Cross-border M&As between Developed and Emerging Countries: Determinants of Deal Completion and the Effect of Deal Direction

Faculty of Economics and Business

Double Degree Programme: International Economics and Business, Master of Science& International Economics, Master of Arts

Cross-border M&As between Developed

and Emerging Countries: Determinants of

Deal Completion and the Effect of Deal

Direction

Master Thesis

Johanna Wittenberg

First Supervisor: Dr. P. Rao Sahib

Second Supervisor: Prof. Dr. M. Ibañez Diaz

Abstract

The number of cross-border M&A deals between developed and emerging countries increased over the past years. However, not all announced M&As get completed. This paper investigates how the different types of M&A deals (vertical, horizontal or conglomerate), the cultural distance between the home and host countries as well as the motivation behind the deal (strategic or financial) influence the probability of deal completion. Additionally, it studies whether it makes a difference if the acquiring firm is from a developed or emerging country. The analysis is based on 1327 cross-border deals between 15 developed and 22 emerging countries from 2000 until 2017. It reveals that differences between the cultures of the home and the host country affect the likelihood of deal completion negatively. However, this effect is weaker if the acquiring firm is from an emerging country. Moreover, financially motivated deals show a higher probability of completion than strategically motivated ones. By contrast, financially motivated deals decrease the probability of deal completion if the acquiring firm is from an emerging market. These results suggest new managerial implications and can provide the basis future research.

Content

1. Introduction ... 1

2. Literature Review ... 4

2.1 The Acquisition Process ... 4

2.2 Differences between EMNEs and DMNEs Engaging in M&As ... 5

2.3 Factors Influencing M&A Completion and the Impact of M&A Direction ... 6

2.3.1 Horizontal, Vertical and Conglomerate M&As ... 6

2.3.2 Cultural Distance ... 7

2.3.3 Deal Motivation ... 8

3. Theoretical Framework ... 9

3.1 Horizontal, Vertical and Conglomerate M&As ... 9

3.2 Cultural Distance ... 10

3.3 Deal Motivation ... 11

4. Methodology ... 12

4.1 Model & Data ... 12

4.2 Variables ... 15

4.2.1 Dependent Variable... 15

4.2.2 Independent Variables... 15

4.2.3 Control Variables ... 17

5. Results ... 19

5.1 Descriptive Statistics and Multicollinearity ... 19

5.2 Results of the Probit Regression ... 19

5.2.1 Control Variables ... 22

5.2.2 Horizontal, Vertical and Conglomerate M&As ... 22

5.2.3 Cultural Distance ... 23 5.2.4 Deal Motivation ... 24 5.3 Robustness Checks ... 26 6. Concluding Remarks ... 29 6.1 Conclusion ... 29 6.2 Managerial Implications ... 30

6.3 Limitations and Future Research ... 31

References ... 34

1. Introduction

As globalization advanced in the past decades, an increasing number of firms decided to use mergers and acquisitions (M&As) as a way to expedite their businesses in foreign countries and on the international market. Especially the number of deals involving emerging countries is growing. Firms from developed countries often recognize an opportunity to expand into these fast growing markets. For example, the US-based company Walmart recently announced the acquisition of the Indian e-commerce firm Flipkart for as much as $16 billion (BBC News, 2018). According to the Zephyr database (Zephyr.bvdinfo.com, 2018), between 2000 and 2016 the number of M&As deals from developed countries targeting the BRIC states (Brazil, Russia, India China) more than doubled. However, not only show firms from emerging markets a growing attractiveness as a target but are also increasingly involved in M&A deals with developed countries as the acquirer. While in 2000 the number of M&A deals involving an acquiring firm from a BRIC country was 23, it increased to 352 in 2016. For instance, the Chinese car producer Zhejiang Geely Holding Group acquired the Swedish company Volvo Cars from Ford, the Indian firm Tata Motors acquired British Jaguar and

Land Rover, the Taiwanese BenQ purchased the mobile devices division of the German

enterprise Siemens and state-owned Russian Gazprom took over the Finish pipeline company

North Transgas oy. The increasing trend in the number of M&A deals between developed and

emerging countries is accompanied by a growing number of studies that investigate these deals (e.g. Malhotra et al., 2011; Sun et al., 2012; Nicholson & Salabar, 2013; Liu & Woywode, 2013; Munjal & Pereira, 2015; Meyer, 2018). These studies mainly discuss the differences in M&As when the acquiring firm is from a developed country compared to cases in which the acquirer is from an emerging country. They analyze aspects such as the post-merger performance or the drivers of the M&As. Developed and emerging countries often show great differences not only in their development level but also in their regulations and cultures. Companies originating from these countries also reflect such differences and show diverse characteristics.

well as the factors affecting the probability of the withdrawal (Muehlfeld et al., 2007; Aguilera & Dencker, 2008; Dikova et al., 2010; Reis et al., 2013; Lim & Lee, 2016). They stress the importance of the regulatory and cultural environment in the home and host country as well as the relatedness in the business between acquirer and target firm. However, these studies do not focus explicitly on cross-border deals between emerging and developed countries.

This paper aims to combine both streams of research and tries to answer the following research questions: What are factors influencing the probability of deal completion regarding M&As between firms from developed and firms from emerging countries? And does it make a difference whether the acquirer is from a developed economy targeting a company from an emerging country compared to when the acquiring firm is from an emerging country and targeting an enterprise from a developed market?

There is only limited research on this topic. However, Zhou et al. (2016) combine both research streams. They analyze different country-, firm-, and deal-level factors that have an impact on the deal completion and study whether the direction of the M&A (from developed to emerging countries vs. from emerging to developed countries) has a moderator effect using data from 1995 until 2010 for the BRIC countries. Indeed, they find that factors such as the legal environment have a stronger impact on the completion for M&A deals with the acquiring firm coming from a developed country, while prior M&A experience has a weaker effect on these M&As. Moreover, they find that a cash transaction as well as a large percentage of ownership stakes of the acquirer have a positive effect on the completion for M&As from developed to emerging countries while these factors increase the likelihood of failure for M&As with an acquiring firm from an emerging market targeting a firm in developed economy. Since the findings show that the direction of M&A makes a difference, further research is needed. On top of that, factors affecting deal completion are diverse and not all have been covered yet, especially regarding M&As involving emerging economies. Since research on M&A deals with emerging countries has so far mainly focused on the BRIC states, it only reflects a small part of international economic dynamics.

