One of the most consequential events in any firm’s lifetime is a major acquisition. Because of their importance, mergers and acquisitions (M&A) have been researched extensively. The vast majority of research and survey papers have focused on domestic deals. However, cross-border M&A constitutes about 30% of the total number and 37% of the total volume of M&A around the world since the early 1990s. This percentage has increased as the world’s economy has become increasingly integrated.
Our recent paper presents a set of facts and surveys the literature on cross-border mergers and acquisitions. In particular, we discuss the literature on international factors that affect cross-border deals but not domestic ones.
Facts About Cross-Border Acquisitions
We first document several stylized facts about cross-border acquisitions, using a sample of M&A deals across 48 countries that were announced between 1991 and 2020 and completed by the end of 2020, obtained from the Security Data Corporation’s (SDC’s) Mergers and Corporate Transactions database.
We plot the importance of cross-border deals in terms of the number and the dollar value:
- The total number of cross-border deals has increased from about 1,500 to about 4,000 annually in recent years. These deals typically represent between 26 percent and 33 percent of the total deal volume.
- When we consider deal size, the ratio of cross-border to total deal value has fluctuated between 24 percent and 52 percent in the past three decades.
We then look at the characteristics of acquirers and targets.
- Firms from developed countries are more active acquirers in the cross-border acquisition market, making up 91 percent of all acquisitions. These acquirers most often acquire firms from developed countries. Firms in developed countries also acquire firms in emerging markets, with this type of deal amounting to about 15 percent of cross-border acquisitions.
- The majority of cross-border acquisitions (75 %) are cash deals.
- Hostile deals are rare in the cross-border M&A market and are most likely to be completed (97.1%).
Reasons for Cross-Border Acquisitions
The underlying reason for any merger is that the participants believe that the two firms will be more valuable as a combined entity than as separate firms. In our paper, we particularly focus on potential sources of value that are unique to cross-border acquisitions.
One such factor is differences in the way a country’s laws and institutions protect the interests of a firm’s shareholders. If legal rules protecting shareholders’ rights can increase a firm’s ability to access capital markets and also the market’s estimate of the firm’s future cash flows, then the improvements in legal protection could provide a motive for a cross-border acquisition. Differences in regulation also lead firms to merge with other firms in different countries and transfer their regulatory environment to the more favorable one.
A potential impediment to combining firms in different countries is the protection of intellectual property. If a firm uses proprietary technology in its products, it can be risky to share that technology in countries that allow other companies to appropriate it without sufficient compensation. Accordingly, better intellectual property protection in a country does, in fact, lead to more cross-border technology mergers.
Another important factor that can affect the likelihood and value of cross-border acquisitions is political differences. If there is tension between two countries, it would be more difficult to consummate a merger between firms from those countries than if the countries get along well.
An opportunity to reduce corporate taxes can also lead to cross-border acquisitions. One way in which firms avoid taxes is by using transfer pricing and other strategies to move their income to subsidiaries in “tax havens,” where tax rates are particularly low.
The Process of Acquiring Companies Internationally
Once a firm identifies a target in another country that it would like to acquire, international considerations can complicate the process of consummating the deal. Cross-border deals can face unfamiliar regulations as well as political opposition that can make government approval more difficult than in domestic deals. Consequently, institutions that facilitate acquisitions by reducing information asymmetries and finessing regulatory hurdles can help facilitate cross-border deals.
Several empirical studies evaluate the role of institutional investors in facilitating cross-border acquisitions. First, the presence of institutional investors tends to be associated with more concentrated ownership, which tends to make deals easier to complete by lowering free rider problems between shareholders when responding to bids. Second, institutional owners, especially those from the country of a potential bidder, can help to minimize information asymmetries that could make it more difficult for a foreign acquirer. Lastly, foreign institutional investors bring better governance practices from their home country to the countries in which they are investors, which facilitates cross-border acquisitions.
Private equity investors are also likely to be knowledgeable about potential cross-border acquisition targets, as well as any regulatory or political hurdles facing such deals. For example, venture capitalists add value to their portfolio firms by helping them innovate, enhancing the value of cross-border acquisitions.
The largest collection of papers in the field of cross-border mergers and acquisitions has examined the stock price reactions to the announcement of deals. Under the efficient markets hypothesis, the change in the stock price at the time of the announcement should reflect the market’s expectation of the change in the present value of the firm’s cash flows brought on by the acquisition.
Cross-border deals do appear to create value on average. Although the samples of many event studies are very different, the common finding is that the abnormal return to acquirers is positive and statistically significant. This evidence suggests that these deals add value to acquirers. Most of the studies do not report returns of targets, presumably because the majority of cross-border targets are private.
In recent years, cross-border mergers and acquisitions have become common and popular. These deals are potentially determined by many factors that are not relevant to domestic deals. Overall, our paper surveys the literature that has documented the motivations and consequences of cross-border mergers and acquisitions.
Isil Erel is the David A. Rismiller Chair in Finance and the academic director of the Risk Institute at the Fisher College of Business of the Ohio State University
Yeejin Jang is an Associate Professor of Finance at the University of New South Wales School of Banking and Finance.
Michael S. Weisbach is the Ralph W. Kurtz Chair in Finance at Ohio State University, as well as a Research Associate of the National Bureau of Economic Research.
This post was adapted from their paper, “Cross-Border Mergers and Acquisitions,” available on SSRN.