The differences between domestic and cross- border M&As: Empirical evidence from the United States

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The differences between domestic and

cross-border M&As: Empirical evidence from the

United States

Abstract

This paper provides empirical evidence on the differences between cross-border and domestic mergers and acquisitions (M&As). It contributes to the existing literature by studying these differences testing three hypotheses. An event study, the market-adjusted method, is used to calculate the cumulative abnormal returns (CARs) of share prices as an indicator of firm performance. It uses a sample of 1,044 deals for the years 2005 to 2015 to investigate the differences between performance, bid premium and the integration of acquisitions by using the Mann-Whitney U test and the Chi squared t test. Although this study does not find significant evidence that differences among cross-border and domestic M&As exist, it does find significant differences regarding the performance and bid premiums of firms regarding the type of acquisition integration. This research concludes that firms pay a higher bid premium for a vertical acquisition and that these acquisitions underperform compared to horizontal acquisitions.

Keywords: Event study, cross-border acquisitions, cumulative abnormal returns, bid

premium, acquisition integration

JEL classification: G140

Thesis Double Degree Master International Financial Management

Wouter Vijge | s2174863 Faculty of Economics and Business

Rijksuniversiteit Groningen Supervisor: Dhr. M. Reijenga

Uppsala University Assessor: Dr. W. Westerman

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1. Introduction

“In some mergers there truly are major synergies -- though oftentimes the acquirer pays too much to obtain them -- but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.”

- Warren Buffet, 1997 Berkshire Hathaway annual report

This somewhat old, but still relevant quote from Warren Buffet is suitable to describe the current state of research regarding the performances of mergers and acquisitions (M&As)1, because the existing research has not been consistent. Furthermore, the quote also highlights the issue regarding the high price acquirers often pay for the target firms. With the AB InBev-SABMiller deal getting close to completion (Financial Times, 2016), where AB InBev reached an agreement to buy SABMiller for $107 billion (Jarvis and Buckley, 2015), the discussion regarding the high value of the offer price is highly relevant once again.

Over the last decades, the field of M&As has received much attention from the academic world and it is therefore a topic of interest in which research is abundant. When looking at the history of M&As, it can be seen that it is not a new phenomenon. The first M&A wave in the United States, for example, already occurred from the 1890s to 1905 (Sudarsanam, 2003). Previous literature generally concludes that M&As create value for the shareholders of the target firms (e.g. Goergen and Renneboog, 2004; and Bertrand and Betschinger, 2012) but the wealth effects for shareholders of acquiring firms are less clear. This is especially true regarding the research focused on whether cross-border M&As differ from domestic M&As.

Worldwide, several waves of corporate M&As have led to substantial restructuring in different parts of the world. Even though empirical studies on M&As are quite numerous, most of these studies have focused on domestic M&As. Since the 1990s, however, an increasing share of M&As are more internationally oriented and have taken the form of

1_{Even though M&As stands for Mergers and Acquisitions, in this paper it refers to acquisitions only as is mostly}

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border M&A (Bertrand and Betschinger, 2012). However, empirical evidence on the effects of cross-border M&As remains sparse or limited to the analysis of the target firms.

Whether M&As add value to a company is a debatable subject. Bruner (2002) highlights that most studies claim that M&As do add value for the target firms, but not necessarily for the acquirer. Cross-border M&As are relevant because these acquisitions are starting to occur more often and take a larger portion of the total value of M&As (Summerfield, 2014).

This paper aims to fill the gap in the existing literature by researching differences between cross-border and domestic M&As. Most studies focus on either the performance of M&As and its determinants or on the bid premiums paid in the acquisition and its determinants. This study aims to contribute to the existing literature by investigating both phenomena simultaneously, excluding the determinants, and to identify whether the type of acquisition, i.e. cross-border of domestic, can explain whether the acquisition is meant to diversify the firm vertically or horizontally. Therefore, the research question this paper aims to answer is as follows: what are the characteristic differences between cross-border M&As

and domestic M&As? The sub-questions used to assist answering the research question are:

i. Do acquirers who perform a cross-border M&As yield a higher cumulative abnormal return than domestic M&As?

ii. Do firms pay a higher bid premium when performing a cross-border M&A compared to domestic M&As?

iii. Are firms that acquire cross-border more likely to buy a firm that is active in the same industry and thus diversify horizontally?

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2. Literature overview

2.1 Introduction

In this section, leading theories are provided including an overview of the existing literature. Since M&As are an important entry strategy and an important part of foreign direct investments (FDI) (Li, Li and Wang, 2016), theories regarding FDI are first addressed, followed by an examining of the basic M&A theories. Finally, a literature overview and definitions of M&As in relationship to performance, bid premiums and industry differentiation will be elaborated.

