The effect of investor origin on firm performance: Domestic and foreign direct investment in the United States

This paper evaluates the causal relationship between the source of origin of FDI and the performance of the target firm. The empirical analysis uses new data on a comprehensive sample of public U.S. firms that received FDI between 1979 and 2006. To account for the possibility that performance differences arise due to the selection of superior target firm rather than the change in ownership, I use propensity score matching to create similar comparison groups of target firms prior to acquisitions. The analysis reveals three major findings. First, acquiring firms from industrialized countries lead to labor productivity increases of 13% in the target firm three years after the acquisition compared to targets acquired by domestic firms. Firms that received developing country firm acquisitions, on the other hand, exhibit lower labor productivity gains four years after acquisition, compared to targets acquired by domestic firms. Second, targets receiving FDI by firms from industrial and developing countries also experience increases in profits, compared with firms receiving acquisition by domestic firms from the United States. Third, compared with domestic acquisitions, foreign industrial firm acquisition FDI tends to increase their targets' employment and sales, whereas targets acquired by firms located in developing countries experience a decrease in both revenues and total number of employees. These findings suggest that target firms are subject to significantly different restructuring processes depending on the origin of the acquiring firm.     

The pre-acquisition evaluation of target firms and cross border acquisition performance

The paper investigates the impact of the pre-acquisition evaluation of target firms on the performance of cross border acquisitions using data from a sample of acquisitions made by UK firms. The findings provide reasonable support for organizational learning theory, suggesting that the more the acquiring firm learns about the target firm then the better will be the acquisition performance. Specifically, we find support for the hypothesis that thorough evaluation of the strategic and cultural fit positively influences cross border acquisition success. Further, the analysis reveals that detailed evaluation of the target firm's employee and business capability improves acquisition performance. The managerial implications of the findings and directions for future research are also discussed.     

Wealth effects on cross-border acquisition firms from emerging economies

Cross-border acquisitions (CBAs), as a corporate expansion strategy, are being espoused by emerging market firms (EMFs) to overcome their competitive disadvantage at the global level. The objective of this paper is to analyse the wealth effects of cross-border acquisition announcement on the acquiring firms from emerging economies during the period of 2001–17. Wealth effects have been measured in terms of short-term change in equity prices (investors' reaction) around the public announcement of 553 and 125 overseas acquisitions by Indian and Chinese listed firms respectively. The investors' reaction to the acquisition of a foreign target has been captured using the event study methodology. Further, a disaggregated analysis has been conducted to gauge the impact of various deal-specific factors, the legal structure of the target firm and the development status of the target country on the wealth creation potential of a cross-border acquisition.Both Indian and Chinese investors have responded favourably to the announcement of international acquisitions as exhibited in significant and positive average abnormal returns of 0.71% and 0.23% respectively on the event day. Further, it is revealing to note that investors in these economies differ widely with regard to their perception pertaining to the method of payment and acquisition strategy. At the same time, the extent of wealth creation is higher when acquired firms are based in developed economies possessing high quality resources and advanced technology along with better institutional and regulatory milieu; Indian as well as Chinese markets have experienced larger abnormal returns on acquiring advanced vis-à-vis developing market firms.     

Business group affiliation and post-acquisition performance: An extended resource-based view

Prior research on post-acquisition performance suggests positive, negative, or no wealth creation for the acquiring firms. Grounding our arguments on the extended resource-based view, the current article proposes that business group–affiliated firms leverage their affiliation advantages to attain superior long-term acquisition performance, relative to standalone firms, especially in emerging economies such as India. Additionally, we hypothesize that both within-group heterogeneity, manifested as prior group experience, group diversification, and intra-group variation in the form of horizontal ties through boards of directors, also affect the long-term post-acquisition performance of affiliated firms. The findings, obtained with a buy-and-hold abnormal returns method applied to a sample of 468 majority stake mergers and acquisitions, both domestic and cross-border, by Indian firms during 2005–2013, provide robust support for the theoretical arguments.     

The stock market performance of exploration-oriented and exploitation-oriented cross-border mergers and acquisitions: Evidence from emerging market enterprises

This study builds on insights from mergers and acquisitions (M&A) studies and the perspective that stock market performance is affected by the M&A strategies of firms. Past studies show that acquisitions are an effective way to exploit existing knowledge and explore new possibilities. We argue that stock market performance can be a response to exploration/exploitation strategies in the context of cross-border M&As by emerging market multinationals. Based on cross-border M&A data of Chinese multinationals, we find that exploration-oriented acquisitions have worse stock market performance than exploitation-oriented acquisitions. Furthermore, we find support for our premise that acquiring firms can reduce the risk of exploration-oriented acquisitions by having more high-discretion slack resources or by maintaining a high level of equity share of the target firm. In addition, acquiring firms perform better if they conduct exploration-oriented acquisitions in related industries. Our results contribute to a better understanding of exploration and exploitation in the context of M&As.     

