The number and value of cross-border mergers has grown steadily and at last count appears to greatly exceed the comparable numbers for U.S. mergers. They also constitute an increasing fraction of total foreign direct investment (FDI) in emerging markets. Several recent studies help us better understand this increasingly important phenomenon. However, they almost universally focus on the role of governance in the transfer and addition of value to acquirers and targets involved. As a result, it remains unclear if there are other as yet undiscovered factors that remain important determinants of shareholder value for acquirer and target firms. To our knowledge, there are no studies at this point that provide a detailed comparison of the effects of cross–border mergers on the wealth of different groups of acquirer and target shareholders.
In this paper, we provide a comprehensive analysis of the wealth effects of cross–border mergers. Our inclusion of target and combined returns along with acquiror returns allow us to present a more complete picture than that provided by prior studies. For ease of exposition, we divide our sample into four groups based on the country where the acquiror and the target are headquartered. In particular, we refer to our subsample where the acquiror is from a developed market and the target from an emerging market as the DM-EM sample. Following a similar nomenclature, we define the DM-DM, EM-DM, and EM-EM samples. We find that no matter where the acquiror is from, developed market targets always earn higher returns than emerging market targets. We also confirm that cross border mergers are a greater source of synergy when both the target and the acquiror are from dissimilar markets. In other words EM-DM and DM-EM transactions create greater value than EM-EM and DM-DM transactions.
With respect to the acquirors, we confirm that acquirors in the DM-EM sample gain 1.56% more than acquirors in the DM-DM sample. This finding is similar to the findings of Chari et al. (2010). However, in contrast to their findings, we show that emerging market targets that are acquired by developed market acquirors earn abnormal returns that are lower than those earned by any other group of targets. We further test for the relation between the acquiror and target abnormal returns and find a negative relation for cross-market mergers (i.e. for the EM-DM and DM-EM groups).
The significant and negative relation does not hold when both the target and the acquiror are from markets at a similar level of development (i.e. either both firms are from developed markets or both firms are from emerging markets). This suggests that at least a part of the positive returns earned by the acquiror could be at the expense of the target and not due to the transfer of superior governance practices or intangibles.
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Cross–border acquisitions in emerging and developed markets
