ABSTRACT: Key words: real options; corporate valuation; abnormal returns, case study; capital budgeting. JEL: G31

Transcription

1 The Differenial Effec of Revenue Rises and Cos Savings on Invesors Valuaion of Growh Opions. Evidence from a comparaive case in he elecriciy business ABSTRACT: This paper seeks o analyze he way invesors consider growh opion values when pricing equiy. To achieve his objecive we sudy he effec on sock prices of a comparaive case of direc foreign invesmen involving acquisiion of wo differen growh opions, whose valuaion has already been well-documened in prior lieraure. The case consiss of he wo sequenial invesmen sages carried ou in he Chilean group Enersis by he Spanish elecriciy company Endesa in he second half of he 1990s. The effec of growh opion values on invesors expecaions is analyzed on he basis of he abnormal reurns in he period around he ime of he invesmen announcemen. Our resuls show ha a growh opion which value comes from fuure rise in sales has a greaer impac on sock reurns han ha of a growh opion whose value is based on cos savings. Key words: real opions; corporae valuaion; abnormal reurns, case sudy; capial budgeing. JEL: G31

2 1. INTRODUCTION This paper analyzes he impac of real opions value on sock prices. According o he real opions approach, he marke value of a firm s equiy, E 0, is he sum of he presen value of assesin-place aribuable o is shareholders, GO E 0 : AiP E 0, and he presen value of is growh opion porfolio, E AiP GO 0 E0 E0 [1] Asses-in-place (henceforward AiP) refers o he commimens already carried ou by he firm: ha is, curren invesmen already acceped. The value of his componen is derived from he sream of cash-flow generaed over ime, and equals wha he radiional discouned cash-flow (DCF) model aribues o he company as a whole. However, he value of a firm s liabiliies comes no only from he ownership of cash-flow as generaed by a given resource allocaion, bu raher from ownership of he resources hemselves and, hence, from cash-flow as generaed by any oher alernaive allocaion (Andrés e al., 2005). Growh opion (henceforward GO) porfolio refers o hese righs o decide he allocaion of resources which have value, o he exen ha hey affec fuure cash-flow. Esimaion of his source of value is he principal objec of he real opions approach. In an efficien marke, a change in any of hese corporae sources of value, such as ha derived from a new invesmen, should be refleced in sock prices and, herefore, in marke reurns. Prior empirical lieraure has analyzed he relevance of GO values mainly hrough evidence provided by case sudy research. Focusing on he valuaion of GOs embedded in a paricular invesmen presens he advanage of enabling sudy of he value creaion process in deph and he variables on which i depends 1. Some evidence also exiss for addressing he impac of real opions on marke values by means of indirec approximaion in a sample of firms assuming efficien markes (Keser, 1984; Berger e al., 1996; Danbol e al. (2002); Andrés e al., 2006; Alessandri e al., 2007). However, one issue which remains unexplored is analysis of he impac of real opions value on sock prices from he perspecive of marke inefficiencies. Previous empirical findings of marke anomalies, such as size, calendar, momenum or value effec, among ohers, raise he quesion of wheher sock prices correcly reflec he GO value. Our objecive is o analyze he relaion beween a firm s sock prices and he value of is GOs. Our ineres sems from he 1 Numerous case sudies have been carried ou in he area of naural resources due o he greaer availabiliy of informaion (Sick, 1989). More recenly, his evidence has exended o bioechnology (Micalizzi, 1999; Kellogg and Charnes, 2000; Sark, 2001; León and Piñeiro, 2004; Rubio and Lamohe, 2006), Inerne porals (Sáenz-Diez, 2004), axi licenses (Alberí e al., 2003), sea pors (Juan e al., 2001), real esae invesmen (Rocha e al., 2007) and auomobile componen suppliers (Azofra e al., 2004). 2

3 inuiion ha even if equaion (1) were righ, no all ypes of GOs should be valued in a correc manner by invesors. The reasons for he mispricing of a firm s porfolio of GOs may be various and range from marke inefficiencies o invesor biases. In he presence of informaion inefficiencies, we should consider ha invesors migh aach differen value aribues o equivalen sources of value. Swaminahan and Weinrop (1991) and Erimur e al. (2003) find ha invesors reac more srongly o an earnings surprise ha is induced by a dollar of sales increase han by a dollar of cos savings. Furhermore, Erimur e al. (2003) provide evidence ha hese differenial marke reacions are sronger in he case of growh companies (which are in he iniial sages of heir life cycle) han in he case of value firms. A possible explanaion for his asymmery is ha invesors inerpre informaion as a sign of he persisence and/or noise and reac more srongly o any surprise which is more permanen and/or less noisy (Erimur e al., 2003; Berger, 2003). This evidence suggess ha invesor reacions may differ when valuing a firm s GOs, depending on is main value source. The value aained by a company from exercising a GO may increase mainly from wo sources: an increase in is revenues or a saving in coss. To he exen ha a revenue increase is more frequen in he iniial sages of a firm s life cycle, i may be considered a more permanen source of value. Similarly, since an expense reducion is more ypical in he laer sages of a company s life cycle, is effec on value may be considered less recurren or more ransiory. This effec may be greaer in he presence of marke inefficiencies and informaion problems, as invesors will be more prone o inerpre all ypes of signs in order o generae heir reurn expecaions. Therefore, we posi he hypohesis ha, in he presence of informaion problems, invesor reacions are sronger for he acquisiion of a GO whose value comes from a sales increase han for he acquisiion of a GO whose value is based on cos savings. We evaluae his hypohesis by analysis of he reurns in a period of ime around he announcemen of wo sequenial corporae invesmen decisions which involve he acquisiion of differen GOs. This case consiss of acual invesmens implemened by he Spanish company Endesa when rying o ake conrol of he Chilean elecriciy group Enersis in he second half of he 1990s. We consider ha he sudy of sock price variaions associaed wih a firm s wo consecuive invesmens is an appropriae research sraegy for wo main reasons. Firsly, focusing on a case sudy makes i easier o aain he value of GO, which is oherwise an almos unobservable variable. And secondly, examining he effec of wo GO acquisiions underaken close in ime and by he same firm, bu differen in he naure of heir value source, allows us o isolae and compare in deph he relevan evidence for he problem under consideraion. The cases analyzed are represenaive of hose invesmens known as sraegic or 3

