Value creation and destruction in cross‐border acquisitions: an empirical analysis of foreign acquisitions of U.S. firms

We conduct an investigation of the sources of gains and losses in cross‐border acquisitions in light of different motives for undertaking these transactions: synergy‐seeking, managerialism and hubris. We find that the data are consistent with the expectation that multiple sources of value creation exist in synergistic cross‐border acquisitions: asset sharing, reverse internalization of valuable intangible assets, and financial diversification. Gains accrue to bidder firm shareholders only for the least fungible of these sources of gains, i.e., reverse internalization. For value‐destroying acquisitions that are expected to be driven by managerialism, we find that the data are consistent with only one of the sources of value destruction that we examine, i.e., risk reduction. In these acquisitions, the evidence also suggests that the relative size of the target to the bidder mitigates the negative effects of risk reduction. Our results underscore the importance of considering the implications of alternative behavioral assumptions in empirical strategy content research. Copyright © 2002 John Wiley & Sons, Ltd.     

Do newly public acquirers benefit or suffer from their pre‐IPO affiliations with underwriters and VCs?

We examine whether pre‐IPO affiliations affect post‐IPO corporate events, namely acquisitions. On the one hand, newly public acquirers may benefit from their pre‐IPO affiliations through residual signaling value or/and resource‐related benefits. On the other hand, newly public acquirers may suffer from those affiliations when conflicts of interests arise during the post‐IPO period. Equity underwriters may have incentive to promote non–value‐creating acquisitions (Type II error), and venture capitalists (VCs) may have incentive to forgo strategically important acquisitions (Type I error). Drawing on a sample of 4,029 acquisitions made by 717 newly public firms, we find that on average the announcement of an acquisition by a newly public acquirer elicits a positive response from investors. The market views more favorably the acquisitions announced by newly public acquirers associated with prestigious equity underwriters, but this reaction becomes negative when the lead underwriter is retained as the acquisition advisor. The market reacts more favorably to acquisitions announced by VC‐backed newly public acquirers, but only when those VCs are committed to a longer lockup period. The effects of pre‐IPO affiliations on expected returns are stronger for newly public acquirers with a high intangible resource base and persist throughout the three‐year post‐IPO period (across each subsequent acquisition announcement). Copyright © 2010 John Wiley & Sons, Ltd.     

Acquisition Motives and the Distribution of Acquisition Performance

Research summary: I examine how acquisition motives relate to the distribution of post‐acquisition performance. I argue that acquisitions motivated by operating synergies have the potential to experience greater gains than acquisitions driven by financial synergies but are harder to value and implement, making them more uncertain. Using SEC filings, conference calls and press releases to capture acquisition motives, I find that acquirers pursuing operating synergies are more likely to experience highly positive and highly negative long‐term returns than acquirers pursuing financial synergies. I also find that acquisition experience and geographic proximity to targets soften acquirers' extreme downside outcomes in operating synergy acquisitions. My theory and results suggest that approaches that emphasize average outcomes for acquirers and use industry classifications to capture acquisition motives may be incomplete. Managerial summary: Managers engage in acquisitions for various reasons. In this study, I find that reasons related to operating synergies (e.g., revenue growth through new product offerings or cost savings through economies of scale) are more likely to result in extreme high and low performance outcomes for the acquiring firm compared to reasons related to financial synergies (e.g., diversification of cash flow streams). In addition, I find that the acquirer's prior acquisition experience and the geographic proximity between the target and acquirer help soften the extreme low performance outcomes related to operating synergies. Copyright © 2017 John Wiley & Sons, Ltd.     

Erratum: The effects of procedural and informational justice in the integration of related acquisitions

The above article (DOI: 10.1000/smj728) was published online on 20 November 2008 in Wiley Interscience ( www.interscience.wiley.com ). Printing errors were subsequently identified in the article: Page 14. Table 1: row 13 should be labelled ‘Post‐integration financial return’. Page 14. Table 1: row 14 should be labelled ‘Post‐integration market position’. Page 17. lines 48‐50: ‘Improving financial return requires removal of critical organizational elements with which organization members feel tightly connected.’ should read ‘Improving financial return requires removal of critical organizational elements such as company names, departments, products, and people with which organization members feel tightly connected.’     

Corporate acquisition strategies and economic performance

This research investigates the conceptual argument that acquisitions which are related in product/market or technological terms create higher value than unrelated acquisitions. Related acquisitions are found to have greater total dollar gains than unrelated acquisitions. Acquired firms in related acquisitions have substantially higher gains than acquired firms in unrelated acquisitions. These findings indicate that related target firms benefit more from acquisition than unrelated target firms. Implications of these findings for managers are discussed.     

