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Tjalling C. Koopmans Research Institute

(text) Discussion Paper Series nr: 09-21(Vul hier de titel in.) Theory and Evidence on Mergers and Acquisitions by Smalland

Medium Enterprises(vul hier de auteurs in) Utz WeitzelKillian J McCarthy

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TjallingC.KoopmansResearchInstituteUtrecht

SchoolofEconomicsUtrechtUniversity

Janskerkhof123512BLUtrecht

TheNetherlands

telephone+31302539800fax+3130253

7373websitewww.koopmansinstitute.uu.nl

TheTjallingC.KoopmansInstituteistheresearchinstituteandresearchschoolofUtrechtSchoolofEconomics.Itwasfounded

in2003,and

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namedafterProfessorTjallingC.Koopmans,Dutch-born

NobelPrizelaureateineconomicsof1975.

Inthediscussion

papersseriestheKoopmansInstitutepublishesresultsofongoingresearchforearlydissemination

ofresearchresults,andtoenhancediscussionwithcolleagues.

PleasesendanycommentsandsuggestionsontheKoopmansinstitute,orthisseriesto

J.M.vanDort@uu.nl

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ontwerpvoorblad:WRIKUtrecht

How

toreachtheauthors

Pleasedirectallcorrespondencetothe

firstauthor.

UtzWeitzel

UtrechtUniversityUtrechtSchoolof

EconomicsJanskerkhof123512BLUtrechtTheNetherlands.E-mail:u.weitzel@econ.uu.nlMaxPlanckInstituteofEconomicsEntrepreneurship,GrowthandPublicPolicyGroupKahlaischeStrae10,07745

Jena,Germany

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KillianJMcCarthy

Rijksuniversiteit

Groningen,SchoolofEconomicsandBusinessPOBox800,9700AVGroningen

theNetherlandsE-mail:K.J.McCarthy@rug.nl

Thispapercanbedownloadedat:http://

www.uu.nl/rebo/economie/discussionpapers

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UtrechtSchoolofEconomicsTjallingC.

KoopmansResearchInstituteDiscussionPaperSeries09-21

TheoryandEvidence

onMergersandAcquisitionsbySmallandMediumEnterprises

UtzWeitzela

KillianJMcCarthyb

aUtrechtSchoolofEconomicsUtrechtUniversity

aMaxPlanckInstituteofEconomicsJena,Germany

bSchoolofEconomics

andBusinessRijksuniversiteit

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Groningen

August2009

Abstract

Thetheoryofmergersandacquisitions(M&As)hasbeen

developedalmostexclusivelyfromthestudyoflargedealsbylargefirms.In

thispaperwearguethatthebehaviourandsuccessofM&Asbysmallandmediumsizedenterprises(SMEs)maybesignificantlydifferent.Accordingly,werevisit

establishedM&Atheories,

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anddevelopatheoreticalframework,andseveral

testablehypotheses,regardingthedistinctivefeaturesofSMEM&As.Ourempiricalresults

supportourexpectationsandshowthat,comparedtolargefirms,acquiringSMEs:rely

moreintensivelyonexternalgrowthviaM&As;aremorelikelytobewithdrawn,suggestingthatSMEsaremoreflexible,andmoreabletoavoiddeals

thatturnsour;

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and,finally,SMEM&Asaremorelikely

tobefinancedwithequityratherthandebt,indicatingthattheinfluential

financialpeckingordertheoryisoflessrelevancetoSMEs.

Keywords:

mergers,acquisitions,smallandmediumsizedenterprises

JELclassification:M13,G34

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1Introduction

Thereis

alongtradition ofacademicresearch on mergersandacquisitions(M&A)within finance,businessand economics.1

Sincetheverybeginning, thishasconsidered questionsrelatingto performanceevaluation and hasbeenconcerned, primarily, with issuesrelating, forexample, to what sort of returns mergers

generate, and for whom.

Thefocusofthisresearch, however, hasbeen ontheroleofthelargerM&Aevents, and preciouslittleattention hasbeen devoted to thequestionofsmalland mediumsized enterprises(SMEs). Probablythe

mostprominentreason for

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thisisbecausemostSMEsarenot

publiclyquoted -afactwhichmakesitdifficultto obtain reliabledataon theirgeneral

activity, let alone to evaluate their M&Aperformance records2.

And yetsizedoesmatterin mergersand acquisitions(seee.g.,Moelleret

al., 2004;2005)and SMEsareanythingbutinsignificant. In theEuropeancontext, SMEsarethoughtto representabout99%ofallfirms,to employbetween themabout65 million people, and to driveinnovationand competition. Ataglobal

level, SMEsmayeven be

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responsibleforbetween 40% to 50% ofworld GDP (European Commission, 2005)

In

thispaperweattemptto includethisimportantbutlong ignoredsectorofthe

economy,byexplicitlyconsideringtheactivityofthesmalland medium sized entrepreneurial firm within the M&A industry.

Wepresent

directandindirectevidencewhich suggestsnotonlythatthebehaviourand financialsuccessofmergersbySMEsmaysignificantlydifferfromlargerpublicfirms, butalso thatthe

underlyingmergertheories

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which motivatetheseventuresmightneed to berevisited toaccount

forthisdiscrepancy. Theexistingevidenceon mergersandacquisitionshasbeen almostexclusivelydeveloped on the

basisoflargepublic firms and this, wesuggest, needs to be corrected.

Thispapermakesamodestattemptat

rectifyingthislongheld bias. Itdoesso by:firstly, studyingand selectingtherelevantmergertheories;secondly,bytranslating theseinto anumberoftestablehypothesesonSMEM&As;and, finally, byempirically

consideringand commentingupon the applicability of

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these theories to the special case of SME M&As.

1Althoughtechnicallyinaccurate,it

iscommonpracticewithintheliteraturetousethe

termsmerger

,acquisition,

takeoverandM&Asynonymously.2Thevastmajorityofperformancestudies

employeventstudymethodologiesthatrely

onabnormalreturnsofpubliclytradedstockprices,andwithoutaninitialpublic

offering,most

smalltomedium

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sized,privatelyheldentrepreneurialfirms

(especiallyintheirearlystagesorwhentheysimplyaretoosmall

tobeofany

interestforpublicequity)areautomaticallyexcluded

fromthesestudies.

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In doingso, wefind that,compared to largefirms,acquiring

SMEsare:

(1)morelikelyto relyon M&Aasan externalgrowth option;

(2)morelikelywithdrawfromadeal, afinding which, wesuggest, impliesthatSMEsaremore

flexible,and betterableto avoid dealsthatturn sour;and(3)thatSMEM&Asaremorelikelyto befinanced with equityoverdebt,indicating that thepecking order theory is of less relevance to SMEs.Thepaperisstructured asfollows:

Section Two beginsbyoverviewing

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theliteratureon mergers, and bydevelopinganumberof

hypothesesonhowthesemightrelateto SMEs.1Section Threeintroducesthedataand

methodology, which weemploy for testing, and Section Four discusses theresultsand majorimplicationsofourresearch.Section Fiveconcludesthediscussion bydrawing implications, and by

suggestingsomepotentialavenues for future research on SME mergersand acquisitions.

2LiteratureandHypotheses

To understand theroleoftheSMEwithin theM&Aindustryweexploreanumberof

questions. Webegin byasking

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whoarethesmalland mediumsized entrepreneurialfirms

ofinterestto ourresearch?Secondly, weask whytheseSMEsmerge, and whyweshould expectthem

to performdifferentlyto largerfirms?Next, weconsiderhowweexpectthemto perform, and finally, weexplorethrough what

mechanisms we expect SMEs to finance their mergers and acquisitions.