4 necessary which are acceped despie heir negaive Ne Presen Value (henceforward, NPV). These invesmens could reflec a paricular case of he agency problem of free cash flow. In fac, oher auhors, such as Trillas (2001), have analyzed his same operaion, concluding ha i was a sub-opimal invesmen which desroyed value for he shareholders. However, i could also reflec an efficien decision wih a sraegic value beyond he expeced value of direc cash flows, which comes from new opporuniies opened up for he firm, as shown by Alonso e al. (2009a and 2009b) 2. These wo papers analyze he iniial and final invesmen in Enersis, respecively, and inerpre each of hem as a means of improving he value of Endesa s GOs in he Lain American elecriciy business. Our analysis is based on he research resuls repored in hese previous papers and explores he relaion beween real opion value esimaes and sock price movemens. These wo invesmens mach he crieria of providing GOs of a differen naure and, herefore, are represenaive of he phenomenon sudied. The firs invesmen involved acquiring 29.04% of Enersis equiy plus he opion o conrol is fuure GOs in he Lain American marke. Specifically, Endesa would obain he opion o inves in he Brazilian elecriciy disribuion marke. The value resuling from his opion exercise emerged mainly from he increase in sales. The second invesmen was designed o gain majoriy conrol of Enersis. This conrol provided Endesa wih he opion of aking conrol of he generaing company, Endesa Chile, hrough he Chilean holding iself. The benefis o emerge from he exercise of his opion were based mainly on cos savings as a consequence of boh he inegraion of producion and disribuion operaions and he ransfer of Endesa s experience as an efficien verically inegraed company. Our analysis shows ha he sign and significance of cumulaive abnormal reurns (henceforward CARs) in windows close o he announcemen of he invesmen depend on he naure of he GO. In he case of he firs invesmen in Enersis, which was designed o gain conrol over fuure sales growh, he CARs, above all in he days prior o he announcemen, are saisically significan and posiive. Meanwhile, in he second invesmen, he CARs obained in he days prior o he announcemen are saisically no differen from zero, bu hose CARs obained in he days following he announcemen are significan and clearly negaive. In his case, he major benefis o emerge from he GO exercise were fel o be he expense reducions achieved by he ransfer of Endesa s know-how. The remainder of he paper is srucured as follows: Secion 2 describes he mehodology; Secion 3 explains he main characerisics of he comparaive case where we 2 There is a hird possible explanaion based on managerial overconfidence: Overconfiden managers end o overesimae he accuracy of available informaion and heir abiliy o conrol, leading hem o he accepance of unprofiable invesmens (Gervais, 2010). 4

5 presen he analysis of he CARs of Endesa shares; we show he relaion beween hem and esimaed GO values in Secions 4 and 5, respecively, for he firs and second invesmens; Secion 6 discusses he main findings and Secion 7 concludes he sudy. 2. METHODOLOGY Under he efficien marke hypohesis, any change in he naure of he componens in Equaion (1) should be refleced in he marke value of shares. This means ha any announcemen of such a variaion should imply a change in expeced reurns and, consequenly, in sock prices. Accordingly, we analyze he relaion beween he announcemens of he wo corporae invesmens carried ou by Endesa, heir AiP and GO impued values, and sock prices. To assess he pricing effecs of hese evens, we esimae he CAR in a ime window around he announcemen daes of boh invesmens. We obain he CAR for differen periods of ime around each dae of he announcemen. The CAR from Day 1 before he announcemen dae o Day 2 afer he announcemen dae is calculaed by adding he daily abnormal reurns (henceforward AR): CAR, ) ( AR We compue AR as he difference beween he observed reurn (R ) and he normal or risk-adjused reurn, as shown in he following equaion: ˆ ˆ [2] AR R * RM, where ˆ and ˆ are he ordinary leas squares (OLS) esimaed coefficiens for he marke model: R R M, * [3] R M, being he marke reurn, α he expeced reurn which is independen of he marke, β he bea coefficien and, finally, a mean zero disurbance wih a ime invarian consan. We compue normal reurns using a period of 180 days of reurns prior o he even window which is used in he calculaion of he CAR. As he marke reurn, we use he IBEX-35 Index reurn. The significance of he CARs is analyzed by means of he saisic, in such a way ha, if hey are significan, he hypohesis ha he CARs are equal o zero is rejeced. To explore, firsly, he impac of hese invesmens on Endesa s AiPs and GOs values, and, secondly, he relaionship beween he variaion of he laer and he variaion of Endesa sock prices, we use he findings in Alonso e al. (2009a and 2009b). In hese papers, he value of he AiPs was esimaed by using an adapaion of he Keser model (1984) and expeced 5

