Topic: Board of directors’ features that increase value of international M&A deals in beverage industry in 2010-2020. An example by Campari.

INTRODUCTION 3
CHAPTER 1 - Theoretical aspects of board of directors’ features that increase value of international M&A deals in beverage industry 7
1.1 Merger and acquisition reasons and performance assessment 7
1.2 Agency problem in merger and acquisition 11
1.3 Corporate governance 13
1.4 Board of directors 22
1.5 Role of corporate governance in increasing value of M&A in the beverage industry 31
1.6 Hypothesis development 35
CHAPTER 2 - Analytical research of board of directors’ features that increase value of international M&A deals in beverage industry in 2010-2020 exemplified by Campari 40
2.1 Historical background of Campari Group 40
2.2 Analysis of Campari Group’s acquisition strategy 43
2.3 Sample description 47
2.4 Regression results and analysis 56
Practical implications of board of directors’ features that increase value of international M&A deals in beverage industry 58
3.1 Main findings 58
3.2 Limitations and future research 61
CONCLUSION 64
BIBLIOGRAPHY 65
SITOGRAPHY 74

1.1 Merger and acquisition reasons and performance assessment

Obviously, one of the main goals inside every for-profit organization is to make money, so that the shareholders could receive higher dividends and the managers a bigger compensation. However, when the firm has reached its maximal execution or want to expand faster, one of the approaches the company can take is merger and acquisitions (M&A). Even if the two words are most of time linked, they refer to two different practices; indeed, merger indicates the fusion of two companies into one single entity, while the word acquisition is used when a company is acquired by another one but no new firm in formed (DePamphilis, 2011).
Normally, it is possible to identify four different types of M&As according to the objective of the deal (Festa, 2019):
a. Vertical type when targeted company is responsible for one of the stages in the supply chain;
b.
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1.2 Agency problem in merger and acquisition

As it has been shown in the previous section of the chapter, one element that might destroy value during an M&A deal and that on a daily basis affects the ability of a company to create profit for the shareholders is the agency problem.
Starting from 1976, when Jensen and Meckling published their revolutionary work about agency theory, academics started to focus more on this subject, especially on the causes and the possible solutions to this problem.
According to Jensen and Meckling (1976), an agency relationship is a contract where the principal hires an agent to perform a task on his behalf; thus, the principal delegates the decision-making power to the agent. The crux of the matter is therefore the separation between ownership and control (Berle and Means, 1932).
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1.3 Corporate governance

As previously stated, in order to manage the agency problem, shareholders may adopt different mechanisms, but these tools are a component of a bigger system called corporate governance. There is not a unique definition of what corporate governance is, however, it is possible to describe it by dividing the mechanisms into two dimensions (Zattoni, 2015):
a. The interests that should be protected (shareholder vs stakeholder);
b. The corporate governance mechanisms to consider (board of directors vs bundle of mechanisms)
According to Shleifer and Vishny (1997), “corporate governance deals with the ways suppliers of finance to corporations assure themselves of getting a return on their investment”. Based on their definition, the corporate governance of company should be structured in a way should ensure rights to the shareholders.
An opposite point of view is given by Sheridan and Kendall in 1992.
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1.5 Role of corporate governance in increasing value of M&A in the beverage industry

The beverage industry is formed by two fundamental segments: alcohol and non-alcohol. The alcohol sector is formed by wine, beer and spirits; while the non-alcoholic industry counts on water, coffee, soft drinks, dairy, juice and tea.
This market, as it can be noticed by the growth figures, is now almost saturated. Indeed, despite in 2018 the beverage industry worldwide recorded a revenue of 1.5 trillion USD, the annual growth rate is around 3%20. This means that there is no space for new players, and thus, the companies, in order to see their revenue to grow, are forced to acquire the competition. This idea was confirmed by a PWC report21 where it was stated that the international expansion of the biggest corporations was not going to stop; particularly in terms of premium brands acquisitions and “penetration in new markets, to reinforce their positioning among global sector leaders”.
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1.6 Hypothesis development

After having listed the most important literature about corporate governance and merger and acquisitions deals, and previous researches made about their relation, it is time to develop the hypotheses for this paper.
As it was stated in the introduction, the research question of this work is to understand if the features of board of directors can increase the abnormal return for shareholders around announcement period of an M&A.
However, it was underlined that corporate governance system uses three main mechanisms, namely: board of directors, executive compensation and ownership structure. Nevertheless, it was shown that the most critical among these three is surely the board of directors, since it is the most powerful tool in the hands of the shareholders to weaken the agency problem.
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2.1 Historical background of Campari Group

