Concentrating on Turkish legal environment, this paper analyzes whether and how M&A activities could be explained by the changes in legal environment. It provides a detailed review of M&A literature and aims to demonstrate results by using case studies.

1. The Effects of the Legal
Environment on M&A:
A Closer Look at
Turkish Legal
Environment
Saniye Yeniay
Co-founder & Consultant at
GCM360

2. Agenda
1. Mergers and Acquisitions in General
1.1. Definition and classification
1.2. Studies in the Literature
2. Legal Environment
2.1. How can we assess legal environment?
2.1.1. Origin of Law
2.1.2. Economic Freedom Index
3. Legal Environment in Turkey
3.1. Trade Law and Capital Market Law
3.2. Competition Law
4. Conclusions and Future Implications

3. Acquisition
Merger
• Although there is a difference between a
merger and an acquisition, both terms are
used interchangeably, as synonyms in
practice.
Mergers and Acquisitions in General

4. Mergers and Acquisitions in General
• Between 1994-2007,
there is an increased
activity in the market
with a peak of US$4.2
• M&A activities in the
world follow a cyclical
pattern. It is called
M&A Waves in the
literature.
• Vertical vs Horizontal: Are both of the firms operate in the same industry as
rivals?
• Domestic vs Cross-Border: Are both of them in the same economy?
• Friendly vs Hostile: Do the board of the target firm has willingness to hear the
offer?

5. Mergers and Acquisitions in General
Literature investigates the relation between M&A activities and…
• Shareholder valuation: Positive or negative
effect ?
• Behavioral aspects (i.e. motivations,
employee responses)
• Investor protection and legal environment
Legislation in force of a country is
abstracted as stimulating or dampening
factor of mergers and acquisition
activities. Therefore, the last group of
studies is analyzed carefully.

6. Legal Environment
• The fundamental linkage between laws and M&A deals comes from the concerns of
society welfare (i.e. Competition laws are needed to protect consumers)
• The existence of competition law and/or merger control law in a country affects the
number, size, forming process and type of M&A.
• After The William Act made horizontal mergers harder and also increased the number of
business deals between different industries.
• The number of hostile takeovers in USA and UK decreased dramatically in 1990s
compared to 1980s partly because of regulatory changes during 1980s.
• Some economists argue that shareholder gains are blocked by M&A regulations.
• Partial anti-trust policy can cause a decrease in the competition level of markets
compared to the absence of this policy.
Side Effects…

7. Legal Environment
Common law vs Civil Law Countries • Common law countries such as USA and
Canada provide stronger protection to
shareholders and creditors compared to civil
law countries such as Germany and France.
French law countries (e.g. Turkey), have the
weakest protection among all.
• Weaker investor protection leads to smaller
capital, debt and equity markets which
indirectly reduce the chance of mergers.
Accordingly, stronger investor protection
should lead to a higher number of mergers
and acquisitions.
• M&A volume is considerably higher in
countries which have stronger investor
protection and better accounting standards
and this result is also valid for antitrust and
takeover laws
Civil Law
Common
Law (7.5%
higher)
(La Porta and Rossi & Volpin)
How can we assess a legal environment?

8. Nothing is perfect…
• Only one observation in 10 years-period for some countries such as Turkey and
Brazil
• “Mandatory Bid Rule” and “Market Dominance” was measured only one time during
the 10 years period. The existence of a rule may change in a country within the
period and it may mislead the results.
Legal Environment
How can we assess a legal environment?

9. How can we assess a legal environment?
• Economic Freedom
Index can be used in
order to classify
countries regarding
their legal and
institutional
environments.
Economic Freedom Index (Feito-Luiz & Menendez-Requejo)
• Weaker legal and
institutional
environment in the
target country has a
positive effect on
acquiring shareholder
valuation
Source: Heritage Foundation
Legal Environment

10. Nothing is perfect…
How can we assess a legal environment?
• Economic Freedom Index as the only source of legal environment. It might not be enough
to measure the existence and strength of enforcement level of business related laws.
• Furthermore, the study covers only M&A deals between 2002 and 2004 time interval
which is rather short and corresponds to the end of the fourth wave
Legal Environment