6 earnings per share from analyss mean consensus forecas in he I/B/E/S hisorical daabase. Values of he GO embedded in hese invesmens were esimaed by using an adapaion of he proposal by Longsaff and Schwarz (2001). In Appendix 1 and 2, we presen he main valuaion assumpions, inpus and resuls for boh AiPs and GOs values carried ou, respecively, in Alonso e al. (2009a and 2009b). 3. THE INVESTMENT CASES Announcemen of he invesmen agreemen signed beween heads of Endesa and Gesores Clave (a small number of execuives who exercised effecive conrol of he Enersis Board) ook place on 30 July, This iniial agreemen allowed he Spanish company o acquire a significan share of Enersis equiy and o aain conrol over is fuure foreign invesmen opporuniies, in exchange for he paymen of 1,500 million dollars. The main erms of his deal were he following: in he firs place, Endesa would obain a majoriy of equiy in Chispas, he second larges shareholder in Enersis, by paying a presen value of 1,000 million dollars for he ownership righs associaed wih he sake of employees or previous employees of Enersis. Secondly, Endesa would sign cerain managemen conracs wih he Key Managers o obain he decision righs by paying a presen value of 500 million dollars. Finally, he agreemen also included he seing up of Endesis whose mission was o channel he invesmen of Endesa and Enersis in Lain-American. In accordance wih ha esablished, Endesa would conrol 55% of Endesis while he remaining 45% would be conrolled by he Chilean group. Despie is iniial plans, Endesa s primary invesmen did no allow hem o obain he desired conrol of Enersis. The main reason was disrus which arose amongs he shareholders of Enersis wih regard o he clauses of he iniial deal. Three monhs afer his agreemen, a he end of Ocober 1997, an exensive review of he agreemens signed ook place, he main consequence for Endesa being he loss of he decision righs linked o he Key Managers sake, alhough i mainained he ownership righs acquired. A new way of deciding fuure join invesmens was esablished which involved individual sudy of each opporuniy and equal shareholding of boh groups. In exchange, he breaking of he iniial agreemens freed he Spanish company from paying 250 million dollars. Bu he siuaion afer renegoiaion did no respond o he expecaions of Endesa: 1,250 million dollars had been spen o acquire 29% of he ownership righs and 0% of he conrol righs of Enersis. The Spanish company was he main shareholder in Enersis in erms of ownership righs bu i conrolled only hree of he seven members of he Board of Direcors. This siuaion was mainained for one year. In his period, he second main shareholder in Enersis, he Pension Fund Adminisraors (PFAs), exercised effecive conrol of he Board. The objecives of he PFAs were clearly differen from hose of he Spanish company: while he 6

7 aim of Endesa was o use Enersis as a vehicle hrough which o channel fuure invesmens in Lain America, he PFAs wihou he financial abiliy o underake he expansion plans of Endesa were ineresed in selling is sake in Enersis and is affiliaed generaing company, Endesa Chile. A he end of December, 1998, he Enersis Board of Direcors proposed he sale of is sake in Endesa Chile, which reached 25.3% of he equiy, in order o improve Enersis cash flows. This announcemen caused grea ension amongs Enersis shareholders since i involved a direc reverse of Endesa s expansion plans. In consequence, on 23 January, 1999, he Spanish company launched a akeover bid for 32% of Enersis a a price of 1,450 million dollars o aain conrol of he company and hus ry o avoid having o disinves in Endesa Chile. The invesmen of Endesa in Enersis equiy allows us o idenify wo differen invesmen cases wih heir own implicaions for boh sources of value: AiP and GO. These wo evens correspond, respecively, o he iniial agreemen announced on 30 July, 1997 and he announcemen of he second akeover bid for Enersis on 23 January, The iniial invesmen agreemen wih Enersis allowed Endesa o acquire 29.04% of he cash flows which he Chilean Group AiPs were expeced o generae. Furher, i allowed he Spanish company o conrol fuure GOs of Enersis in he Lain American marke. In consequence, he Exended NPV derived from iniial invesmen in Enersis equiy is he resul of comparing he oulay of 1,500 million dollars wih he sum of he presen value of he AiPs and he presen value of he GO porfolio. The benefis o emerge from he exercise of his opion were based on he increase in fuure cash-flows as a consequence of he spread of Enersis operaions in Lain America. This opion arose from he privaizaion of he elecrical disribuion business announced by he Brazilian governmen in July, 1997 and sequenially accomplished in he following 5 years. The las and definiive round in Endesa s akeover of Enersis began wih he decision of he Enersis Board o dispose of Enersis sake in Endesa Chile. The impossibiliy of seing in moion he managemen model sough by he Spanish elecriciy company in Enersis brough abou he launch of a akeover bid for he Chilean group which, were i successful, would have allowed Endesa o acquire 32% of he cash flows o be generaed by Enersis AiPs. More imporanly, i would confer on Endesa conrol over managemen of he fuure GOs of he group, he invesmen opion in Endesa Chile being he mos imminen of hose opporuniies. The benefis o emerge from he exercise of his opion were based mainly on cos savings, boh from verical inegraion of producion and disribuion and ransfer of Endesa know-how and is wide experience as a verically inegraed company. 7