2.1. Who are the SMEs?Atpresentthereisnoconsensuson thethreshold atwhich enterprisesareconsidered small,mediumorlarge. Asillustrated byTable1,currentEuropean definitions, forexample, categorisecompanieswith

fewerthan 10employees

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asbeingmicroenterprises, thosewith fewerthan 50 asbeing

small,and thosewith fewerthan 250 asmedium(EUCommission, 2005). TheUS, bycontrast, definessmallashaving fewer

than 100 employees, and medium as havingfewerthan 500.

Thedistinction ofentrepreneurialfirmsisatleastequallydebated (see

e.g., Johnson, 2007), and theexistingmergerdatadoesnotdistinguishthemalongapredetermined workingdefinition. Atpresent,entrepreneurialfirmsarevariouslydistinguished in termsofownershipprofiles, innovativenessand risk attitudes, with theeffectthatmarkedly

different sets of firms can be studied within the field entrepreneurship.

1

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Notethatwefocusontheoriesthat

explainindividualmergersandnotmergerswaves.

Severalapproachesattempt

toexplainacommonlyobservedwave-likepatternof

mergers.SeeMartynova

andRenneboog,2008foranexcellentreview.

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Basedon thedataavailableto us, however,and

thefocusofboththerelevantempiricalstudieson mergers(seebelow)and on the

economicroleofentrepreneurialfirms, webelievethatitisreasonableto suggestthatthe

(single)setofSMEswilloverlapsignificantlywith thesetofentrepreneurialfirms. Weassumethat, in general, entrepreneurialfirms,and in particularnascentventures, willbesmallerfirms, and also thattheywillhavemore

privatethan publicequity

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than theaverageofthetotalpopulation offirms

(seeJohnson,2007;Deakinsand Freel, 2006). Wefullyappreciatethatsuchadefinition isimperfect, but

suggestthat, in thepresenceofdatalimitations, theoverlapbetween thetwo willbesufficiently large to provide us with some useful results.

Table

1:EuropeanCommissionSMEDefinitions

CategoryHeadcountTurnover*Assets*IndependenceMicroEnterprises

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Enterprises=5050mil>43mil

*Atleastoneof

theseconditionshavetobesatisfied.AllmonetaryvaluesincurrentEuros(also

forU.S.bidders).

**Thedetailedconditionsforindependencearemorecomplex(seesourceabove)

2.2. Why do SMEsMerge?Thequestion ofwhy

whydo SMEsmerge, and why

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should weexpectthemto performdifferentlyto largefirms

isnotso easilyaddressed. To answerthesesortsofquestionswemustconsiderthe

applicabilityofthevariousmergertheories, and mustoverviewtheliteraturewhich hasbeen putforward to explainmergers

in general. Dueto theexistenceofsomeempiricalfindings, which suggestthatmergersunder-performthemarket, thisliteraturehasbeendivided into two broadschools thevalue-increasing, efficientmarketschool, and value-decreasing agency schools and in our analysis we adopt this method.

The Value-Increasing Theories

Accordingto the

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valueincreasingschool, mergersoccur, broadly,becausemergersgenerate

synergiesbetween theacquirerand thetarget,and synergies, in turn, increases the value of the firm (Hitt et al., 2001).

Thetheoryofefficiencysuggests, in fact, that

mergerswillonlyoccurwhen theyareexpected to generateenough realisablesynergiesto makethedealbeneficial

to both parties;it isthe symmetricexpectationsofgainswhich resultsin afriendlymergerbeingproposed and accepted. Ifthe

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gainin valueto thetargetwasnot

positive, itissuggested, thetargetfirmsownerswould notsellorsubmitto theacquisition, and if

thegainswerenegativeto thebiddersowners, thebidderwould notcompletethedeal. Hence, ifwe

observeamergerdeal, efficiencytheorypredictsvaluecreation with positivereturnsto both theacquirerand thetarget. Banerjeeand Eckard (1998)and Klein (2001) evidence this suggestion.

FollowingChatterjee(1986), wemust, however, distinguish betweenoperativesynergies orefficiencygains

achieved through economiesofscale

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andscope andallocativesynergiesor

collusivesynergiesresultantfromincreased marketpowerand an improved abilityto extractconsumersurpluswhen commenting on value

creation in mergersandacquisitions. Mostofthemorerecentliteratureconcludesthatoperatingsynergiesare

themoresignificantsourceofgain(seee.g., Devosetal.,2008;Houston etal., 2001;Mukherjeeetal., 2004)1, although itdoesalsosuggestthatmarketpowertheoryremainsa

valid mergermotive.Increased allocative

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synergiesissaid to offerthefirmpositiveand

significantprivatebenefits(Feinberg, 1985)because, ceterisparibus,firmswith greatermarketpowerchargehigher

pricesandearn greatermarginsthrough theappropriation ofconsumersurplus. Indeed,anumberofstudiesfind increased

profitsand decreased salesaftermanymergers(Prager,1992;Chatterjee, 1986;KimandSingal, 1993;Sapienza, 2002;Cefisetal.,2008)-afindingwhichhasbeeninterpretedbymanyas

evidenceofincreasing

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marketpowerand allocativesynergygains(seee.g., Gugler et al., 2003). From a dynamic

point of view too, marketpoweris said to allow for the deterrence ofpotential future entrants (Motta, 2004;Besanko, 2006;Gugleretal., 2003), which canagain afford thefirmasignificant

premium, and so offeranother long-term source ofgain2.

In an efficientmergermarketthetheoryofcorporatecontrolprovides

athird justification, beyond simplysynergisticgains, forwhymergersmustcreatevalue. Itsuggeststhatthereisalwaysanotherfirmormanagementteamwillingto acquirean underperformingfirm, to removethosemanagers

who havefailed to capitaliseon the

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opportunitiesto createsynergies, and thus to improve theperformance of its assets (Weston etal.,2004). Managerswho offer

thehighestvalueto theowners, itsuggests,willtakeovertherightto manage

thefirmuntiltheythemselvesarereplaced byanotherteamthatdiscoversan even highervalue

foritsassets.

1Mukherjeeetal.(2004)findthat90%ofmanagersidentifyoperativemotivesasa

reasontomerge,and

Devosetal.

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(2008)suggestthat,ofatotal10.3%

synergygain,

some8.3%arisethroughoperativesynergies.2Few

bidders,ofcourse,openlyannouncethegoalofincreasedmarketpowerasan

explicitmergermotivation,butthefactthathorizontalmergersthatis,mergers

betweencompetitorsdominatetheM&Aindustry(Gugler

etal.,2003)

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issurely

indicativeofjust

howpopularitisasamergermotive.

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Hence, inefficientmanagerswillsupplythemarket

forcorporatecontrol(Manne, 1965), and managersthatdo notmaximiseprofitswillnotsurvive, even ifthe

competitiveforceson theirproductand inputmarketsfailsto eliminatethem.Hostiletakeoversshould, asa

result, beobservedamongstpoorlyperformingfirms, and amongstthosewhoseinternalcorporategovernancemechanismshavefailed to disciplinetheirmanagers. Onceagain theempiricalevidenceagain seemsto supportthisconclusion (seee.g., Hasbrouck, 1985; Palepu, 1986).

Fromthebidders

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perspective, thetheoryofcorporatecontrolispartially

based on efficiencytheory, although therearetwo importantdifferences. First, itdoesnotassume, perse, theexistenceofsynergies

between thecorporateassetsofboth firms, butratherbetween thebiddersmanagerialcapabilitiesand thetargetsassets. Hence, corporate

controlpredictsmanagerialefficienciesfromthere-allocation ofunder-utilizedassets. Second,itimpliesthatthetargetsmanagementteamislikelytoresisttakeoverattempts, astheteamitself

and itsmanagerialinefficiency

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isthemain obstacleto an improved utilization ofassets. Typicalbiddersare

eitherprivateinvestors orcorporateraiders who bringin morecompetentmanagementteams, ormoreefficient

firms, asmeasured byTobins Q, with bettergrowth prospects and superiorperformance.