Since it is expected that the number and volume of M&As deals will increase in the future (Deloitte, 2017), it is important to fully understand the process as well as possible burdens to the successful completion. Due to globalization and high economic growth rates of emerging countries, it can be presumed that M&As between developed and emerging economies remain a crucial part for all deals. Hence, new insights in this research area could support managers in their decision making as well as the process of cross-border M&As with firms from alien environments.

2. Literature Review

In this section, I am going to review some of the existing literature on the completion of M&As and on M&As between developed and emerging countries. However, in order to analyze the completion of cross-border deals, it is important to fully understand the process and to identify possible bottlenecks for the acquirer and the target firm. Therefore, I will first outline the process of cross-border M&As.

2.1 The Acquisition Process

reasons that seem to frequently lead to the final failure of announced M&As. First, there is a misunderstanding between both parties and some important information has been initially neglected. Secondly, new information emerges during the public takeover process that significantly affects the outcome. For instance, the American tobacco company Philip Morris

International intended to acquire the Colombian firm Productora Tabacalera de Colombia.

However, during the public takeover process the US-firm discovered that the deal conditions demanded by the government were too much of a burden (Law360, 2018).

M&As between firms from different countries are even more complex than M&As between firms with a similar cultural background and show a higher probability of failure as cultural, linguistic, political as well as institutional differences form an additional burden (Quah & Young, 2005; Zhou et al., 2016). Especially the collection and evaluation of information becomes more complex when there is a difference in culture and language (Kyvik, 2013). There is a higher risk of misinterpretation and misunderstanding between both parties that might lead to the abandonment of the M&A. As developed and emerging markets show high differences on the country- but also on the firm-level (Lebedev et al., 2015), the risk of withdrawing a deal is particularly high for cross-border deals between these two markets. Thus, the process of M&As is complex and contains many bottlenecks that might lead to failure.

2.2 Differences between EMNEs and DMNEs Engaging in M&As

Why is there the possibility of different outcomes for outbound deals compared to inbound deals? In order to answer this, I will present the different characteristics of multinational enterprises from developed countries (DMNE) that invest in emerging markets as well as the characteristics of MNEs from emerging markets (EMNE) that decide to acquire a target firm in a developed market. By identifying the different characteristics of DMNEs and EMNEs, I derive different challenges for inbound and outbound M&As, respectively.

inexperienced often lack behind DMNEs who are leading in technology, management and global brands (Ramamurti, 2012; Sun et al., 2012). Hence, they are latecomers in the international market which imposes some disadvantages (Luo & Tung, 2007). Furthermore, the FSAs of EMNEs are often dependent on the CSAs (Li & Oh, 2016) which again leads to ownership advantages such as being able to operate in a difficult business environment, produce at low costs and to be able to meet the needs of customers in emerging markets (Sun et al., 2012). However, their CSAs are rather strong while their FSAs are weak since they are specific to the home country environment (Li & Oh, 2016). In order to improve the FSAs, EMNEs can access and absorb the assets of firms in developed markets using for instance acquisitions. Still, EMNEs often struggle absorbing such assets as they lack absorptive capacity (Li & Oh, 2016; Zhou et al., 2016). In contrast, DMNEs are interested in improving their CSAs and seek for endowments such as low labor costs and natural resources in order to improve their ownership advantage (Stiebale & Trax, 2011). As they lack the FSAs that are based on the CSAs of emerging markets, they might struggle in absorbing such CSAs (Zhou et al., 2016). Hence, there are differences in the ownership advantages of DMNEs and EMNEs as well as in the location advantages. Both types of MNEs seek to relocate in different locations as they seek different complementing assets and both have a great interest in exploiting new markets (Stiebale & Trax, 2011). In this paper, I will only focus on M&As as an internationalization strategy. Therefore, the internalization advantage of the OLI paradigm can be ignored here.

2.3 Factors Influencing M&A Completion and the Impact of M&A

Direction

Research concerning M&As revealed several factors at the country-, firm-, and deal-level that have an impact on its completion. In this paper, I am going to focus on three elements that are of special interest when studying M&As involving emerging economies: (1) the impact of horizontal, vertical or unrelated M&As, (2) the cultural distance and (3) the motives of M&As as well as the possible moderator effect of the deal direction. So far, no study analyzed these country- and firm-level factors explicitly for deals between developed and emerging markets. Moreover, the potential moderator effect of the deal direction has been neglected. Thus, additional research in this area is highly relevant and closes a research gap.

2.3.1 Horizontal, Vertical and Conglomerate M&As

stage of production), vertical (buyer-supplier relation) and conglomerate M&As (different industries and unrelated business activities). Due to the increasing globalization and the emergence of global value chains, relations between firms from developed and emerging economies are more complex and often refer to buyer-supplier relations. Thus, a more accurate differentiation is useful here. Rozen-Bakher (2017) also uses these three categories in order to investigate their impact on M&A integration. She finds that conglomerate M&As show the highest success during integration as there are only few overlaps in the organization and in the personnel which might lead to conflicts during the process of M&As. Aguilera & Dencker (2008) study the effect of industry relatedness on the completion of M&As and find a negative impact of related M&As. Since both parties have expertise in the same area, more frictions emerge during the negotiations as there is lower information asymmetry between the acquirer and target firm. Yet, these studies do not differentiate between domestic and border M&As. Lim & Lee (2016) analyze the link between industry relatedness and cross-border deal completion and find opposing results since a higher relatedness is associated with a higher probability of completion. Overlapping knowledge of both firms leads to an improvement in the data collection and interpretation process which reduces uncertainty during the takeover process and thereby makes a closure more likely. This is supported by the example of the Hummer acquisition. The president of GM China stated that one reason for the failure was that Tengzhong, which usually produces heavy machinery for road constructions, was lacking qualifications to build cars (People's Daily Online, 2018). Thus, the overlapping knowledge between both companies was too limited.