Davide Campari-Milano Spa, is an Italian company, based in Sesto San Giovani (Milan), world leader in the beverage industry. From the group's flagship drink, Campari Bitter, its portfolio has expanded to more than 50 premium and super premium brands, such as: Aperol, Appleton, Campari, Cinzano, SKYY Vodka and Wild Turkey. The Campari Group is now a global company that produces and distributes its products in more than 190 countries. The company has more than 4,000 employees and has its own distribution in 21 countries worldwide; other markets will then use local distributors22.
The experience of the Campari Group, which has registered a strong growth in the last twenty years, is a relevant example of how a business can use merger and acquisition deals in order to create value and expand its operations in foreign markets.
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2.2 Analysis of Campari Group’s acquisition strategy

Using a famous analytical tool, named Ansoff’s matrix, it is possible to fully understand the greatness of the task performed by Campari. The Ansoff matrix33 (also called the product-market matrix) is a marketing tool which allows to determine four ways to increase the business, through existing or new products, in existing or new markets (Fig. 5). This tool helps companies classify intensive and diversified growth strategies and assess the implications in terms of changing the skills needed to successfully follow the identified growth paths. The matrix consists of four strategies:
• Market penetration (existing product, existing market): this position, typical of most companies, sees the proposal of an existing product in an existing market. There are several ways to achieve this: the best is to win over competitors' customers, through pricing policies.
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2.3 Sample description

In order to study the possible relation between board characteristics and cumulative abnormal return of the merger and acquisitions performed by Campari in the last 10 years, it necessary to compose a sample made of the different deals.
For what concerns the different variables that will be taken into consideration, data were obtained by a mix usage of Eikon Thomson Reuters database, Orbis database, and independent analysis of documents published by companies. A small summary of all variables can be found in Table 2.
The first variable to be analyzed is the dependent one, namely the performance of merger and acquisition. Normally, in order to assess if a M&A deal had a positive or negative effect on a company, the researchers look at the cumulative abnormal return (CAR).
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2.4 Regression results and analysis

In order to understand the value that each independent variable brings to the model, the forward selection method is used; this means that, initially, a regression is run where the only variables used are the dependent one and the control ones, just to understand the starting point, and then, one independent variable at time is added, so that the change in adjusted R squared46 can be calculated for each one.
Since there are two independent variables, namely CAR ±3 and CAR ±5, the first model to be analyzed will be the one with the narrower window. After the first regression was run47, the results were quite encouraging, indeed adjusted R squared was 0,18, and the overall significance was quite low (0,065). However, the significance F should not be taken too much into consideration since it’s a value for the total model, and thus, the p-value of the single variable can be statically significant while the overall model is not.
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3.1 Main findings

After having addressed the results of the regressions, it is time to analyze them (Table 5). As discussed before, adjusted R squared values were not the highest, but this is because it should be taken into consideration only when there are multiple independent variables at the same time. Indeed, the “simple” R squared49 was 0,60 for CAR ±5 and 0,64 for CAR ±3, therefore quite good. However, since previous researches (Ben-Amar & André, 2006; De Jong, Van der Poel & Wolfswinkel, 2007), which studied the effects of corporate governance on M&A value, obtained even lower scores but still accepted them, it was decided to accept them as well.
Indeed, it is very difficult to assess the impact that solely corporate governance had on abnormal return of acquirers’ share price.
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3.2 Limitations and future research

Despite it was possible to achieve some important results, there are several important limitations, which, if fixed, might be the foundation for obtaining better results in future works. The most critical shortcomings of this study are here below listed.
The first restraint is about the event period taken into consideration. Indeed, as the research itself demonstrated, when the “window” becomes larger, the regression fails to detect a relationship between the abnormal return of share price and the explanatory and control variables. This is because the probability that external factors might affect CAR increases with the enlargement of the event period. Moreover, the presence of weekends and/or holidays during the event study might affect positively or negatively the abnormal return of the share price.
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CONCLUSION

The objective of this paper was to investigate about the existence of a positive relationship between abnormal return of acquirer share price and board characteristics of this firm. Fortunately, the regressions results were quite reassuring. Indeed, for both windows, the regressions detected a relationship for what concerns board size (p-value at 0,011 and 0,027) and independence (p-value at 0,035 and 0,049). However, when it comes to board duality, since the data never changed throughout the period analysed, it was impossible to calculate the link.
Overall, it could be stated that this work is in line with agency theorists’ thought; since the outcome showed that: when the directors number decreases and the percentage of independent members goes up, the abnormal return is positively affected.
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