Foreign Acquirers Research Articles

Indirect corporate political strategy in cross-border acquisitions: influence of political affinity on target-dependent firm lobbying

Purpose To mitigate the impact of legitimacy concerns, firms often depend on strategic partnerships that enable them to navigate both complex political landscapes and regulatory environments. In this paper, the authors expand research into the dynamics of indirect and collective forms of corporate political activities (CPA), particularly focusing on multinational enterprises (MNEs) originating from countries with low political affinity with the host country and its allies. Design/methodology/approach Using a sample consisting of 2,173 friendly acquisitions in the USA made by 1,612 foreign acquirers originating from 66 countries, the authors used Tobit regression analysis to test the direct and moderating hypotheses. Findings The empirical evidence shows that acquiring MNEs grappling with heightened legitimacy issues due to low political affinity between the involved countries are more inclined to leverage target firms for effective lobbying resources. This tendency is amplified when the multilateral political affinity between the home and the host country's allies is also considered. Originality/value The evolving nature of global politics and the increasing scrutiny of corporate-political interactions necessitate a deeper understanding of indirect CPA strategies. The findings of this research shed light on how bilateral and multilateral political relations affect MNEs’ corporate political activities, specifically in the form of indirect, collective lobbying.

Context matters: The signaling role of foreign bidders’ reputation in cross-border acquisition contests

Existing research offers limited understanding of how foreign acquirers enhance their chance of success in cross-border acquisition (CBA) deals. Engaging and extending signaling theory, this paper argues that during the bidding stage of an acquisition deal wherein information asymmetry is heightened between the bidder and seller, reputation of foreign bidders can serve as a signal of quality, increasing their likelihood of winning a deal over domestic bidders. Importantly, this signal is only effective when there is strong nationalist sentiment in the seller's country. Analyses of 580 bidders in 275 cross-border multi-bidder acquisition contests between 1994 and 2016 support our predictions.

ISDS disputes, adjudication and cross-border M&As

ISDS claims are associated with reductions in the likelihood, frequency, and dollar volume of M&As from claimant home countries to respondent states. The host-state expropriation events underlying ISDS claims show no significant effects. The impact of ISDS claims remains after including traditional country risk metrics. Thus, ISDS claims play a unique role in guiding international investment. They prompt foreign acquirers to adopt risk-avoiding strategies, which affect various deal characteristics. We detect strong substantiation effects of investor-win cases and some acquittal effects of state-win cases. The ISDS claims related to direct expropriations and strong-institution respondent states typically produce more striking effects.

Private Equity Exits in the CEE:

Purpose of the article: The purpose of this article is to assess private equity exit strategies of CEE portfolio companies with regards to desired exit routes, including a cross-border deal aspect and a pre-exit holding period.Methodology/methods: This paper employs secondary data from the Mergermarket database containing information on more than 20 thousand private equity M&A deals and IPOs. General scientific methods such as analysis, comparison or generalization were used.Scientific aim: Only limited amount of research was carried out on the private equity exits in the region of central and eastern Europe. This study aims at shedding new light on understanding of private equity exit route decisions and timing in this particular geographic area.Findings: Exiting a CEE portfolio company, private equity investors tend to prefer exiting via trade sales over secondary buyouts or IPOs. They also tend to prefer foreign acquirers over domestic ones. A typical pre-exit holding period averages around 5 years.Conclusions: Our results show that while exiting a CEE portfolio company, private equity investors tend to divest by selling the company to a strategic investor (trade sales) rather than a financial investor (secondary buyouts) or exiting via an IPO. While exiting via trade sales and secondary buyouts, private equity investors tend to prefer foreign acquirers rather than domestic ones with a strong preference of acquirers from outside of the respective region. Typical holding period of a CEE private equity portfolio company remains on average in line with academic theory. Our paper contributes to the developing literature of private equity by using an extended and up to date dataset and introducing the research on the cross-border aspect of PE exit strategies.