The Value-Destroying Theories

Theimpactofmergers

and acquisitionson theperformanceoftheacquiringfirmremains,however, atbest, inconclusiveand,atworst,systematic[ally]detrimental(Dickerson etal., 1997). Mergersfailtocreatevalue, itissuggested with somewherebetween 60 and 80%classified as failures

(Puranamand Singh, 1999) and a number of valuedestroying theories have

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been put forward in explanation.

Generallyspeaking, thesevalue-destroying theoriescan bedivided into

two groups:thefirstassumesthatthebiddersmanagementisboundedlyrational, and thusmakes

mistakesand incurslossesdueto informationalconstraintsdespitewhataregenerallyvalue-increasingintentions. Thesecond assumes

rationalbutself-servingmanagers, who maximiseaprivate utility function, which at least fails to positively affect firm value.

Withinthefirstcategory, thetheoryofmanagerialhubris(Roll, 1986)suggeststhatmanagersmayhavegood intentionsin increasingtheirfirms

valuebut, beingover-confident, they

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over-estimatetheirabilitiesto createsynergies. Over-confidenceincreasesthe

probabilityofoverpaying(Hayward and Hambrick, 1997;Malmendierand Tate, 2008), and may

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leavethewinningbidderin thesituation of

awinner's-curse1, whichdramaticallyincreasesthechancesoffailure(Dongetal.,2006).

Empiricallyspeaking, Berkovitch and Narayanan (1993)find strongevidenceofhubrisin UStakeovers, and Goergen and Renneboog (2004)find thesamein aEuropean context. Thelatter

estimatethataboutonethird ofthelargetakeoversin the1990ssuffered fromsomeformofhubris. Malmendierand Tate(2005)showthatoverlyoptimisticmanagers, who voluntarilyretain in-the-moneystock optionsin their

ownfirms, morefrequently

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engagein lessprofitablediversifying mergers, andRau and Vermaelen (1998)find thathubris

ismorelikelytobeseenamongstlowbook-to-marketratio firms thatis, amongst

theso-calledglamour firms than amongst high book-to-market ratio valuefirms.

Jensens(1986)theoryofmanagerialdiscretionclaimsthat

itisnotover-confidencethatdrivesunproductiveacquisitions, butratherthepresence of excess liquidity, or freecash flow (FCF). Firms whose internalfundsarein excessoftheinvestmentsrequired to fund positivenetpresentvalueprojects, itissuggested, are

morelikelyto make

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quick strategicdecisions, and aremorelikelyto engagein large-scalestrategic

actionswith lessanalysisthantheircash-strapped peers.Highlevelsofliquidityincreasemanagerial

discretion, makingitincreasinglypossibleformanagersto choosepooracquisitionswhen theyrun outofgood ones

(Martynovaand Renneboog, 2008). Indeed,severalempiricalstudiesdemonstratethattheabnormalsharepricereaction to takeoverannouncementsbycash-rich biddersisnegativeand decreasingin theamountofFCFheld bythebidder

(seee.g., Harford, 1999). Moreover, itis

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suggested thattheotherstakeholdersin thefirmwill

bemorelikelytogivemanagementthebenefitofthedoubtin such situations, and to

approveacquisition planson thebasisoffuzzyand subjectiveconceptssuch asmanagerialinstincts, gutfeelingsand intuition, based on high

pastand currentcash flows(Rau andVermaelen, 1998). Thus, likethehubristheory, thetheoryofFCFsuggeststhatotherwisewell-intentionedmangersmakebad decisions, notoutofmalice,butsimplybecausethe

qualityoftheir

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decisionsarelesschallenged than theywould bein theabsence of excess liquidity.

Ofcourse, asthedegreeofmanagerialdiscretionincreasesin FCF, orin high marketvaluations

(asin thecaseofglamourfirmsabove), orinotherproxies, so, too, doestheopportunityfor

self-interestedmanagerstopursueself-servingacquisitions(Jensen, 2005). Itisgenerallyagreed thatmanagerialself-interestdoesplayarolein M&A;research hasshown that

1Thewinner'scurse

isaphenomenon

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thatoccursincommonvalueauctionswith

incompleteinformation.Iftheauctioneditemisworthroughlythesameto

allbidders,thewinneristhebidderwhomakesthehighestestimateof

itsvalue.Ifweassumethattheaveragebidisaccurate,thewinningbidderoverpays.

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bidderreturnsare,forexample, generallyhigher

when themanageroftheacquiringfirmisalargeshareholder(Lewellenet

al., 1985), and lowerwhen managementisnot(Langetal., 1991;Harford 1999). Thissuggeststhatmanagerspaymore

attention to an acquisition when theythemselvesarefinanciallyconcerned. Further, itsupportsthenotion ofagencycostand themanagerialtheoriesofthefirm(Berleand Means, 1932;Marris,1963), which broadlysuggestthatmanagerspursueself-serving

acquisitions, and it is this fact that leads to value-destruction.

The

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theoryofmanagerialentrenchment(Shleiferand Vishny, 1989),for

example, claimsthatunsuccessfulmergersoccurbecausemanagersprimarilymakeinvestmentsthatminimise

therisk ofreplacement. Itsuggeststhatmanagerspursueprojectsnotinan effortto maximiseenterprise

value, butin an effortto entrench themselvesbyincreasingtheirindividualvalueto thefirm. Entrenchingmanagerswill, accordingly,makemanager-specificinvestmentsthatmakeitmorecostlyforshareholdersto replacethem, and valuewill

bereducedbecause

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freeresourcesareinvestedin manager-specificassetsrather

than in ashareholdervalue-maximisingalternative. Amihud and Lev(1981)empiricallysupportthisnotion, and suggestthatmanagerspursue

diversifying mergers in order to decreaseearningsvolatility which, in turn,enhances corporate survival and protects theirpositions.1

Ofcourse, entrenchmentisnotonlypursued for

jobsecurityitself, butalso becauseentrenchedmanagersmaybeableto extractmorewealth,power, reputation and fame. While entrenchmenttheoryprimarily explainstheprocessofhowmanagersposition themselvesto achievetheseobjectives, thetheory

ofempire-buildingand other

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related, well-testedtheoriesprovideboth themotivationsand evidencebehind these

objectives(Marris, 1963;1964;Ravenscraftand Scherer, 1987;Rhoades,1983;Black, 1989). Accordingto empiretheory,managersare

explicitlymotivated to investin thegrowth oftheirfirmsrevenues(sales)orassetbase, subject to a minimumprofit requirement (Marris, 1963).2

1ShleiferandVishny(1991)suggestthatduringthethirdmergerwaverisk

diversificationplayedalargeroleinM&Apolicy

aspriorto

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the1980smanagers

hadinsufficient

incentivetofocusonshareholderconcernsandithasbeen

suggestedthattheriseoftheconglomeratemaybeanoutgrowthof

thisprinciple-

agentproblem(MartynovaandRenneboog,2008).2Mueller(1969)introducedmergersasavehicleforgrowthmaximization(notprofit

maximization),

andWilliamson(1964)

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complementsthisbyintroducingcompany

cars,excessstafforprestigiousinvestmentsascomplementarymotives.Rhoades

(1983)analysesthethirdmergerwave,andshowsthatmanagerialpowerservesas

anexplanationoffirmgrowththroughM&A,andconcludesthatthepowermotive

replacedtheprofitmotiveasthedrivingforce

behindlargecompanies'

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behaviour.

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Modifying and ApplyingMerger Theories to SMEs

Themerger

theoriesdescribed abovehasevolved fromtheanalysisofrelativelylarge-scaledealsbypublic

acquirers,with littleeffortbeingexplicitlymadeto understandingtheroleofSMEs. However, wesuggestthat SMEs are, different to their larger

rivals, forat least two reasons.