Deal Direction

What characteristics of DMNEs and EMNEs might have an impact on the effect of the type of M&A? First of all, EMNEs have the primary aim of obtaining valuable assets from foreign firms and are less interested in the corporate control (Lebedev et al., 2015). Furthermore, EMNEs are often interested in rather complementing than substituting expertise in order to gain additional knowledge (Boateng et al., 2008). Still, EMNEs often lack required expertise and capacity to bring the deal to completion. This is especially the case for vertical M&As, in which the EMNEs aim for “upgrading” within the value chain which requires sophisticated knowledge and capabilities (Farfan, 2005).

2.3.2 Cultural Distance

different countries, which in turn influences routines and values of the organization, the development of new products as well as the management of firms involved in M&As (Dikova & Sahib, 2013; Quer et al., 2011). Therefore, cultural distance is of particular interest when investigating cross-border M&As. Companies have to overcome “liabilities of foreignness” (Zaheer,1995) that are defined as the costs of entering a foreign market as well as “double-layered acculturation” (Barkema et al., 1996). This means that firms have to cope with the different corporate and national cultures. As already stated, a high cultural distance between the acquirer and the target firm makes the M&A process more complex as misinterpretation and misunderstanding of information becomes more likely which might lead to the withdrawal of the deal. This is supported by Dikova et al. (2010) who find a negative impact of differences in informal institutions on the completion of publicly announced M&As using a logistic regression analysis. Since informal institutions are based on the country’s national culture, they argue that the gathering of information in a relatively short period of time in a culturally unknown environment is challenging. Furthermore, it is more likely that the target and acquiring firm trust each other less, that conflict between the parties arises and that terms have to be renegotiated. Their findings are consistent with the results of Aguilera et al. (2004) and Reis et al. (2013) who studied the effect of cultural distance on deal completion.

Deal Direction

EMNEs have the advantage of being experienced to operate in challenging business environments and have lower learning barriers regarding culture, institutions and economy when entering a new market (Zhou et al., 2016). Moreover, since their internationalization is often driven by strategic asset seeking, liabilities of foreignness are less of an issue for them (Ramamurti, 2012). This is also supported by Quer et al. (2011) as they find that cultural distance has only a weak effect on the location decision of Chinese outward FDI and by Malhotra et al. (2011) who find that cultural distance has a greater impact on the internationalization strategy of US firms than on firms from emerging countries.

2.3.3 Deal Motivation

successful completion than ones based on financial motives. Since firms with financial motives rather focus on the short-term success of the deal, the acquirer is more risk-averse. In contrast, firms acting according to their strategic motives are long-term oriented, expect high returns from the takeover and are more risk-seeking.

Deal Direction

As already stated, DMNEs that invest in emerging markets mainly seek to exploit new markets, reduce operation costs and access country-specific resources (Nicholson & Salabar, 2013; Stiebale & Trax, 2011). Contrary, outbound M&As are mainly driven by acquiring intangible assets from firms of developed countries such as technologies, management skills or brands (Boateng et al., 2008; Deng & Yang, 2015; Lebedev et al., 2015). Especially the aim of EMNEs to seek strategic assets in a foreign country promotes long-term strategic objectives (Dunning & Lundan, 2008). Moreover, they seek such intangible resources and a fast entry in foreign markets in order to overcome their latecomer disadvantages in the global markets as well as to obtain FSAs. For instance, the Chinese firm Lenovo was able to overcome its latecomer disadvantage by overtaking the IBM PC business and thereby obtaining the brand name as well as the technology (Lebedev et al., 2015). Thus, in order to catch up with DMNEs, EMNEs are willing to engage in risky entry modes (Luo & Tung, 2007).

3. Theoretical Framework

Based on the literature, I develop hypotheses regarding the general effect of the country- and firm-level factors on the probability of completion of cross-border deals explicitly between developed and emerging countries but also on the possible moderator effect of the deal direction.

3.1 Horizontal, Vertical and Conglomerate M&As

number of potential targets compared to the other two types of M&A (Rozen-Bakher, 2017). Therefore, the acquiring firm is more willing to endure risks and the completion becomes more likely compared to conglomerate deals.

Hypothesis 1a: Horizontal M&As are more likely to be completed than conglomerate deals. Hypothesis 1b: Vertical M&As are more likely to be completed than conglomerate deals. However, I suppose that these effects are weaker for outbound M&As. Since EMNEs are rather interested in gaining additional knowledge and other valuable assets, overlapping knowledge bases have a lower effect during the negotiations. Moreover, since EMNEs are more willing to take risks during their internationalization, they are less sensitive regarding the additional uncertainty of unrelated M&As. Still, as these firms often lack crucial capabilities in order to acquire companies that are at higher stages of the value chain, the effect of vertical M&As on completion will be less strong for outbound deals.

Hypothesis 1c: The outbound deal direction negatively moderates the relationship between

horizontal M&As and the probability of completion such that the positive effect is less strong compared to inbound deals.

Hypothesis 1d: The outbound deal direction negatively moderates the relationship between

vertical M&As and the probability of completion such that the positive effect is less strong compared to inbound deals.

3.2 Cultural Distance

I expect a negative link between the cultural distance and the completion of announced M&As. Especially as countries with different levels of economic development are studied, a high cultural distance between the acquiring firm’s country and the target firm’s country can be expected, since countries with different development levels show high cultural differences (Lim et al., 2014). Therefore, cultural distance can impose a major burden on inbound and outbound M&As.

Hypothesis 2a: The greater the cultural distance between the acquirers’ and target firms’

national culture, the less likely is the M&A deal completion.

the target firm’s assets, making them less vulnerable to differences in culture compared to firms that seek to expand into foreign markets.

Hypothesis 2b: The outbound deal direction positively moderates the relationship between

cultural distance and the probability of completion such that the negative effect is less strong compared to inbound deals.

3.3 Deal Motivation

In line with Lim & Lee (2016), I expect the strategic motive to have a positive effect on the likelihood of completion. Since the acquirer is more risk-averse when the deal is financially motivated, there is also a higher risk of withdrawing from the deal during the public takeover phase compared to strategically driven deals. Acquiring firms with a strategic motive are aware of the uncertainty of such deals and therefore endure additional risks that emerge during the public takeover phase.