Government Effectiveness, Institutional Distance, and Equity Ownership in Cross-Border Acquisitions by Emerging Economies: A Comparative Analysis

Our study enhances comprehension regarding the motivations behind cross-border acquisitions (CBMA) by Emerging Market Multinationals (EMNEs). This research explores the impact of both formal and informal institutional distance on equity ownership in emerging markets. Additionally, we posit that these direct correlations are more pronounced for EMNEs compared to Multinational Enterprises (MNEs). To validate these hypotheses, we compare the CBMA of firms based in developing countries with those in developed countries. Motivated by the need to better understand a prominent group of foreign acquirers, we examine acquisitions initiated by EMNEs over a 12-year period. We observe that acquirers from developing countries tend to hold greater equity share in targets located in more economically advanced nations, sharing cultural proximity. Our study’s empirical findings highlight the differential impact of economic distance on the equity share sought by acquirers based in emerging markets, contingent upon the level of government efficiency. Specifically, we note that this relationship shifts from a linear correlation in instances of low government efficiency to a curvilinear association in situations of high government efficiency. While the cultural distance seems to have a greater adverse effect on the degree of ownership taken in acquisitions for EMNEs compared to Emerging Market Multinationals (DMNEs). It lends support to the position that the context of institutions, and institutional theory, matter.

How Does Foreign Acquirers’ ESG Misbehaviour Exposure Affect the Completion of Cross‐Border Acquisitions?

AbstractThis study investigates how foreign acquirers’ environmental, social and governance (ESG) misbehaviour exposure affects the completion of cross‐border acquisitions (CBAs), and how this impact varies according to citizen power in the target country and the presence of deal rumours. Using a sample of CBAs attempted by Chinese listed firms from 2011 to 2019, we find that foreign acquirers with higher ESG misbehaviour exposure are more likely to fail in CBA completions. As citizen power in the target country increases, such acquirers face greater challenges in CBA completion. In addition, deal rumours can make matters worse (akin to pouring fuel on a fire), putting foreign acquirers with high ESG misbehaviour exposure in a more unfavourable position. Overall, our findings shed light on the concerns and resistance of stakeholders in the target country towards a foreign acquirer with ESG misbehaviour exposure and demonstrate boundary conditions for such an adverse effect.

Scaling versus Selling Startups: The Role of Foreign Acquirers in Entrepreneurial Ecosystems

Scaling versus Selling Startups: The Role of Foreign Acquirers in Entrepreneurial Ecosystems

Navigating political risk: Protectionism and ownership strategy in cross-border M&As

Rising protectionism sentiment has led to increased scrutiny of cross-border mergers and acquisitions (CBAs). Informed by the legitimacy-based view, we posit that heightened protectionism in the host countries triggers legitimacy concerns towards foreign firms and presents a political risk that influences foreign acquirers’ ownership strategy in CBAs. Analyzing CBAs in the recent decade, we find that foreign acquirers tend to acquire greater ownership stakes to mitigate the political risk associated with protectionism. Further, bilateral relationships between the host and home countries involved in CBAs regarding economic dependence, political animosity, and social interactions linked to migration have differential moderating effects either easing or intensifying legitimacy concerns.

Friends, foes, or “frenemies”: Intercountry relations and cross‐border acquisitions

AbstractResearch SummaryWe draw on the political institutions approach and relational embeddedness perspective to advance a relational theory of policy risk. We argue that policy risk negatively affects acquisition completion, but the strength of the effect is dependent on home‐host country relations. Home‐host country relations underpin host governments' motivation to commit to policies and influence foreign acquirers' perceptions of the credibility of such commitments. Using longitudinal event data on intercountry interactions, we measure the valence and strength of home‐host country relations and examine the relationship between policy risk and cross‐border acquisition (CBA) completion under cooperative, conflictive, and ambivalent relations. In a sample of 26,124 CBAs, we find that the relationship is negative and strong under conflictive relations, weaker under cooperative relations, and weakest under ambivalent relations.Managerial SummaryWe examine whether acquirers can use intercountry relations to infer and predict host governments' credibility of commitment to policies and evaluate the risk of arbitrary or opportunistic policy changes. Results show that policy risk decreases the likelihood of CBA completion, but the effect depends on home‐host country relations. The negative effect of policy risk is strongest under conflictive intercountry relations, weaker under cooperative relations, and weakest under ambivalent relations. Executives' evaluations of home‐host country relations in high policy risk environments can help assess the risk associated with completing CBAs and develop appropriate strategies to address potential issues.