2.2 Foreign Direct Investment

A clear definition of foreign direct investment (FDI) is given by Verbeke (2009, pp 31) who defines FDI as “the allocation of resource bundles (combinations of physical, financial, human, knowledge and reputational resources) by an Multinational Enterprise (MNE) in a host country, with the purpose of performing business activities over which the MNE retains strategic control in that country.” The difference between FDI and portfolio investments is explained in the last part of the definition. “…retains strategic control in that country.” According to Hymer (1976), there are two kinds of long-term private international capital movements. If the investor directly controls the foreign enterprise, his investment is called foreign direct investment. However, when the investor lacks the ability to control the enterprise, it is called a portfolio investment. The difference thus lies in whether the investor ‘controls’ the foreign enterprise. This control cannot be easily defined and the difference between some control and no control is arbitrary (Hymer, 1976). Generally, if an investor can influence the firm it can be seen as control and thus FDI. But why would a firm want to engage activities in foreign countries? According to Verbeke (2009), there could be four possible motives that explain the international expansion behavior of firms; natural resource seeking, market seeking, strategic resource seeking and efficiency seeking.

The first motivation is called natural resource seeking. This entails the search for physical, human or financial resources in the host country. These resources are not available in the home country, which means that gaining access of these resources abroad can lead to higher value creation.

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alternative investment projects in the home country. The advantage the host country brings is the presence of ‘new’ customers willing to purchase the firm’s products. There is a distinct difference between market seeking and exporting. Market seeking involves business activities in the host country that are based on resource bundles transferred there, over which the firm remains strategic control, whereas exporting does not include a transportation of these resource bundles.

The third motivation is strategic resource seeking. This motive to invest abroad is often the main reason for firms from developing countries. It involves the desire to gain access of advanced resources, which are not available at the home country. These resources could be upstream knowledge, downstream knowledge, administrative knowledge or reputational resources. These strategic resources are not, in contrast to market seeking and natural resource seeking, easily accessible in the foreign country. Because these resources are difficult to acquire, firms who seek strategic resources often engage in M&As activities or try to become an insider in foreign knowledge clusters.

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competences themselves due to low transaction costs, the firm is should engage in FDI and thus directly invest abroad.

2.3 Mergers and acquisitions

After describing the two theories regarding FDI, mergers and acquisitions (M&As) should be explained. M&As describe two different phenomena, even though both words are often used as synonyms and the term ‘M&A’ is often used to indicate either of the two. A merger can be defined as “a unification of two or more companies to form a new company”. An acquisition, on the other hand, occurs when “a firm purchases a majority of shares of a new firm”. In the literature, the term M&A is often used to describe either of the two. Throughout this paper, M&A will refer to acquisitions only.

M&As are an important entry strategy for FDI and are often justified by the same potential benefits and strategic considerations as other forms of FDI decisions, e.g. to better exploit the firm’s assets, enhance the firm’s competitive advantage and to diversify the firm’s risk (Li et al, 2016). Firms that possess superior assets may seek to expand their operations to other countries to enhance the utilization of firm-specific assets such as superior products, brand names, technology, management skills and economics of scale or scope (Li et al, 2016; and Bris and Cabolis, 2008). These firm-specific intangible assets can potentially provide a foreign acquirer higher profits than a local potential bidder for the same target (Dunning, 1988; Krugman, 1987; Martynova and Renneboog, 2008). Firms from developing countries, however, are more likely to use M&A as an entry method not to exploit their assets, but to acquire strategic assets; strategic assets seeking (Makino, Lau and Yeh, 2002). These firms have inferior brands, management skills, technology and other tangible and intangible assets (Li et al, 2016). These assets may be difficult to obtain or develop in the firm’s domestic (developing) country, which may lack the appropriate institutional infrastructures such as property rights protection.

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not. These non-value-maximizing acquisitions can occur when the purpose is to increase market power, this could lead to reduced performance due to stealing business effects, or when the acquisition pursues empire-building objectives by the management. Another classification of the rationale of M&As is provided by Schoenberg (2006). This classification model divides motives for M&As into three classes; strategic, financial and managerial. Strategic motives include the improvement of business capabilities, a change of competitive structure and the extension of business practices. Urbsiene, Nemunaityte and Zatulinas (2015) added another motive as part of the strategic motive, namely the preemptive motive. This motive implies that firms engage in acquisition activities because they are afraid that a competitor might acquire the same target. The financial motives consist of financial efficiency, tax efficiency and asset stripping or unbundling. Investment opportunity can also be seen as part of the financial motive, as firms may acquire a target just because it is undervalued (Damodaran, 2011). The final type of motives are the managerial motives. These motives are similar to the aforementioned non-value-maximizing type of acquisition and serve the managers’ interest rather than those of the shareholders.

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2.4 M&As and performance

In general, the empirical evidence on post-merger performance effects for domestic acquirers is mixed. Although the Finance literature generally concludes that M&As, both domestic as cross-border, are beneficial for the target firms, the outcome is less clear for acquirers.