Do early birds get the returns? An empirical investigation of early‐mover advantages in acquisitions

We explore whether pioneering advantages exist for early‐mover acquirers in industry acquisition waves by examining both combined (target and acquirer) and acquirer stock returns. Combined abnormal returns are higher for acquisitions that occur at the beginning of acquisition waves. However, for acquirers' returns, only strategic pioneers—those acting in manners consistent with having superior information—capture significant advantages. Specifically, early‐mover acquirers who realize superior stock returns are those that conduct acquisitions in related industries, during industry expansionary phases, and finance their acquisitions as financial theory suggests they should when they possess an informational advantage—with cash. Our findings extend the first‐mover literature to corporate practices and link these practices to acquisition returns. Copyright © 2004 John Wiley & Sons, Ltd.     

Cross‐border acquisitions and the asymmetric effect of power distance value difference on long‐term post‐acquisition performance

Research summary : Inconclusive findings about the effect of national cultural differences on post‐acquisition performance may be created by the failure to distinguish among the different cultural dimensions and the asymmetry of cultural differences. To demonstrate a different approach, this study focuses on one dimension of national cultural values—power distance value (PDV) and develops a framework for the asymmetric effect of PDV differences in creating two types of conflicts. The analysis of 2,115 cross‐border acquisitions in the global information technology industry shows that PDV differences undermine the long‐term post‐acquisition performance of acquirers. This effect is stronger when acquirers are higher than targets in PDV than when the opposite is the case. This asymmetric effect of PDV difference depends on national status difference, business relatedness, and acquisition experience. Managerial summary: National cultural differences can create “cultural clashes” to undermine the value creation by cross‐border acquisitions. During integration, individuals react to the acquirer–target hierarchy according to their respective power distance value (PDV): the extent to which they value equality (low PDV) or hierarchy (high PDV). PDV divergence results in two types of conflicts, depending on whether acquirers are higher or lower than targets in PDV. The two types of conflicts vary in the magnitude of their harmful effect on post‐acquisition performance. Both types of conflicts are more detrimental when acquirers are higher than targets in country status and when individuals need to interact more intensely. Acquisition experience can both help and harm post‐acquisition performance. These findings offer important implications for managing cross‐border acquisitions. Copyright © 2016 John Wiley & Sons, Ltd.     

Deliberate learning in corporate acquisitions: post‐acquisition strategies and integration capability in U.S. bank mergers

This paper introduces a knowledge‐based view of corporate acquisitions and tests the post‐acquisition consequences on performance of integration decisions and capability‐building mechanisms. In our model, the acquiring firm decides both how much to integrate the acquired firm and the extent to which it replaces this firm's top management team. It can also learn to manage the post‐acquisition integration process by tacitly accumulating acquisition experience and explicitly codifying it in manuals, systems, and other acquisition‐specific tools. Using a sample of 228 acquisitions in the U.S. banking industry, we find that knowledge codification strongly and positively influences acquisition performance, while experience accumulation does not. Furthermore, increasing levels of post‐acquisition integration strengthen the positive effect of codification. Finally, the level of integration between the two merged firms significantly enhances performance, while replacing top managers in the acquired firm negatively impacts performance, all else being equal. Implications are drawn for both organizational learning theory and a knowledge‐based approach to corporate strategy research. Copyright © 2004 John Wiley & Sons, Ltd.     

Value creation in acquisitions: A re-examination of performance issues

This study provides a conceptual framework and an empirical methodology to assess the extent of value creation in acquisitions. Arguments are presented to examine why related acquisitions might not outperform unrelated acquisitions on average. New measures of value creation are developed which resolve the difficulties with measures used by earlier researchers. In addition, the influence of the classification scheme used to identify acquisition types, and the impact of the relative size of the target to the bidder, on the measurement of the extent of value creation, is examined. The empirical results indicate that value is created in both unrelated and related acquisitions. Further, the data do not appear to indicate that related acquisitions create more value than unrelated acquisitions on average.     

Market value effects of acquisitions involving internet firms: a resource‐based analysis

While most prior research suggests that the average change in market value of acquiring firms varies closely around zero, recent research grounded in the resource‐based view and organizational learning theory identify positive returns to acquirers. We contribute to this literature by focusing on acquisitions of Internet firms and the potential for the transfer of scarce resources. We hypothesize that acquisitions made by offline firms of Internet firms and by Internet firms of other Internet firms lead to positive market valuation for the acquirer. Results of an event study of 798 acquisitions of Internet firms provided support for these predictions. We also find that prior alliances with online firms do not reduce the gains from such acquisitions to offline firms. Copyright © 2006 John Wiley & Sons, Ltd.     