8 4. STOCK PRICES AND THE OPTION TO INVEST IN BRAZIL Figure 1 shows he price rend of Endesa shares beween 1 July and 31 Augus, 1997, wih an indicaion of he principal evens which could influence he sock price. The announcemen of he alliance wih he Chilean group, Enersis, mean a rise in he sock price of he Spanish elecriciy company which surpassed 21 dollars per share. This announcemen corroboraed he informaion published a he beginning of he monh regarding he subsanial resources which were o be se aside and invesed in Lain America over he following years. Figure 1. Daily sock price of Endesa (Values in dollars) Announcemen of invesmens plans in La. Am. up o Adjudicaion of 60% of Reevisión Announcemen of alliance wih Enersis Sock price $ Resumpion of BCH- Endesa alliance Singing of he alliance wih Enersis 18 Dae The CARs in he period around he announcemen of Endesa s invesmen are repored in Table 1. We compue he CARs for nine differen even windows. CARs of Endesa are posiive and saisically significan a he 10% level in he windows prior o he announcemen (up o 15 days). This evidence may be coheren wih he fac ha days before he announcemen of he agreemen rumors circulaed as regards he exisence of hese negoiaions. In his case, he expecaions of he invesors should reflec boh he sake holding in a major elecriciy group and he GOs embedded in i. I is ineresing o consider ha barely a few monhs before, in February 1997, Endesa s Chairmanship had been removed and he new Chairman, Rodolfo Marín Villa, declared he ineres of he Spanish company in carrying ou foreign invesmens wih he inenion of effecively conrolling is subsidiaries. In fac, a he beginning of July he 8

9 invesmen plans in Lain America over he coming years were made public wih a forecas invesmen of over 2,500 million dollars. In consequence, we may consider ha he posiive abnormal reurns consiue evidence in favor of he relevance of he value of he GOs which invesors aribue o invesmen in he Chilean group. Table 1. Cumulaive abnormal reurns around he announcemen of Endesa s iniial invesmen in Enersis This able presens he cumulaive abnormal reurn around he announcemen of he invesmen. Risk adjused reurns are obained using he marke model regression, which repors ˆ , ˆ and R %. Accumulaion period CAR Average AR CAR Deviaion -saisic p-value (-20; 0) 5.439% 0.259% (-15; 0) % 0.601% (*) (-10; 0) 8.831% 0.803% (*) (-20; +20) 6.418% 0.196% (-15; +15) % 0.433% (**) (-10; +10) 9.792% 0.523% (*) (-5; +5) 7.988% 0.726% (-5; +10) 8.927% 0.558% (0; +10) 1.298% 0.118% ***Significan a he 0.01 level. **Significan a he 0.05 level. *Significan a he 0.10 level. Figure 2 presens he sensiiviy of he valuaion of he AiP o change in he perpeual growh rae of cash-flows according o he model in Alonso e al. (2009a). Esimaed NPV vary beween minus 835,259, dollars (which corresponds o a value of minus dollars for each share in Endesa) when he growh rae is nil (g = 0%), and 472,661,226 dollars ( dollars for each share in Endesa) when growh rae is six per cen (g = 6%). These resuls show ha, excep for unlikely high values of g, he esimaed NPV does no jusify per se he invesmen decision of Endesa and, herefore, neiher a posiive change in sock prices in he period around he announcemen of he operaion. Figure 2. NPV per Endesa share of he iniial invesmen in Enersis (Values in dollars) Value per Endesa share (dollars) 0,60 0,40 0,20 0,00-0,20-0,40-0,60-0,80-1,00 0,45-0,04 0% 1% 2% 3% 4% 5% 6% -0,32-0,51-0,63-0,73-0,80 Perpeual growh of he cash flows Resuls in Table 2 relae he CARs in he period around he ime of he invesmen announcemen and he weigh of he invesmen value aribuable o each Endesa share. To 9

10 calculae his weigh, we consider he Exended NPV per share as obained in Alonso e al. (2009a), which includes he value aribuable o Endesa s improvemen in he GO in Brazil. Specifically, hese resuls, which are repored in Panel A of Table 2, are presened for wo scenarios: when poliical inerference in deermining he disribuion margin is no considered (wihou regulaory risk) and when regulaory uncerainy of he margin reaches 50% (wih regulaory risk). We also consider differen assumpions regarding he overpricing offered in he ender (increases in he srike price of 10%, 30% or 50%) or alernaively, he likelihood of bid success (33% or 66%). Panel B of Table 2 shows he weigh which represens he Exended NPV per share over he sock price, aking as a reference value for he laer eiher he price a he beginning of he reference window or he average reached during he days covered by he window prior o he invesmen announcemen. Calculaion of he weigh of he Exended NPV per share wih regard o he sock price is carried ou for hose ime inervals around he dae of he invesmen announcemen in which he previously esimaed CAR are significan. As can be verified, when hese weighs are posiive hey reach maximum values of around 2%. These values are significanly disan from he CARs which we have esimaed for he differen windows around he ime of he invesmen announcemen and which are siuaed a over 10% in he majoriy of cases. Table 2. Exended NPV per Endesa share and is weigh in he sock price Panel A: Exended NPV per Endesa share (dollars) Wihou regulaory risk Wih regulaory risk 50% Wih Premium Paymen Prem. 10% Prem. 30% Prem. 50% Wih Probabiliies of Adjudicaion Prob 66% Prob 33% Panel B: Weigh of he Exended NPV per share wih respec o he sock price of Endesa for differen windows around he dae of he invesmen announcemen (%) Windows (-10; 0) (-10;+10) Wihou regulaory risk Wih regulaory risk 50% Sock Price beginning Wih Premium Paymen Mean sock price (-10; 0) Sock Price beginning Mean sock price (-10; 0) Prem. 10% 1.967% 2.016% 0.740% 0.759% Prem. 30% % % % % Prem. 50% % % % % Wih Probabiliies of Adjudicaion Sock Price beginning Mean sock price (-10; 0) Sock Price beginning Mean sock price (-10; 0)