Table2:RefiningthesetofApplicableMergerMotives

OutcomeBenefitsHow?TheoryLinkSMEs?Netgainsthroughoperativesynergies

EfficiencyHighGains

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OwnersWealthtransfersfromcustomersMarketPower

SynergyMediumNetgainsthroughmanagerialsynergiesCorporateControlMediumOwnerNet

lossesthoughoverpayingHubrisBoundedMediumIntendedNetlossesduetovaluationmistakes

ManagerialDiscretionRationalityMediumNetlossesasLossesmanagersmakeacquisitionstoEntrenchmentLowManagerreinforcejobpositionsAgencyCostsNetlossesasmanagersmake

acquisitionstoEmpire

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BuildingLowincreasefirmsize

Firstly,wesuggestthatbecausethemanagerisoften theownerin thecase

ofan SME, manyofthevalue-destroyingtheoriesdiscussed abovewillsimplynotapply. Mostofthe

value-destroyingtheoriesweconsidered aroseoutofagencyproblems thatis, problemsofcompetingand notoverlappingobjectivefunctionswhichoccurwith theseparationofownershipand control. In thecase

ofowner-mangers, however,principle-agent costs

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areremoved, and so the theories ofentrenchmentandempire-buildingare unlikely to playa

part in SME M&As.

Secondly,andeveninthecaseofaprinciple-agentstructure, we

suggestthattheinformation asymmetries, whichfacilitateself-interestedbehaviour, willbereduced in thecaseofSMEs. Largerfirms, we

suggest,havedeeperhierarchies, moredispersed responsibilitiesand more

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complexsystemsofaccountabilitythen theirsmaller

peers, and thisobstructstransparencyand information symmetries. Wesuggestthatthelevelofinformation asymmetrysuffered bythe

firmisinverselyrelatedtoitssize, and thatsmallerfirmswillallowself-interested managersfewer

opportunitiesto actin aself-interested way.Thusthelikelihood thatagency motives willplay a role in SMEs is significantlyreduced.

Byrefiningthesetofmergermotivesto excludetheagencymotives(seeTable2), we

can clearlyseethat

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SMEM&Aswillmoreoften bemadein the

interestsoftheowners. Onlyhubrisand theproblemsofover-valuation remain aspotentialsources

ofvaluedestruction, butaccordingto Moelleretal., (2004)thesetoo should belessofaproblem

in SMEs.Moelleretal., (2004)examinesasampleof12,023 mergersovertheperiod 1980 to 2001 and findsthatlargefirmsaremorelikelyto completeadealthen smallfirmsbecause,they

suggest, hubrisismore

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ofaproblemforlargerfirms. Managersin smaller

firms, theysuggested, areaslikelytomakethesameboundedlyrationalmistakesas

theircolleaguesin largerfirms, butbecausetheinterestsofmanagersin smallfirmsaremore

closelyaligned with theowners, themanagersin smallfirmsaremorelikelyto withdrawfromadealoncetheyrealisetheirmistakes(forinstance, in aduediligencepriorto consummation). Evidencethat

thenumberof

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value-destroyingmistakesisreduced in thecaseofSMEs

should thusbefoundbylookingatthenumberofwithdrawn bids, and soweoperationalise

ourintuition thatvalue-destroyingmotivesarelesslikely to play a role with SME M&As with the following hypothesis:

Hypothesis1:SMEsare

morelikelyto withdrawfrom(arguablyvalue-destroying) mergers than large enterprises

2.3. How do SMEsperform in M&As?Fromtheprecedingdiscussion wecan assumethatSMEM&Asfaceahigherprobabilityofsuccessful

mergersthantheir

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largerrivals. Theyfaceloweragencycosts, andare

morelikelytobewithdrawn when motivated,wesuggest, bymistakesand misevaluations. Becauseofthiswe

believethat SME M&A will, on average, demonstrate superiorperformance.

Preciouslittleattention hasbeen paid, however, to theroleoftheSMEperformance

within theM&Aindustry. Thenearstandard methodologyinmostM&Aresearch is,in fact, to placealowerlimiton dealvaluetypicallyin therangeof$10 to $50 million with thedeliberateintentionof excluding smaller firms with smaller deals (e.g., Schlingemann, 2004).

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Researchhasshown, however, thatsizematterswhen it

comestoperformance, and thatthetwo areinverselyrelated. Carlineetal. (2002),for example, shows that larger deal valuespredictpoorer

performance, andthishasleadto thesuggestion thatsmallerfirms, making smallerdeals,maymakebetteracquirers. Moeller

etal(2004, 2005)empiricallyconfirmthissuggestion. Definingsmallfirmsasthosefirmswhosecapitalisationfallsbelowthe25th percentileofNYSE, Moelleretal(2004)showthat

smallacquisitionsmade

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bysmallfirmsaretypicallyprofitable, whereaslarge

firmsmakinglargeacquisitionsoften resultin largedollarlosses. Intheirsampletheyfind that

shareholdersfromsmallfirmsearned roughly$9 billion fromtheiracquisitionsduringtheperiod 1980-2001, whereasshareholdersfrom

largefirmsmadesignificantlossesovertheperiod ofabout$312 billion. Defininglargelossdealsasacquisitionswithshareholderwealth lossesin excessof$1 billion, Moelleretal(2005)find,

in fact, thatwhilesuch mega-loss

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dealsrepresentonly2.1%ofallM&A

eventswhich occurred intheperiod 1998-2001, theyaccountfor43.4%ofthemoneyspenton acquisitions. By

doingso, Moelleretal. (2005)showthatrelativelyfewlargeloss-making dealscontributesignificantlyand

disproportionallytothelowaverageperformanceofmergers,andprovidesome solid evidence thatsmall firms mayperformabove average.

Consequently, theliteraturesuggeststhatsmallerfirms, on average,willmakeforbetter

acquirers, andbecausefurthermore

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theM&Asthattheypursuewillbe

morelikelyto createvalue,webelievethatM&Aislikelyto bean important

growth strategyforSME. WepredictthatSMEmanagerswillbeawareofthis, and consequentlywe

predictthatSMEswill make up a sizableproportion of the annual M&Apopulation.

Hypothesis2:SMEsthatpursueexternalgrowthand engagein M&Aactivities,do so with thesameoreven greaterintensitythan large enterprises.

2.4. How do SMEs

financeM&As?Mergers

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and acquisitionsarebig business-averagedealsize(based on

disclosed prices)was$198.2 millionin 2006 (Wilmerhale, 2007)-andthis raises the question as to how SMEs go about raising M&A finance.

Myersand Majluf(1984)arguethat

differentfundscomeatdifferentcostsfordifferentfirms. Forpublicfirms, theysuggest, externalfinancing

optionsaremorecostlythan internalfinancingoptions, becauseexternalcapitalissubjectto adverseselection andtransaction costscaused bytheexistenceofasymmetricinformation between thefirmsmanagersand its

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investors. Internallygenerated cash in theformoffreecash and retained

earnings isnotsubjectto thesecosts, and soisthecheapestformofcapital1. Several

studieshaveshown thatcash-financed dealsare,consequently, morebeneficial(oratleastlessdetrimental)to bidding

shareholders(e.g., Carow et al., 2004; Huang and Walking, 1987).

With externallysourcedoptions, debtischeaperthan equitybecauseconvincingonebank toinvest, itissuggested,incurslesscoststhanconvincing agroupofown/old acquirershareholders

to voteforan M&A

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deal, and to dilutetheirstock, beforethenconvincing agroupof

target/newshareholdersto acceptthisnewstock (Carpenter,1995). Thus,Myers and Mailuf(1984)propose afinancial pecking order hypothesis inthe form: internal cash, then debt and then equity.