Contradicting views exist when looking at the performance of cross-border M&As and why these different views exist. Two studies that can be seen as pioneers of cross-border M&A studies are the books of Scherer and Ross (1990) and Ravenscraft and Scherer (1987). Scherer and Ross (1990) argue that performance of cross-border M&As is higher if the acquirer can apply one country’s management techniques that are superior to the target’s techniques. Moreover, if the acquirer can apply economies of scale this may lead to a better performance as well. Conversely, a cross-border merger can also lead to a certain level of loss of control, which may reduce the performance of the acquirer (Ravenscraft and Scherer, 1989). Later, more studies have followed to investigate whether cross-border M&As outperform domestic M&As or vice versa. Some studies found evidence that domestic M&A’s create higher wealth effects than cross-border M&As (i.e. Goergen and Renneboog, 2004; Moeller and Schlingemann, 2005; and Eckbo and Thorburn, 2000), whereas others provide significant evidence that cross-border M&A’s outperform domestic M&As (Danbolt and Maciver, 2012; Harris and Ravenscraft, 1991; and Gregory and Donohoe, 2013). A study by Lowinski, Schiereck and Thomas (2004), indicates that there are no differences between domestic and cross-border M&As when investigating acquisitions in Switzerland. A problem that arises when trying to measure the successfulness of an M&A is that the typical acquired company is small relative to its acquirer (Scherer and Ross, 1990).

Using a sample of 79 M&As that involves UK acquirers, whose deals value exceeded US$400m, Aw and Chatterjee (2004) investigated the cumulative abnormal returns of large firms as a measure of post-takeover performance of domestic and cross-border deals. Their study finds evidence that domestic takeovers (i.e. UK firms acquiring UK firms) outperform cross-border M&As (i.e. UK firms acquiring US firms). The post-takeover performance of cross-border M&As is even worse when UK firms acquired firms from Continental Europe. Several other studies find that firm value is reduced after a cross-border merge (e.g. Walker, 2000; Moeller, Schlingemann and Stulz, 2004). Other studies, however, find that acquisitions can actually generate value for the acquirer (e.g. Martynova and Renneboog, 2011).

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the pharmaceutical industry. They observed that companies with high R&D expenditures as a percentage of total sales, but that have an inadequate numbers of drug approvals, are more likely to form international M&As. Domestic M&As are more likely a result between firms with lower R&D expenditures, as a percentage of total sales, and with a smaller drug portfolio.

2.5 M&As and bid premiums

From the host country’s perspective, many policy makers try to prevent a foreign firm to acquire a domestic firm. This is especially true for knowledge intensive industries (Stiebale, 2013). This ‘economic nationalism’ is line with Ding and Erel (2013) who observed that governments prefer that target companies remain domestically owned rather than foreign owned. This can result in firms paying a higher bid premium for foreign companies. High bid premiums could be dangerous for the bidder firm, because these costs may be larger than the synergistic gains (Sirower and Sahni, 2006). Some limited evidence exist that cross-border M&As are more expensive than domestic M&As (Rustige and Grote, 2010; Hope, Thomas and Vyas, 2011; and Urbsiene et al., 2015). Instead of studying whether differences exist between bid premiums, research have emphasized and focused on the drivers of the height of bid premium (Urbsiene, 2015). According to Hayward and Hambrick, (1997) one of the determinants of bid premiums is managerial hubris which is defined as “exaggerated pride or self-confidence, often resulting in retribution” (Hayward and Hambrick, 1997. p. 106). Moreover, acquirers that are less risk-averse are more likely to be willing to pay a higher bid premium (Agarwal and Zeephongsekul, 2013). Some research also indicated that an overestimation of acquisitions gains could lead to higher bid premiums (e.g. Varaiya and Ferris, 1987; and Capron, Dussauge and Mitchell, 1998). Another determinant of the height of bid premiums is the organic growth of a firm. If the acquirer’s organic growth is low, they are likely to pay a higher bid premium (Kim, Haleblian and Finkelstein, 2011).

2.6 M&As and integration

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3. Hypotheses development

The hypotheses that will be tested in this study are examined in this section. Before a hypothesis is stated, a brief overview of relevant literature is provided, which have led to the construction of these hypotheses. These hypotheses are built upon the sub-questions that were mentioned in the introduction. The first hypothesis is related to the performance differences of cross-border M&As and domestic M&As, whereas the second hypothesis includes the differences of the bid premium regarding the M&As. Finally, the third hypothesis is concerned with type of integration of an acquisition.

3.2 M&As and cumulative abnormal returns

When comparing the wealth effects of domestic M&As with cross-border M&As, there are typically three possible outcomes. The performance outcomes of cross-border M&As are either more favorable, less favorable or equally favorable compared to domestic M&As. On the one hand, cross-border M&As could produce more beneficial efficiency effects, because the acquirer can acquire additional resources and skills that may not be available in the domestic country and to find new growth opportunities when the domestic market is already saturated (Bertrand and Betschinger, 2012). Furthermore, cross-border acquisitions, in contrast to other cross-border entry modes, allows the acquiring firm a high amount of control over the acquired firm which enables them to benefit from synergy gains, risk diversification and benefits from internalization (Shimizu, Hitt, Vaidyanath and Pisano, 2004).