11 Windows (-15; 0) (-15;+15) Prob 66% 0.923% 0.946% % % Prob 33% % % % % Wihou regulaory risk Wih regulaory risk 50% Panel A: Wih Premium Paymen Sock Price beginning Mean sock price (-15; 0) Sock Price beginning Mean sock price (-15; 0) Prem. 10% 1.960% 2.002% 0.738% 0.753% Prem. 30% % % % % Prem. 50% % % % -2261% Panel B: Wih Probabiliies of Adjudicaion Sock Price beginning Mean sock price (-15; 0) Sock Price beginning Mean sock price (-15; 0) Prob 66% 0.920% 0.940% % % Prob 33% % % % % Panel A shows he Exended NPV per Endesa share including he value aribuable o he GO in Brazil, as obained in Alonso e al. (2009a). Panel B shows he weigh which represens he Exended NPV per share over he sock price for hose ime inervals in which he esimaed CAR are significan. For sock prices, wo values are considered as reference: i) he price a he beginning of he reference window, or ii) he average reached during he days covered by he window prior o he invesmen announcemen. I should be noed ha hese values depend on he ime inervals around he dae of he invesmen announcemen. Analysis of hese differences is no wihou ineres. We could consider reviewing he scenarios se ou in Alonso e al. (2009a) wih he aim of proposing a more opimisic valuaion of he expansion opion in Brazil. However, in view of he resuls, i does no seem ha his is sufficien given ha, if we observe he rend which he weighs show for he premium values exhibied, we can predic, for example, ha non-consideraion of he overpricing offered in he ender will improve he Exended NPV bu no in a sufficien quaniy o jusify per se he CAR. 5. STOCK PRICES AND THE OPTION TO INVEST IN ENDESA CHILE Figure 3 plos he price rend of Endesa shares in he ime period around he second and definiive akeover bid for Enersis. As can be observed in he Figure, he sock price of Endesa underwen considerable flucuaions from he dae on which he Enersis board of direcors decided upon he sale of is sake in he subsidiary, Endesa Chile. A he ime of he launch of he akeover bid, Endesa s sock price slighly surpassed ha which i presened a he ime when he Board adoped he sale decision. However, from ha dae onwards, and even hough large flucuaions were sill observed, he price rend of he Spanish firm was clearly falling 11

12 Figure 3. Daily sock price of Endesa shares (Values in dollars) As in he previous sage, we esimae Endesa CARs for differen ime windows, boh symmerical and non-symmerical, around he dae of he announcemen of he akeover bid 3. In view of he resuls in Table 3, we can affirm ha use of symmerical windows does no reveal any significan resul for he differen inervals considered. However, he CARs are negaive and saisically significan in he days subsequen o he announcemen of he akeover bid. These resuls clearly indicae ha prior expecaions of he invesors do no recognize any valuecreaion associaed wih he decision adoped by he Endesa managemen. Table 3. Cumulaive abnormal reurn from he final invesmen of Endesa in Enersis This able presens he cumulaive abnormal reurn around he announcemen of he final invesmen. Risk adjused reurns are obained using he marke model regression, which repors he values for ˆ ( ) and ˆ (0.6239). R 2 is %. Accumulaion period CAR Average AR CAR Deviaion -saisic p-value (-10; 0) 3.000% 0.273% , (-20; +20) % % (-15; +15) % 0.158% (-10; +10) % % (-5; +5) 0.561% 0.051% (0; +10) % % (**) 3 Noe ha, he marke model regression R-squared improves wih respec o ha achieved in he firs invesmen, indicaing ha he observed profiabiliy of he Spanish firm can be explained up o almos 48% from he marke model. 12

13 (0; +15) % % (**) (0;+20) % % (*) ***Significan a he 0.01 level. **Significan a he 0.05 level. *Significan a he 0.10 level. To deermine wheher he value effec of he decision aken by he Endesa managemen is properly refleced in is price variaions we consider again he Exended NPV of his second and definiive invesmen of Endesa in Enersis. This value should be obained by subracing he 1,450 million dollar oulay required in he akeover bid from he sum of he presen value of expeced cash flows from AiPs and he value provided by he opion o inves in Endesa Chile. The value of AiPs is again deermined by means of adapion of he Keser Model (1984) and he opion o inves in Endesa Chile is esimaed via adapaion of he proposal of Longsaff and Schwarz (2001), following Alonso e al. (2009b). 4 Valuaion of he AiP allows us o evidence is insufficiency when i comes o jusifying he decision adoped by he Spanish elecriciy company. Figure 4 plos he resuls of he valuaion of he invesmen for perpeual growh values of cash flows beween 0% and 6%. The NPV resuling from his second invesmen in Enersis, bearing in mind he ax saving generaed by he prearranged deb, varies beween minus 963,915, dollars (which corresponds o a value of minus dollars per Endesa share) when he perpeual growh rae is 0%, and minus 593,670, dollars (minus dollars for each Endesa share) when he growh rae is 6%. Figure 4. NPV per Endesa share of he second invesmen in Enersis (Values in dollars) Value per Endesa share (dollars) 0,00-0,10-0,20-0,30-0,40-0,50-0,60-0,70-0,80-0,90-1,00 0% 1% 2% 3% 4% 5% 6% -0,57-0,67-0,75-0,81-0,86-0,93-0,90 Perpeual growh of he cash flows Panel A in Table 4 shows some of he resuls aained by Alonso e al. (2009b) wih regard o he Exended NPV per share. These values are compued for differen assumpions regarding he improvemen in he margin 5 and he premium which deermines he srike price of 4 Appendix 2 summarizes he main hypoheses, parameers and valuaion resuls carried ou in his paper. 5 This margin improvemen is due o he greaer efficiency which was expeced o be aribued o he managemen of Endesa Chile on he par of he Spanish company 13