Wesuggestthat,forthespecialcaseofSMEfinancing, thetheory

doesnotfullyapply. Internalcash reserveswill, weargue,remain thepreferredsourceofcapitalforSMEsbut, becauseoftheirspecialfeatures, therelative costs and benefits of using debtand equitywill differ.

Wehave

alreadyargued thatmany

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SMEsareowner-managed, and so iftheholdingsofold shareholders

arediluted forexample, bytheissueofnewstocksforthetarget

shareholdersto financethedealwith astock-for-stock exchange thenthiswillbedone,we

suggest, bymanagerswhoarealso incumbentshareholders, and thusfreefrominformation asymmetries.Baeet al. (2002)find some supportive evidence for this conclusion.

Usingthesameargument, wesuggestthatthecostsinvolved inconvincing thetargetshareholders

to acceptthestock of

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theacquirerwillalso belowerforSMEs. SMEs, it

isargued, buysmallertargets, which arealso moreoften owner-managed than largerenterprise. Ifthesetargetmanagers, sittingon theother

sideofthetable, go through allthenegotiationsand alltheduediligencereportswith theowner-managers

oftheacquirer, then theinformation symmetryfaced bythem, asreceiversofthenewlyissued shares, willalso bereduced. Furthermore, itissuggestedthateven ifsomeoffirmsarepubliclyquoted, SMEstypicallywill

havemoreconcentrated block-holders

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than largerfirmswith moreatomisticownership, whichmakesit

easierto approach and easiertoconvince.Becausetheseshareholderswillalso haveaseatin the

board, theywillagain face relatively lessinformation asymmetries to their largerrivals.

In contrast, goingto abank, remainsarelativelycostlyoption. Next

tothecostsofnegotiatingwith theacquirer which in thecaseabove, would

1Indeedanumberofstudiessuggestthatfirmswithinternalcashreservesare

betterableto

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adapttoachangingbusinessenvironment(see

e.g.,Bruner,1988,WanandYin,2009),andexcessliquidityandfinancial

slackisanimportantfeatureforinnovativefirms(seee.g.,NohriaandGulanti,

1996,Damanpour,1987,MajumdarandVenkataraman,1993,Singh,1986)experimentingwithnewproducts,technologiesormarkets(e.g.,MajumdarandVenkataraman,1993,Moses,1992).

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besufficientto arrangeastock-for-stockexchange

athird party,thebanks, isrequired inthecaseofdebt, andthesetoo haveto be

convincedto financethedeal. Smallercompaniestend tobelesstransparentthanlargercompanies, and thiscreates

difficultiesforbanks, andraisescosts.Thus, thepeckingorderforSMEsiscash, then stock and thendebt. Ifthedealistoo largeto befinanced with internalcash/retained earnings, stock-for-stock-exchange is, we argue, the nextbest means of financing.

ForSMEs, financing

with internalcash isan unlikely

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scenario. SMEsareunlikelyto havethenecessaryliquid resources

to coverthecostofanacquisition, and cognisantoftheimportanceofretainingacushion ofliquidity(Cyertand March, 1963), theyareunlikelyto over-utilisetheirinternaloptions. Cash in SMEtransactionswillmore

likelycomefromexternaldebtsources, and becausewehaveargued thattheserepresentthemorecostlyoption, weexpectthattheconsideration paid to thetargetwillbecomprisedofmore

stock andlesscash than

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theaveragelargedeal. Thisleads us to postulate a third and final hypothesis on SMEs and M&As:

Hypothesis3:SMEsusemorestockand lesscash asmeansofpaymentthan large enterprises.

3.Data&Methodology3.1 SampleDesignTo testourhypotheseson M&AsbetweenSMEs

weemploydatafromThomson Reuterswell-known SDCmergerdatabase, and analyseallacquisitionsthatsatisfythefollowingconditions. (1)theacquisition isannounced betweenJanuary1, 1996 andDecember31, 2007;(2)theacquisition is

eithercompleted orwithdrawn, but

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notpendingorrumoured;(3)theacquirer

islocated eitherin theU.S. orin WesternEurope1;(4)thetargetislocated in thesame

countryastheacquirer;(5)theacquisition doesnotinvolvearecapitalisation, self-tender, repurchaseofshares, privatization, or

spin-offto existingshareholders;(6)theacquirerisnotoperatingin thefinancialsector(SIC6000-6999), in publicadministration (two-digit-SIC91-99), orin an unknown industry(SIC0000);(7)theacquirerand thetargetare

notowned bythe

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sameultimate

1Asdefined

inthedatabase,includingAndorra,Austria,Belgium,Cyprus,Denmark,FaroeIslands,Finland,

France,Germany,Gibraltar,Greece,Greenland,Guernsey,VaticanCity,Iceland,IsleofMan,Italy,

Jersey,Liechtenstein,Luxembourg,Malta,Monaco,Netherlands,Norway(incl.Svalbard/JanMayerIslands),Portugal,RepublicofIreland,SanMarino,Spain,Sweden,Switzerland,UnitedKingdom.

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parent;(8)theacquirerseeksfull

ownershipofthetarget;and (9)thevariablesneeded to run ouranalyses(seenextsection)

arenotmissing.Thisrefinementprocessproducesasampleof17,137 M&Aobservations.We

classifyacquirersaccordingto thelatestEuropean Commissiondefinitions on SMEs (seeTable 2), as derived by Johnson (2007).

3.2 VariableDescriptionAsdependentvariablesin ouranalysisweuse:(1)dealvaluepermergerand dealfrequency

peracquirernormalised with (that

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is, dividedby)totalassets, totalsales, and numberofemployees

ofacquirer;(2)thepercentageofstock, cash, otherin consideration;and (3)adummyfor

completed merger(=1, 0=withdrawn).Asindependentvariablesweuse:

(1)adummyfor

microfirms, smallfirms, mediumfirms, largefirms,each; and (2) a dummy for SMEs (non-largefirms=1, largefirms=0).Furthermore, and asanextensivebodyofliteratureshowsthatanumberoffirm-and deal-specificcharacteristicsaffectM&Abehaviour(see

King, etal., 2004 foran overview), we

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includeanumberofcontrolvariables in our model to account for unobserved effects. We include:

PublicversusPrivate:Officer(2007), Chang(1998)andBargeron etal(2007)each provide

evidencethatreturnsin publiclylisted firmsdifferssignificantlyfromprivatetargets, and so wecontrolfor:(1)

theacquirer and (2) the targetby status (using a dummy in each case)

Hostility:Thehostilityofthetakeoverhasbeen shown to impactreturns, although heretheevidenceissomewhatmixed (Schwert,2000). To accountforthispossibility, however, weincludean indicator

variable equal to 1 if thetargetsboard officially rejects the

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bid.

Size:AsMoelleretal. (2004, 2005)

shows, largedealsoften underperform, and thereforeweincludethelogofthedealvalue

(notused inregressionsin M&Aintensity dependentvariables(1)above asthendeal value would be on the left and right hand side of estimation)

Consideration:Ithasbeen shown thatstockpaymentsaremorefrequentlyassociated with lowerreturnsto acquirershareholders(seee.g.,Andrade, Mitchelland Stafford, 2001). Tocontrolforthis, weincludethepercentageof

consideration paid in cash and stock (butnotin the case of

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H3 testing, as it is dependent variable there).Time,Type,Trends&Location:Furthermore, we

dummyfor(1)thelocation oftheacquirer(in US=1, 0ifotherwise);(2)time, so

asto

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controlforthepossibilityofyear-and seasonal-specific

unobservedeffects;and finally, (3)industries, on thebasisofSIC1 levelcodes, soasto captureindustry-specific

effects. Finally, weusetheyearofthemergeras a count variable to capture trending effects.