On the other hand, the effects of a cross-border M&A could also be value destroying for a firm. The firm has to deal with and how to operate in a country with a different legal, economic and cultural environment (e.g. Li et al., 2016; and Chakrabarti, 2001). Furthermore, the boundaries of expanding their business overseas could result in more information asymmetries. It takes more time to learn the increasing organizational complexity and the way of integrating and coordinating activities across multiple countries.

One could expect the benefits of a cross-border M&A to outweigh the costs. Therefore the first hypothesis is:

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3.3 M&As and bid premium

Ding and Erel (2013) provided evidence that governments prefer that target companies remain domestically owned rather than foreign owned. Governments therefore often support domestic mergers in order to create national firms that are deemed too big to be acquired. One may therefore argue that it is likely that bid premiums are higher in cross-border M&As. Moreover, firms from the U.S. may encounter more takeover defenses when attempting to acquire a foreign company than when it aims to acquire a domestic company. Therefore, the second hypothesis is as follows:

H2: Firms performing a cross-border M&A pay a higher bid premium than domestic M&As.

3.4 Industry integration

When companies engage in acquisition activities, it is often done in order to diversify the firm to reduce risk (Jorion, 1985). This is especially true in the case of a vertical acquisition, because a firm can also reduce risks (e.g. currency risks) by expanding into a new country. This expansion into a new country can also be seen as a diversification, which means that they are two types of diversification. One could expect a firm to accomplish at least one way of diversification, either by expanding into a new industry or a new country. If a firm chooses to do both, the acquisition might contain too much risk because the acquirer has to adapt to a whole new environment in which both the country and industry are different. Therefore the third hypothesis expects that because cross-border M&As already entail one way of diversification, the target firm’s major sector is identical to the acquirer’s industry, i.e. a horizontal integration. Therefore the third hypothesis this paper aims to research is as follows:

H3: Firms that acquire a foreign company are more likely to diversify horizontally and firms

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4. Methodology

To test the aforementioned hypotheses, several steps are required to be taken. This section provides an overview of the data collection process and the databases used in order to obtain this data, followed by the methodology where relevant formulas are displayed. Moreover, this section also provides some literature of studies who have used similar methodologies.

4.2 Data collection

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were cross-border and 954 domestic. The aforementioned criteria have been used to screen the sample in order to increase the likelihood that any effects on the valuation of shares associated with the acquisition would be detectable in the share prices. This study, like many others (e.g. Dennis and McConnell 1986; Faccio et al. 2006; and Seth, 1990), relies on the assumption that much of the information relating to the event, in this case the announcement of an acquisition, is included in the share prices at a single point of time.

After using Zephyr to obtain the sample used in this study, a decision needs to be made regarding which method to use to measure the performance of an acquisition. Two broad approaches can be used to investigate the relationship between pre- and post-merger performance (Mohanty and Das, 2015). The first approach is the accounting measure analysis which aims to observe the relationship by using the financial results as reported by firms to assess differences in per- and post-merger performance. The literature that uses this approach found mixed results. Some (Ramakrishnan, 2008; Andrade, Mitchell and Stafford, 2001; and Healy, Palepu and Rubak, 1992) found a positive relationship, whereas others (Saple, 2000; and Weston and Mansingka, 1971) found a negative relationship. Sharma and Ho (2002) replicated the methodology that Healy et al. (1992) used on a sample of 36 Australian manufacturing firms, but did not find, in contrast to Healy et al., significant results.

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relationship between acquisition and performance. While observing a positive stock market reaction to the announcement of M&As, the accounting performance reported a negative change from pre to post-acquisition.

In this study, a share price analysis is used because based on share price reactions, the abnormal returns induced by an M&A announcement can be clearly attributed to that event (Li et al., 2016). When using an accounting measurement, one cannot clearly distinguish whether the gains, or losses, from an M&A announcement are the result of an acquisition or from a different event. Data concerning share prices of the firms in the sample were collected from Datastream.

4.3 Methodology

To test whether cross-border M&As are outperforming domestic M&As, a calculation of the abnormal returns surrounding the announcement day is required. When using an event study, one must choose which technique will be used in order to calculate the abnormal returns and three well-known techniques are available: 1. market models; 2. mean-adjusted models; and 3. market-adjusted models (Peterson, 1989). I choose to apply the market-adjusted model, which assumes that the best predictor of share price returns for a given firm is the current return on the market (Peterson, 1989). This leads to the following formula:

𝐴𝑅𝑖,𝑡 = 𝑅𝑖,𝑡− 𝑅𝑚,𝑡 (1)

where 𝐴𝑅𝑖,𝑡 is the market-adjusted abnormal return of stock i at time t, 𝑅𝑖,𝑡 is the stock return

of stock i on day t, and 𝑅_𝑚,𝑡 denotes the local market index at time t. The market-adjusted model is most suitable to use when the sample includes acquirers who have acquired multiple targets because it prevents endogeneity problems, it is therefore widely used in the literature (e.g. Gonenc, Hermes and Sinderen, 2013; Denis and McConnell 1986; and Faccio et al., 2006). If market models or mean-adjusted models were used, prior acquisitions can be included in the estimation period, which can influence the calculation of the normal returns.

