International mergers and acquisitions: Past, present and future

INTERNATIONAL MERGERS ANDACQUISITIONS: PAST, PRESENT ANDFUTURE

Pervez N. Ghauri and Peter J. Buckley

INTRODUCTION

Mergers and acquisitions (M&As) have played a dominant role in the worldeconomy for the past ten years. In 1998, mergers were worth US$2.4 trillionworldwide, a 50% increase on 1997, which was itself a record year. In 1999,this figure exceeded US$3.3 trillion and in 2000 US$3.5 trillion. In Europe, amajor M&A activity area, the value of M&As rose to $1.2 trillion in 2002. Thepace of M&A activity has slowed down in the last two years, mainly becauseno mega mergers, over $50 billion, were announced in these years.

We define a merger as combination of assets of two previously separate firmsinto a single new legal entity. In a takeover or acquisition, the control of assetsis transferred from one company to another. In a complete takeover, all theassets of the acquired company are absorbed by the acquirer; and the takeover“victim” disappears. In fact, the number of mergers in ‘mergers andacquisitions’ is almost vanishingly small. Less than 3% of cross border M&Asby number are mergers (UNCTAD, 2000, p. 99). Full or outright acquisitions(100% control) accounted for more than half of all cross border M&As in 1999,although the proportion was lower in developing countries, largely because oflegislation. In reality, even when mergers are supposedly between equalpartners, most result in one partner dominating the other. The number of “real”mergers is so insignificant, that for practical purposes “M&As” should besimply referred to as “acquisitions” (UNCTAD, 2000, p. 99).

Advances in Mergers and Acquisitions, Volume 2, pages 207–229.© 2003 Published by Elsevier Science Ltd.ISBN: 0-7623-1003-0

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Friendly M&As can be distinguished from hostile ones. In a friendly M&A,the Board of the target firm agrees to the transaction (this may be after a periodof opposition to it). Hostile M&As, on the contrary, are undertaken against thewishes of the target firm’s owners. The price premium tends to be higher inhostile than in friendly M&As even in situations where only one bidder isinvolved. The overwhelming proportion of both international and domesticM&As are friendly. In 1999, there were only 30 hostile takeovers out of 17,000M&As between domestic firms. Hostile cross-border completed M&Asaccounted for less than 5% of total value and less than 0.2% of the total numberof M&As during the 1990s (UNCTAD, 2000, p. 105; Thomson FinancialSecurities Data Company). There are of course some high profile battles whichattract attention to hostile M&As. M&As are conventionally grouped into threecategories (Buckley & Ghauri, 2002):

• Horizontal – between competing firms in the same industry.• Vertical – between firms in buyer-seller, client-supplier and value chain

linkages.• Conglomerate – between companies in unrelated businesses.

Acquisitions differ according to the size of the acquired assets relative to theacquiring firm. In situations where the acquirer can leverage its assets to buy afirm which is as big or bigger than itself, the problems posed are quite differentfrom ‘bolt-on’ deals where the new assets can be integrated with an existingpart of the buying firm.

A firm that takes over another firm makes two assumptions. The first is thatthe acquiring firm can extract more value from the same assets than can thecurrent owners. This is a strong statement of comparative management ability.The second assumption is that not only the acquiring firm can extract morevalue from the same assets than the present owners, but also that the valueextracted will be more than the market price paid for the assets. In order words,an acquiring firm is saying “our valuation of the assets is superior to the currentvaluation”. The fact that this assumption is often erroneous is the core reasonwhy many acquisitions fail as profit enhancing tools – if the market price fullyreflects the future profit stream of the acquired assets, then there is no scope forprofit from the acquisition. However, opportunities for profit arise in situationswhere assets do not have a market price, as is the case with private firms ordivisions of multi-unit companies. Here, ‘guesstimates’ of the market pricehave to be made, which provides scope for some firms to be more skilled thanothers in this estimation (Buckley & Ghauri, 2002).

208 PERVEZ N. GHAURI AND PETER J. BUCKLEY

The uncertainty in the valuation of future income streams is an importantissue in takeovers. Superior competitive performance may well be unique to thefirm, viewed as a team, which is not obtainable by others except by thepurchase of the whole firm (Alchian & Demsetz, 1972). The firm may have areputation or goodwill that is difficult to separate from the firm itself. Possiblymembers of the employee team derive their productivity from the knowledgethey possess about each other in the particular environment of that unique firm.This gives rise to concern about “knowledge management” within firms.Knowledge may be difficult to transfer piecemeal to other firms by M&A or byany other means. The complexity of the modern firm defies easy analysis; sothe inputs responsible for (long term) success may be difficult to identify andmay be overvalued or undervalued for some time. The success of firms will bereflected in higher returns and stock prices, not higher input process. This iscompounded by the fact that inputs are acquired at historic cost, but the usemade of these inputs yields only uncertain outcomes. The acquisition cost ofthese inputs may fail to reflect their value to the firm at some future date. Bythe time their value is recognised, they are beyond acquisition by other firmsat the same historic cost, and meanwhile the shareholders of this lucky firmhave enjoyed higher profits. When such input acquisition decisions are made,they can give rise to high accounting returns for several years (Demsetz,1973, p. 1).

