Mergers and acquisitions have attracted the attention of scholars in a number of business disciplines, especially the areas of strategic management, international business, finance and industrial economics. However, past research in the U.S. has almost exclusively been confined to the study of domestic acquisitions (Datta, Narayanan and Pinches 1992). Surprisingly little attention has been paid to international or cross-border acquisitions despite a significant increase in the number and value of such transactions in the last decade - according to Directors and Boards (1991, p. 54), "...the tilt towards cross-border dealmaking is expected to be one of the leading M & A forces during the 90 s". The dearth of research on cross-border acquisitions also comes as a surprise, in light of the increased research focus on global strategies in recent years.
The objectives of this paper are twofold. First, this paper addresses the issue of shareholder wealth creation for U.S. acquiring firms in cross-border acquisitions. Although a few studies have addressed the above question (Conn and Connell 1990, Doukas and Travlos 1988, Fatemi and Furtado 1988, Markides and Oyon 1991), their findings have been equivocal. The findings of this research are, therefore, expected to shed additional empirical light on the general appropriateness of cross-border acquisitions as a foreign direct investment strategy. Second, the study examines how relatedness and cultural distance impact wealth effects in individual acquisitions. The role of relatedness in mergers and acquisitions has been emphasized in the strategic management literature on domestic acquisitions - this study examines whether such relatedness influences shareholder value creation in cross-border acquisitions. Also, while cultural fit has been acknowledged as a key determinant of success in cross-border acquisitions, empirical examination has been lacking. This study provides empirical evidence on the influence that cultural differences have on shareholder value in acquiring firms.
The paper is structured as follows: first, the existing literature on the potential benefits associated with cross-border acquisitions is briefly discussed. Also discussed is the literature pertaining to the likely impact of relatedness and cultural distance on shareholder value creation in such acquisitions. In addition, the section identifies the hypotheses examined in the study. The next section describes the research method adopted, including, sample identification, sample characteristics, variable operationalization, and a brief discussion of the event study methodology used in analyzing the data. Finally, the results of the study are presented and discussed, followed by a discussion of their implications from the viewpoint of both researchers and managers.
Wealth Effects in Cross-border Acquisitions: Literature Review and Research Hypotheses
Shareholder Wealth Effects
Literature on cross-border acquisitions identifies a number of benefits for acquiring firms associated with such transactions. Cross-border acquisitions are motivated by the same strategic considerations and potential benefits that drive other direct foreign investment decisions: the availability of new markets, availability of scarce specialized resources, opportunity to achieve production efficiencies or as a means of reducing political risk (Cooke 1988). Cross-border acquisitions have been associated with helping acquiring firms overcome traditional trade and investment barriers (Mergers and Acquisitions 1990) allowing firms to exploit foreign market opportunities more quickly than other direct investment strategies (Root 1987). For example, while member countries of the European Community (EC) have reduced or eliminated tariffs within the community, significant tariffs still exist for outsiders. Such barriers provide an added incentive to foreign firms to establish operations within the EC; …