14 he invesmen opion in Endesa Chile. These resuls sugges ha he second invesmen was only jusified for opimisic expecaions for he impac of Endesa s conrol over he efficiency of he Chilean company, independen of he premium paid.. Table 4. Exended NPV per Endesa share and is weigh in he sock price on he day of he announcemen of he akeover bid for Enersis Panel A: Exended NPV per Endesa share (dollars) Premium in he akeover bid Improvemen of he margin Via Enersis (29.7%) 0% 4% 8% 12% 16% 50% % % Panel B: Weigh of he Exended NPV per share wih respec o he sock price of Endesa on he day of he announcemen of he akeover bid (%) Premium in he akeover bid Improvemen of he margin Sock price Via Enersis (29.7%) 0% 4% 8% 12% 16% 50% % % % % % 40% % % % % % 30% % % % 1,2461% % Panel A shows he Exended NPV per Endesa share including he value aribuable o he GO in Endesa Chile, as obained in Alonso e al. (2009b). Panel B shows he weigh which represens he Exended NPV per share over he sock price for hose ime inervals in which he esimaed CAR are significan. The valuaion resuls for he exended NPV are relaed o he sock close price reached on he announcemen dae of he operaion in Panel B. These weighs vary beween -2% and 2% in accordance wih he scenarios shown. These values are considerably differen from he CARs shown in Table 3 and esimaed for differen accumulaion periods, which flucuae beween - 12% and -10%, when hey were significan. Besides he consideraions wih regard o he valuaion assumpions or he exisence of a greaer number of invesmen opporuniies linked o Endesa s akeover of Enersis, he resul which prevails is he prominenly negaive value of he CARs. In his case, invesors reac in a markedly negaive way o he decision adoped by Endesa, underesimaing he GO value embedded in his second invesmen in Enersis. 6. DISCUSSION The resuls in he previous secions do no allow us o demonsrae ha GO values are properly refleced in sock prices, a leas no in he way prediced by efficien marke heory. We have found ha he sign and significance of CARs in windows nex o he announcemen of he invesmen are differen for each of he cases valued. In he case of he firs invesmen in 14

15 Enersis, which was designed o gain conrol over he fuure growh of sales, he cumulaive abnormal reurns, above all in he days prior o he announcemen, are saisically significan and posiive. This resul could, herefore, evidence he effec of GOs on he valuaions carried ou by invesors. Meanwhile, in he second invesmen, he CARs obained in he days prior o he announcemen are saisically no differen from zero, bu hose CARs obained in he days following he announcemen are significan and clearly negaive. The main difference beween boh cases is heir main source of value. In he firs case, he embedded GO is defined on he sream of cash-flows ha emerge from elecriciy disribuion in Brazil, as a consequence of is imminen privaizaion. When valuing his GO, invesors no only recognized he exisence of fuure benefis associaed wih he discreionary expansion in Brazil bu also aribued o hem a higher value han ha derived from is valuaion by means of appropriae models and exensive informaion. In he case of he opion o inves in Endesa Chile, he major benefis emerging from is exercise were fel o be he expense reducions achieved by improving efficiency of boh Endesa Chile s operaions and inegraion of disribuion and generaing businesses. The in-deph analysis in Alonso e al. (2009b) reveals ha his efficiency improvemen was due o he ransfer of Endesa know-how and experience as a verically inegraed company. However, our resuls indicae ha invesors did no consider his informaion when pricing Endesa sock prior o he announcemen. Furhermore, even afer he announcemen was made, invesors considerably underraed he value of his GO, even in he mos pessimisic scenarios regarding he ransfer of efficiency and he size of he premium o be paid o gain conrol of Endesa Chile. I should be menioned in his respec ha, a he ime of he announcemen of he second invesmen, cerain hurdles exised which condiioned is success, such as he need for a reform of he saues of he Chilean group in order o increase he maximum sake-holding. This circumsance migh have brough abou a seemingly undervaluaion of Endesa socks due o exreme pessimism on he par of invesors. However, our resuls may be beer explained by he exisence of informaion problems which made invesors overreac differenly o economically equivalen evens. In fac, our findings are in line wih prior lieraure on invesors reacing differenly o an earnings surprise induced by a dollar of sale increase and a dollar of cos savings (Swaminahan and Weinrop, 1991; Erimur e al., 2003). These previous works explain such evidence as a consequence of he differen persisence and/or noise of each of hese wo sources of value: invesors reac more srongly o any surprise induced by a sale increase because i is expeced o be more permanen and/or less noisy han any surprise induced by a equivalen cos saving (Erimur e al., 2003; Berger, 2003). Furhermore, Erimur e al. (2003) provide evidence ha hese differenial marke reacions are sronger in he case of growh 15