By the same token, once assets are embodied into a firm, their value becomesdifficult to separate from the other assets which comprise the firm. Takeoversoften involve the search for undervalued assets packaged into an existing firm.In a takeover, the potential acquirer is seeking some otherwise unavailableassets. Key examples of such assets are brand names, distribution networks,R&D facilities, management team skills, a loyal customer base, or specificknowledge. Often, the only way to acquire such assets is to purchase the wholefirm. On the positive side for the acquiring firm, all the other assets of theacquired firm which are not required can be sold off. This gives rise tothe phrase “asset stripping”. On the negative side, the remaining assets may notprovide the value which the purchaser envisaged. This may be due to a simplemisvaluation of the assets or it may result from the inability of the acquirer torelease the synergy between the new assets and the firm’s existing ones.

The purpose of this paper is to review the field of Mergers and Acquisitionsand to analyse the present boom in order to provide guidance and evidence formanagers engaged in M&A activities. The purpose is also to bring forwardunderpinning theoretical and societal implications of M&As, thus stimulatingfurther research in the field.

209International Mergers and Acquisitions: Past, Present and Future

MERGER WAVES

M&A activity has experienced growth and downfall in different time periodsover the last century, giving rise to the notion of ‘merger waves’. Table 1 showssuccessive waves of merger activity in the U.S. industry and features five suchwaves – the latest running from 1997 until 2000 and continuing into 2001(Buckley & Ghauri, 2002, p. 4).

The chief reason why M&As occur is “that control of corporations is avaluable asset; that this asset exists independently of any interest in eithereconomies of scale or monopoly profits; that an active market for corporatecontrol exists; and that a great many mergers are probably the result of thesuccessful workings of this special market” (Manne, 1965, p. 112). Thus,management teams compete for the right to control corporations, and operatingefficiency is ensured by a natural selection mechanism in which the threat andact of a takeover by raiders ensures the survival of the fittest managementteams. The key mechanism works as follows: Inefficiency or abuse ofmanagerial discretion by present managers leads to weak share prices. Potentialraiders see the opportunity to alter policies and make capital gains as shareprices respond to their improved management of the victim’s assets, and try totake over the company. Several conditions are necessary for this stock marketselection process to work (Hughes, 1993):

(1) Share prices should reflect the relative expected profitability of firms.(2) Raiders should be able to distinguish managerial shirking from poor

performance arising from external circumstances.(3) Raiders should be motivated by the desire to remove policies that do not

maximize shareholder value.

Table 1. Merger Waves in U.S. Industry.

Merger WaveApproximate Dates

Current$ AmountBillion

Constant (2000)$ AmountBillion

Number ofDeals*

1. 1898–1902 6.9 136 30122. 1926–1939 7.3 69.3 48283. 1966–1969 46 236 Na4. 1983–1986 618 Na 96175. 1997–2000 4,500 4,500 31,152

* Involving U.S. companies.Source: Buckley and Ghauri (2002), p. 4


(4) Raiders should be able to obtain a sufficient payoff to make their activitiesworthwhile.

If (1) does not hold, scope for changes in corporate control occurs because ofdifferences of opinion about the accuracy of stock market valuations betweenseller and raiders, rather than (potential) changes in managerial objectives orcorporate efficiency. Failures to generate acceptable returns in the market forcorporate control are also caused by transaction costs and because acquiringcompanies cannot capture all the benefits of the raid. Acquisitions andtakeovers incur large transaction costs (legal, advisory, and information costs).Defensive tactics on the victims’ part aim to increase these costs. They include:“shark repellents;” constitutional or voting arrangements to protect incum-bents; “golden parachutes” to raise the costs of firing incumbent managers;counterbidding; seeking a “white knight” to contests an unwanted bid; orraiding a third party.

It has been suggested (Grossman & Hart, 1980) that the incentive structuresin bids may lead to too few M&As for them to serve as a disciplining force forinefficient managers. There can be an incentive for individual shareholders to“free ride” on post-merger gains rather than to sell out. In this case, the privatereturn to the raider is less than the overall return which is split between theraider and the free riders. However, the presence of huge “merger waves”suggests that free riding may not be a major problem. Alternatively, partial bids(e.g. 51% acquisitions) may be undesirable given that while incurringtransaction costs they may merely redistribute wealth between the raiders andthe “oppressed” minority shareholders. Smaller companies with substantialowner control may be overvalued by the owners, making the costs ofdisciplinary M&A action prohibitive.

MOTIVES FOR M&As

There are several motives for choosing M&A as a strategy. The most important,as seen from the experience of the last decade, has been economies of scale andscope. Companies aim to achieve economies of scale by merging the resourcesof two companies, or create economies of scope by acquiring a companyallowing product/market diversification. Daimler’s merger (acquisition) withChrysler and AOL’s merger with Time Warner are good examples. Othermotives include accessing each other’s technology or market reach, achievinga dominant position in the industry, and consolidation of the industry. Overall,value creation for either company, or at least for the acquiring company, is theunderlying reason. This value is created through either cost cutting or through


increased scope. However, not all the possible motives can be consideredrational from the business perspective. Fashion, too often, has led managers topursue a strategy of M&A. As a consequence, M&A strategy has become anend in itself or a means of empire-building.

Another motive for M&A is differences in asset valuation between differentnational markets. In examining cross-border mergers, Gonzalez et al. (1998)suggest that assets at a national level are systematically undervalued.Imperfections that cause friction in the product and service markets lead toasset undervaluation. This leads to acquisitions being the most cost-effectivestrategy for penetrating certain national markets.