Hypothesis 3a: Strategically motivated M&As are more likely to be completed than

financially motivated deals.

However, I expect the effect to be stronger for outbound M&As. Even though, most motives for cross-border M&As between developed and emerging countries refer to strategic drivers, there are still differences in the time-orientation and risk aversion between inbound and outbound M&As. Particularly EMNEs are future-oriented and more willing to take risks in order to catch up with DMNEs. Accordingly, they are less risk-averse than DMNEs during the public takeover phase.

Hypothesis 3b: The outbound deal direction positively moderates the relationship between the

strategically motivated M&As and the probability of completion such that the positive effect is stronger compared to inbound deals.

4. Methodology

In order to test the theory, I apply a probit model to investigate the impact of the different factors on the success or failure of cross-border M&As. Here, announced deals that fail to accomplish completion are defined as a failure while the M&As that are actually executed after the announcement are defined as a success.

Therefore, data on deals between developed and emerging countries has been retrieved for a period of almost twenty years. This section aims to explain the method and data in more detail.

4.1 Model & Data

In line with previous studies (Zhou et al., 2016; Lim & Lee, 2016), a probit model is used to estimate the impact of the deal motivation, the cultural distance and the type of M&A on the probability of deal completion. Hence, it is assumed that the link between the likelihood of

Completion of M&As between Developed and

Emerging Countries Deal Direction  Inbound  Outbound M&A type  Horizontal  Vertical  Conglomerate Cultural distance  Power Distance  Individualism vs. Collectivism  Masculinity vs. Femininity  Uncertainty Avoidance M&A Motivation  Strategic Motive  Financial Motive

Figure 1 Theoretical Framework of Factors Affecting the Completion of M&As Between

deal completion and the explanatory variables can, in general, be described by the following model:

(1)

With pr being the probability of a successful deal completion, ɸ implies the normal distribution of the probit model, x presents the explanatory and control variables and β the regression estimators.

As this paper aims to estimate the effect of the deal direction, I differentiate between outbound and inbound deals using a dummy variable. Here, 1 indicates that it is an outbound deal, thus the acquirer is from an emerging country while the target firm is located in one of the developed countries. The value 0 represents an inbound deal, hence the acquirer firm is from a developed economy and the target from an emerging one. In order to estimate the effect of the direction on the deal completion, I will include the explanatory variables in levels first but also the interaction of my explanatory variables with the dummy variable outbound. Therefore, the model can be specified by

) (2)

Here, denotes whether the deal is horizontal, vertical or conglomerate, presents the cultural distances between the acquirer and target country in the dimension k, denotes whether the deal was strategically or financially motivated, gives information about whether the deal direction is inbound or outbound,

describes a set of control variables, serves as the error term and the indicator i represents the acquiring firm while the indicator j denotes the target firm of a deal.

Because 64.88% of the firms in the sample are involved in only one M&A deal throughout the sample, I decided to not make use of a panel model. Instead, I apply a pooled model and hence, assume independency of the observations.

investability and replicability of economies and appears to be suitable when analyzing M&A deals as the country’s investment opportunities are set into perspective (MSCI, 2018). It identifies 23 developed countries as well as 46 emerging and frontier countries. However, I exclude the West African Economic and Monetary Union from the data since I focus my analysis on countries.

The data on cross-border M&A deals was collected from the Zephyr database owned by the Bureau van Dijk. It gives detailed information on M&A deals around the globe including announcement date, deal status and value as well as the country of origin of the acquirer and target firm. Moreover, it provides background information about the involved firms (Zephyr.bvdinfo.com, 2018). I only include deals that are categorized as Mergers and Acquisitions and exclude rumored and assumed completed M&As from the dataset. The final dataset consists of 1327 cross-border M&As from 15 developed and 22 emerging countries. A complete list of all countries can be found in the Appendix A.

Table 1 Distribution of Inbound and Outbound M&As

Inbound (n=696) Outbound (n=631) Total (n=1327) Emerging Countries:

LatinAmerica and Caribbean 72 31 103

Sub-Sahara Africa 42 22 64

Middle East and North Africa 9 0 9

Asia and Pacific 448 558 1006

Europe and Eurasia 125 20 145

Developed Countries:

North America 93 177 270

Asia and Pacific 316 323 639

Europe and Eurasia 287 131 418

Time Period: 2000-2005 136 44 180 2006-2011 289 210 499 2012-2017 271 377 648 Completion Status: Completed 639 (91.81%) 482 (76.39%) 1121 (84.48%) Withdrawn 57 (8.19%) 149 (23.61%) 206 (15.52%) Source: Zephyr.bvdinfo.com (2018)

followed by the countries from Europe and Eurasia. The emerging countries from the Asia and Pacific region also were the most active in the outbound deals, while the remaining regions only participated in few deals as an acquirer. The developed countries in the Asia and Pacific region show the highest share as both, the acquirer in inbound deals and the target in outbound deals. However, the developed countries from the Europe and Eurasia region participated in a high share of inbound deals as well while North American region is an attractive target in outbound deals. Furthermore, the number in outbound deals grew frequently over the studied time period, while the number of inbound deals rather stagnated in my sample. The majority of deals was completed although the share of completed deals is higher for inbound than for outbound M&As.

4.2 Variables

Next, I will specify my variables, namely the dependent, independent and control variables, that I use in order to estimate equation (2).

4.2.1 Dependent Variable

The dependent variable is a dummy variable describing whether a deal was completed or withdrawn after it was announced using the deal status from the Zephyr database. The deal status “completed” has a value of 1 and the status “withdrawn” has a value of 0. Furthermore, only deals that were announced between 01/01/2000 and 04/01/2017 are analyzed. Thus, deals that were completed in 2000 but announced before are excluded. Moreover, deals that were announced before 04/01/2017 are included as successful if they were completed before 04/01/2018 and have a value of 0 if no completion took place within this year. Since the majority of deals are completed within one year after the announcement, I assume that the deal was a failure if no completion occurred so far (Zhou et al., 2016).

4.2.2 Independent Variables

Horizontal, Vertical and Conglomerate M&As

definitions of horizontal, vertical and conglomerate M&As are in line with Rozen-Bakher (2017).

