Determining Ownership Positions in Acquisitions: Market and Strategic Influences on Investments in European Targets

Article excerpt

ABSTRACT

Ownership positions taken in international acquisitions are based on developing efficient organizational arrangements for the purpose of integrating and coordinating activities between the target and the acquirer. This process is influenced by factors within market contexts and by the strategic repertoires of the acquiring firm as they face the complexity of foreign markets.

Regression is used to model these factors influencing the ownership positions of U.S. firms in the acquisition of targets within European Union nations. Results indicate that strategic similarity and to lesser degree market uncertainty influence ownership and that these results differ depending on the cultural proximity.

INTRODUCTION

Merger and acquisition activity has risen dramatically as an internationalization strategy and as a means to establish an immediate foreign presence. Of particular importance in an acquisition is the ability to effectively combine resources and coordinate activities through the use of power and control, where power is one member's potential to influence the decision variables of its partner and align inter-firm resources (Griffith & Harvey, 2001). In recent years researchers have focused on the determinants of power and the control issues implied by various internationalization strategies (Davidson & McFetridge, 1984, 1985; Davis, Desai & Francis, 1999; Contractor, 1990; Erramilli, 1991; Argarwal & Ramaswami, 1992; Anderson & Gatignon, 1986). While this attention has been helpful in determining why various organizational arrangements have been used, its application to merger and acquisition activity has been somewhat simplistic. Much of the internationalization literature presents acquisitions as if targets are always fully acquired in order to classify this organizational arrangement as one that affords a high degree of control to the parent (Caves & Mehra, 1986; Kogut & Singh, 1989).

In reality, international mergers and acquisitions involve various organizational arrangements ranging from minority owned to wholly owned positions, each involving tradeoffs between the extent of control afforded, the amount of risk exposure, and the level of resource commitments required. Ownership choices in acquisitions are the first in a sequence of strategic steps aimed at effectively combining resources and coordinating activities in global relationships based on the power created from the investment position taken.

Transaction costs arguments suggest that ownership positions are predicated upon economic arrangements aimed at achieving competitive efficiencies across national boundaries. As each transaction involves an acquiring firm and target from different markets and firm orientations, aspects of each are expected to influence the ownership position taken as firms attempt to maximize efficiency and reduce transaction costs. For international acquisitions, ownership positions must also be examined in relationship to the specific context of crossing national boundaries. Economic efficiency is predicated on the strategic allocation of acquisition ownership based on effectively combining resources and coordinating the activities of international relationships. In international acquisitions, this process involves overcoming potentially difficult national differences that lead to greater transaction costs. These differences alter the strength of industry and firm influences as acquiring firms seek to enter markets very different from their own.

In order to understand this aspect of international acquisitions, the paper addresses these issues and examines the degree of ownership an acquiring firm purchases by juxtaposing elements at two levels of analysis: those at the market and firm. The research addresses four key, related issues:

What impact do industry characteristics have on the degree of ownership of an international target firm? …