The idea that knowledge acquisition is frequently the motive of corporateacquisitions has been pointed out by many studies (Buckley & Ghauri, 2002).Knowledge is a key focus because often it cannot be acquired in efficient factormarkets as it is bundled with other assets and because of asymmetricinformation. The range of buyer responses to the possibility of overbiddingincludes the following: lower bid premia, contingent buy-outs, and lengthynegotiations designed to elicit tacit information. Where the firms draw onunrelated forms of expertise, these strategies are not used, leading to theconclusion that either lower post-merger integration is envisaged or thatunrelated buyers are simply unaware of extra information needs.

Seth et al. (2000) suggest three motives for the foreign acquisitions of U.S.firms – synergy, managerialism, and hubris. The synergy hypothesis proposesthat M&As take place when the value of the combined firm is greater than thesum of the values of the individual firms. The managerialism hypothesissuggests that managers embark on an acquisition to maximise their ownutilities at the expense of the firm’s shareholders. The hubris hypothesissuggests that bidding firm managers make mistakes in evaluating the targetfirm, but undertake the acquisition presuming that their valuations are correct.There is something of a conflation of these motives with outcomes in theempirical testing where positive and negative gains are attributed to acquirersand targets, and total gains and losses are distributed among motives on asomewhat arbitrary basis.

In addition to all the possible motives listed in the previous section, M&Asmay be the result of empire-building behaviour by managers. Growthmaximizing implies that some management teams have a lower discount ratethan the market as a whole. Such teams are then faced with a wealth of“undervalued” takeover opportunities. In the international arena, the explana-tion of takeovers can have a two-fold aspect. If we use the simple formula forcapitalising a future income stream:


C =1

r

where “C” is the value of a capital asset, “I” is the stream of income itproduces, and “r” is the rate of return on investment, then a foreign firm cansuccessfully buy out a domestic one if either “I” is higher or “r” is lower (orboth). International business theory suggests that “I” will be higher where theforeign firm can raise the income stream by infusing the victim with bettermanagement, technology, organisational skills, or superior marketing (Kindle-berger, 1969; Buckley & Ghauri, 1999). Alternatively, the capital market mayapply a lower discount rate to the asset when it comes under foreign ownership,perhaps in the belief that higher returns will result. Thus, Aliber (1970, 1971)suggests that a foreign asset owned by a U.S. firm will be evaluated by thecapital market as if it were a dollar asset. Differences in capitalisation ratios setby the market on the basis of ownership may provide a rationale for foreigntakeovers even if no increase in earnings occurs.

Morck et al. (1988) align the categories of hostile and friendly takeoverswith disciplinary and synergistic motives. “Disciplinary takeovers” are aimedat correcting non-value-maximising practices of the managers of target firms.Here, the actual integration of the acquirer and the target firm is not essential.A takeover is the best way to change control and therefore strategy.“Synergistic takeovers” are motivated by the possibility of benefits ofcombining the businesses of the two firms. Morck et al strongly suggest thathostile and friendly takeovers should not be lumped together in an analysis ofM&As, but that they should be separated and inferences about one type shouldnot be drawn on takeovers undertaken for the other motive. The empirical worksamples from the Fortune 500 in 1980 and examines takeovers between 1981and 1985. They found that firms which were the target for hostile take-over bidscompared to the universe of firms, were smaller, older, more slowly growing,and had lower Tobin’s q, more debt, and less investment of their income. Theywere less likely to be run by the founding family and had lower officerownership than the average firm. Compared to the universe of Fortune 500firms, friendly targets were smaller and younger but had comparable Tobin’s qvalues and growth rates. The friendly targets were more likely to be run by amember of the founding family and had higher officer ownership than theaverage firm. The decision of a CEO to retire with a large stake in the firm orwith a relationship to the founder often precipitated a friendly takeover – highofficer ownership was the most important attribute predicting friendlyacquisitions.


ARE M&As THE RIGHT CHOICE?

Kogut (1991) examines joint ventures (JVs) as an option to acquire. He seeksto explain JVs as “real options” to expand in response to future technologicaland market developments. In this sense, the exercise of the option is the moveto acquisition. JVs thus reduce the risks associated with uncertainty in entryinto a new (national) market or technology. Investment in acquisition thenbecomes a second stage choice made after the firm acquires additionalinformation from its initial venture. Such a strategy is useful in times of greatvolatility (Buckley & Casson, 1998), but entrant firms should be aware of therisk of being locked into a joint venture where it is captured by the localpartner.

Brouthers and Brouthers (2000) examine the impact of institutional cultural,and transaction cost factors on the “buy or build” (acquire or establish newfacilities) choice. As joint ventures and wholly owned subsidiaries areownership choices, the “buy or build” decision can be related to the entry modechoice of acquiring existing assets vs. establishing new facilities or a“greenfield” site. Greenfield entry is more likely to take place in high-techindustries where the entrant firm has strong intangible competitive advan-tages.