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paper uses a three-day event window to calculate the CAR (i.e. -1,+1). This enables the research to focus on the effect of the announcement itself, rather than other possible reasons, which influence fluctuations of share prices.

Subsequently, the cumulative abnormal returns are calculated and the formula can be expressed as follows:

𝐶𝐴𝑅𝑖 = ∑ 𝐴𝑅𝑖,𝑡 𝑇2

𝑡=𝑇1

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where 𝐶𝐴𝑅_𝑖 is the cumulative abnormal returns for security i. T2 implies the end of the event window, in this case +1 and T1 refers to the beginning of the event window, -1. AR refers to the abnormal returns which have been calculated using the first formula.

In order to measure whether U.S. companies pay a higher bid premium for cross-border M&As than domestic M&As, bid premiums are extracted from the Zephyr database. A bid premium is a percentage of the negotiated price of one target’s share price and the pre-announcement market price at which the share is traded (Urbsiene et al., 2015). As investors in the stock market try to anticipate on an acquisition and the likelihood of the acquisition increases before the acquisition, the premium is normally smaller than when it is determined over a longer period (Laamanen, 2007). This occurs because the share price increases due to investors expecting an acquisition and expect to profit from the acquisition. Many studies use a longer and more extended time frame to measure the bid premium while excluding the impact of the M&A announcement (e.g. Reuer, Tong and Wu, 2012; Hayward and Hambrick, 1997; and Kim et al., 2011). These longer time frames, however, give also room for noise where other events could have impacted the share price (Laamanen, 2007). The bid premiums from Zephyr are calculated as follows:

𝐵𝑖𝑑 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 =𝑂𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

(3)

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Finally, to test the third hypothesis, information regarding the industry has been obtained using Zephyr. Horizontal acquisitions were labeled as a ‘1’, whereas vertical acquisitions were labeled a ‘2’. This is done by identifying if the target firm’s major industry sector is the same as the acquirer’s major industry sector. The exact definitions of the variables used in this paper are provided in table 1.

Table 1 : Variable description

Variable Description

Acquisition type Describes whether an acquisition is cross-border or

domestic. Cross-border acquisitions were given a value of 1, domestic acquisitions a value of 2.

Acquisition integration Describes the integration purpose of the acquisition.

Horizontal acquisition were labeled with 1, vertical acquisitions with a 2.

CAR (-1,+1) Cumulative abnormal return for the event window.

Describes the acquirer’s gains.

Bid premium % The bid premium percentage, which is calculated as offer

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5. Results and discussion

In this section the results are displayed starting with the descriptive statistics of the variables and followed by the empirical results. Due to the length of the different tests and results, the discussion is integrated throughout this section to facilitate the reader to link the results to the implications and the discussion.

5.2 Descriptive statistics

Table 2 presents the descriptive statistics of the bid premium and the CAR of both domestic and cross-border M&As. It presents the mean, minimum, maximum and the standard deviation. For the complete sample, the CAR (-1,+1) results on average in a negative CAR of 0,1%. On average, a bid premium of 31.2% is being paid for the shares of the target firms.

Table 2: Descriptive Statistics of whole sample

N Minimum % Maximum % Mean % Std. Deviation

CAR(-1, +1) 1044 -27.90 73.07 -.10 .0645

Bid premium 1044 -84.8650 175.8620 31.2022 31.4697

Valid N (listwise) ₁₀₄₄

In tables 3 and 4, the descriptive statistics of above are analyzed by including the categorical variable acquisition type. The medians are mentioned here as well because the Mann-Whitney U test, which is the main test used in this study, tests whether two groups have the same median (Huizingh, 2007). The first differences between cross-border and domestic M&As can be addressed. In these tables, the mean, median, standard deviation, maximum and the minimum are presented. On average, cross-border acquisitions have led to a negative CAR of 0.36% of the acquirers, whereas domestic M&As have led to a negative CAR of 0.08% of the acquirers. So when looking at the average, domestic M&As could have performed better than cross-border M&As. The medians, however, tell a different story and indicates that domestic M&As are performing worse than cross-border M&As, where the median of

Table 3: Summary statistics of CAR and acquisition type CAR(-1, +1)

Acquisition type N Mean % Median % Std. Deviation Minimum % Maximum %

Crossborder 90 -.36 -.08 .0640 -19.95 22.05

Domestic 954 -.08 -.15 .0645 -27.90 73.07

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domestic M&As is -0.15% and the median of cross-border M&As is -0.08%. These combined results suggest that the performance of cross-border M&As and domestic M&As are very similar.