Overbidding in cross-border acquisitions: Misperceptions in assessing and valuing knowledge

Many firms competing across borders use acquisitions to gain the knowledge and capabilities that reside in target firms. Assessing and valuing knowledge in the international context is complex and frequently error-prone. The international acquisition literature has not adequately addressed the difficulties of valuing knowledge, the costs associated with acquiring knowledge, the factors behind escalating bids to acquire knowledge, and the impact of knowledge acquisitions on returns. We conceptually explore several key dimensions that influence the assessment and valuation of knowledge and develop propositions positing the effects of predictor variables and moderators on knowledge assessment and valuation in cross-border acquisitions.     

Foreign Acquisitions and Target Firms' Performance in China

This paper empirically investigates the effects of foreign acquisitions on several performance measures of Chinese target firms. Using a self‐constructed database that includes information on foreign acquisitions in China and the accounting information of Chinese manufacturing firms from 1998 to 2007, we find that foreign acquisitions significantly improve the productivity, sales and fixed asset investment of the target firms. We address the potential endogeneity issue in the OLS estimation using the difference‐in‐differences technique, with two control groups, namely the would‐be targets and the propensity‐score‐matched targets. We also find that the performance‐enhancing effect of foreign acquisitions becomes stronger when larger technology gaps are observed between the acquirers and the targets. An inverted‐U relationship is observed between the post‐acquisition performance of the target firms and the target firm equity that is held by the foreign acquirers. The performance effects are qualitatively different among vertical, horizontal and conglomerate acquisitions.     

中国上市公司并购长期绩效研究

从2000~2004年发生于我国证券市场的208起上市公司并购情况来看,收购公司在并购后1~3年实现显著负的超常收益,即收购方发生了价值损失,遭受了显著的财富损失。同时,国有控股公司的并购绩效好于非国有公司,同城并购表现好于异域并购,多元化并购绩效差于同业并购,优势控股公司表现差于非优势控股公司。此外,与资产收购相比,股权收购的长期绩效表现更好。     

Management of Overseas Acquisitions by Developing Country Multinationals and Its Performance Implications: The Indian Example

Developing‐country multinationals (DMNCs) make overseas acquisitions to leverage extant capabilities of acquired companies in order to enter foreign markets and acquire their know‐how to enhance their own competitiveness against global competition at home and abroad. We go “inside the black box” to examine how DMNCs manage those acquisitions and the attendant implications for postacquisition performance. When DMNCs keep the acquired firm “structurally separate” from their own organization and retain its senior executives, they exhibit better acquisition performance. Also, “linking mechanisms” to coordinate interdependencies between the two firms improves performance, especially when the acquired firm is kept structurally separate. Analyses of large‐sample data of Indian DMNCs’ overseas acquisitions show that DMNCs’ light‐handed approach to managing acquisitions, despite acquiring majority ownership in them, seems suited to their acquisition objectives. © 2016 Wiley Periodicals, Inc.     

Acquisitions Entry Strategies in Africa: The Role of Institutions,Target‐Specific Experience,and Host‐Country Capabilities—The Case Acquisitions of Finnish Multinationals in Africa

Acquisition is an important entry strategy for multinational enterprises (MNEs) seeking to gain faster entry into new and emerging markets and remain competitive in the global marketplace. MNEs utilize partial‐, staged‐, and full‐acquisition strategies when entering into foreign markets. This research analyzes how and why firms opt for these acquisition strategies in the context of Africa. The study applies institutional theory and explores constructs derived from the Uppsala internationalization process model. Using a case study of five Finnish acquisitions in Africa (Egypt, Morocco, Kenya, and South Africa), it was found that Finnish MNEs opt for partial acquisition rather than staged and full acquisition in the context of acquisitions made prior to late 1990s without earnout arrangements. Finnish MNEs opt for the choice of staged acquisition rather than partial and full acquisition in the contexts of mild regulatory framework in host countries and when the acquired firm business requires extensive improvements and the target host market structure is fragmented. Finnish MNEs opt for the choice of full acquisition rather than partial and staged acquisition in three contexts specifically: (1) when the acquiring Finnish MNE possesses host‐country capability, target‐specific experience, and ensures the retention of top management personnel of the acquired target; (2) when the size of the acquired target is relatively very small compared to the acquiring MNE; and (3) when the nature of the acquired firm business is well developed and the target host‐market structure is consolidating. © 2016 Wiley Periodicals, Inc.     