The option perspective is widely recognised as a means of understanding thedynamics of JVs as the partners have the option to acquire, divest, and expandtheir stake. However, as Chi (2000) points out, the nature of the option, itsvalue to the “buyer” and the “seller” varies markedly with its structure. “Eventhe most commonly recognised option in a JV – the option to acquire thepartner’s stake – tends to have some unique structural attributes” (Chi, 2000,p. 665). A typical JV contract, as Kogut (1991) points out, does not give eitherpartner the right to acquire or divest the venture at an ex ante specified price.Thus, the partners have to negotiate a price ex post making the options exerciseprice indeterminate ex ante. Partners have good reasons for believing that newinformation will arrive during the operation of the JV, which can result in oneof them moving to a full acquisition.

Hennart and Reddy (1997, p. 1) examine the choice between “two alternativemethods of pooling similar and complementary assets: the merger/acquisitionand the greenfield equity joint ventures”. This conflates the ownership choice(wholly owned versus joint venture) with the entry choice (takeovers versusgreenfield entry). In fact, there are technically four potential choices of entrymode viz:

(1) Greenfield/Wholly Owned;


(2) Greenfield/Joint Venture;(3) Takeover/Wholly Owned; and(4) a partial takeover, Takeover/Joint Venture.

Hennart and Reddy compare (3) with (2) leaving out wholly owned greenfieldentry and partial acquisitions presumably because they are not methods of“pooling similar and complementary assets”. Hennart and Reddy contrast “twocompeting theories of why joint ventures exist” (p. 1): asymmetric informationin the pre-merger situation versus “indigestibility” which refers to the (post-merger) problems of acquiring indivisible resources. In a commentary, Reuerand Koza (2000) point out that these views are complementary andoverlapping.

Kogut and Singh (1988) examine the effect of national culture on choice ofentry mode after accounting for firm and industry level variables. They classifyentries into “greenfield” (equals wholly owned greenfield ventures), “jointventures” (greenfield shared ownership), and “takeovers” (purchase of stock inan already existing company in an amount sufficient to confer control). Theyclaim that all acquisitions in their sample conferred a controlling equity shareso the partial takeover (takeover/joint venture) category conveniently dis-appeared. After allowing for the impact of firm and industry variables, theyfound that cultural distance was significant in influencing the entry modechoice into the U.S. They used a conflation of Hofstede’s (Hofstede, 1980) fourcultural dimensions (power distance, uncertainty avoidance, masculinity/femininity, and individualism) as a measure of cultural distance. It should benoted that this measure is open to great objections even if the separaterelevance of the four dimensions to the decision is accepted.

Baumann (1975) sets out a theory of (international) mergers. He examines“monopoly power, economies of scale, synergistic effects” and “non-profitmaximising behaviour, differences in attitudes towards risk” and economicdisturbance theory as alternative explanations for mergers, and applies propertyrights theory to foreign direct investment. The theoretical base, following anearly version of internalisation theory (McManus, 1972, following Coase,1937, see also Buckley & Casson, 1976) is tested on U.S. FDI in Canada. Boththe improvement in the profit stream and the lower discount rate for assetsdenominated in stronger currencies are included as explanatory variables as areimprovements due to superior management post takeover. Although Baumann’smodel is unable to distinguish between M&As and greenfield FDI, he is ableto show the close relationship between the determinants of M&As and ofFDI.


EVALUATION AND TACTICS

Mergers and Acquisitions face two rather distinct groups of issues andproblems: the motives and valuation at pre-merger stage and then integrationand performance evaluation at post-merger stage. This section discusses thequestions of valuation that arise in the pre-merger stage, post-mergerintegration and performance evaluation.

Valuation has been and is one of the most difficult problems in M&As.Keenan (1980) examines a situation in which real economic adjustments evolvefrom the mergers and focuses on the valuation problems related to synergisticbenefits arising from M&A. He claims that capital budgeting theory is notdeveloped enough to handle such “multi-period” problems where risk levels areshifting and where project-tied financing consideration exists. Moreover, thetheory is rather generalised at the firm level, considering equations for demand,supply, and budget constraints in the economy. The valuation of M&Asbecomes particularly complex because the real economic markets for labourand capital are not strongly efficient. Most of the research on M&As since the1960s focused on two questions: (1) Are there any real benefits to conglomeratetype mergers? and (2) What are the portfolio implications of a merger betweentwo firms? According to this research, statistically there are few valuationbenefits, and many M&As are in fact detrimental to profit maximising goals.While the stockholders of acquired firm may reap some benefits, thestockholders of the acquiring firm do not.

Keenan (1980) also demonstrates the complexities of valuation in ahypothetical case where a firm (A) wants to take over a firm (B) and becomesa new firm (C). He claims that a merger between two firms with differentconstant growth rates yields a firm that does not have a constant growth rate.This leads to the question of whether mergers generate any real benefits.Kennan (1980) also builds up a scenario with acquisition of labour-intensivefirms and demonstrates how the value of the acquired firm may, in fact,decrease. This suggests that there may be serious problems in the expected-value determination, negotiated-price determination, and accounting standardsapplied to the acquisition of a service firm where the value of the labourproduct is greater than the wage rate paid.

Singh and Montgomery (1987) find that acquired firms in relatedacquisitions have higher returns than acquired firms in unrelated acquisitions.For acquiring firms, abnormal returns directly attributable to the acquisitiontransaction are not significant. However, announcement effects are less easilydetectable for the acquirers rather than targets because the acquisition affectsonly part of the acquiring firm but the whole of the target firm. In addition, as


the acquisition is an event in a series of an implicit diversification programme,its effect as a unique market signal is mitigated. Expected gains for acquiringfirms are thus often competed away in the bidding process, while stockholdersof the target firm obtain high proportions of the gains.