Table3:SMEMergers

peryearandindustry

No.ofdealsinpermicroenterprisessmallenterprisesmediumenterpriseslargeenterprisesTotalSMEin%YEAR1996

321190

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1,0041,21817.6%1997222249

1,3681,64116.6%19986482431,5761,87315.9%199914

953641,3851,85825.5%2000281084211,2931,85030.1%2001

22762229811,30124.6%200226611479561,19019.7%200329591478691,10421.3%20041988225951

1,28325.9%2005

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23661929961,27722.0%2006

18841771,0171,29621.5%200724531789911,246

20.5%Total2147812,75513,38717,13721.9%INDUSTRY(acq)Agriculture1

012617417.6%Mining40426245860223.9%Construction273830034713.5%Manufacturing522268225,1006,200

17.7%Transp.,Utility1

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14658509308.6%Communication11

511359471,14417.2%Wholesale,Retail18541651,3751,61214.7%

Services893871,4564,2966,22831.0%Total2147812,75513,38717,137

21.9%LOCATIONWesternEurope322808572,8804,04928.9%USA1825011,89810,50713,08819.7%Total2147812,75513,38717,13721.9%STATUS

(tar)targetpublic

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542037976,5957,64913.8%target

private1605781,9586,7929,48828.4%Total2147812,75513,387

17,13721.9%

4.Results4.1. DescriptivesTable3reportsthenumberof

M&Adealsperyear, industry, locationand bytype, accordingtotheEuropean Commissionsdefinitionsofmicro,small, mediumand largeenterprises, aswellasthetotalnumberofdeals.From it we can makea number of important observations:

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Firstly,wecanclearlyseethat,

asMoelleretal(2005)suggest, smallM&Asareoverwhelmed in theaveragestatisticsby

largeM&A:214micro-enterpriseM&Asversus13,387 largefirmdeals. Despitethisweseethat

SMEsaccountforabout20%ofthetotaldealsovertheperiod;with ahigh in 2000, when SMEsaccounted for30%, and alowin 1998 ata level of 15.9%. Thisare, we suggest, sizable numbers.

Secondly, and lookingattheindustry

level, weseethat

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SMEM&Asaremoreoftenobserved in servicesand manufacturing, and least

often intransportation and utilities. Asthelatterarethemostlikelyto besubjecttominimum efficient scale

considerations, this result is an intuitive one.

Thirdly, weseethat, in absoluteterms, thelionsshareoftheSMEM&Asis

in theUS(2581 versus1169), butthatrelativelyspeaking,proportionallymoreSMEM&Asoccurred in Europe. During theperiodJanuary1996 to December2007, 28.9%ofallWestern European M&Aswere SME orientated, asopposed to 19.7% of allAmerican M&As.

Finally, wesee

that in allthree

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ofourSMEcategories, and incomparison to largerfirmstoo private

targetsaremuch morecommonthan publictargetsin oursample. Thisobservation providessomesuggestiveevidence in favour of our third hypothesis.

Table4:PairwiseCorrelations

MeanS.D.MinMax12

3456781completeddeal0.960.200.001.002targetsize(logdealvalue)3.252.10-6.9112.01-0.13(0.00)

3acquirerprivately

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owned0.010.100.001.000.01-0.03

(0.38)(0.00)4targetprivatelyowned0.550.500.001.000.11-0.33

0.00(0.00)(0.00)(0.51)5targetfriendly0.990.120.001.000.27-0.12

0.010.07(0.00)(0.00)(0.35)(0.00)6paidincash(pct)41.0344.670.00100.000.050.01-0.03-0.08-0.01(0.00)(0.11)(0.00)(0.00)(0.11)

7paidin

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stock(pct)24.5938.950.00100.00-0.12

0.11-0.030.07-0.01-0.46(0.00)(0.00)(0.00)(0.00)(0.40)(0.00)8

paidother(pct)8.4319.970.00100.000.02-0.03-0.020.100.01-0.15

-0.12(0.04)(0.00)(0.01)(0.00)(0.25)(0.00)(0.00)9acquirerinU.S.0.760.420.001.00-0.020.25-0.03-0.070.02-0.070.12-0.13(0.02)

(0.00)(0.00)(0.00)

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(0.00)(0.00)(0.00)(0.00)

Table

4then reportson thepairwisecorrelation foranumberofimportantvariablesemployed in thestudy. We

also check formulticollinearity, which does not appear to be a serious issue in this study.

4.2. Hypothesis One: On Withdrawn and Completed MergersWesuggestthatM&AsamongstSMEsaremore

likelyto bemotivatedbyvalue-enhancingobjectivesin general, and lesslikelythan largerfirms

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to completeavalue-destroyingdealmadesubject

to bounded rationality.SMEM&As, wesuggest, arelesslikelytobecompleted whendrivenbyovervaluations, mistakes

ormiscalculations, and so SMEsaremorelikelythan largerfirmsto bewithdrawn. Wetestthishypothesisby

lookingatthepercentage of withdrawn and completed dealsper firm category.

Table5reportstheresultsofthisinvestigation on aunivariatebasis.Fromthiswecan clearlyseesomeevidencein supportof

ourhypothesisthat

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theincreasingsizeofthefirmand the

proportion ofthedealsthattheycompletearepositivelyrelated. Smalland micro-firmscompleteless

dealsthan medium sized firms, who in turn complete less deals than larger firm.

Table5:ThePercentageofCompletedDealsbyFirmSize

Enterprisesizecompleted*micro93.93%small92.06%medium95.17%large96.35%Total95.93%

*SMEaveragestatisticallydifferentfromlargeenterprise

averageat0.05

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significancelevel(two-sidedttest)Table6investigates

therelationshipfurther,and presentstheresultsofalogisticmaximumlikelihood estimation, which usesa

dummyforcompleted mergersasthedependentvariable. Instead ofcoefficientswereporttheoddsratios

forabetterunderstandingoftheeconomiceffects.Fromtheresultswecan seethattherelationshipbetweenincreasingfirmsizeand theincreasinglikelihood ofawithdrawal

isrobust:each of

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thedisaggregatedsizecategories(micro, smalland medium)for

theacquiringfirm, aswellastheaggregated SMEvariable, aresignificantatthe1%

level. Theoddsratiosforallthreesizecategorydummiesareclearlybelow1, which indicates

thattheyarelesslikelyto completeamergerthan largefirms. Formicro firmsand smallfirms,theoddsofcompletingamergerare,respectively,0.195and0.162 timesthe

oddsofa

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largefirmto complete. Inotherwords, theoddsto withdraw

fromadealaremorethan 5 timesaslarge(1/0.195=5.13, 1/0.162=6.17)than theoddsfor

alargefirm. Formediumsized firms, theoddsofdealcompletion (0.336)areroughlytwotimes

higherthan formicro and smallfirms. Thisdealcompletion likelihood, however, isstillonlyaboutthird ofthatforlargefirms. ThesameistruefortheSMEdummyin Model3, which showsthecombined effect of the three individual size dummies.

Table6:

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Logisticmaximumlikelihoodestimation

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DependentLogitestimationModel1Model

2CompleteddealdummyModel3microenterprisesmallenterprisemediumenterprise

SMEacquirerprivatelyownedtargetprivatelyownedtargetfriendlytargetsize(logdeal

value)acquirerinU.S.trendvariable(year)paidincash(pct)paidinstock(pct)constantyeardummiesindustrydummiesP-Micro-SmallP-Small-MediumP-Micro-Medium1.117[0.193]

2.525***[9.062]20.830***

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[19.225]0.887***[-5.040]1.087[0.704]1.02[0.887]

1.001[0.414]0.987***[-9.725]0[-0.871]yy0.195***[-4.937]0.162***[-9.858]

0.336***[-8.590]1.322[0.505]2.657***[9.457]21.080***[19.195]0.787***[-9.453]1.065[0.522]1.036

[1.595]1[0.191]0.990***[-7.089]0[-1.562]yy0.59580.00010.09950.284***[-10.855]1.286[0.452]2.652***[9.488]21.188***[19.220]0.796***[-9.067]1.061[0.494]1.031

[1.372]1[0.233]

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0.990***[-7.460]0[-1.341]yyobservations

(N)171371713717137clusters(N)616661666166chisquare802.451

921.247905.81Nagelkerker20.1550.1790.176prob>chi2000

z-valuesinparenthesis;*p

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thatcomparesthecoefficientsofthemicro

andsmallenterprisedummies.Ifthenullhypothesisisrejected,thecoefficients

arenotequaltoeachother.P-Small-MediumandP-Micro-Mediumarecomputedanalogously.The

standarderrorsinallmodelsallowforcorrelationbetweenmergersbythesameacquirer.