16 companies han in he case of value firms. Our resuls are consisen wih hese argumens. They show ha invesor percepions regarding fuure cash-flows o emerge from he exercise of hese wo GOs differed significanly. The indeph analysis of resuls in Alonso (2009a and b) reveals ha here are no oher marked differences in boh cases apar from he naure of heir source of value. Boh invesmen oulays were alike: US$ 1,500 million, in he firs case, and US$ 1,450 million, in he second. The financial policies were also comparable: in he firs case, 2/3 of he oulay was financed by deb and, in he second case, he invesmen was oally financed by deb. Boh projecs repored negaive NPV and were considered as sraegic invesmens by Endesa managers. Therefore, he hypohesis of higher perceived persisence of a sales increase over ha of a cos saving can be seen as a highly credible explanaion. There are poenial alernaive explanaions for our resuls. Apar from random hypoheses, anoher possible explanaion deals wih he increase in invesor pessimism as a consequence of he successive sebacks which occurred during he operaion. Fuure evidence from addiional cases will enable us o shed ligh on a opic which has imporan implicaions for equiy valuaion. 7. CONCLUSION In his paper, we have sough o sudy how invesors incorporae new informaion ino he valuaions of GOs. Specifically, we analyze wheher invesors are more concerned abou specific GOs sources of value. A comparaive case sudy may be considered an appropriae research sraegy o evaluae how similar GOs affec sock prices. Deailed analysis of sources of value enables us o deermine wheher invesors aach differen value aribues o comparable GOs and give a basis for discussing is possible explanaions. Specifically, we examine he valuaion resuls repored by Alonso e al. (2009a and b) for he invesmens carried ou by he Spanish elecriciy company, Endesa, in he capial of he Chilean group, Enersis. The akeover of he Chilean group involved wo differen invesmens wih he consequen variaion in sources of value. We esimae he CARs of Endesa shares in an inerval around he ime of he announcemen of boh invesmens. Alhough he CARs are significan in boh invesmens, in he iniial invesmen hey are clearly posiive and are obained prior o he dae of he announcemen, while, for he definiive invesmen, only he cumulaive reurns in he days afer he announcemen are significan and, furher, negaive. In he firs invesmen, in which he CARs are posiive, we can sae ha sock prices may reflec GO values. On he oher hand, evidence for he second case seems o indicae ha hey did no consider GO values when pricing Endesa shares, or if hey did, hey valued he embedded GO assuming ha akeover of Endesa Chile would no lead o any subsanial 16

17 improvemens in is performance. Taking ino accoun he differences beween boh GOs embedded in hese invesmens, our analysis has allowed us o observe ha he marke overreaced posiively (negaively) o he announcemen of he acquisiion of a GO whose value emerges from a sales increase (expense saving). These resuls are in line wih he inuiion ha in he presence of informaion problems, invesors ends o aach differen value aribues o available informaion regarding GOs, depending on heir naure: GOs based on sale increases seem o be inerpreed as a more permanen source of value han GOs based on cos savings. 17

18 APPENDIX 1 Summary of Alonso e al. (2009a) s valuaion of Endesa s iniial invesmen in Enersis AiP valuaion GO valuaion Main assumpions Fuure non-discreionary invesmens and expeced equiy cash flow are equal o economic mainenance of asses and expeced mean ne profi, respecively. Enersis ne profi increases perpeually a a consan rae, g. Deb ineres generaes ax savings which increases AiP values. The value aribuable o Endesa invesmen is 29.04% of Enersis AiP oal value. Expeced ne profi for year 1997 (NI 1 = US$) is proxied by analyss mean consensus forecas in hisorical daa base I/B/E/S. Risk adjused discoun rae for invesmen (K e = 8.7%) is compued using CAPM. Risk-free ineres rae and marke premium are obained by mean reurn of 10-year American bond (R F = 6.22%), and Fama and French s (2002) esimaes (MP = 4.23%), respecively. Bea coefficien ( 0.587) is esimaed from prior 60 monhly reurns of Enersis socks and S&P 1200 Global Index. Perpeual growh rae for Enersis AiP cashflows is 3% (g = 3%) Invesmen in Enersis provides Endesa wih preferenial access o inves in Brazilian elecriciy disribuion marke. Underlying asse is sake in fuure cash-flows o emerge from elecriciy disribuion over a given leased area in Brazil. Life-span of underlying asse is indefinie and generaes a consan cashflow in perpeuiy. Opporuniy expires in 5 years and may be exercised every six monhs. Value resuling from opion exercise is weighed by likelihood of success of alliance in adjudicaion of ender. Fuure cash-flows from underlying asse depend on wo sae variables: 1. Disribuion uni margin (difference beween revenues and energy acquisiion coss) which follows a geomeric Brownian process wih Poisson jumps (gahering he possibiliy of abnormal variaions from poliical inerference). 2. Demand for elecriciy in Brazil which follows a geomeric Brownian process wih Poisson jumps (reflecing possibiliy of abnormal variaions from dry periods). Correlaion beween non-anicipaed changes in variaion of demand and of disribuion margin is assumed o be 90%. The GO value aribuable o Endesa invesmen is difference beween value of opion o inves in Brazil hrough he alliance wih Enersis and value of he opion which Endesa mainains by iself. Inpu esimaion Srike price per megawa disribued is esimaed from daa of previous enders and se equal o US$. Success probabiliies in adjudicaion of ender range beween 33 and 66%. Cash-flows o emerge from underlying asse are compued as: F S, M ( MB Cos )(1 ) where MB is he operaing gross margin of disribuion aciviy calculaed as: MB = M S c, being: M : Uni margin per megawa disribued, whose evoluion is esimaed from hisorical variaion of he GDP in Elecriciy, Gas and Waer secor beween 1953 and S : Demand for elecriciy in Brazil, whose evoluion is esimaed from hisorical daa on elecriciy consumpion in Brazil beween 1952 and c: Percenage of demand which can be me in he case of adjudicaion of ender. Esimaed from expeced marke share by ender and minoriy shareholding of a local parner and se equal o 7.5%. Cos is he sum of iems which reduce operaing gross margin and are obained as a proporional par of gross margin: Cos 0.75 MB is ax rae esimaed from informaion offered by Brazilian Insiue of Geography and Saisics and se equal o 30%. NPV is negaive and equal o -525, dollars ( dollars per Endesa share) Resuls Value of GO in Brazil is relevan enough o jusify Endesa invesmen in Enersis. Posiive relaionship beween value of GO and likelihood of success in ender. Negaive relaionship beween value of GO and he overpriced ender offered. Increase in regulaory uncerainy reduces value of GO under all assumpions considered. 18