11. Trade Law (1956 vs 2012)
Capital Market Law (1981 vs 2012)
Bidder Target Bidder Target
Open Company Open Company Open Company Open Company
Limited Partnership Limited Partnership Limited Partnership Limited Partnership
Limited Company Limited Company Limited Company Limited Company
Incorporated Business Incorporated Business Incorporated Business Incorporated Business
Limited Partnership
Divided into Shares
Limited Partnership
Divided into Shares
Limited Partnership
Divided into Shares
Limited Partnership
Divided into Shares
Old Trade Law New Trade Law
• Increased possibility of mergers
• Increased cost of auditing, triggers mergers for limited companies
• Capital Market Boards of Turkey (CMB) controls mergers between 414 traded companies
• Right to refuse a deal and punishment (e.g. Viking Paper case)
Legal Environment in Turkey

12. Competition Law (1994)
• Since 1997 The Turkey Competition Authority has been working to facilitate and to
protect the competition in markets.
• Article 7 says: “All legal transactions and behavior in the nature of mergers and
acquisitions which aim to create dominant position or strengthen existing dominant
position and which will significantly decrease competition as a result are forbidden”.
• Toros Gubre case:
The leader compost manufacturer in Turkey, had announced that it was going to acquire
99.98% of shares of IGSAS (Istanbul Gubre San. AS) which was operating in the same
industry. However, Competition Authority cancelled this deal. The sum of compost
production units of two firms were 46.6% of the market and total market share was about
46%. Competition Authority uses Herfindahl-Hirschman Index (HHI Index) to measure
market dominance as Europe and USA agencies do (Köse, 2010). HHI Index of the deal
between the companies was above 1800 which shows that in the result of the merger, the
compost market would be highly concentrated which leads to a decrease in the competition
and blocking the entrance to the market.
Legal Environment in Turkey

13. Conclusion and Future Implications
• The effects of the current changes in Turkish Trade Law and
Capital Market Law will appear in coming periods and this
effect should be carefully analyzed in future studies.
• Privatizations might be separated from other M&A
activities for developing countries due to the large size and
a bit different nature of the deals.
• It is also important to follow the changes in EU legislation in order to estimate possible
future revisions in Turkey’s regulation, regarding business activities.
• Cross-country studies vs time series analysis.

14. References
Annual Reports of Competition Authority, (2002, 2007, 2008), Turkish Competition
Authority: Ankara
Bris, A., Cabolis, C. & Janowski, V. (2007). The Effect of Merger Laws on Merger Activity:
International Evidence, in: Gregoriou, G. N. & Renneboog, L. (2007). International
Mergers and Acquisitions Activity since 1990: Recent Research and Quantitative
Analysis. Elsevier, Pages 15-41.
Chen, C. & Findlay C. (2003), A Review of Cross-border Mergers and Acquisitions in APEC, in:
Asian-Pacific Economic Literature, 17, 14-38.
DePamphilis, D. M. (2012), Mergers, Acquisitions, and Other Restructuring Activities, 6th ed.,
Academic Press: San Diego.
Eckbo, B. E. (1983), Horizontal Mergers, Collusion, and Stockholder Wealth, Journal of
Financial Economics, 11, 241-273.
Feito-Ruiz, I. & Menendez-Requejo, S. (2010), Family Firm Mergers and Acquisitions in
Different Legal Environments, Family Business Review, 23, 60-75.

15. References
Köse, A. (2010), The Vertical and Horizantal Mergers in Companies: An Application to
Turkey, (Doctoral Dissertation).
La Porta, R. & Lopez-de-Silanes, F., Shleifer, A. & Vishny, R. W. (1997), Legal Determinants of
External Finance, Journal of Finance 52, 1131-1150.
Mattoo, A., (1999), Can No Antitrust Policy Be Better Than Some Antitrust Policy?, Policy
Research Working Paper Series, 2191, The World Bank.
Rossi, S. & Volpin, P. (2004), Cross-country Determinants of Mergers and Acquisitions,
Journal of Financial Economics, 74, 277-304.
Gregoriou, G. N. & Renneboog, L. (2007), International Mergers and Acquisitions Activity
since 1990: Recent Research and Quantitative Analysis, Elsevier.
Göktürk, K. (2013), Merger Process of Companies According to Turkish Trade Law and Some
Problems, Gazi University Law Faculty Magazin 2, 631-662.

16. Appendix