Economic Nationalism in Mergers and Acquisitions

This paper studies government reactions to large corporate merger attempts in the European Union during 1997 to 2006 using hand‐collected data. We document widespread economic nationalism in which the government prefers that target companies remain domestically owned rather than foreign‐owned. This preference is stronger in times and countries with strong far‐right parties and weak governments. Nationalist government reactions have both direct and indirect economic impacts on mergers. In particular, these reactions not only affect the outcome of the mergers that they target but also deter foreign companies from bidding for other companies in that country in the future.     

Determinants of Cross‐Border Mergers and Acquisitions

The vast majority of cross‐border mergers involve private firms outside of the United States. We analyze a sample of 56,978 cross‐border mergers between 1990 and 2007. We find that geography, the quality of accounting disclosure, and bilateral trade increase the likelihood of mergers between two countries. Valuation appears to play a role in motivating mergers: firms in countries whose stock market has increased in value, whose currency has recently appreciated, and that have a relatively high market‐to‐book value tend to be purchasers, while firms from weaker‐performing economies tend to be targets.     

Do Acquisitions Relieve Target Firms’ Financial Constraints?

Managers often claim that target firms are financially constrained prior to being acquired and that these constraints are eased following the acquisition. Using a large sample of European acquisitions, we document that the level of cash that target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline, while investment increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. Our findings suggest that acquisitions relieve financial frictions in target firms, especially when the target firm is relatively small.