The prognostics of diversifying acquisitions

The paper offers a possible explanation for the discrepancy between the observed increase in the number of diversified firms in the U.S. and the evidence from finance studies which at best offers only weak support for value creation in diversifying acquisitions. It is argued that the acquisition could be the culmination of a series of related strategic moves by the acquiring firm to enter a new industry, and therefore a significant fraction of the gains from synergy could have been anticipated by the capital market well ahead of the acquisition. Results from an event study of the stock market's reactions to the antecedents of the recent acquisition of Rolm Inc. by IBM lend support to this argument.     

Productivity enhancement at home via cross‐border acquisitions: The roles of learning and contemporaneous domestic investments

We examine whether ex post domestic productivity gains accrue to firms making cross‐border acquisitions. We argue that cross‐border acquisitions can enhance the acquirers' productivity at home, and we posit that these domestic productivity gains will be greater when there are learning opportunities in the target's host country and when contemporaneous domestic productivity‐enhancing investments are made by the acquirer in conjunction with the acquisition. These predictions are supported by data drawn from a sample of French acquiring and nonacquiring firms. Our results indicate that cross‐border acquisitions and investing in productivity at home are complementary: each makes the other more beneficial to firm productivity. Copyright © 2014 John Wiley & Sons, Ltd.     

Rent appropriation of knowledge‐based assets and firm performance when institutions are weak: A study of Chinese publicly listed firms

Research summary : A firm's strategic investments in knowledge‐based assets through research and development (R&D) can generate economic rents for the firm, and thus are expected to affect positively a firm's financial performance. However, weak protection of minority shareholders, weak property rights, and ineffective law enforcement can allow those rents to be appropriated disproportionately by a firm's powerful insiders such as large owners and top managers. Recent data on Chinese publicly listed firms during 2007–2012 were used to demonstrate that the expected positive relationship between knowledge assets and performance is weaker in transition economies when a firm's ownership is highly concentrated and its managers have wide discretion. Moreover, rent appropriation by insiders was shown to vary with the levels of institutional development in which a firm operates. Managerial summary : Investing in knowledge‐based intangible assets (e.g., R&D) is an important value‐creation activity for the firm. Such value creation process can be facilitated by large shareholders and powerful managers, who can then take an advantageous position with critical insider information on these valuable intangible assets and therefore enjoy more opportunities to appropriate more value from them, leaving less value for other minority shareholders. The value distribution becomes increasingly skewed against minority shareholders when the institutional protection for them is weak. Indeed, in a large sample of Chinese publicly listed firms, we found that R&D investment becomes less positively associated with firm financial performance with the presence of large shareholders, high managerial equity, or CEO/Chairman duality, especially in Chinese provinces with weak institutional development. Copyright © 2016 John Wiley & Sons, Ltd.     

Should competition authorities care about conglomerate mergers?

Mergers and acquisitions may change competition even when they do not affect market structure, a case known as conglomerate mergers. In this paper, we explore a wave of acquisitions of higher education institutions by educational groups in Brazil, which allows us to disentangle the effects of conglomerate mergers and of horizontal mergers on price, quantity, and quality indicators. Our findings show that multiunit organizations are able to increase some quality indicators. As for the effect on price and quantity, results are different. For conglomerate mergers, we estimated an increase in the number of freshmen and tuition fees, whereas for acquisitions that lead to horizontal concentration there is no increase in quantity, just in prices. Also these effects are larger the smaller the market share of the acquired HEI. On the whole, our findings are consistent with the hypothesis that multiunit operations increase efficiency, but only conglomerate mergers tend to pass those gains on to consumers. Results also indicate that greater caution should be taken in market extension mergers when the acquired firm has a clear dominant position.     

Innovation Process and Outcomes for Large Japanese Firms: Roles of Entrepreneurial Proclivity and Customer Equity

The authors investigate the structural relationships among entrepreneurial proclivity, innovation process characteristics (technological strength, marketing strength, and marketing–R&D integration), and customer equity in achieving business growth and financial return in the Japanese context. Following field interviews and a pilot test, survey data are collected from 207 pairs of marketing and R&D executives from strategic business units (SBUs) of large manufacturing companies in Japan. Based on the partial least squares analysis of data, the authors find nuanced effects of organizations' entrepreneurial proclivity on the critical organizational process, resource, and business performance. The study theorizes and empirically supports the idea that customer equity is a potent intermediary outcome that contributes to both top‐line (growth) and the bottom‐line (ROI) of a business. Specifically, the study shows that: (1) entrepreneurial proclivity directly and positively influences technology strength, marketing strength, and marketing‐R&D integration; (2) entrepreneurial proclivity's effect on business growth and financial return is positive and mediated by customer equity; (3) marketing–R&D integration has a moderating effect on the positive impact of technology strength on customer equity; and (4) customer equity is a strong driver of business growth and financial return. There is a dearth of research on entrepreneurship in Asia; very few empirical studies have been reported from Japan in particular. This study contributes to boundary testing of the theoretical relationships. Although entrepreneurial proclivity appears to be an inspirational concept, its actual adoption remains an important question for many Japanese companies. Those Japanese firms that aspire to be entrepreneurial need to be mindful what innovation processes and resources it takes to fulfill the positive influences of entrepreneurship.     