Acquirer’s Corporate Social Irresponsibility, Deal Rumor and Cross-Border Acquisition Completion

We draw on signaling theory to examine how foreign acquirers’ corporate social irresponsibility (CSI) affects the outcomes of cross-border acquisition completion and how this impact varies according to the existence of deal rumor. We argue that foreign acquirers’ CSI is a negative signal that not only makes firms more likely to be rejected when they seek foreign acquisitions but also leads to longer times to completion even if they are approved. Deal rumor has warming-up effects that amplify the signaling effects of CSI, thereby putting foreign acquirers with CSI in a more unfavorable position. Analyzing a sample of 939 manufacturing sector cross-border acquisitions by firms from European developed countries in the United States during 2000–2019, we find strong support for our arguments.

Domestic and foreign acquisitions, plant survival and employment effects

ABSTRACT We estimate causal treatment effects of domestic and foreign acquisitions on plant survival, employment (growth) and the skill composition within acquired plants. To do so, we look at takeovers of private firms in Danish manufacturing and service sectors during the period 2002–2015. We use plant-, firm-, and industry-level information to control for the non-random selection of the acquisition targets, differentiated for domestic and foreign acquirers, by combining a difference-in-differences approach with a propensity score weighting estimator. Our results reveal positive effects on plant survival, employment (growth) and the skill intensity for domestic targets, while foreign targets reduce their skill intensity following an acquisition.

Scaling versus Selling Startups: The Role of Foreign Acquirers in Entrepreneurial Ecosystems

Scaling versus Selling Startups: The Role of Foreign Acquirers in Entrepreneurial Ecosystems

The real effects of earnout contracts in M&As

AbstractEarnouts address merger valuation risk by deferring payment of a large part of deal consideration and making it contingent on targets’ future performance. We find acquirers of unlisted targets using earnouts gain more (less) than those making full up‐front payments in cash (stock). Larger and older acquirers benefit more from earnout‐based deals, as do foreign acquirers and acquirers advised by top‐tier or boutique advisors. We address identification through the propensity score matching method and a quasi‐natural experiment. Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value. Deferred payments are larger after the SFAS 141(R) reform.

Acquirers and financial constraints: Theory and evidence from emerging markets

Financial crises in emerging market economies induce diverging patterns of ownership stakes and subsequent divestiture rates among domestic and foreign acquirers. We rationalize these empirical findings in a tractable model where domestic acquirers are subject to borrowing constraints. In contrast to standard fire-sale effects operating for acquisitions by foreign acquirers, acquisition patterns of domestic firms are shaped by a novel counteracting selection effect, resulting in larger acquired stakes and more persistent ownership. We present empirical evidence consistent with the model’s predictions using a large dataset of domestic and cross-border emerging market acquisitions over 1990–2007. The estimated contribution of selection effects is quantitatively significant, leading to 12% increases in stakes, 25% increases in full acquisitions, and 30% declines in divestiture rates among crisis-time domestic acquisitions. Our results demonstrate how financial crises can have both short- and long-run effects through the market for corporate control, by changing the set of acquirers and how long acquirers keep ownership.

Public sentiment is everything: Host-country public sentiment toward home country and acquisition ownership during institutional transition

Under strict scrutiny of public governance primed by international relation tensions, geopolitics, and the rise of social movements and public activism in the globalized economy, public sentiment is exerting increasing pressure on multinational corporations (MNCs). Utilizing the context of inward acquisition, a sensitive cross-border action that often triggers sentiment of host-country nationals, we theorize from the public sentiment perspective and the public thermostat analogy that foreign acquirers will adjust their ownership levels in target firms according to how they perceive to be acceptable and legitimate as expressed by host-country nationals’ public sentiment toward their home country. Using a sample of 410 acquisition deals from 22 foreign countries/economies into China during 2010–2017 and a sentiment analysis of 100,902 blog posts, we find that a host country’s public sentiment toward the acquiring firm’s home country is positively related to acquisition ownership levels, and has a mutualistic symbiotic interaction with the host region’s marketization level. Our study contributes to the study of informal institutions by proposing public sentiment as a new form of informal institution that is normative-cognitive whilst affective, and can be mobilized and communicated broadly and timely via a public sphere to confer social, political, and cognitive legitimacy to MNCs.

