A 100 percent difference in country-level stock returns between two countries leads to a 17 percent increase in the expected number of acquisitions of the worse performing country's firms by the better performing country's firms.
While a significant proportion of mergers involve private firms from different countries, the economic research on the subject had largely focused on domestic deals, or on cross-border mergers involving public firms from the United States. Now, writing in World Markets for Mergers and Acquisitions (NBER Working Paper No. 15132), co-authors Isil Erel, Rose Liao, and Michael Weisbach characterize the patterns of cross-border mergers and acquisitions and how they affect world markets and both public and private firms. They rely on a sample of over 56,000 cross-border mergers that occurred between 1990 and 2007. A large majority of these deals targeted a non-U.S. firm, or did not involve a U.S. firm as an acquirer; and nearly all of the mergers had either private acquirers or private targets.
The authors first identify the patterns of who buys whom. They conclude that geography matters: firms are much more likely to merge with a counterpart in a nearby country than in a country far away. Moreover, the majority of acquirers are from developed countries -- around 90 percent -- and they tend to purchase firms in countries with lower investor protection and accounting standards.
Exploring what determines acquisition patterns, the authors find that valuation differences due to relative currency movements and to relative stock market returns are important drivers of cross-border merger activity. While it has been shown that differences in valuation between potential acquirers and targets are a motive for domestic mergers, it turns out that these valuation differences are even more important in an international context -- movements in country-level stock markets and currencies provide additional sources of valuation differences.
Currency movements significantly affect the likelihood of a cross-border merger. A target firm is more likely to be acquired by a firm from a country whose currency has appreciated relative to the target's currency. A 75 percent appreciation of one country's currency relative to another's leads to a 50 percent increase in the number of acquisitions of firms in the country with the relatively depreciated currency.
Currency movements predict mergers mostly for within-region country-pairs and appear to be most important when the acquiring country is wealthier than the target. Firms in wealthier countries purchase firms in nearby poorer countries because they are relatively inexpensive after currency depreciation.
Economy-wide factors reflected in the country's stock market returns are also an important determinant of a merger. The acquirer is likely to come from a country whose stock market has outperformed the target country's stock market. A 100 percent difference in country-level stock returns between two countries leads to a 17 percent increase in the expected number of acquisitions of the worse performing country's firms by the better performing country's firms.
Both the currency and the stock market effects may reflect errors in valuation or wealth explanations of what is happening. The authors find that the evidence is more consistent with the wealth explanation -- an increase in wealth leads to improved ability of a firm to finance acquisitions.
-- Claire Brunel