The effects of strategic and market complementarity on acquisition performance: evidence from the U.S. commercial banking industry, 1989–2001

Most traditional research on mergers and acquisitions tends to focus on the role of similarity in explaining acquisition performance. While scholars have recently begun to examine acquisition complementarity, there is still little evidence concerning how complementarity influences acquisition performance. Further, previous research has not drawn the connections between related contexts and the potential benefits from complementarity. In this article, we move the study of acquisition complementarity forward by investigating the effects of strategic and market complementarity on acquisition performance in the context of related horizontal acquisitions. We also propose that two key attributes of acquirers—strategic focus and out‐of‐market acquisition experience—will moderate this relationship. We investigate our research questions in the context of all 2,204 acquisitions made by publicly traded U.S. commercial banks during the 12‐year period from 1989 to 2001. Our findings are generally supportive, suggesting complementarity is an important antecedent of acquisition performance, and raising important issues on the nature of acquisition research in general. Copyright © 2009 John Wiley & Sons, Ltd.     

Make,buy, organize: The interplay between research,external knowledge,and firm structure

We bridge current streams of innovation research to explore the interplay between R&D, external knowledge, and organizational structure—three elements of a firm's innovation strategy, which we argue should logically be studied together. Using within‐firm patent assignment patterns, we develop a novel measure of structure for a large sample of American firms. We find that centralized firms invest more in research, and patent more per R&D dollar, than decentralized firms. Both types access technology via mergers and acquisitions, but their acquisitions differ in terms of frequency, size, and integration. Consistent with our framework, their sources of value creation differ: while centralized firms derive more value from internal R&D, decentralized firms rely more on external knowledge. We discuss how these findings should stimulate more integrative work on theories of innovation. Copyright © 2013 John Wiley & Sons, Ltd.     

What they know vs. what they do: how acquirers leverage technology acquisitions

Existing research suggests that in acquisitions of small technology‐based firms by large established firms post‐merger integration both enables and hinders acquirers' efforts to leverage the technology of acquired firms. This apparent paradox can be resolved once we account for the qualitatively distinct ways in which acquirers leverage technology acquisitions. Integration helps acquirers use the acquired firm's existing knowledge as an input to their own innovation processes (leveraging what they know), but hinders their reliance on the acquired firm as an independent source of ongoing innovation (leveraging what they do). We also show that experienced acquirers are better able to mitigate the disruptive consequences of the loss of autonomy entailed by integration, though we find no evidence that they achieve greater coordination benefits from integration. Copyright © 2007 John Wiley & Sons, Ltd.     

The Wealth Effects of Property Acquisitions: Evidence from Japanese and Singaporean REITs

This article examines the wealth effects of 228 property acquisition announcements made by REITs publicly traded in Singapore and Japan, which are the two largest REIT markets in Asia. Adopting an aggressive growth‐by‐acquisition strategy, the newly listed REITs acquired a number of properties within a short time period. Despite their regular activities, we observe the acquisition announcements are associated with a significantly positive abnormal increase in shareholder wealth averaging 0.38% in a 5‐day window around the event date. Controlling for the method of payment, buyer's acquisition strategy and seller's relationship with the acquiring REIT, the regression results show that the likely sources of economic gains associated with acquisitions are economies of scale and better management by acquiring firms. We also find strong evidence that the market reacts less favorably to acquisitions involving a portfolio of properties as opposed to a single property and weaker evidence that it reacts less favorably to mixed‐use acquisitions. These findings suggest the presence of premiums on transparency and corporate focus.     

程序公平对新产品开发成功的影响——跨职能整合的中介作用

本文通过对中外汽车合资企业的实地调研，提出将程序公平引入现有关于跨职能整合与新产品开发成功的模型中，并进一步提出跨职能整合在合资企业程序公平与新产品开发成功关系中的中介作用。通过对获取数据的分析，发现合资企业程序公平不仅可以直接影响合资企业的新产品开发成功，而且也可以通过跨职能整合间接影响新产品开发成功，而跨职能整合在程序公平与新产品开发成功关系中起中介作用。