Political Connections,Government Intervention and Acquirer Performance in Cross‐border Mergers and Acquisitions: an Empirical Analysis Based on Chinese Acquirers

The extant literature suggests that the political connections enjoyed by Chinese acquiring firms have both positive and negative effects on their performance in cross‐border mergers and acquisitions (CBMA). We employed firm‐level data on Chinese acquirers from 2001 to 2012, demonstrating that the effect of political connections on mergers and acquisitions performance is determined by external government intervention. Holding the level of political connections constant, the greater the degree of government intervention is, the worse the acquirer's performance in cross‐border mergers and acquisitions will be. We also demonstrated that political connections affect acquirer performance in cross‐border mergers and acquisitions through the channel of preferential access to bank financing, and the acquiring firms' high cash holdings, which are encouraged by the ease of bank financing, have a negative effect on acquirer CBMA performance. Using the Blinder‐Oaxaca decomposition, we investigated changes in the Chinese acquirers' performance following changes in the external policy environment in 2008 and the effect of political connections and other factors on this change.     

Acquisitions by emerging market multinationals: Implications for firm performance

This study develops and tests a framework about the resource- and context-specificity of prior experience in acquisitions. Although extant research has explained why multinational companies from emerging countries (EMNCs) acquire companies in developed countries, we have an incomplete and inconsistent understanding of the consequences of such acquisitions for the performance of target firms. First, we show that despite the concerns raised by politicians and the general public in developed countries, the acquisitions made by EMNCs often enhance the performance of target firms. Second, we examine whether the role of EMNCs' idiosyncratic resources (such as access to new markets and cheap production facilities) and investment experience in enhancing the performance of target firms differs across acquisition contexts. We demonstrate that not all types of resources and investment experience are equally beneficial and, in fact, some types of experience even have a negative effect on the performance of target firms. By contrast, other types of experience that EMNCs accumulate from prior investment enhance the performance of target firms by facilitating resource redeployment and the exploitation of complementarities.     

Why do over-deviated firms from target leverage undertake foreign acquisitions?

This paper examines how deviation from firms’ target leverage influences their decisions on undertaking foreign acquisitions. Using a sample of 5746 completed bids by UK acquirers from 1987 to 2012, we observe that over-deviated firms are more likely to acquire foreign targets. Consistent with co-insurance theory, we find that over-deviated firms engage in foreign acquisition deals to relieve their financial constraints and to mitigate their financial distress risk. We also note that foreign acquisitions enhance over-deviated firms’ value and performance, measured by Tobin’s q and return on assets (ROA) respectively. These findings support the view that over-deviated firms pursue the most value-enhancing acquisitions. Overall, this paper suggests that co-insurance effects, value creation and performance improvements are the main incentives for over-deviated firms’ involvement in foreign acquisitions.     

Effects of board characteristics on post-acquisition performance: A study of cross-border acquisitions by firms in the manufacturing sector

Our study examines how acquiring firm board characteristics influence the performance of cross-border merger and acquisitions (CBMAs). It is based on a sample of 250 large transactions in the manufacturing sector undertaken by U.S. firms in 33 countries between 1991 and 2006. Our findings reveal that acquiring firms having a larger board and outside directors with greater influence exhibit superior post-acquisition shareholder value creation in CBMAs. In addition, our results indicate that acquiring firms with more dominant CEOs perform better in such acquisitions. From the standpoint of firms engaged in CBMAs, our findings suggest that they stand to benefit from having a larger board and influential outside directors who can diligently monitor and advise top management in undertaking CBMAs. Finally, acquiring firms need to recognize that the complexities and challenges generally associated with CBMAs may require dominant CEOs who can provide clear and unambiguous leadership during the pre- and post- acquisition process.     

Learning by doing: Cross-border mergers and acquisitions

We rely on organizational learning theory and strategic momentum research to examine the international merger and acquisition (M&A) activities of a sample of S&P 500 firms. We hypothesize that the learning associated with a firm's prior acquisition experience increases the likelihood the firm will engage in subsequent international acquisitions. Results from a sample including company-country level data indicate that both prior domestic acquisitions and international acquisitions influence the likelihood of acquisitions in foreign markets by U.S.-based firms. We also find that prior experience with international acquisitions is more predictive of subsequent international acquisitions than prior domestic acquisition experience. Moreover, we find that the acquisition experience within a host country had a stronger influence on subsequent acquisitions within that country than other prior non-host country international acquisition experiences.     