Cultural Distance

In order to set the countries’ culture into perspective, I apply Hofstede’s cultural dimensions. Here, I only focus on the four original dimensions power distance, individualism vs. collectivism, masculinity vs. femininity and uncertainty avoidance. All four dimensions are taken into account individually as this can give additional insights about which factors have a crucial effect on the deal completion. Data of the countries’ individual scores in the different dimensions was collected from Geert Hofstede (2018) and completed by Hofstede Insights (2018) and range from 0 to 100. As Mauritius has no individual country score, I assume that its culture is similar to the culture of a neighboring country. Hence, I use the cultural dimension score of India for Mauritius. This is in line with other studies (e.g. Bochner & Hesketh, 1994). As I am interested in the differences in culture, I apply the Kogut and Singh formula in order to estimate the cultural distance for a single dimension (Kogut & Singh, 1988).

(3)

Where the presents the index for Hofstede’s kth cultural dimension for the home country i and the index score for the host country j, respectively. denotes the variance in the kth cultural dimension in this sample.

Deal Motivation

motives. However, both categories are overlapping, making a differentiation difficult since many economic drivers are at the same time strategically motivated. Therefore, both motives are pooled under the strategic motivation (Lim & Lee, 2016). Long-term wealth, obtaining a competitive advantage and an increasing market share, economies of scale and scope, the access to additional resources and capabilities as well as the expansion to new markets refer to this category. Therefore, I assign a rationale such as “Bridex Singapore will tap KP Automation's network to create a sales and distribution center for its products in the Philippines” to be strategically. Still, some rationales could not be assigned to a category as too few information was given or the acquirer and target had different motives for the M&A. I excluded these deals as no clear assignment could be made. Also, some firms named financial as well as strategic reasons for a takeover. In this case, the motivation that was explained in more detail and named first is assumed to be the primary motive such as “The injected capital will be used by Reyphon Jiangxi to expand production capacity, develop new products, strengthen sales and distribution network and as working capital.” Working capital is financially motivated, but still most of the purposes are strategically motivated which is why I assigned the rationale to be strategic. However, rationales such as “… it was announced that the transaction will enable Kingsignal Technology to reduce its debt ratio and to expand its business internationally” give equally financial and strategic reasons and thus, are excluded from the sample for clarification.

4.2.3 Control Variables

interested in the differences between countries and apply again the Kogut and Singh formula as it corrects for variations in the variance (Kogut & Singh, 1988)

Furthermore, I include control variables on language, prior colonial relation and geographical distance as these factors show potential to impact the M&A completion probability as well. The data is conducted from the GeoDist database (CEPII, 2011). A dummy variable captures whether the acquiring and target countries have the same primary official language with 1 showing that they have a common language and 0 otherwise. If both countries have ever been in a colonial relationship the dummy variable has the value 1 and 0 otherwise. The geographical distance is presented by the simple distance in kilometers between the countries’ most populated cities.

On the firm-level, multiple dummy variables are applied. First, there is a dummy variable on the acquirer firm’s ownership. The value 1 presents that the owner of the firm is a “Public authority, State, Government” while 0 implies a private ownership. In case the acquirer firm is public owned, the government’s strategy has a crucial effect on the M&A success. Second, I use a dummy variable for prior M&A experience in the same target country. Hence, the value 1 describes firms that already have takeover experience in the same country but in a prior year, while 0 captures firms that have no prior M&A experience or they conducted experience in different countries or acquired all target firms in the same country within the same year. Third, the operating revenue of the acquiring firm one year prior to the deal announcement is included since firms with a sound financial performance are more willing to take risks than firms that experience financial hardship. Here, the Skewness-Kurtosis test of normality shows that taking the logarithm of the revenue is more suitable. The information about ownership status and revenue was collected from the Zephyr database as well.

On the deal-level, there is a control variable for the deal value as well as for the method of payment. Again, the normality test suggests using the logarithm of the deal value. The method of payment is expressed by a dummy variable. It attains the value 1 if the payment was made in cash and 0 otherwise. This data was provided by the Zephyr database as well. I exclude controls for the target firm ownership status and revenue as it does not offer additional insights to the model. I also neglect the M&A attitude as too few deals are considered as hostile in the sample.

categories (Prob > chi2< 0.05). Similarly, I include year-fixed effects in order to control for variation among time that is not explained by the probit model. This is also supported by the joint F-test (Prob > chi2 = 0.00).

Next, the results of this model are analyzed.

5. Results

In this section, I am going to present and discuss the results of the empirical analysis that I specified in the prior section. I will show the summary statistics and the possible issue with multicollinearity first.

5.1 Descriptive Statistics and Multicollinearity

Table 2 shows the summary statistics for the full data set as well as the correlation matrix. Even though the correlation between some variables is significant, most correlation coefficients are under 0.7 which is an often applied cut off level in research. The variables for the regulatory quality distance, the corruption control distance and the rule of law distance between the home and host country show a high correlation with coefficients above 0.7. Still, the variance inflation factors (VIF) of these legal environment variables are ranging between 4.36 and 5.22 and therefore under the threshold level of 10 just like the VIFs of the other variables in the dataset. Hence, I conclude that there is no issue with multicollinearity. The VIFs as well as the summary statistics for in- and outbound deals separately can be found in the Appendix B. Furthermore, I apply White’s standard error in order to deal with the heteroskedasticity in the model.