M&A literature cites culture as one of the dominating factors that influenceperformance. Buono et al. (1985) studied a merger between two banks from theperspective of organisational culture. Data on organisational culture is collectedand analysed through pre- and post-merger interviews. The interesting point isthat the study shows that culture is an important issue even when the firmscome from the same country and same industry. The study thus enhances ourunderstanding of culture and its consequences on the merger process. It alsoclarifies and helps us understand how a new culture emerges in a newly formedorganisation. It looks at objective and subjective organisational culture andsuggests that although both aspects of culture are important, subjective cultureprovides more distinctive interpretations of similarities and differences amongpeople in different groups, as it is particularly unique to an organisation.Another issue discussed is the organisational climate. These are the issues thatinfluence behaviour, satisfaction, expectations of organisational members andthereby success or failure of a merger.

Bresman et al. (1999) focus on the factors facilitating the post-acquisitiontransfer of knowledge over time. They find that the transfer of technologicalknow-how is facilitated by communication, visits, and meetings and increasesas time goes by. The transfer of patents is associated with the articulability ofthe knowledge, the size of the acquired unit, and the recency of the acquisition.High quality reciprocal knowledge transfer takes time to develop but itgradually replaces the one-way transfer of knowledge from acquirer toacquired. This parallels the increasing transfer of tacit knowledge which ismore time consuming to transfer than knowledge which is more articulated.The human relations processes across the merged unit develop in similarfashion (Buono & Bowditch, 1989).

Calori et al. (1994) examine the influence on national culture on the choiceof integration mechanisms used by French and U.S. entrants into Britain andBritish and U.S. acquirers in France. They find that firms are influenced by theirnational administrative heritage when they acquire foreign firms. In the U.K.comparison, the French acquiring firms relied more on formal control ofstrategy and of operations than U.S. firms. The American acquiring firms reliedmore on informal communication and cooperation (teamwork) than the French.In examining the acquisition of French firms, it was found that the U.S.acquiring firms relied more on formal control by procedures than the British,and American managers became more personally involved, suggesting a


“hands off” attitude from the managers of British acquiring firms. In terms ofimpact on post-merger performance, the article is suggestive. It points out thatthe health of the acquired firm prior to the merger is negatively correlated toimprovements in attitudinal performance, and both informal communicationand cooperation (teamwork) and informal personal efforts from the managersof the buying firms are positively correlated with improvements in attitudinalperformance. This confirms the view that socialisation is a key factor inreducing post-merger conflicts and demotivation (Haspeslagh & Jemison,1991). Two other variables are significant in economic performance of theacquired firms – time elapsed since acquisition and the level of sharedresources and transfers. Thus the implementation of synergies between themerging firms contributes to economic performance but there seems to be adelay before the economic performance becomes evident. Two measures ofcontrol mechanisms are also correlated with economic performance. Informalpersonal effects of the buying firm’s managers positively affect performance,and the level of control of operations exercised by the buying firm is negativelycorrelated with performance.

Chatterjee et al. (1992) deal with the compatibility of the merging firms andits relationship to shareholder gains and relatedness. They surveyed theperceptions of top management teams in 168 M&As. Based on the responsefrom 73 firms, their findings show an intense relationship between the acquiredmanagers’ perceptions of cultural difference and shareholder value. Theirresults support the hypothesis that changes in shareholder value of acquiringfirms are directly related to the degree to which buyer’s top management teamtolerates multiculturalism. Their findings also show that a lower culturaltolerance will influence shareholder value negatively. This study providessystematic evidence linking equity and human capital in M&As.

Morosini et al. (1998) examine cross-border acquisition activity in Italy.They measure post acquisition performance using the percentage rate of growthof sales over the two-year period following the acquisition. This is clearly a lesssatisfying measure of performance than stock market pricing or profitability.The results of the study are quite surprising. The authors found that nationalcultural distance enhances cross-border acquisition performance. They explainthis result by the argument that cross-border acquisition in more culturallydistant countries might provide a mechanism for multinational companies toaccess diverse routines and repertoires which have the potential to enhance thecombined firm’s performance over time. Post-acquisition strategies are alsoadduced to enhance this result.

Deepak Datta (1991) studies the relationship between organisational andacquisition performance. Using a sample of 173 U.S. acquisitions he evaluates


post-merger performance of the firms involved in acquisition. This studydemonstrates that differences in top management styles of two firms have anegative impact on post-merger performance as well as integration. He alsoexamines difference in reward and evaluation systems and suggests that thesedifferences do not have the same kind of negative impact on performance asdifferences in management styles. A possible reason is that differences inreward and evaluation systems are more easily and quickly reconciledfollowing an acquisition than are differences in management styles. Althoughthe study only takes two aspects of organisational fit into account and there aresome flaws in data collection, it brings forward important issues in post-acquisition integration of firms.

