2. Literature review

Literature reviews has three sub-parts. In first section, M&As during financial crisis, particularly recent financial crisis, are mentioned. In second section, abnormal returns in cross-border M&As during financial crisis are investigated. In final section, there is a summary of financial overview of BRICS-T countries.

#### 2.1. Mergers and acquisitions during financial crisis

It has been argued that M&As1 are closely related to the stock markets' welfare. [2] suggests that M&A activities are not closely related to the business cycle but the state of the economy. In other words, if economy is in a good condition, stock markets have desired conditions for the firms to raise capital and grow their profitability [3]. On the other hand, in the opposite situation, that is, if economy is in a narrow condition, firms tend to be more conservative about M&A.

M&As are assumed to be a way of foreign direct investment<sup>2</sup> (FDI) and they follow a wave path due to economic state [4]. M&A wave between 2003 and 2007 (precrisis period) indicated that cross-border M&As had increased compared to the recession periods. Especially in 2005, there had been a number of FDI flows to the developed countries, and the quantity and the

<sup>1</sup> M&A is a way of economic growth strategies by combining or consolidating of companies.

<sup>2</sup> FDI is a company's investment to another company operating in a different country.

value of M&As were the highest since 2000 [4]. In 2006, M&A activities started to rise in emerging countries. Until the second half of 2007, M&As continued increasing but after that they started to fall and got even worse in the first half of 2008 compared to 2007 [4].

Collapse of Lehman Brothers is assumed to be the trigger of financial crisis in September 2008 [1]. Hence, economic crisis caused a drastic fall in M&As.

On the other hand, according to [5], financial crisis originated in developed countries in 2008 did not have the same large impact on emerging economies. The crisis emerged in United States, spread immediately to Europe but it only affected the specific regions and countries so harsh.

While some banks utilized M&A as an expansion strategy, some banks used it into their advantage during crisis. Banks in emerging economies such as China, Brazil and Russia acquired undervalued banks in developed countries as their prices in the stock markets fell [3]. Banks that are in healthy conditions in terms of capital and liquidity took the advantage of increasing their market share through M&As [6].

#### 2.2. Abnormal returns of cross-border M&As during financial crisis

Aim of the study is to investigate how economic crisis originated in developed countries have affected developing economies. Therefore, we examined the mergers & acquisitions activities of banking sector in BRICS-T countries. Lehman Brothers' crash in September 2008 is assumed to be the trigger of the global financial crisis [1]. With this reasoning, we analyzed cumulative abnormal returns in precrisis (January 2004–September 2008) and postcrisis (November 2008–December 2013) periods to check if there are any differences between these periods. Brazil has negative mean cumulative abnormal returns in pre crisis period as well as the post crisis period. Russia has negative mean cumulative abnormal returns in precrisis period while mean cumulative abnormal returns for Russia are positive in postcrisis period. India has negative mean cumulative abnormal returns in precrisis period, which switches to positive in postcrisis period. China, in the opposite, has positive mean cumulative abnormal returns before crisis but negative mean cumulative abnormal returns after crisis. The mean cumulative abnormal returns in South Africa are positive in the precrisis period and negative in the post crisis period. Turkey has positive mean cumulative abnormal returns in

Section 2 introduces a literature review about M&As in BRICS-T countries in three different parts. First, literature about M&As during financial crisis is mentioned. Then, literature on abnormal returns in M&As during financial crisis is examined. Finally, financial overview of BRICS-T countries is investigated and shared. In Section 3, data and methodology are men-

Literature reviews has three sub-parts. In first section, M&As during financial crisis, particularly recent financial crisis, are mentioned. In second section, abnormal returns in cross-border M&As during financial crisis are investigated. In final section, there is a summary of financial

It has been argued that M&As1 are closely related to the stock markets' welfare. [2] suggests that M&A activities are not closely related to the business cycle but the state of the economy. In other words, if economy is in a good condition, stock markets have desired conditions for the firms to raise capital and grow their profitability [3]. On the other hand, in the opposite situation, that is,

M&As are assumed to be a way of foreign direct investment<sup>2</sup> (FDI) and they follow a wave path due to economic state [4]. M&A wave between 2003 and 2007 (precrisis period) indicated that cross-border M&As had increased compared to the recession periods. Especially in 2005, there had been a number of FDI flows to the developed countries, and the quantity and the

if economy is in a narrow condition, firms tend to be more conservative about M&A.

M&A is a way of economic growth strategies by combining or consolidating of companies.

FDI is a company's investment to another company operating in a different country.

tioned as well as the empirical results. The study is concluded with Section 4.

both periods.

1

2

2. Literature review

overview of BRICS-T countries.

132 Financial Management from an Emerging Market Perspective

2.1. Mergers and acquisitions during financial crisis

There is a broad literature about generating abnormal returns<sup>3</sup> through M&As. However, there are not many studies in investigating the abnormal returns during 2007–2008 crisis. In addition, the results of the studies are mixed.