When comparing the means of domestic and cross-border bid premiums, it can be seen that on average, U.S. firms pay a bit premium of 32.0% for a foreign company and 31.1% for domestic firms. The median of domestic M&As is 24.8%, whereas cross-border M&As entail a median of 29.0%.

5.3 Empirical results

In this section, empirical results are presented for each hypothesis and the results from the descriptive statistics will be further analyzed.

5.3.1. Cumulative abnormal returns

To test whether the cumulative abnormal returns are different, and more specifically to see if cross-border M&As outperform domestic M&As, the Mann-Whitney U test is used. Like aforementioned, this study focusses on the outcome differences between domestic and cross-border M&As, not on the determinants of it. The Mann-Whitney U test is therefore an applicable test, because it can be used to identify whether two groups of the same variable have different medians (Huizingh, 2007). The Mann-Whitney U test can be used in the event study context when the assumptions of other, parametric testing cannot be met (Bowman, 1983). Furthermore, a non-parametric test is the appropriate test because one group (domestic M&As) is much larger than the other (cross-border M&As). In this case, the dependent variable is CAR (-1, +1) and the grouping variable is acquisition type where a value of 1 indicates a cross-border M&A and a value of 2 indicates a domestic M&A. In order to research whether the differences between the medians are significant, the null hypothesis for this test is: H0: there are no differences of performance between domestic and cross-border

M&As. The alternative hypothesis is then: H1: The performance of cross-border and domestic M&As are different.

Table 4: Summary statistics of bid premium and acquisition type Bid premium

Acquisition type N Mean % Median % Std. Deviation Minimum % Maximum %

Crossborder 90 32.04 28.99 30.00 -45.46 115.69

domestic 954 31.12 24.81 31.62 -84.87 175.86

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Table 5 provides the mean ranks of the CARs of both groups. These mean ranks are useful in order to indicate which group can be considered to have a higher cumulative abnormal return (Huizingh, 2007). More specifically, if the test statistics proves to be significant, cross-border’s higher mean rank indicates that cross-border M&As from the sample outperformed domestic M&As.

Table 5: Mean Ranks of Mann-Whitney U test

Acquisition type N Mean Rank Sum of Ranks

CAR(-1, +1) crossborder 90 523.94 47155.00

domestic ₉₅₄ _522.36 _498335.00

Total ₁₀₄₄

From the table above we can see that the mean rank of cross-border M&As was indeed higher than the mean rank of domestic M&As. This was to be expected because in table 3 it can already be seen that the median CAR of cross-border M&As is higher than the median CAR of domestic M&As. However, as mentioned earlier, the means show opposing results and indicate that cross-border M&As perform worse than domestic M&As.

In order to see if the difference is significant, table 6 can be used. The Z-value corresponds to a significance level of 0.962. When using a critical α of 0.05 the null hypothesis cannot be rejected. The difference between the mean ranks, and thus the CARs, is therefore not significant enough to conclude that cross-border M&As outperform domestic M&As. The results show that performance of cross-border M&As and domestic M&As are similar and both negative. This is in line with the descriptive statistics, because deviations were found in the means and medians of cross-border and domestic M&As.

The result of a negative CAR is in line with previous studies (e.g. Bertrand and Betschinger, 2012; and Aw and Chatterjee, 2004), and concludes that M&As do not increase value for the shareholders of acquirers. Regarding the first hypothesis of this study, predicting that cross-border M&As outperform domestic M&As, it cannot be accepted, similarly to the study of Lowinski et al. (2004). Due to the different evidence in the literature, where on the one hand there is proof that cross-border M&As outperform domestic M&As (e.g. Danbolt and Maciver, 2012; Harris and Ravenscraft, 1991; and Gregory and O’Donohoe, 2013), and on the other hand, literature suggests that domestic M&As have a higher performance than cross-border M&As (e.g.. Goergen and Renneboog, 2004; Moeller and Schlingemann, 2005; and Eckbo and Thorburn, 2000), the results of this study seems to be consistent with the literature by providing an observation that lies within the conclusions of these studies.

Table 6: Test Statisticsa

CAR(-1, +1)

Mann-Whitney U 42800.000

Wilcoxon W 498335.000

Z -.048

Asymp. Sig. (2-tailed) .962

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When performing the same test but using the acquisition integration as grouping variable, the results are interesting to notice. From table 7 it can be seen that the mean rank of horizontal M&As is higher than the rank of vertical M&As. This indicates that if the test statistics are significant, horizontal M&As outperform vertical M&As.