Villinger (1996) deals with post-acquisition learning by Western firms inHungary, Czech Republic, Slovakia, and Poland. By focusing on thesecountries, he covers the most important market area for M&A activity inCentral and Eastern Europe. He points out that in these countries, cross-bordermanagement skills seem to be more important than general business skills forpost-acquisition management efforts. The knowledge of acquired partner’slanguage and sensitivity about cultural issues are crucial. He claims thatlearning is the central aspect rather than integration, at least in the earlierphases of the post-acquisition stage, as it is more important to transform theEast European target than to integrate it in its Western parent. It then proposesthree levels of learning based on Senge (1968) and Child et al. (1992) as“single-loop learning,” “double-loop learning,” and “deuterolearning.” Thesedifferent levels pose different problems for learners and learning entity but inthe Eastern Europe context and for a successful transition, this framework isconsidered to be the most “elegant.” Empirically examining 35 cases, Villinger(1996) concludes that general business competence dominates cross-borderskills, which creates post-acquisition problems. A lack of communication andunderstanding is generally blamed for insufficient learning. Language andcultural awareness is thus considered the most important issue for post-acquisition integration in Eastern Europe.

THE IMPACT OF M&As ON COMPANY STRATEGIES

Many problems can arise in the assessment of the impact of M&As onefficiency and economic performance. In terms of the stock market selectionprocess, the choice of the control group is critical. Control groups are classifiedinto acquirers, acquired, and neither acquiring nor acquired. Some firms maybelong to both the first two categories. Characteristics of firms may affect therelevant comparisons – the size of firms, industry, and time may affect


the choice of the most appropriate control group. M&A performance, too, canbe measured in various ways – profitability, growth, changes in profitability,and market value are possible measures. The impact on technical change mayalso be relevant in certain contexts; and again, it is important to choose theappropriate counterfactual.

Total gains in cross-border acquisition are estimated to be 7.6% of the pre-acquisition value of the combined firm (Seth et al., 2000). This is similar to theestimate of total gains for domestic acquisitions (Bradley, Desai & Kim, 1988)but larger than that reported by Eun et al. (1996). Seth et al. find that positivetotal gains occur in 74% of the acquisitions in their sample, similar to theproportions reported by Berkovitch and Narayanan (1993) at 76% and Bradley,Desai and Kim 75%. However, Seth et al. find that targets realise the majorityof the gains, whilst acquirers appear to neither gain or lose on average.Successful acquirers in single bidder acquisitions retain around 40% of the totalgains on average, whilst acquirers in multiple bidder transactions make smalllosses.

Researchers find that only about one-third of recent M&As have positiveeffects on the shareholder value for the buying firm (Schenk, 2000).Performance results, reported by earlier research, are quite mixed (Cowling etal., 1980; Magenheim & Mueller, 1988; Sirowar, 1997). Dickerson et al. (1997)show that company growth through acquisition yielded a lower rate of returnthan growth through internal investment. A survey of 22 accounting datastudies from nine countries showed that the average acquiring firm does notearn a significantly higher profit than the industry average (Bild, 1998). Earlierresults from Mandelker (1974) found that the market for acquisitions can beregarded as perfectly competitive, supporting the hypothesis that informationregarding mergers is efficiently incorporated into the stock price. Stockholdersof acquiring firms seem to earn normal returns from mergers as compared toother ventures of similar risks. Stockholders of acquired firms earned abnormalreturns of approximately 14% on average in the seven months preceding themerger. The fact that the market anticipates mergers, at least three months onaverage according to Franks et al. (1977), before announcement furthercomplicates the analysis. Aiello and Watkins (2000) suggest that leveragedbuyouts (LBO) are more successful than M&As in general. “Between 1984 and1994, some 80% of LBO firms exported that their fund investors had receiveda return that matched or exceeded their cost of capital, even though in manycases the prices paid for the companies those funds acquired were pushed upby competing bidders” (p. 101). This, they suggest, is due to the fact that seniormanagers at financial investors, like the most successful corporate acquirers,approach potential acquisitions with sensitivity and a well established process.


They contrast this approach with that of “most corporate managers” who try tobeat down prices and often delegate actual deal management to outside experts,investment bankers and lawyers.

Literature from the strategic management and international business fieldssuggests that M&As are not a uniform phenomenon (Lubatkin, 1983).Outcomes of M&As depend on the strategic fit between the firms and on thequality of pre- and post-merger management. In addition, market conditionsinfluence M&A outcomes. Halpern (1973) showed that since most mergersoccur in rising markets, this effect needs to be removed in estimating gains andpremia. Size of company is a factor too. If we accept that acquisitions are oftena search for a unique asset embedded in a company, then returns from that assetwill vary as the size of the unique element varies as a proportion of the totalcompany. Because quality of management, too, is a factor, uncertainty aboutwhen that management will be replaced will be reflected in the current stockprice. When the merger is announced, there is a positive total adjusted gainwhich reflects the markets’ re-evaluation of the company under its newmanagement. Bargaining strategies also will affect the distribution of gains.

THE IMPACT OF M&As ON SOCIETY

Siegfield and Sweeney (1981) discuss the most important characteristics ofM&A, namely, market concentration, firm size, product diversification, andgeographic dispersion, and discuss their impact on society. Based on empiricalevidence, they then assess other social consequences such as effect on workers,distribution of income, and on community welfare and explain reasons whyM&A might increase and/or decrease social goals. Finally, they stress the needfor more systematic research in this area that will assist policy makers inhandling these problems.

