Cross-border mergers and acquisitions: maximizing the value of the firm

Abstract

In recent years, increasing international merger and acquisition activity has captured the attention of not only the business press but also of academia and policymakers. The effects of this 'mergermania' are felt by many (i.e. managers, stockholders, regulators, and consumers), and the dollar amounts are significant. However, little has been done to find out the financial characteristics of the US and foreign firms participating in the cross-border merger and acquisition activity. The main objective of this study is to gain a better understanding of the characteristics of firms involved in the international market for corporate control. To meet this objective, the firm-specific financial variables of both foreign companies and US companies have been investigated and the effect that these variables have on the probability of a successful acquisition has been assessed. In addition, despite the fact that foreign acquisitions of US firms have outnumbered US acquisitions overseas, it is thought relevant to look into the financial characteristics of US companies acquiring foreign companies. This gives a more complete picture of the cross-border takeover phenomenon. Under the assumption that the goal of corporate managers is the maximization of shareholders' wealth, analysis is conducted within the neoclassical theoretical framework of maximization of the value of the firm. If the acquisition of a US company is a project with a net present value (NPV) larger than zero, then there is an increase in the shareholders' wealth of the acquiring company. Thus, financial variables were chosen on the basis of their hypothesized effect on value using the NPV criterion. It was found that six out the eight financial variables studied affect the NPV measure in the predicted direction.

Why Do Cross-Border Merger/Acquisition Deals Become Delayed, or Unsuccessful? A Cross-Case Analysis in the Dynamic Industries

“…Zhu (2011) suggested that overseas deals require more sophisticated and advanced managerial skills and expertise to control the firm internationalization process. Further, acquiring firm's economic value, availability of free cash flows and market potential stimulate to engage in overseas acquisitions (Gonzalez, Vasconcellos, Kish, & Kramer, 1997). Albeit, it is not our primary objective of the research to evaluate the financial performance but after reviewing their previous annual reports, we found that both companies have sufficient cash reserves and good financial indicators.…”

Cross-Border Mergers and Acquisition (CBMAs): A Review on Top Six ASEAN Country CBMA Players

“…Likewise, Gonzalez et al (1997) found that target firms in CBMAs tend to be smaller firms because smaller firms are associated with having lower risk for the fund invested during CBMAs. However, some studies reported that larger target size associated with high probability of being acquired by foreign firms (Ferreira, Massa, & Matos, 2010;Martynova & Renneboog, 2008).…”

“…Studies by Gonzalez, Vasconcellos, Kish and Kramer (1997), Martynova and Renneboog (2008), Alba et al (2009), Chen et al (2009 and Popli & Sinha (2014) indicated that larger firms tend to be a bidder in CBMAs as compared with smaller size firms. This is due to the fact that a large firm normally has strong market presence (Popli & Sinha, 2014) and less likely to experience financial constraints (Alba et al, 2009;Chen et al, 2009).…”

“…Studies have acknowledged that firms with financial advantage have higher tendency to be bidder in CBMAs (Datta, Musteen, & Herrmann, 2009;Gonzalez et al, 1997;Popli & Sinha, 2014) as compared with firms with financial constraints (Alba et al, 2009;Chen et al, 2009). In addition, it is also important for a target firm to have financial advantage (Gonzalez et al, 1997).…”

Determinants of Cross-Border Mergers and Acquisitions: A Comprehensive Review and Future Direction

“…First and foremost, Gonzalez, Vasconcellos, Kish, and Kramer (1997) found that firms acquiring US-based firms have better liquidity ratio, while targets have low price-to-earnings ratio. Whereas, firms that have better financial advantages (e.g., large amount of assets and deep pockets), and low price-to-earnings participate in outbound deals.…”