5.2 Results of the Probit Regression

Table 3 Results of the Probit Regression on Probability of Deal Completion

(1) (2) (3)

VARIABLES Model 1 Model 2 Model 3

Horizontal -0.112 -0.227 (0.121) (0.175) Vertical 0.214 0.633 (0.219) (0.419) Power Distance 0.0998 0.104 (0.0769) (0.108) Individualism -0.0170 -0.117* (0.0587) (0.0652) Masculinity -0.0174 -0.00274 (0.0619) (0.0738) Uncertainty Avoidance -0.0229 -0.0457 (0.0415) (0.0511) Deal Motivation -0.00614 -0.589** (0.135) (0.258) Outbound -0.467 -2.087* (1.120) (1.244) Horizontal*out 0.156 (0.240) Vertical*out -0.689 (0.504) Power Distance*out 0.0789 (0.169) Individualism*out 0.387** (0.154) Masculinity*out -0.0684 (0.115) Uncertainty Avoidance*out 0.0722 (0.0653) Deal Motivation*out 0.825*** (0.318) Regulatory Quality -0.323*** -0.300*** -0.256*** (0.0890) (0.0889) (0.0889) Corruption Control 0.252*** 0.270*** 0.260*** (0.0843) (0.0840) (0.0857) Rule of Law 0.386*** 0.369*** 0.359** (0.137) (0.140) (0.144) Common Language 0.124 0.126 0.148 (0.285) (0.373) (0.425) Colony 0.482* 0.404 0.399 (0.283) (0.302) (0.323)

Distance 3.89e-06 1.12e-07 1.12e-06

(2.86e-05) (3.05e-05) (3.27e-05)

Method of Payment -0.127 -0.121 -0.104 (0.145) (0.147) (0.148) Acquirer Ownership -0.0164 0.0405 0.0444 (0.311) (0.312) (0.326) Deal Value -0.0260** -0.0264*** -0.0253** (0.0102) (0.0103) (0.0106) Acquirer Revenue 0.0171 0.0155 0.0133 (0.0186) (0.0189) (0.0200) M&A experience 0.473*** 0.471*** 0.495*** (0.169) (0.169) (0.168) Constant 0.638 0.703 1.687 (1.368) (1.452) (1.545) Observations 1,327 1,327 1,327

Acquirer Country Fixed Effects YES YES YES

Target Country Fixed Effects YES YES YES

Year Fixed Effects YES YES YES

Industry Fixed Effects YES YES YES

Log-likelihood -328.7 -326.7 -318.7

Wald Chi2 449.4 458.2 476.4

Pseudo R2 0.426 0.430 0.444

5.2.1 Control Variables

First, I will discuss the results of the control variables and focus on the most outstanding effects. In all three models, the variables of the legal environment show significant effects. The impact of the distance in regulatory quality on the probability of deal completion is negative. The more the acquiring country and the target country differ in their laws and policies concerning the private sector, the more unlikely is the deal completion. However, the other two measures of formal institutions show the opposite effect. High differences in control of corruption and the rule of law increase the likelihood of a deal success. While the effect of regulatory quality is in line with the literature (Zhou et al., 2016; Dikova et al., 2010), the other two regulatory control variables contradict the findings. However, these studies used alternative measures of the legal environment as they focused on exposure to risk and a sound regulatory business environment which might explain the outcome. Furthermore, the deal value has a significant negative impact on the probability of deal completion for all three models. The higher the volume of a deal, the higher is the risk and hence also the probability of withdrawing the deal. Acquirers that already gained M&A experience in the same target country show a higher probability of completing the next deal in that country. Again, this effect is significant and valid for all three models.

The sample shows a high rate of completion as only 15.5% of the deals were withdrawn (see Table 1). This rate is lower than the withdraw rate of most other studies (Holl & Kyriazis, 1996; Zhou et al., 2016; Dikova et al., 2010), as most of these deals are probably well-prepared and planned in advance. Still, the completion rate for inbound deals is with 91.81% higher than the completion rate of outbound deals with 76.39%. Table 3 also shows that outbound deals have a lower likelihood of completion than inbound deals. This effect is significant in the full model (p<0.1). This might reflect the lack of experience of EMNEs as they are rather young and often miss critical resources such as financial assets compared to the DMNEs (Ramamurti, 2012). As the coefficient in the probit model only gives information about the effect direction but not about the magnitude, I estimate the marginal effect of the individualism distance for the full model separately. The probability of deal completion decreases by 25.33% when the deal direction is outbound. A table providing all marginal effects can be found in the Appendix D.

Next, I will discuss the explanatory variables and interaction effects with outbound deals.

5.2.2 Horizontal, Vertical and Conglomerate M&As

likelihood of completion than conglomerate deals. However, the effect is not significant (p>0.1). Vertical M&As have a higher likelihood of completion than conglomerate deals but again this relationship is not significant (p>0.1) which is why there is no evidence supporting hypothesis 1b either. The reason for the higher probability of success in vertical M&As might be due to the fact that the acquirer and target often worked together prior to the M&A as they are both part of the same value chain. The joint work experience makes the success more likely. Taking into account the deal direction, I cannot confirm that in the case of outbound deals, the effect of vertical and horizontal deals compared to conglomerate ones is weaker. Even though the sign of vertical M&As in outbound deals is in line with hypothesis 1d, the effect is insignificant. The sign of the horizontal M&A contradicts hypothesis 1c. Moreover, the effect is insignificant as well. Hence, not any of the hypotheses concerning the type of M&A could be confirmed.

5.2.3 Cultural Distance

probability of deal completion by 5.09% on average. Figure 2a illustrates this effect. As the distance in individualism increases, the likelihood of completion decreases in the case of inbound deals. In contrast, the probability of deal completion increases as the distance grows for outbound M&As. Still, outbound deals show a lower likelihood of completion. As the distance increases, they can overcome this disadvantage. Figure 2b demonstrates the burden of outbound deals even stronger. Compared to inbound deals, the probability of completion is already negative. As the general effect of an increasing individualism distance is negative, the likelihood of completion decreases for both deal directions. However, as there is a positive relation between distance and deal completion for outbound deals, the negative effect is weaker. This results in a higher likelihood of completion compared to inbound deals given that the distance is large enough. Here, the distance has to be larger than 10.