Table 7: Mean Ranks of Mann-Whitney U test for acquisition integration

Acquisition integration N Mean Rank

Sum of Ranks CAR(-1, +1) horizontal 714 537.47 383755.50 vertical 330 490.10 161734.50 Total 1044

In table 8 the test statistics are displayed. The Z-value of -2.360 corresponds to a significance level of 0.018, which is lower than the alpha of 0.05. This holds that the medians of both groups are significantly different. From the table above, the displayed mean rank of horizontal M&As is higher than vertical M&As. It can therefore be concluded that horizontal M&As outperform vertical M&As.

In order to provide insights on the value of the medians, table 9 is provided. This table is similar to the ones used in the section of descriptive statistics, but are displayed here because these results were not the aim of this research. From the table, it can be seen that the mean CAR of horizontal acquisitions, which is the majority of the sample with 714 acquisitions, was positive with a value 0.21%. In contrast, the mean CAR of vertical acquisitions is -0.77%. The significant result of the Mann-Whitney U test relates to the medians, where horizontal acquisitions have a median CAR of -0.04% and vertical acquisitions a median CAR of -0.55%. With the Mann-Whitney U test used above, it can thus be concluded that horizontal acquisitions yield higher CARs than vertical acquisitions do.

Table 9: Summary statistics of CAR and acquisition integration CAR(-1, +1)

Acquisition integration N Mean % Median % Std. Deviation Minimum % Maximum %

horizontal 714 .21 -.04 .0692 -27.90 73.07

vertical 330 -.77 -.55 .0521 -19.97 22.92

Total 1044 -.10 -.14 .0645 -27.90 73.07

This result is interesting as it provides evidence that firms who perform a horizontal acquisition outperform firms that perform vertical acquisitions. This relationship should be

CAR(-1, +1)

Z -2.360

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further investigated. This result might be explained by the fact that firms which acquire horizontally are better able to reap the synergistic benefits due to a better knowhow of the products, markets and the industry. Firms may be able to better integrate the target’s operations when they are active in the same industry as opposed to when the target operates in a different industry.

5.3.2. Bid premium

Similar to the first hypothesis, the Mann-Whitney U test can also be used to test the second hypothesis. The dependent variable for the second hypothesis is the bid premium. The test is used to identify whether the bid premiums paid for cross-border acquisitions are different from the bid premiums paid for domestic acquisitions. Therefore the null hypothesis in this test is: H0: there are no differences between the bid premiums paid in cross-border M&As

and the bid premiums paid in domestic M&As. Subsequently, the alternative test is: H1: the bid premiums paid in cross-border acquisitions are different from the bid premiums paid in domestic acquisitions.

The table below, table 10, provides the mean rank of the bid premium with the grouping variable acquisition type. The results suggest that the average bid premium paid in a cross-border acquisition is higher than in a domestic acquisition. Similar to previous tests, to see if the difference is sufficient, the alpha need to be

smaller than 0.05.

Table 10: Mean Ranks – bid premium

Acquisition type N Mean Rank Sum of Ranks

Bid premium crossborder 90 546.69 49202.50

domestic 954 520.22 496287.50

Total ₁₀₄₄

In table 11 the test statistics can be observed. A Z-value of -0.796 can be observed which corresponds to a significance level of 0.426. This significance level is above the threshold of 0.05, which means that the null hypothesis cannot be rejected. Even though the mean of cross-border premiums is higher than domestic premiums, the difference is not significant enough to conclude that bid premiums paid in cross-border M&As are higher than bid premiums paid in domestic M&As.

The second hypothesis of this paper, the prediction that firms pay more for a foreign target than a domestic target, can therefore not be accepted. Even though they do seem to pay

Bid premium

Z -.796

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more, the difference is not significant. Other studies (e.g. Urbsiene et al. 2015; and Rustige and Grote, 2010) have indicated that firms pay a higher premium for a foreign acquisition. In the sample used in this study, this seems to be the case as well, although the results are not significant.

Also in this case it is interesting to see if differences exist between bid premiums paid in vertical acquisitions and horizontal acquisitions. To investigate whether differences exist, the identical Mean Whitney U test is used. From the rank results in table 12, it can be clearly seen that the mean rank of bid premiums in vertical acquisitions is much higher than horizontal acquisitions. In order to test whether this difference is significant, the p-value needs to be below the alpha of 0.05.

Table 12: Ranks – bid premium with acquisition integration

Acquisition integration N Mean Rank Sum of Ranks

Bid premium horizontal 714 497.14 354957.50

vertical 330 577.37 190532.50

Total ₁₀₄₄

Table 13 presents the test statistics of the Mann-Whitney U test. Because the p-value is lower than the threshold of 0.05, the null hypothesis that there are no differences between the medians of bid premiums in cross-border and domestic acquisitions can be rejected and the alternative hypothesis that differences exist can be accepted. Because the mean rank of bid premiums in vertical acquisitions is higher, the test provides evidence that the bid premiums paid in vertical acquisitions is significantly higher than in horizontal acquisitions.