The research that does not include 2008 crisis is as follows. [7] examined 507 cross-border M&As between 1985 and 1998. They found negative and significant abnormal returns. In another study, [8] investigated cross-border M&A activities of 15 international banks between 1982 and 1987. They concluded that there had been negative and significant abnormal returns. In a single country study, [9] investigated M&As in U.S. between 1989 and 1999. He found that U.S. targets earn significantly positive abnormal returns while U.S. bidders' wealth gains are insignificant. In another research conducted in the U.S., [10] used the data for bank-holding companies in United States between 1980 and 1990 in order to determine abnormal returns. Results revealed significantly negative abnormal returns. On the other hand, [11] found that there had been significant positive returns using 216 large publicly traded U.S. bank M&As between 1987 and 1999. In a cross-border study, [12] employed 73 cross-border banks M&As (from advanced economies to emerging economies) between 1998 and 2005. They found significant and positive abnormal returns. In Europe, [13] achieved the existence of positive abnormal returns for the shareholders of target banks cross-border M&As between 1989 and 1996. In another study in Europe, [14] found positive abnormal returns using the data from European banks between 1988 and 1997. [15] gathered the data for 98 large M&As in Europe between 1985 and 2000. They found that domestic M&As created positive returns. [16] suggested that value created would be larger if the target firm was in advanced economy using 425 cross-border M&As in India between 2000 and 2007.

<sup>3</sup> Abnormal return is the return on a security that is different from the expected return.

In order to investigate the effects of Asian crisis, [17] used a data of nine emerging countries namely Argentina, Brazil, Chile, Indonesia, Philippines, South Korea, and Thailand between 1988 and 2002. They concluded that acquirer firms show no significant difference in abnormal returns pre and postcrisis periods. On the other hand, [18] studied the M&As in eight East Asian countries between 1997 and 2003 in order to determine market reaction to M&As during Asian crisis. Their results showed that market reaction was negative in Indonesia, Malaysia, the Philippines, South Korea, and Thailand where the bank structure was less well settled.

The results of the studies that investigate the effects of 2008 crisis are mixed. [19] utilized the M&A data in Europe between 2007 and 2010 to evaluate whether M&A differed in crisis period. They concluded that there were insignificant abnormal returns on the event date. On the other hand, abnormal returns were generated positively at the completions. However, [20] used 80 M&As in UK, USA, Canada, Germany, Japan, and France between 1999 and 2009 to determine stock returns of bidder firms. Abnormal returns precrisis and postcrisis period was not significantly different from zero. In another research, [3] examined 883 cross-border M&A deals in banking sector between 2004 and 2012. They concluded that only in M&As from emerging countries targeting developed countries, returns of the shareholders were significantly positive after the crisis. Finally, [21] gathered the M&A data for 20 emerging countries namely BRICS-T countries and Chile, Colombia, Czech Republic, Egypt, Hungary, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Taiwan and Thailand between 1997 and 2013. They concluded that M&As created positive abnormal returns. In addition, they found out that abnormal returns had increased after crisis for target firm's stock.

In conclusion, results of the studies are mixed and they change according to the period.

#### 2.3. Financial overview of BRICS-T countries in precrisis and postcrisis periods

In previous sections, it has been mentioned that there exists M&A waves. According to [22], there had been six M&A waves before the 2008 crisis, which are 1887–1907, 1919–1933, 1955– 1975, 1980–1989, 1992–2002, and finally 2003–2007.

Table 1 shows the quantity and transaction value of cross-border M&As in BRICS-T countries between 2002 and 2016 [23]. In Brazil, cross-border M&As have value of \$17 billion in 2003. It increased by 65% in 2004 and reached to \$26 billion. In 2005, there is a decrease by 58% and the value is \$15 billion. Then in 2006, there is a jump in the value and it has reached to \$74 billion. In 2007, there is a fall by 72% in value. M&As have the peak value in 2008 during the precrisis period. There is a drastic fall in value in 2009 due to crisis. In 2010, M&As have the peak value in postcrisis period. It started declining afterwards. In Russia, the value of cross-border M&As is \$35 billion in 2003, and in 2004, the value has declined by 72%. In 2005, the value has jumped to \$63 billion and during the precrisis period, M&As have the peak value in 2007. In 2008, the value has decreased by 52% and in 2009 the decrease is 43%. Then, the value has been tripled in 2010. Cross-border M&As have their peak value in 2012 in postcrisis period. In India and China, cross-border M&As have the peak value in 2007 in precrisis period and in 2010 in postcrisis period. In India, there is a jump in cross-border M&A value in 2005 (4.5 times higher than 2004), and in China, there is a high increase in 2005 as well (6.25 times higher than 2004).


Table 1. Quantity and Transaction Value of Cross-border M&As in BRICS-T Countries between 1992 and 2016 (value in billion dollars).

In South Africa, values of M&As follow an increasing pattern until 2007. M&As have their peak value in 2007 in precrisis period and in 2009 in postcrisis period. Finally, in Turkey, M&As have their peak value in 2005 in precrisis period and 2012 in postcrisis period.