Figure 2 Simulated Impact of the Individualism Distance on M&A Completion a) Single Marginal Effect b) General Marginal Effect

5.2.4 Deal Motivation

The results regarding the deal motivation contradict hypothesis 1a as there is a negative link between a strategically motivated deal and the likelihood of success. In the full model, this relationship is also significant (p<0.01). Here, it is estimated that the probability of deal completion is 7.75% lower in the case of a strategic M&A rationale compared to financial ones. This result is also not in line with existing research on the effect of deal motivations (Lim & Lee, 2016). The reason for the finding of a negative relationship might be that the deals that are strategically motivated show a higher risk per se. If a firm decides to expand its business in a foreign country and operate in an alien environment, this strategy already contains high risk. This can be illustrated by considering the Walmart example from the

growing Indian e-commerce market (Pham, 2018). Thus, its motive for the acquisition is strategic. Still, it involves a lot of risk as the development of the e-commerce sector in India and the future success of Flipkart remains uncertain. Therefore, companies with risky strategic rationales try to avoid any additional risk that might emerge during the renegotiations. The firm is more sensitive to internal risks of the target firm which makes it more likely that the acquiring firm withdraws the deal. In contrast, if a firm carries out M&As because of financial motives, it selects target countries and firms that imply a lower risk a priori. This is also supported by the correlation coefficients in Table 2. It shows a positive and significant correlation between the deal motivation and the cultural distance measures of power distance and individualism as well as the distance in the rule of law. Hence, a strategic motivated deal is correlated with greater differences between the home and host country while financial motives are correlated with lower distances. The interaction effect of the deal motivation and deal direction is positive and significant as well (p<0.01). In the case of outbound deals, the likelihood of success increases by 10.85%. Thus, it supports hypothesis 3b that predicts a positive link between the strategic motivation and outbound deals as EMNE are less risk-averse during the public takeover phase. This is illustrated by Figure 3. In the case of inbound deals, a financially motivated deal has a higher probability to be completed than strategically motivated M&As. In contrast, outbound deals show the opposing effect, since financially driven deals are less likely to be completed compared to strategically ones. Also Figure 3 shows that the probability of completion is lower for outbound deals in general.

Figure 3 Simulated Impact of the Deal Motivation on M&A Completion

5.3 Robustness Checks

Finally, I also perform some robustness tests in order to verify the findings. First, I use a logit model instead of a probit regression. The significance levels changed but the impact direction remained the same as in Model 3 in Table 3. All robustness checks can be found in the Appendix E.

Next, I replace Hofstede’s measures of the four cultural dimensions by an alternative measure. Hofstede originally collected his data from surveys of employees from a single company (IBM) in 70 countries. This work was updated and expanded over the years. The GLOBE project surveyed managers from different firms in 62 countries for its study and defined additional cultural dimensions (Venaik & Brewer, 2008). However, I only use the dimensions that are compatible to Hofstede’s dimension in order to produce comparable results. Therefore, I include the dimensions of power distance and uncertainty avoidance as well as gender egalitarianism, assertiveness, institutional collectivism and in-group collectivism. While gender egalitarianism and assertiveness refer to the masculinity dimension of Hofstede, institutional collectivism and in-group collectivism are similar to his individualism measure. In order to estimate the cultural distances, I apply again the Kogut and Singh formula (Kogut & Singh, 1988). Although, I calculate an index for the distances in masculinity and individualism using the referring GLOBE dimensions in each case. As the GLOBE project provides cultural measures for fewer countries, I had to use a proxy for five countries which makes the data less precise. An overview of the proxies used can be found in the Appendix F. I re-estimate Model 3 with the alternative measures. The outcome shows that most effects are similar to Model 3 in Table 3. However, there are some differences as the relationships between individualism and deal completion as well as its interaction with outbound on deal completion are not significant anymore. Three of the four cultural interaction variables switched the sign. Moreover, the interaction term with uncertainty avoidance has a significant effect now. Still, the previous findings regarding the deal motivation, the mainly negative effect of cultural distance and the impact of deal direction on this effect are supported. Differences in the definitions of the dimension and therefore in the scores and distances might explain the different outcomes (Venaik & Brewer, 2008). As I had to substitute more missing data in the GLOBE dataset, I assume that the Hofstede measurement is more accurate for this study.

Uncertainty avoidance has a positive and significant effect on the probability of deal completion. Horizontal deals show a higher probability of deal success compared to conglomerate M&As but the interaction term with the deal direction reveals that in case of outbound deals the relationship is significantly negative. The sample results also show some opposing signs in the cultural distance and its interaction terms compared to the full model, although these findings are insignificant. In contrast, the subsample containing the remaining emerging markets supports the findings from Table 3 as the only differences are the significance levels and the effect of the power distance measure for outbound deals. Still, strategically motivated deals show a lower likelihood of completion than financially motivated ones in both samples, although this effect turns positive for outbound deals. Moreover, the effect of cultural distance is negative for the majority of the dimensions and, in the case of outbound M&As, this effect is often weaker. Splitting the full sample into two different subsets also reveals that the use of the BRIC states as proxy for emerging markets can be misleading as their outcome differs compared to other emerging countries.

As the global financial crisis occurred within my time period of investigation, I also perform a Chow test in order to investigate whether the financial crises should be treated as a breaking point in the data set. Therefore, I divide the dataset into two time periods: the first one from 2000 until 2009, thus including the financial crisis and the second one from 2010 until 2017 including the post-crisis period. Indeed, the Chow test reveals that the regression line for both periods is not the same with Prob>chi2=0.0022. Hence, the structure of the model is different in the time period before the financial crisis compared to the period after this event as the crisis had a major impact on the global economy.

Endogeneity does not pose a problem in my model, since the data consists of many exogenous variables that are time-invariant and already reflect what could have led to an endogeneity issue such as the national culture, colonial relationship or geographical distance.

It is possible that acquiring firms only approach target companies based on their host countries. The acquirer aims to expand its business to this country and thus approaches potential firms there. This would imply a potential sample selection bias. However, this issue does not exist in my model. The rationales of a deal are diverse and not only limited to the motive of business expansion. Thus, M&As are not just based on the target country characteristics but also on the target company characteristics.

6. Concluding Remarks

In this last section, the findings of the thesis are discussed and conclusions from the analysis are drawn. Based on this, managerial implications as well as limitations of this thesis are evaluated and recommendations for further research are given.