Franks and Mayer (1993) examine the relationship between capital marketsand corporate control. They compare the relationship in France, Germany, andthe U.K. and include buy-out and buy-ins by managers. They find thatregulation (company laws, competition policy, stock exchange rules, and labourlaws) explains much of the difference in control and ownership changes acrosscountries, even within an economic area such as the European Union (EU). TheEU’s Competition Commissioner heads a competition authority which iscurrently “seen by business as overburdened and unpredictable in its decisionmaking” (Hargreaves, Financial Times 18.9.2000, p. 16). The EU’s mergerregulation has a theoretically clear remit to prevent mergers which inhibitcompetition and allow others to proceed. In practice, European mergers stillneed clearance from several national competition authorities. The unit that


reviews mergers, the Merger Task Force, is under-resourced. The absence of asingle European regulatory organisation, let alone a global one, vastly increasesthe transaction costs of M&As. In practice, European authorities veto very fewmergers (of 1500 deals in the decade of the 1990 only 13 were vetoed and 12more withdrawn after it became clear that Commission would intervene overexcessive market power). The increase in number and complexity of deals isputting pressure on regulatory authorities – particularly those like the EUwhich wants to examine ever smaller sized M&As. In Europe in particular,labour organisations play a role in M&As. Given the high rate of failurebecause of the human factor, this is perhaps to be welcomed. The InternationalLabour Office (ILO) is currently calling for increased dialogue betweenmanagement and workers in the M&A process in an attempt to minimise thenegative effects.

The number of the significant regulatory authorities with which mergingcompanies have to comply in the world has mushroomed. Reports of the dealbetween Coca-Cola and Cadbury-Schweppes suggest that their lawyers soughtanti-trust approval in more than 40 jurisdictions around the world. In the failedeffort to merge, Alcan Aluminium of Canada, Pechiney of France and Algroupof Switzerland, lawyers from 35 firms filed for regulatory approval in 16jurisdictions and 8 languages. Pernod Ricard’s £2.1 billion purchase of 38.6%of Seagram’s drinks portfolio (with Diageo) has required filing for regulatoryapproval in 70 countries (Kemeny, Sunday Times 21.1.01, pp. 3/6). Simplifica-tion of competition laws and creating a consensus among regulators to makeantitrust laws coherent and predictable is the current extent of feasibility. Thereis little current prospect of a new international bureaucracy to oversee mergers.The United States has recently opposed a European proposal to give the WorldTrade Organisation (WTO) a central role in policing mergers. However,harmonisation is made urgent by the increased number of merger cases whichamounted to 26,000 filings between 1994 and 2000, with the U.S. Departmentof Justice and the Federal Trade Commission (FTC).

In case of regulations and antitrust laws, firms often jump into bed with eachother without even considering regulatory concerns. MCI and WorldCom, twoAmerican telecommunication firms were totally surprised by objections to their$37 billion marriage from European regulators (The Economist, Jan. 9, 1999).The liberalizations in FDI regimes has encouraged companies to expandthrough M&As. The international regulatory framework, bilateral investment,and double taxation agreements and the WTO have also supported these trends.In Europe, the EU has stimulated restructuring for national, regional, and cross-border M&As which has resulted in major changes in corporate ownership.One impact of all these changes is that there is an increased acceptance of


M&A all over the world, even though there are mixed opinions on the impactof M&A on industrial concentration. According to one opinion, cross-borderM&As can have a positive effect on competition if the foreign firm takes overailing domestic firms that would otherwise have been forced out of the market.They can also challenge established domestic firms to create effective rivals.

The opposing view is that “monopolizing M&As” can occur in the followingsituations (UNCTAD, 2000, p. 193):

(1) The acquiring firm was exporting substantially to a market before it buysa competing firm in it;

(2) A foreign firm with an affiliate already in the market acquires another,thereby acquiring a dominant or monopolistic market share;

(3) The foreign firm acquires a market leader with which it has previouslycompeted;

(4) The acquisition is intended to suppress rather than develop the competitivepotential of the acquired firm;

(5) A foreign firm with an affiliate in a host country acquires an enterprise ina third country that has been a source of import competition in the hostcountry market;

(6) Two foreign affiliates in a host country merge, although their parent firmsremain separate, eliminating competition between the two and leading to adominant market position.

Although we can accept that higher concentration by itself does not indicateanti-competitive conduct, the crucial issue is that it differs from market tomarket and from industry to industry. In the United States and the EuropeanUnion, only a small number of M&As are scrutinized to assess negativeimpacts on competition. An even a smaller number are asked to sell off partsof the business or are completely ruled out. In the United States, for example,only 1.6% of 4,679 M&As notified to antitrust authorities resulted inenforcement actions, with only about 1% being challenged in the end (U.S.Department of Justice, 2000). In the EU, the situation is not much different. In1999, only 14 out of 292 M&As (less than 5%) were challenged or subject toa second phase investigation, while an additional 19 cases were reported butcleared in the first phase of investigation. In Japan, all 3,813 M&As notified in1998 were cleared, only 2 transactions were revised during pre-notificationconsultation (ibid, p. 7). This means that the authorities do not believe M&A tobe against the public interest even if concentration does increase. This reallyneeds further research.


CONCLUSIONS

Mergers and acquisitions have become the most dramatic demonstration ofvision and strategy in the corporate world. With one single move you canchange the course of your company, the careers of your managers, and createvalue for your shareholders (Puranam et al., 2000). Time and again, we haveseen how share values increase or decrease due to the mergers announced andcompleted. Daimler-Chrysler, a $38 billion merger, is a good example wherethe share values dropped by almost 40% from the time of the announcement ofmerger, May 1998 to December 2000 (Bert & Trait, 2000). More than 50% ofthe mergers so far have led to a decrease in share value and another 25% haveshown no significant increase.

