Cross-Border Mergers and Acquisitions

UK Dimensions

Moshfique Uddin, Agyenim Boateng

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781135045142
• Edition: 1
• Topic: Business
• Subtopic: Fusioni e acquisizioni
• Index: Business

Cross-border mergers and acquisitions (CBM&As) activityhas become an important vehicle for firms' internationalization and corporate restructuring over the past three decades. Despite the huge volume of global CBM&A activity, however, there are few books which carefully explore the strategies, motives, and consequences of global mergers and acquisitions.

This book discusses and synthesizesthe theoretical literature on the motivation and performance of international merger activities.Focusing onthe UK as a top acquiring country in the European Union, the authors explore the recent trends in cross-border mergers and acquisitions, motives for cross-border mergers and acquisitions, the mergers integration process, home and host countries' macroeconomic consequences on mergers and acquisitions, and shareholder's wealth effects on CBM&A.

This book explores and sheds much-needed light on the UK CBM&A market, what drives it, and what lessons can be learned for other regions around the globe.

Part I
Overview and Review of Literature of Cross-Border Mergers and Acquisitions

1
An Overview of Cross-Border Mergers and Acquisitions

1.1 Background

Almost everywhere in the world the story of economic development involves FDI, from the Persian Gulf’s oil fields to Ghana’s gold mining fields, Malaysian’s rubber plantations and Spain’s telecommunications (Boateng, 2001). One dominant way by which a firm engages in business outside its national borders is through cross-border mergers and acquisitions (CBM&A). The United Nations Conference on Trade and Development (UNCTAD, 2000) reported that CBM&A account for the majority of FDI outflows. A number of reasons have been given to explain the rising proportion of CBM&A of FDI. First, CBM&A activities are seen as the most rapid and radical means of expanding and changing the economic organization of the firm, leading to swift changes in shareholder wealth (Morck et al., 1990). Parvinen and Tikkanen (2007) argue that M&A process is one of the most extensive initiatives aimed at the economic and organizational transformation of the firm. Second, UNCTAD (2000) attributes the reasons behind the surge in CBM&A in recent times to the economic reforms and liberalization around the world during the past two decades. Moreover, the creation of the regional economic and political union such as European Union (EU) has also led to a huge surge in the CBM&A activities (see Danbolt, 1995; Gugler et al., 2003).

Traditionally, the fundamental motives behind mergers and acquisitions (M&A) revolve around financial and strategic considerations. These encompass economies of scale and scope and synergy (Eun et al., 1996), quicker access to international markets (UNCTAD, 2000), risk diversification and accessing valuable intangible assets (Morck and Yeung, 1992). Synergy, diversification, under-valuation, tax arbitrage and strategic acquisition theories lend support to the justification of corporate M&A. Nevertheless, a number of empirical studies have challenged these justifications by suggesting that CBM&A are not always a value enhancing activity of the corporate concern, rather in many cases they actually destroy shareholders’ value. The debate regarding CBM&A also comes from purely economic and political grounds. For example, it has been argued that cross-border acquisitions do not increase the productive capacity within an economy rather CBM&A transfers the ownership and control of the firm to the foreign owners (UNCTAD, 2000). This transfer may lead to a reduction in employment and foreign exchange loss. Moreover, foreign oligopolistic acquirers may create an imbalance in the local market by enhancing their control thereby reducing the competition. At the extreme end, large multinational acquirers may even pose a threat to the national interest and security by exerting pressure on the host government. However, facts and figures of worldwide CBM&A flows clearly show that neither the negative empirical evidence on performance of CBM&A nor the economic and political fears deter their growth.

1.2 Definitions and Types of Mergers and Acquisitions

Mergers and acquisitions occur when two separate firms come together in which only one company ceases to exist. Following the merger and acquisition, the acquired company is subject to managerial, economic and legal control of the acquiring company. In a takeover or an acquisition, one company takes over the control of assets and liabilities of another company. Acquisitions may range from partial to complete acquisitions. With complete acquisition (100% control), the acquired firm ceases to exist. In terms of merger, two companies combine, but few companies really merged. UNCTAD (2000) suggests that mergers and acquisitions basically mean acquisitions.

Mergers and acquisitions are classified into three types:

• Horizontal M&A occurs when two companies in the same industry come together to combine.
• Vertical M&A occurs between two companies in different stages of production; for example manufacturing and marketing combine.
• Conglomerate M&A involves two unrelated businesses.

CBM&A is defined as the purchase of the trade name and assets of one company (an acquiree) by another company (an acquirer), headquartered outside the country where the acquired company is located as the combination of two companies of different nationalities. In a cross-border acquisition, the control of assets and operations are transferred from a local to a foreign company, with the former becoming an affiliate of the later (UNCTAD, 2000).

1.3 Motivation for the Book

CBM&A activity has become an important vehicle for firm’s internationalization and corporate restructuring over the past three decades. Companies from different geographic origins are merging with each other as never before. UNCTAD (2010) reported that in the year 2007, total value of completed cross-border deals reached a staggering US$1,000 billion. Gregory and McCorriston (2005) pointed out that CBM&A constitute the main form of FDI in the UK. For example, in 1999, the outward CBM&A account for 76% of total UK FDI (UNCTAD, 2000). Between 1991 and 2005, the UK was the largest acquiring nation in the world. In terms of inward CBM&A activities, the UK has been the second-largest destination in the world during the same period and the top acquiring and target nation in Europe since 1991. The spectacular growth of the UK CBM&A activities needs special attention from the researchers in order to understand the underlying causes and consequences of this huge flow of international acquisition activities. Although the volume of CBM&A literature are considerable, the findings are diverse, encompassing finance, corporate strategy and international business, and, more important, lacks sufficient integration. The theoretical explanation, development and the empirical findings of CBM&A activities from the UK remain fragmented. In this book, we provide the timely synthesis and consolidation of extant literature and examine the consequences of the UK CBM&A.