Wealso testfordifferencesbetween theoddsratiosofthree

sizecategories.Table 6 reports the

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p-values of the nullhypothesis that the oddsratiosofthethreedummies

areequal(seeWald, 1940). Whilewefind nostatisticaldifferencebetween thedealcompletion likelihoodsof

microfirmsand smallfirms, theoddsratiosofboth sizecategoriesdifferata10%

and a0.01%confidencelevelfrommediumsized firms. Thecontrol

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variables, targetfirmsize, measured asthenaturallogarithm

ofthedealvalue, also hasastatisticallysignificantoddsratio belowone. Further, wefind thatthe

greaterthepercentageofstock offered in thedealthegreaterthelikelihood thatthedealwill

bewithdrawn. FollowingMoelleretal.,(2004), weinterpretanincreased likelihood ofwithdrawalto signalareduction in theproportion ofvalue-destruction, and so inferthatSMEM&As are less likely to bepursued for value-destroying reasons.

4.3. Hypothesis Two:On M&APopularityOursecond hypothesis

suggestthat, becauseSME

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M&Asaremorelikelyto bepursuedfor

value-increasing motives, SMEswillpursueexternalgrowth opportunitiesthrough mergers, and willengagein M&Aactivitywith thesame

ifnotgreater intensitythan largeenterprises.Wetestthisbylookingatthe

frequencyofdealsand thedealsize,normalised overtotalassets, numberofemployees, and totalsales. Table7presentstheresultsofresultsofunivariateresultsofourinvestigation.From

thisalreadywe

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canclearlyseethatSMEswhich mergeat

leastoncein theobserved period(i.e. enterthesample)relysignificantlymoreheavily on external growth than large firms in thesame

period.

Table7:M&AsamongstSMEs

Enterprisesizedealvalue/

employee*dealvalue/assets*dealvalue/sales*dealno./assets*micro5.686584.783107.1238small0.599197.19212.0041.28medium0.22630.41.0960.211

large0.1080.778

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0.2670.022Total0.21921.7842.270.209

*SMEaveragestatisticallydifferentfromlargeenterpriseaverageat

0.05significancelevel(two-sidedttest)Table8presentstheresultsofan OLSregression which further

exploresthisfinding, and employsanumberofdifferentmeasuresofmergerintensityasthedependentvariable. ForallmodelsweuseaBreusch-Pagan (1980)testto investigatewhetheror

notthedisturbances

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arenormallydistributed.AsTable8shows, the

correspondingp-valuesrejectthisnullhypothesis. Wethereforeuseheteroskedasticity-consistentestimators of variance in all models.

Table

8:M&AsamongstSMEs

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DependentOLSestimationModel1Model

2dealvalue/totalsalesModel3Model4dealvalue

/totalassetsModel5Model6dealvalue/employeesModel7

Model8dealfreq./totalassetsmicroenterprisesmallenterprisemediumenterpriseSMEacquirerprivatelyownedtargetprivatelyownedtargetfriendlyacquirerinU.S.

trendvariable(year)

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constantyeardummiesindustrydummiesP-Breusch-PaganP-Micro-Small

P-Small-MediumP-Micro-Medium107.088**[2.384]11.821**[2.136]0.663*[1.917]9.160***[3.075]-1.829-1.547

[-1.323][-1.149]0.5991.017[0.991][1.370]-1.446**-1.111**[-2.368][-1.998]0.6082.103[0.473]

[1.170]0.1650.348[0.562][1.181]-333.165-698.447[-0.569][-1.187]yyyy000.03430.05120.0175586.949**[2.214]195.274*[1.846]28.624**[2.463]95.406***

[3.422]-39.109**-32.702**

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[-2.226][-2.538]-15.536-12.763[-1.164][-0.971]4.65

6.687[0.547][0.731]-5.7571.242[-0.299][0.070]-1.165*-0.036[-1.960][-0.131]2314.894*

64.686[1.954][0.114]yyyy000.16990.11980.03515.571***

[4.290]0.508***[8.764]0.126***[6.031]0.521***[6.460]-0.115**-0.109**[-2.058][-2.424]-0.115***-0.095***[-3.318][-2.626]-0.199***-0.183***[-3.453][-3.168]0.0460.124**[0.828][2.187]0.0020.011***

[0.563][3.677]-3.512

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-21.620***[-0.501][-3.572]yyyy

000.0001007.953***[5.649]1.254***[4.147]0.194***[7.364]0.864***

[7.517]-0.079-0.048[-0.847][-0.550]0.0560.088**[1.564][2.237]-0.0120.013[-0.573][0.461]

0.0480.155***[1.029][2.846]-0.007*0.007*[-1.826][1.735]14.320*-13.072*[1.810][-1.735]yyyy0000.00030observations(N)1713717137

171371713717137

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171371713717137clusters(N)61666166

616661666166616661666166F2.9032.791.3311.50512.523

12.23310.037.902adjustedr20.0220.0020.0080.0020.0710.0110.0990.017

prob>F000.1250.0570000

t-valuesinparenthesis;*p

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(1980)test.Ifthenullhypothesisis

rejected,theregressiondisturbancesarenotnormallydistributedandheteroskedasticity-consistentestimatorsof

varianceareused.P-Micro-Smallisthep-valueinaWald(1940)testthat

comparesthecoefficientsofthemicroandsmallenterprisedummies.Ifthenullhypothesisisrejected,thecoefficientsarenotequaltoeachother.P-Small-Medium

andP-Micro-Mediumare

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computedanalogously.Thestandarderrorsinall

modelsallowforcorrelationbetweenmergersbythesameacquirer.

Thepositiveand statisticallysignificantcoefficientsofthesizedummiessupportourpreviousfinding that

SMEswhich mergeduring theobserved period relymoreheavilyon externalgrowth than largefirmsinallthreeofourmeasurements. Thisresultisrobust, whetherweidentifymicro, smallormediumsized firmsindependently

oraggregatethem

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asonecategory(SMEdummy).1When comparingthe

coefficientsofthesizedummies(seep-values)wefind thattheyareall

statisticallydifferentfrom

1Thelargecoefficientsofthemicrofirm

dummysuggestarobustnesscheckwhereweexcludeallmicrofirmsfromthesampleandre-estimatethemodelsinTable8.Theresultsdonot

changequalitatively.

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each other, with theexception ofModel3, wherewenormalize

dealvalues with total assets rather than total sales oremployee numbers.1

Table9:CashandStockasa

MeansofPayment

Enterprisesizecash*stock*other*micro18.06%53.05%

11.99%small25.97%44.45%13.76%medium31.63%37.61%11.58%large44.22%20.30%7.42%Total41.03%24.59%8.43%

*SMEaveragestatisticallydifferentfrom

largeenterpriseaverage

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at0.05significancelevel(two-sidedttest)Figure

1:Averagepercentofstockinconsiderationoveryearsandtypesof

enterprises.