To get a better understanding of the values of the bid premiums, table 14 is provided. It can be observed that both the mean and median of bid premiums are much lower for horizontal acquisitions than compared to vertical acquisitions. The mean and median bid premium of horizontal acquisitions are 28.76% and 23.09% respectively. For vertical acquisitions, these values are 36,49% and 30,85%.

Table 14: Summary statistics of bid premium and acquisition integration Bid premium

Acquisition integration N Mean% Median % Std. Deviation Minimum % Maximum %

horizontal 714 28.76 23.09 29.49 -83.62 173.02

vertical 330 36.49 30.85 34.84 -84.87 175.86

Total 1044 31.20 25.29 31.47 -84.87 175.86

Bid premium

Z -3.997

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These results indicate that firms acquiring a target from a different industry, so those who diversify vertically, seem to pay a higher price for their acquisitions than those who diversify horizontally. This is an interesting discovery and to the author’s knowledge not researched before. This relationship should be investigated further. A plausible reason could be that firms who acquire a firm from the same industry makes the acquisition because of an investment opportunity when a firm is undervalued, increasing the market share for a low price (Damodaran, 2011).

5.3.3. Acquisition integration

To test the third hypothesis, the Pearson Chi-squared test is used. This test is viable for identifying associations among two or more variables with categorical values (Huizingh, 2007), which is the case in this study. It is used to identify if there is a relationship among two categorical variables. If the p-value of the test is lower than the threshold of 0.05, the null hypothesis can be rejected. The null hypothesis in this test is as follows: H0: The variables

acquisition type and acquisition integration are independent. Logically, the alternative

hypothesis is: H1: The variables acquisition type and acquisition integration are dependent. The results of this test are displayed in table 15.

Table 15: Chi-Square Tests

Value df

Asymptotic Significance

(2-sided) Exact Sig. (2-sided)

Exact Sig. (1-sided) Pearson Chi-Square _.337a 1 .561 Continuity Correctionb _.214 ₁ _.644 Likelihood Ratio _.342 ₁ _.559

Fisher's Exact Test _.636 _.326

Linear-by-Linear Association _.337 ₁ _.562

N of Valid Cases ₁₀₄₄

a. 0 cells (0.0%) have expected count less than 5. The minimum expected count is 28.45. b. Computed only for a 2x2 table

In the table above, a significance level of 0.561 can be observed. This level is higher than the threshold of 0.05, which means that the null hypothesis cannot be rejected. One of the two variables can therefore not be used to explain the other variable, i.e. there is not relationship between the two variables.

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6. Conclusion, recommendations and limitations.

The primary aim of this study was to identify the differences between cross-border M&As and domestic M&As in the U.S. in the time period 2005 to 2015. In order to do so, three hypotheses were tested. These hypotheses predicted that cross-border M&As outperform domestic M&As, that firms pay a higher bid premium when acquiring a foreign target and that most cross-border M&As were aimed at horizontal integration and domestic M&As aimed at vertical integration. This paper uses a market-adjusted event study to calculate the cumulative abnormal returns and the Mann-Whitney U test to test if the differences between domestic and cross-border M&As are significant. Moreover, the Pearson Chi-square test is used to identify the relationship between acquisition type and acquisition integration. This research contributes to the literature by providing insights in differences between cross-border and domestic M&As regarding firm performance, bid premium and industry acquisition simultaneously.

Using a sample of 1,044 deals of which 90 were cross-border and 954 domestic, none of the hypotheses could be accepted. The results indicate that, even though cross-border M&As contained CARs that were higher, but negative, than domestic M&As, the difference was insignificant. Interestingly, when performing the same Mann-Whitney U test but with the acquisition integration as a categorical variable instead of acquisition type, the results show a significant result. It indicates that horizontal acquisitions outperform vertical acquisitions. A reason for this could be the better ability to exploit synergy effects.

The bid premiums that were paid for cross-border M&As were also higher than those paid in domestic M&A deals. However, these results were not significant either. Similar to the first hypothesis, the variable acquisition integration does seem to have a significant impact. Using a Mann-Whitney U test, the results indicate that firms pay a higher bid premium for a firm that is active in a different industry. A plausible reason could be the higher dedication for a vertical integration.

To test whether cross-border M&As are more likely to occur to diversify horizontally, the Pearson Chi-Square test was used. The result of this test was insignificant, indicating that the variable acquisition type cannot be used to identify the integration of the acquisition.

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different bid premiums used in cross-border and domestic M&As. For example, if most of the domestic deals are linked with a bid premium calculated one day before the announcement date and the cross-border deals with five days prior to the announcement date, this could influence the results. Moreover, even though the observation period of 2005 to 2015 was selected for a reason, namely to include both up as down times in the economy, the inclusion of the financial crisis that started in the U.S. in 2007 could explain the insignificant results. Finally, from the 1,044 deals included in the sample, only 90 deals were cross-border deals, which may have had an influence on the result.

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The differences between domestic and cross- border M&As: Empirical evidence from the United States