1.4 Outline of the Book

The aims and objectives of this study set out in this chapter are addressed through separate but interrelated analyses.

In Chapter 2 we review and synthesize the theoretical and empirical literature relating to the motivation behind CBM&A.

Chapter 3 reviews the literature focusing on the question: Do CBM&A add or destroy value for acquirer and target firms? This chapter reviews and provides a synthesis of the relevant literature of CBM&A performance over the last 30 years.

In Chapter 4 we trace the wave behaviour, recent trends, patterns and distribution of CBM&A in the UK. Using the data from both the Office of National Statistics and UNCTAD, this chapter provides a succinct analysis of trends and patterns of the CBM&A in the UK including geographical and sectoral distribution of CBM&A from 1987 to 2010.

Chapter 5 uses a number of theoretical frameworks including eclectic paradigm of John Dunning, an empirical work on macroeconomic influences in the UK CBM&A is presented. Prior literature has extensively covered the ownership and location advantages accruing to US multinationals thanks to their geopolitical clout and the relative strength of the US dollar. More recently, we have seen the single currency in Europe, and this chapter analyzes the influences of the UK outside the European single-currency zone on CBM&A activities.

The primary question of Chapter 6 is: What motivates the UK firms to make CBM&A? Specifically, this chapter’s aim is to discern firm-specific motives commonly cited by acquisition managers at the time of the acquisition decision. The chapter develops hypotheses and uses primary data from acquisition managers of selected bidding firms to rank the relative importance of motives and a parsimonious set of motives for the sample studied by means of factor analysis for CBM&A.

Chapter 7, “Managing the Post-Acquisition Integration Process: An Examination of Accounting Task Integration,” uses interviews with senior managers to examine the post-acquisition integration process. The issues examined include human integration and task integration, and how the sub-processes of human and task integration interact to foster value creation is discussed

Chapter 8 uses share-price data to investigate the short-run performance of CBM&A.

Chapter 9, “A Study of the Changes in Operating Performance of the UK Cross-Border Mergers and Acquisitions,” uses accounting and stock market data to examine whether the UK acquirers create value in the long run.

In the final chapter (Chapter 10) we provide a useful summary of the empirical research findings and their implications for policy and further extensions in the future.

1.5 Summary

This chapter has established the context of the study, has set out the aims and scope of the book and has described the importance of the study and the basic structure of the book. It is evident from the preceding discussion that the focus of the book is about examining the trends, the motivations and the determinants of UK CBM&A and to evaluate their short- and long-run performance.

References

Boateng, A. (2001). Dimensions of International Joint Ventures in Ghana and Nigeria, Unpublished PhD Dissertation, University of Leeds, UK.

Danbolt, J. (1995). An Analysis of Gains and Losses to Shareholders of Foreign Bidding Companies Engaged in Cross-Border Acquisitions into the United Kingdom: 1986– 1991, European Journal of Finance, Vol. 1(3), pp. 279–309.

Eun, C.S., Kolodny, R. and Scheraga, C. (1996). Cross-Border Acquisitions and Shareholder Wealth: Tests of the Synergy and Internalization Hypotheses, Journal of Banking and Finance, Vol. 20, pp. 1559–1582.

Gregory, A. and McCorriston, S. (2005). Foreign Acquisitions by UK Limited Companies: Short- and Long-Run Performance, Journal of Empirical Finance, Vol. 12(1), pp. 99–125.

Gugler, K., Mueller, D.C., Yurtoglu, B.B. and Zulehner, C. (2003). The effects of merger: An international comparison, International Journal of Industrial Organization, Vol. 21(5), pp. 625–653.

Morck, R., Shleifer, A. and Vishny, R. (1990). Do managerial objectives drive bad acquisitions? Journal of Finance, 45, pp. 31–48.

Morck, R. and Yeung, B. (1992). Internalization: An Event Study Test, Journal of International Economics, Vol. 33(1/2), pp. 41–56.

Parvinen, P. and Tikkanen, H. (2007). Incentive Asymmetries in the Mergers and Acquisitions Process, Journal of Management Studies, 44(5), pp. 759–787.

United Nations Conference on Trade and Development (UNCTAD) (2000). World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development, New York: United Nations.

United Nations Conference on Trade and Development (UNCTAD) (2010). World Investment Report 2010: Investing in Low Carbon Economy, New York: United Nations.

2
Theoretical and Empirical Literature

Cross-Border Mergers and Acquisitions

2.1 Introduction

M&A activity is a popular corporate development, yet complex and has attracted significant interest from both the popular press and academic literature over the past three decades. The complex phenomenon which acquisitions represents has generated the research interests from a broad range of management disciplines, including finance, corporate strategy and economics (Cartwright and Schoenberg, 2006). As a result, over the course of time, M&A research has been approached from a myriad of theoretical perspectives. The purpose of this chapter is to review the distinct strand of thoughts in respect of why CBM&A take place. Drawing heavily on FDI and finance literature, the chapter proceeds as follows: The next section traces the theoretical development of CBM&A. This encompasses the industrial organization theory, the eclectic paradigm, the resource-based view and the internalization theory. We then focus our attention specifically on the literature which has been used to explain the reasons behind CBM&A, mostly in finance literature, over the past three decades. The final section summarizes this chapter.

2.2 Theoretical Development of CBM&A

The theoretical literature in respect of CBM&A are largely derived from the theories of FDI as CBM&A is one important entry mode of FDI by multinational corporations (Chen and Findlay, 2003). The United Nations Conference on Trade and Development (UNCTAD, 2000, 2012) reports that over the past thre...