Mergers perform better thanks to the Euro

From the macroeconomic perspective, a rich literature shows that currency unions, in general, and of the Euro, in particular, should: (1) contribute to the emergence of a single, European, business cycle (e.g., Giannone and Reichlin, 2006); (2) increase the levels of financial market integration (e.g., Baele et al., 2004); (3) reduce the incentives for the state to embark on product and/or labour market reforms (e.g., Duval and Elmeskov, 2006); (4) expand regional trade (e.g., Rose, 2002); and (5) cause inflation rates to converge (Meller and Nautz, 2012). From the microeconomic perspective, however, little is known about if, how, and in what way currency unions, in general, and the Euro, in particular, have impacted firm-level behavior (Ekkayokkaya et al., 2009 study of banking deals being the one exception). From a regional perspective, however, the market for corporate control is an economically and strategically important one: $1.42 trillion US – or 9.57% of the European Union’s GDP — was spent in 2012, on 12,260 acquisitions. 

To explore the way in which the Euro altered the European market for corporate control, we built a sample of 19,362 inter-European acquisitions, spanning a 22 year period, 48 countries, 273 statistical regions, and 4,950 cities. In doing so, we find that: 

1. the Euro has had a positive and significant impact on the number of deals in the Eurozone. Interestingly, we find that the Euro has had a negative effect on the number of acquisitions in the Non-Eurozone members of the Euro. The Euro, in other words, has led acquirers to substitute non-Euro for Eurozone targets.
2. acquirers have demonstrated an increased willingness to make distant acquisitions since the introduction of the Euro. Prior to 1999, the average distance between the target and acquirer was 475 kilometres. After 1999 this rose to 595 kilometres. The Euro, in other words, has increased the willingness of acquirers to travel. 
3. the Euro has increased the spread European acquisitions. Prior to the Euro, European acquisitions were focused on the old core. Since the introduction of the Euro, however, we note an increase in the use of acquisitions in the core, as well as a spread of acquisitions to the periphery. The Euro, in other words, has brought more targets, from a wider geographical area, to the attention of the core.  
4. the Euro has had a direct, and significantly positive impact on the size of the deals concludes in the Eurozone. The Euro, it seems, has made acquirers generous. 
5. Finally, and perhaps most importantly, we find that the Euro has had a positive and significant impact on the performance of the deal, irrespective of the performance measure employed. The Euro, we suggest, has increased transparency, and made more deals more comparable, and the result, we find, is that deals concluded in the Eurozone, after the introduction of the Euro, perform better than deals outside of the Eurozone, or before the introduction of the Euro. 

The Euro has been much maligned in recent years. From the perspective of the market for corporate control, however, the results are unambiguously positive. For advisors, managers, and shareholders alike, the Euro means more deals, bigger deals, and better deals. Those within the Euro have consolidated, and those without have been left out. 

About the Author: 

Dr. Killian McCarthy is assistant professor bij de University of Groningen. Hij behaalde zijn PhD in economics of corporate strategy in 2011, voor zijn onderzoek over overnameprestaties. In dit onderzoek evalueerde Killian de prestatie van 35,000+ deals in Europe, Noord-Amerika en Azië in de periode 1990-2010. 

• Baele, L., Ferrando, A., Hördahl, P., Krylova, E. and Monnet, C. (2004) Measuring European financial integration, Oxford Review of Economic Policy 20: 509–530.
• Duval, R., and J. Elmeskov, 2006, The effects of EMU on Structural reforms in labour and product markets, Working paper, European Central Bank.
• Ekkayokkaya, M., Holmes, P., Paudyal, K., 2009. The Euro and the changing face of European banking: Evidence from mergers and acquisitions. European Financial Management 15, 451-476.
• Giannone, D., and L. Reichlin (2006): “Does information help recovering structural shocks from past observations?,” Journal of the European Economic Association 4(2- 3), 455–465. 
• Meller, B., & D. Nautz, 2012. Inflation persistence in the Euro area before and after the European Monetary Union, Economic Modelling 29(4): 1170–1176.
• Rose, A. 2000, “One Money, One Market: Estimating The Effect of Common Currencies on Trade,” Economic Policy, Vol. 15 (April), 7-45.