6.1 Conclusion

This paper was aiming to give additional insights on the completion of M&A deals exclusively between developed and emerging markets as research in this area is limited. These deals involve a lot of risk as the acquiring country and target country show high differences in many aspects such as culture and legal frameworks. Still, the number of cross-border M&As between those countries is increasing since emerging markets become more and more important in the global economy. Hence, studying the factors that have an impact on success of such deals is crucial. Therefore, I analyzed the effect of the type of M&A (horizontal, vertical or conglomerate), the cultural distance between the home and host country and the deal motivation on the likelihood of deal completion. In fact, a better understanding of this topic might lead to a higher rate of deal completion and to the avoidance of additional costs for expanding firms. Moreover, it is important to acknowledge that not only firms from developed markets acquire companies in emerging countries but that an increasing number of M&As involve an acquiring enterprise from an emerging economy targeting firms from developed markets. As DMNEs and EMNEs show different characteristics, the deal direction has an influence on the deal completion as well.

individualism are not robust. Still, all robustness tests support that cultural distance has a mainly negative effect on deal success and the outbound deal direction moderates this relationship positively. Strategically motivated M&As lower the probability of deal completion compared to financially motivated deals. The a priori higher risk of these deals might be an explanation for the negative impact. Again, the deal direction has an influence on the effect since strategic motives increase the likelihood of completion compared to financial motives for outbound deals. These findings are robust, given that the companies have some experience and routine in carrying out cross-border deals that involve emerging markets. Hence, I can answer my initial research questions about the factors influencing the deal completion and the effect of the deal direction. The analysis reveals that cultural differences between the host and home country as well as the rationale behind the M&A deal influence the probability of deal completion between firms from developed and firms from emerging countries. It can be confirmed that it makes a difference whether the acquirer is from a developed economy targeting a company from an emerging country compared to when the acquiring firm is from an emerging country and targeting an enterprise from a developed economy. Thus, a moderating effect of the deal direction can be identified.

These results also give new insights for the companies involved such that the strategy and the M&A procedure of companies should be adjusted to the circumstances. Therefore, I will first discuss possible implications for the firms that are involved in such M&A deals before I present the limitations of this paper as well as possible future research.

6.2 Managerial Implications

Initiating a M&A deal is costly for firms. The firm has to spend resources on the searching process and on the analysis of the potential partner firm. Especially deals between developed and emerging countries require preparation due to their complexity and thus include high costs. The abandonment of a deal means that these expenditures are wasted. Moreover, the acquiring firm has to pay a fine when withdrawing from an announced deal in some cases and the reputation of the company might suffer which could affect future deals (Zhou et al., 2016; Dikova et al., 2010). Hence, it is of great interest of the acquiring firms to avoid such abandonment. Based on the outcome of this paper, I derive managerial implications that reduce the risk of the withdrawal of a deal.

reduced. The EMNE should familiarize itself with the target firm and its home environment in order to avoid potential misunderstandings and conflict during the public takeover phase. Moreover, EMNEs should select the target carefully when the deal is financially motivated in order to raise the likelihood of deal completion. Hence, EMNEs should emphasize the screening process. As experience increases the likelihood of deal success (Zhou et al., 2016; Dikova et al., 2010), some M&A routine might support the acquisition efforts of firms from emerging countries as well. However, EMNEs do not have to be concerned with the cultural environment. Since they can cope easily with a culturally different host country, they should not avoid deals with a firm from an alien environment.

In contrast, DMNEs should mind the host country’s culture. The closer the target country’s culture, the more likely is the completion of the deal. Hence, in some cases they should avoid M&A deals with host countries that have a national culture which is too different from the home culture since the risk of withdrawal would be too high. Even though inbound deals show a higher probability of completion in general, DMNEs should emphasize their selection process as well, in case the deal is strategically motivated. These risky deals require a reliable target company. Thus, the partner has to be selected carefully. This also means that it is recommendable for DMNEs to follow the Uppsala model. This leads to investments in countries with similar cultures first in order to gain experience, before investing in countries that show greater differences. This approach might increase the likelihood of a successful completion for later M&As as well.

Hence, firms that decide to engage in cross-border deals between developed and emerging countries need to be prepared and well-informed in order to reduce the risk of such acquisition. If firms do not have the internal resources and expertise, external support such as consultants should be considered. Especially the selection process is crucial here. Even though this means that the firms have to invest more prior to the public takeover phase, it lowers the risk of withdrawal and therefore the overall costs. However, it still has to be considered that in some cases, an uncompleted M&A might be better for a firm than a completed M&A which fails after large investments. Indeed also after a completed M&A it cannot be guaranteed that the advantages arise as anticipated. However, M&A deals can be of great value and are often a basis for future success despite of the risk of failure.

6.3 Limitations and Future Research

since there is no general definition of developed and emerging markets, the use of another classification would be of interest as well. Moreover, the separation of the sample into deals involving the BRIC states and deals involving other emerging countries showed that the BRIC states differ from other emerging economies. As many studies investigating M&As involving emerging countries used the BRIC states to represent emerging markets (Zhou et al., 2016; Sethi, 2009; Rabbiosi et al, 2012), it would be interesting to replicate these studies using a broader definition of emerging countries as well.

I decided to use a pooled model as most firms were involved in only one M&A in the sample. Still, a panel model should be an option for future research given that enough data is available.

Furthermore, the rationales provided by the Zephyr database are often limited in the availability but also in the provided detail. The Zephyr rationales are based on press releases and other corporate documents (Reiter, 2013). Since this paper shows that the deal rationale behind the M&A has a significant impact on the deal completion and this finding contradicts other studies on deal motivation and completion (Lim & Lee, 2016), an in-depth case study might be of interest in order to fully understand the process and outcome.

The Chow test revealed a different structure for the M&A deals in the periods before and after the global financial crisis. In this paper, I ignore this finding as the main focus is not on the deal development over time. However, an in-depth investigation of the different structures would be of interest here as well. Studying the implications of the financial crisis such as increased protectionism on the structure of M&As presents new insights and a better understanding of present cross-border M&A deals.

As it was not the main research aim of this paper, I did not investigate the outcome of the legal environment measures in more detail. Still, future research should analyze the unexpected outcome of the corruption control as well as the rule of law variable.

Moreover, the deal rationales showed that many companies already worked together prior to the M&A deal. This was not in the focus of this paper, although it would be of interest whether prior cooperation between the firms from developed and emerging markets affects the deal completion. Here, the type of prior governance mode of the cooperation and its impact on the completion can provide a better understanding of this research area too.

Additionally, I ignore the period after the M&A is completed. Even though the acquisition took place, it does not imply that the firm then is successful. Future studies should investigate whether the same factors that reduce the likelihood of deal completion also decrease the performance of the firm after the takeover and whether the affect is the same for EMNEs and DMNEs.

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