As well as the strategies of actual and potential acquiring firms, the defensivestrategies of potential victims also impact taxpayers, employees, managers, andworkers in other firms, consumers and the pace of technological change.M&As have a profound impact on social and political processes as well as thepurely business and economic ones.

The merger wave, which in the early 1990s was considered an Americantrend, became a worldwide trend and the latter part of the 1990s and the year2000 has shown increased M&A activity in other parts of the world. Europe ledin M&A activities in 2000. In 1999–2000, the total value of M&A reached $3.5trillion (from $0.4 billion in 1990). Out of this, the USA accounted for about$1 trillion and Asia for $144.6 billion, the rest came from Europe (TheEconomist, Jan. 27, 2001, p. 59). In spite of this popularity, more than 50% ofthe M&As are reporting post-merger problems. While in the past, firms havejustified these deals arguing for synergistic benefits, more and more M&A arereporting synergistic losses.

Only about one-third of M&As were found to have positive effects on theshareholder value for the buying firm in one study (Schenk, 2000).Performance results, reported by earlier research, are quite mixed (Magenheim& Mueller, 1998; Sirower, 1997). A survey of 22 accounting data studies fromnine countries showed that the average acquiring firm does not earn asignificantly higher profit than the industry average (Bild, 1998).

As for achieving efficiency gains, the most cited justifications for M&As, thescope for rationalization and improving company performance by achieving aninternational specialization of the value chain can be particularly high inM&As (UNCTAD, 2000). Moreover, size can have a large influence on R&Dand the expansion of distribution networks as well as adoption of newinformation and innovations.


More than 50% of the total M&A activity in the last few years have beenbetween cross-border firms, and a lot of these mergers and acquisitionsexperienced problems stemming from cultural and institutional countrydifferences. For example, in Upjohn-Pharmacia, a lot of time and energy wasspent on “American” versus “European” practices rather than on achievingsynergistic benefits. Daimler Chrysler was taken to court by its biggestshareholder for misleading information. The fact that cross-border M&As placehost country assets under the governance of TNCs and contribute to the growthof an international production system does not necessarily mean that it createssynergistic benefits. In addition, as a result of these cross-border mergers,concentration has increased in many industries such as: banking, pharmaceuti-cals, automobiles, telecommunication, insurance, and energy. After the Asiancrisis, cross-border M&As in the five main crisis-hit countries accounted formore than 60% of the total Asian M&As in 1998–1999. Since cross-borderM&As have become an important element in the expansion of the internationalproduction system, there is a need for a better understanding of what impactthey have on countries, especially the host country (UNCTAD, 2000).

A great omission in the literature on M&As and their performance is that toolittle attention is given to cultural clashes, while many mergers faced enormousproblems due to cultural differences. Bankers Trust and Deutsche Bank,Upjohn and Pharmacia, and Daimler Chrysler are good examples. As put byMr. Hubert of Daimler Chrysler, “We are absolutely happy with thedevelopment of the merger, we have a clear understanding: one company, onevision, one chairman, two cultures.” This is also due to the fact that in mostM&As more attention is given to the financial and legal aspects of the dealrather than to the integration of the companies involved. In many cases, themerged company ends up with two bosses, two accounting systems and neitherpartner really know what the other is doing (The Economist, Jan. 9, 1999).

The literature so far (see e.g. Cooper & Gregory, 2001; Buckley & Ghauri,2002) contains many fascinating insights from experienced M&A executives.M&As possess several important advantages: speed of entry and speed tomarket, the ability to acquire critical assets, platforms for future growth, andentry into new geographical markets. Speed of entry is felt to be particularlycritical in the internet age (UNCTAD, 2000). At the same time, disadvantagesare significant: asset values go down as well as up, cultural barriers ininternational acquisitions often mean that M&As do not replace internal growthand alliances. However, the failure of M&As is often very visible whereas start-ups and new venture failures often go unnoticed.

Industry differences are obviously important – it may be that where thepurpose of the M&A is to cut costs, these benefits are more obvious and


quantifiable than revenue enhancing strategies, where there may be more risk.R&D synergies are often to be the major reason for M&As, as inpharmaceuticals. Keeping the focus on the acquisition of products andtechnologies rather than companies may be important. Venture capitaloperations in biotechnology, for instance, are alternatives to M&As. Thisdiscussion and the views on the need to integrate internet start-ups stronglysuggest that M&A strategy should be part of an overall strategy, and notseparate from it.

Further research is needed to fully understand the impact of Mergers andAcquisitions on companies and societies. M&As can be approached from anumber of perspectives (Buckley & Ghauri, 2002):

(1) the market for corporate control;(2) transaction cost theory;(3) the resource based view of the firm;(4) the impact of national and organizational cultures;(5) processes: pre- and post-acquisition strategies;

There are a number of key constituencies whom M&As directly impact:

(1) the acquiring firm including managers, workers, and its shareholders;(2) the acquired firm including managers, workers, and its shareholders;(3) potential rival acquirers and non-acquired firms;(4) in international M&As, the host country and source country (competitive

environment) and welfare impacts.

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International mergers and acquisitions: Past, present and future

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