Corporate Acquisitions and Bank Relationships

Using a large dataset of firm-bank and ownership information for 23 European countries over 2008-2015, we study the dynamics of bank relationships after corporate acquisitions and the effects of changing banks on firm performance. Foreign acquirers do not rely on internal capital markets but keep targets’ domestic banks. With more domestic banks, firms increase fixed capital and trade credit. In contrast, domestic acquirers remove domestic but add foreign banks. The latter mainly help reduce the cost of financing. We further explore firm and bank heterogeneity and confirm cost of financing and information asymmetry as plausible reasons to change banks.

Cross-border buyout pricing

Using a dataset of 1149 global private equity transactions, we find that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones. We attribute this finding to informational disadvantages of foreign acquirers. Consistent with this idea, we find that the spread in valuation multiples narrows when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size. Further results suggest that local partnering in a syndicate serves as an effective remedy to avoid adverse pricing effects. The spread in valuation multiples is also less pronounced for large buyout funds, presumably because they draw on sufficient organizational resources to cope with cross-border-related transaction costs.

A BIT goes a long way: Bilateral investment treaties and cross-border mergers

We examine whether bilateral investment treaties (BITs), an external governance mechanism, stimulate cross-border mergers by protecting the property rights of foreign acquirers. Exploiting the staggered adoption and bilateral nature of the treaties, we find that BITs have a large positive effect on cross-border mergers. The probability and dollar volume of mergers between two given countries more than doubles after the signing of a BIT. The increase is driven by deals flowing from developed economies to developing economies and is concentrated in target countries with medium levels of political risk. The results suggest BITs are effective in expanding the global market for corporate control, particularly in the developing world.

Ownership and cross-border patent sales in M&A transactions

We examine the relation between acquirer and target firm ownership and the probability of a cross-border deal involving patents. By focusing on M&A deals involving intangible assets, we are better positioned to analyze technology sales. We show how different owners on the acquirer and the target side, and their relative position, are related to the decision to conduct a domestic versus cross-border transaction involving patent sales. We find that acquirer bank and fund ownership have very little association with cross-border M&A transactions involving patent sales. However, risk-averse family owners and insiders in an acquirer firm are negatively related to the probability if they are minority shareholders. In contrast, family owners and insiders have a positive association if they are the largest shareholder. We also illustrate how target owners shape cross-border M&A decisions. Family and fund owners in target firms are negatively related to the probability of a cross-border M&A transaction involving patent sales. This is attributable to the fact that the valuation of intangible assets can be overly complicated with foreign acquirers. Thus, target owners can likely secure better deals domestically.

Foreign investor reactions to risk and uncertainty in antitrust: U.S. merger policy investigations and the deterrence of foreign acquirer presence

Motivated by the potential for antitrust and competition policies to be protectionist in effect, we formulate the theoretical prior that merger policy deters foreign acquirer participation in local M&A markets. The policy risk and policy uncertainty characteristic of merger review may negatively affect foreign acquirers more so than domestic acquirers, thereby disadvantaging foreign acquisitions of local firms and deterring future cross-border investment activities. We test this prior by employing sector-level data on U.S. merger policy investigations and foreign acquirer presence in U.S. M&A markets over the 2002–2017 period. Our panel-data methodological approach indicates that the risk and uncertainty characteristic of U.S. merger policy disproportionately deters the acquisition activities of foreign investors. The empirical results also suggest that the application of competition and merger policies in other national jurisdictions – where there is less of a strong commitment to antitrust principles – might also be effectively protectionist.