19 APPENDIX 2 Summary of he valuaion of he second invesmen of Endesa in Enersis AiP valuaion GO valuaion Principal hypoheses Cash flow aribuable o shareholders is idenified wih ne profi. Ne profi of Enersis increases a consan rae, g. Value of curren invesmen is adjused by ax savings which deb generaes. The value aribuable o he AiP is calculaed as: V NI 1 0,32 NI k g AiP 1 0 e Expeced ne profi in following period. Taken from hisorical daa base I/B/E/S of Daasream, (0.018 US$) k e Discoun rae adjused o risk for Endesa share (11.63%). CAPM is applied wih a marke premium of 4.23% and risk-free rae of 5.83%. G Consan rae of perpeual growh of cash flow. Esimaed beween 3% and 7%. Value of he opion is obained as difference beween value of invesmen opion in Endesa Chile via alliance wih Enersis and value of opion which Endesa mainains per se. For his, differen scenarios of he premium are used which deermines price of opion exercise. Life-span of underlying invesmen is assumed o be indefinie and is divided ino an iniial period of en years, T = 10, a he end of which i is assumed ha invesmen generaes a perpeual cash flow equal o las one obained in previous period. Possibiliy of invesing in Endesa Chile over hree years, evaluaing opion exercise wice a year (every six monhs) An improvemen in efficiency ha akeover by Endesa of Endesa Chile involves is assumed. I is inroduced in valuaion via he growh variable of operaing uni margin, wih a range of values beween 0 and 16% which is generaed saring from year following exercise of he opion. Value resuling from invesmen opporuniy in Endesa Chile is weighed by probabiliy of success in akeover by means of a 50% probabiliy. Dependence of cash flows underlying exercise of opion on wo variables: 1) Uni margin of disribuion which measures difference beween revenue and acquisiion coss of energy disribued. 2) Demand for elecriciy in Brazil. Esimaion of he parameers F W i, Bea Bea coefficien X obained from monhly correlaion of reurn of Endesa and Global Index S&P 1200 for five previous years. (1.372) NPV varies beween -843 million dollars and -439 million, according o perpeual growh rae of cash flows which is considered for Enersis. Underlying asse: value of cash flows discouned which invesmen is expeced o generae. Cash flow in is calculaed as: F MBi, Cos (1 ) i MB : gross margin of generaing aciviy in counries in which Endesa Chile operaes. I depends on five uncerain variables which refer o energy generaed in each of counries. I is calculaed as: MB m W s i, i, i, i Gross margin in marke i is obained by muliplying uniary margin, m i,, volume of energy generaed in ha marke, W i,, and share which Endesa Chile serves in marke, s i Cos : iems which reduce gross operaing margin. They represen a proporional par of gross margin. Cos 0,5 MB : Corporae ax rae (15%) Toal volume of energy generaed in markes in which Endesa Chile operaes: Argenina, Chile, Colombia, Peru and Brazil. Brownian geomeric process wih Poisson jumps which reflec abnormal variaions in dry periods caused by dependence on hydraulic generaion. dwi, i i ki Wi, d i Wi, dzi ( i 1) Wi, dqi Parameers are esimaed for each counry and are defined in same way as in previous sage. Srike price. Calculaed from sock price of Endesa Chile wih premiums beween 30% and 50% for opion via Enersis (i.e., opion o buy 29.7% of Endesa Chile) and premiums beween 60% and 100% for direc acquisiion opion by Endesa (i.e., purchase opion of 55% of Endesa Chile). In consequence, he srike prices of hese opions flucuae, respecively, beween 1,286 and 1,484 million dollars for invesmen opion via alliance and beween 2,902 and 3,627 million dollars for independen invesmen opion. Principal resuls Incremenal value of invesmen opion for Endesa share varies beween 118 million dollars, when improvemen in margin is zero and values of premium are higher and 1,847 when improvemen in margin is 16% and premium is lower. Values of he invesmen opion increase as esimaed improvemen in margin increases from sake in managemen of Spanish elecriciy company and are reduced wih premium o be paid in akeover bid. 19

20 Whaever he case, i is negaive and allows us o jusify decision adoped by Endesa. Invesmen opion in Endesa Chile only allows compensaion of negaive NPV in some scenarios. 20

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