Dangers of the international mergers

 

On the face of it, internationalisation makes sense. Internationalisation allows the firm to pick up opportunities in foreign markets. Internationalisation is said to allow for the realisation of scale economies, and for a reduction in purchasing, management, finance, R&D, marketing and production costs (Markides and Ittner, 1994, Morck and Yung, 1991). The classic example, of course, is the Chinese acquisition that reduced the firms production costs, and increased its revenues, by providing the firm with access to a large and growing market. 

 

In practice, however, crossing borders can be more difficult than it may at first appear. And many of those classic Chinese acquisitions turned out to be less profitable than forecast. Scholars suggest that as much as 60% of the synergies forecast in a cost-cutting acquisitions tend to be realised, while as little as 7% of the expansionary synergies forecast in a cross-border deal tend to be realised. As a result of this gross miscalculation, between 50-65% of all foreign acquisitions tend to be divested in the first five years after the acquisition (McCarthy, 2011). 

 

So why are international acquisitions so problematic? Child et al. (2001) suggests that managers acquiring outside of their home market often face ‘unforeseen and insurmountable challenges’. Comparing the Netherlands and China, for example, using Hofstede's classic cultural dimensions -- 'power distance' between managers and employees (PDI), 'individualism' (IDV), 'masculinity' (MAS), and 'uncertainty avoidance' (UAI) -- shows that China and the Netherlands are dramatically different business environments (see Figure 1 below). Unforeseen cultural differences can cause major difficulties and delays for even the most well prepared manager.

 

 

Figure 1 - Hofstedes Cultural Distance Dimensions

Source: 

http://geert-hofstede.com/index.php

 

Others suggest that otherwise well-intentioned managers may be fully aware of the challenges that geographic expansion presents but, because of ‘hubris’ or over-confidence, may simply ‘feel’ that ‘their deal’ will be different (Roll, 1986). Over-confident managers, it is suggested, tend to over-estimate the probability of success, and their role in that, and to underestimate the probability of failure. Proponents of the ‘managerial theories’ are even less forgiving of managers that make geographic expansions. They suggest that many cross-border deals are never intended to create value, but are instead little more than self interested attempts on behalf of the manager to grow the firm beyond its optimal size. Such deals, it is suggested, are designed not to create shareholder value, but to build empires, and to maximise managerial power and prestige; and indeed, several studies find that empire building plays at least some role in expansionary merger decisions (Rhodes, 1983, Ravenscraft and Scherer, 1987). 

 

Empirically, a number of studies document sub-par performance for geographically expansionary merger and acquisitions (Rossi and Volpin, 2004). Gozzi et al. (2008), for example, finds that the value of a firm decreases after an expansion, and others have shown that any gains to such acquisitions are, at best, ‘transitory’ in nature (Sarkissian and Schill, 2008). And our own research shows that the Dutch are no exception to this rule. 

 

In the past 30 years, stock-listed Dutch acquirers made 7,446 foreign acquisitions, in 138 different countries, with an average return of -0.003%. Table 1 reports the top 5 destinations for Dutch acquirers, as well as the number of deals in the sample, and the average performance per destination. It reports that there were 973 Dutch acquisitions in Germany in the period, with the average German acquisition yielding a loss of 0.027%. The pattern of negative returns to the acquirer is as true of targets in established markets -- like the US, the UK, and France -- as it is of the emerging markets -- such as the BRIC economies of China, India, Brazil, and Russia. The average Dutch acquirer that stayed home, and acquired a target within the Netherlands, by contrast, made a positive return of 0.01%, 

 

 

Table 1 -- The costs of Internationalisation 

Source: K.J.McCarthy

 

Our conclusion is a straight forward one: for whatever the reasons, be it a lack of preparation, an excess of confidence, or a host of ulterior motives, overseas acquisitions trend to be significantly more dangerous than domestic acquisitions of the same sort, and trend, at best, to be disappointing. 

 

There is after all, its seems, no place like home. 

 

Over de auteur

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. 

 

References: 

Child, J., Faulkner, D., Pitkethly, R. 2001. The Management of International Acquisitions. Oxford University Press

Gozzi, J., Levine, R., Schmukler, S.L., 2008. Internationalization and the evolution of corporate valuation. Journal of Financial Economics 88: 607–632.

Markides, C.C., Ittner, C.D. 1994. Shareholder Benefits from Corporate International Diversification: Evidence from U.S. International Acquisitions. Journal of International Business Studies 25: 343-367.

McCarthy, K.J., (2011), Understanding success and failure in mergers and acquisitions : questing for the Holy Grail of economics, finance, and strategic management, University of Groningen, Faculty of Economics and Business

Morck, R., Yung, D. 1992. Internalization : An event study test," Journal of International Economics, vol. 33(1-2), pages 41-56

Ravenscraft, D.J., Scherer, F.M. 1987. Mergers, Sell-offs and Economic Efficiency. The Brookings Institution: Washington,DC.

Rhodes, S.A. 1983. Power, Empire Building and Mergers. D.C Heath and Co.: Lexington, MA. 

Roll, R. 1986. The Hubris Hypothesis of Corporate Takeovers. Journal of Business 59: 197-216. 

Rossi, S, Volpin, P. 2004. Cross-Country Determinants of Mergers and Acquisitions. Journal of Financial Economics 74: 277-304