4.4. Hypothesis Three:On MergerFinance and thePecking OrderFinally, and in lookingatourthird hypothesis,which suggests

thatSMEswillusemorestock and lesscash asmeansofpaymentthan largeenterprises, weconsiderwhetherSMEshaveahigher/lowerstock/cashpercentagein theirconsideration than largercompanies. Table9presents

the result of our investigation, again first on a univariatebasis.

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Fromthiswecan clearlyseethatthe

probabilitythatafirmpayswithstock decreasesquitesignificantlyasthesize

ofthefirmgrows, whiletheprobability that itpays with cash increases, without exception.

1Wecontrolforindustries

thatmaypointtowardslessstructuraldifferencesinexternalgrowthstrategiesofSMEsinmoreasset-intensivesectorslikemanufacturing.

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Table10:CashandStockas

aMeansofPayment

DependentOLSestimationModel1%

paidModel2instockModel3%paidModel4incash

Model5%paidModel6inothermicroenterprisesmallenterprisemediumenterpriseSMEacquirerprivatelyownedtargetprivatelyownedtargetfriendlytargetsize

(logdealvalue)

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acquirerinU.S.trendvariable(year)constant

yeardummiesindustrydummiesP-Breusch-PaganP-Micro-SmallP-Small-MediumP-Micro-Medium46.445***[13.668]34.548***[19.774]

21.831***[20.380]-12.118***[-3.878]7.704***[11.124]0.484[0.182]4.888***[24.697]5.275***[6.741]-2.083***

[-13.271]4155.712***[13.220]yy00.00120025.600***[26.180]-11.631***[-3.765]7.682***[11.064]0.302[0.113]4.718***[23.808]5.716***[7.260]-2.015***[-12.788]4022.857***[12.742]

yy0

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-30.319***[-11.895]-21.432***[-13.172]-12.770***[-11.931]-12.061***

[-2.787]-7.736***[-9.580]-1.798[-0.599]-1.406***[-6.436]-5.384***[-5.136]1.877***[10.390]-3697.257***

[-10.229]yy00.001200-15.378***[-15.525]-12.390***[-2.894]-7.720***[-9.554]

-1.671[-0.554]-1.287***[-5.926]-5.698***[-5.451]1.830***[10.100]-3604.009***[-9.941]yy06.252***[3.242]6.713***[6.083]4.298***[7.399]-4.721***[-3.025]4.293***[12.440]1.522[1.367]

0.775***[8.579]-5.955***

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[-10.443]-0.107[-1.464]219.446[1.503]yy

00.050.4250.984.873***[9.121]-4.620***[-2.947]4.291***[12.427]1.498[1.346]

0.754***[8.329]-5.923***[-10.397]-0.099[-1.351]203.778[1.391]yy0observations(N)

171371713717137171371713717137clusters(N)616661666166616661666166F81.96284.19242.11543.16115.24316.309adjustedr20.1750.168

0.0780.0760.042

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0.042prob>F000

000

t-valuesinparenthesis;*p

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thecoefficientsofthemicroandsmall

enterprisedummies.Ifthenullhypothesisisrejected,thecoefficientsarenot

equaltoeachother.P-Small-MediumandP-Micro-Mediumarecomputedanalogously.Thestandarderrors

inallmodelsallowforcorrelationbetweenmergersbythesameacquirer.

Figure1 showshowthisdevelopedovertime. Fromitwecansee

that

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stock paymentsdecreased in relativeimportanceduring thecourseofthe

lastmergerwave whenthecostofcreditwasat

historicallows butthat

theorderofpreferenceforstock in SMEand large

firmM&Asholds

constantin almostallyears. Micro firmsusethemoststock intheir

dealings, small less than that, medium even less, and large firms the least.

To ensuretherobustnessofthisconclusion, and beforewe

acceptour

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hypothesison thesourceand natureofSME

M&Afinancing, weconduct

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OLSregressionsusingpercentageofstock, cash and other

meansofpayment e.g.acquirerdebtdirectlyissued to targetshareholders. Table10 presents the results, and provides clear support for Hypothesis 3.

Assuggested bythep-valuesoftheBreusch-Pagan (1980)test, weuseheteroskedasticity-consistentestimatorsofvariance

in allmodels.Wealsotestwhetherthecoefficientsofthesizedummiesareequalandrejectthisnullhypothesisin allcasesbuttwo (differencesto mediumsized firms

inModel5). In other

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words, wedo notfind adifferencebetween mediumsized firmsand other

SMEsizecategorieswhenwelook atpaymentsthatareneithercash norstock. Although interesting

asan additionalinsight,thisresultdoesnotweaken thesupportforHypothesis3. Firstly,Hypothesis

3predictsdifferencesbetween SMEsand largefirms, notwithin SMEs. Secondly,when wefocusontheuseofstockandcashaspreferredmethodsofpaymentwefind highlysignificantdifferences

between all size groups:micro, small, medium, and large (Models 1-4).

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5.ConclusionsInthispaperwenoted that

theexistingM&Aliteratureisdominatedbytheanalysisoflargerfirms

makinglargedeals, and suggested thatSMEsmaydifferfromtheseintheiracquisition behaviour. Wepresented directand indirect

evidenceto illustratethispoint, and showed thattheconductand financialsuccessofmergers, byentrepreneurialfirms, isindeedsignificantlydifferentto largepublicfirms. To accountforthis, weconsidered theapplicabilityofthedominant

motivatingtheories the

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theoriesofefficiency, marketpowerand corporatecontrol, managerialhubris, discretion, and entrenchments, Q-theory, raider

theoryand empirebuilding aswellasthepecking-ordertheoryofmergerfinance. We

madeanumberofmodificationsto thetheoryofmergersand acquisitions,byadaptingand translating

theliteratureon largeM&Asto thespecialsituation of SMEs. In theprocess we came to a number of conclusions:

(1)ThereareproportionallymoreSMEM&Asin Europethan in theUS. Ourresultsshowthatabout30%

ofWestern European M&Awere

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bySMEs. AsmuchoftheEuropean mergerregulation focuses

on largeM&As, ourfindingsindicateapossibleneed formoredifferentiatedpolicies with respect to SMEs M&As.(2)Smaller

firmsaremorelikelyto withdrawfromM&Aagreement,and seemto bemoreflexiblein walking

awayfromvalue-destroyingmergers.Ourresultssupporttheconclusion thatlargerfirmsperformlesswellin M&As, and thesuggestion thatthelargelossesmadebythe

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fewmayblotoutthesmall

successesmadethemany, when analysed inaverage terms.

(3)Mergertheoryneedsto bemodified for

SMEM&As.Ourresultsindicatethatagencycostsaresignificantlyreduced forSMEs, and thatboundedly

rationalvalue-destroyingactionsarelesslikelyto beseenthrough to theirconclusion. Accordingly, wesuggestthatmergertheory needs to be updated for the special case ofSME M&A.(4)M&Asareamorepopulargrowth strategyforSMEs. Ourresults

showthatM&As

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arepopularoptionsforSMEs, and even moreso thanfor

largefirms. Thisagain stressestheimportanceofmoredifferentiated M&Apolicies.(5)Smallerfirms

financeM&Aprimarilywith stock. Ourresultsshowthatthepeckingorderhypothesisonlypartially

appliesto SMEs, andthat this too needs to be updated for the special case of SMEs.In doingso, thispaperprovidesboth directand indirectevidence,which suggeststhatsmallfirmsbehaveand performdifferentlyin theirmergersand acquisitions. Ourpaperthuscontributesto abetter

understandingofSME

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M&Asand whytheseareso differentto thelarge

public acquirers typically studied within the wider literature.

Datalimitationsloomlargein thestudyofSMEM&As, howeverand

wesuggestthatmuch work stillneedsto bedoneto betterunderstandthese special firms. Clearly subject definitions need to beagreed upon, andan exploration ofappropriate

performancemeasures orproxies forSME M&As would make a valuable contribution to the literature.

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