

250

300

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


1224

101118

136

251

191

74 75

124



November 12th 2012

Beneficiario Colfuturo 2011 | Appendix 85

Exhibit 43 Latin American Cross-Border M&A - Observations

Announcement

Date

Completion

DateAcquirer Target

Transaction Value

At Announcement

(USD M)

Country of

Acquirer

Country of

Target

22/7/02 13/5/03 Petroleo Brasileiro S,A, Petrobras Perez Companc SA 1 116,10 Brazil Argentina

3/3/04 27/8/04 Companhia Brasileira de Bebidas AMBEV Labatt Brewing Canada Holding Limited 1 505,80 Brazil Canada

5/8/05 5/8/05 Companhia Brasileira de Bebidas AMBEV Cerveceria y Malteria Quilmes SAICA y G 1 100,00 Brazil Argentina

15/9/05 9/12/05 Companhia Vale do Rio Doce Canico Resource Corp 734,35 Brazil Canada

10/1/06 10/1/06 Gerdau SA China Minmetals Corp and China Metallurgical Construction Corp's Steel-Making Equipments236,50 Brazil China

22/12/05 31/3/06 Petroleo Brasileiro S,A, Petrobras Royal Dutch Shell Assets in Paraguay Uruguay and Colombia140,00 Brazil Paraguay

28/6/06 13/7/06 Gerdau SA Empresa Siderurgica del Peru SAA 161,25 Brazil Peru

11/8/06 5/1/07 Companhia Vale do Rio Doce Inco Ltd 15 227,55 Brazil Canada

2/5/06 27/2/07 Banco Itau Holding Financeira SA BankBoston Chile Holdings Inc 559,52 Brazil United States

27/2/07 27/2/07 Companhia Vale do Rio Doce AMCI Holdings Australia Pty Ltd 787,85 Brazil Australia

10/5/07 12/7/07 JBS SA Swift & Co 1 425,00 Brazil United States

14/9/07 27/12/07 Marfrig Frigorificos e Comercio Quickfood SA 140,88 Brazil Argentina

22/12/07 12/2/08 Companhia Brasileira de Bebidas AMBEV Quilmes Industrial (Quinsa) SA 385,62 Brazil Luxembourg

19/11/07 23/4/08 Gerdau SA Quanex Corp 1 736,73 Brazil United States

23/6/08 15/10/08 Marfrig Frigorificos e Comercio Albert van Zoonen BV 680,00 Brazil Netherlands

30/1/09 4/2/09 Companhia Vale do Rio Doce Rio Tinto PLC potash project in Argentina 850,00 Brazil Argentina

23/12/08 1/4/09 Companhia Vale do Rio Doce Cementos Argos SA coal and logistic assets 300,00 Brazil Colombia

4/8/09 21/9/09 Iochpe Maxion SA ArvinMeritor Inc - wheel assembly plant 180,00 Brazil Mexico

2/6/10 30/8/10 Gerdau SA Gerdau AmeriSteel Corp 1 606,83 Brazil United States

14/6/10 1/10/10 Marfrig Alimentos SA Keystone Foods LLC 1 260,00 Brazil United States

15/12/09 12/4/11 Banco do Brasil SA Banco Patagonia SA 487,14 Brazil Argentina

12/6/02 30/7/02 Cemex SA de CV (MEX) Puerto Rican Cement Co Inc 171,96 Mexico Puerto Rico

5/3/03 5/3/03 America Movil SA BSE SA 180,00 Mexico Brazil

8/9/03 22/10/03 America Movil SA Compania de Telecomunicaciones de El Salvador SA 417,00 Mexico El Salvador

29/8/03 14/11/03 America Movil SA Bcp SA 625,00 Mexico Brazil

22/6/04 5/8/04 America Movil SA Empresa Nicaraguense de Telecomunicaciones 128,00 Mexico Nicaragua

25/7/05 25/7/05 Grupo Simec SA de CV [and others] PAV Republic Inc 229,00 Mexico United States

3/8/05 3/8/05 America Movil SA SMARTCOM LTD 505,00 Mexico Chile

10/8/05 10/8/05 America Movil SA TIM Peru 503,50 Mexico Peru

26/4/06 2/5/06 Grupo Cementos de Chihuahua Hardesty Company Inc 271,00 Mexico United States

3/4/06 1/12/06 America Movil SA Verizon Dominicana 2 062,00 Mexico Dominican Republic

5/12/06 14/2/07 Telefonos de Mexico SA de CV Cable Pacifico SA 130,00 Mexico Colombia

22/2/07 9/3/07 Mexichem SA de CV Amanco Holding Inc 500,00 Mexico Panama

3/3/06 30/3/07 America Movil SA Telecomunicaciones de Puerto Rico Inc 1 900,00 Mexico Puerto Rico

22/2/07 3/4/07 Mexichem SA de CV Petroquimica Colombiana SA 250,00 Mexico Colombia

10/12/08 22/1/09 Grupo Bimbo SAB de CV Weston Foods Inc 2 380,00 Mexico United States

19/3/09 1/4/09 Grupo Financiero Banorte SAB De CV Inter National Bank 146,60 Mexico United States

17/12/10 10/1/11 Mexichem SAB de CV Rockwood Holdings Inc -AlphaGary Plastic Compounding Business300,00 Mexico United States

8/10/10 12/8/11 CEMEX SAB de CV CEMEX Southeast LLC 360,00 Mexico United States

28/6/07 27/6/07 Sonda SA PWI Corp Participacoes Ltda 118,00 Chile Brazil

16/12/07 31/1/08 Cencosud SA GSW SA 467,00 Chile Peru

9/10/09 9/10/09 Endesa Chile SA Edegel SAA 375,00 Chile Peru

16/9/09 15/12/09 Empresas CMPC SA Guaiba Plant 1 430,00 Chile Brazil

23/8/11 19/10/11 Sigdo Koppers SA Magotteaux SA 789,77 Chile Belgium

10/3/06 10/4/06 Cementos Argos SA Ready Mixed Concrete Co Carolina 435,00 Colombia United States

18/5/06 2/8/06 Nutresa Pozuelo SA 119,00 Colombia Costa Rica

29/6/11 30/9/11 Almacenes Exito SA Spice Investment Mercosur 527,06 Colombia Uruguay

Cross-Border M&A - Observations

Documents

November 12 2012 - SIEDS · M&A announcements involving Latin American bidders were found in this study. From this ... Sarah Lee by Bimbo, Inco by Vale do Rio Doce, Wavin by Mexichem,