Foreign vs domestic ownership on debt reduction: An investigation of acquisition targets in Italy and Spain

This paper examines the role of foreign versus domestic ownership in reducing the debt levels of acquired firms in Italy and Spain over the period 2002–2010. Acknowledging that lower debt levels can mitigate the risk of failure and thus enhance the chances for a positive post-acquisition performance and survival, we particularly examine the causal effect of foreign and domestic acquisitions on two firm-level debt measures: gearing and short-term leverage. To estimate causal relationships, we control for selection bias by applying propensity score matching techniques. Our results indicate that foreign acquisition leads to a significant and steady reduction in the debt ratios of the target companies. In contrast, the relationship between domestic acquisition and debt reduction appears to be smaller and statistically less robust.     

Analyzing determinants of value creation in domestic and cross border acquisitions in India

The present study seeks to assess the acquiring company announcement gains, and determinants thereof, in domestic and cross border acquisitions in India. For this purpose, 268 acquisitions comprising of 202 cross border acquisitions and 66 domestic acquisitions constitute the sample set. Standard event study methodology has been employed for computing the announcement returns. Further, regression analysis has been conducted to assess the sources of wealth gains in domestic and cross border acquisition. The results of event study indicate that cross border acquisitions have created significantly higher wealth gains than the domestic ones. Further, the results of regression analysis highlight that cross border acquisitions, pursued by the acquiring companies in technology intensive sector, for the target companies also in technology intensive sector, create superior wealth gains. The reason being, such cross border acquisitions provide an opportunity to the acquiring company to combine and judiciously utilize intangible resources of both the companies on a broader scale across new geographies. Thus, the study contributes to the existing literature on internalization theory by extending it to an emerging market like India.     

The function-specific microfoundations of dynamic capabilities in cross-border mergers and acquisitions

In mergers and acquisitions, the acquiring firm must combine two firms’ resources and capabilities so that the outcome yields value. In individual firms, the marketing & sales, and R&D functions have typically developed intertwined and complex relationships over time. These multifaceted dependencies may obscure the integration of the firms and their functions. In order to reveal to what extent cross-functional relationships determine the success or failure of an acquisitions, we have made one of the first attempts to study merging firms’ function-specific capabilities, underlying microfoundations, and their cross-functional relationships during the integration process—instead of focusing on acquisition capabilities as such. We use longitudinal data from two cross-border acquisitions between US and Finnish SMEs. Our results indicate that major differences between merging firms’ cross-functional microfoundations—that is, their structures, processes, routines, and skills—might either enforce or erode the seemingly promising synergies at the product and market levels, depending on managerial awareness of their nature.     

Determinants of chief executive officer compensation following major acquisitions

This study sought to determine whether major increases in firm size, achieved through acquisitions, result in greater chief executive officer (CEO) compensation, given manager versus owner control. A second issue addressed is whether the type of firm—single industry or multiple industry—plays a role in the linkage between acquisition activity and additional compensation. Other variables included in the analysis were CEO tenure and profitability. Annual observations from 1979 through 1986 of 50 firms that had engaged in acquisition activity form the basis of the study. Findings reveal that acquisitions, after allowing 1 year for the full impact of the merger to be felt, led to significant increases in CEO compensation for both owner- and manager-controlled firms. Also, it was found that manager-controlled firms gave their CEOs further rewards for additional years on the job, regardless of performance, while owner-controlled firms were found to reward more on the basis of performance.     

Impact of host‐country corruption on U.S. and Chinese cross‐border acquisitions

Does corruption in a target country create a similar effect on cross‐border acquisitions (CBAs) by firms from a developed and a developing country? This article empirically examines the relationship between corruption and CBAs by firms from China and the United States. Based on a combined sample of 10,236 completed acquisitions over the period of 1990–2006, the authors find that both Chinese and U.S. firms make a significantly greater number of acquisitions in less corrupt countries. However, unlike the U.S. CBAs, we find a significantly positive relationship between the transaction value of Chinese CBAs and the level of perceived corruption in the target country. It is suggested that having been schooled in weaker institutions themselves, Chinese firms may find it easier to deal with corrupt conditions in target countries, giving them an advantage over firms from less corrupt countries. © 2010 Wiley Periodicals, Inc.