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World Markets for Mergers and Acquisitions

By Harvard Law School Program on Corporate Governance

In our recently completed working paper, World Markets for Mergers and Acquisitions, we investigate the extent to which valuation differences and other international factors motivate cross-border mergers and acquisitions. Valuation differences between acquirers and targets can be broken into three components: Differences in country-level stock market movements, differences in firm-specific stock price movements relative to country-level indices, or appreciation or depreciation of the currencies in which acquirers? and targets? securities are traded. Each of these components potentially reflects an alternative source of valuation difference that could motivate mergers.

We estimate the effect of these factors on merger propensities using a sample of 56,978 cross-border mergers occurring between 1990 and 2007. In our sample, 80% of completed cross-border deals between 1990 and 2007 targeted a non-US firm, while 75% did not involve a US firm as an acquirer. The majority of acquirers (90%) are from ?developed? countries, while the other 10% being from ?developing? countries. Furthermore, the vast majority of cross-border mergers involve private firms as either bidder or target: 96% of the deals involve a private target, 26% involve a private acquirer, and 97% have either private acquirers or targets.

Our results suggest that valuation differences between acquirers and targets significantly affect the likelihood of a cross-border merger. The cross-border acquirer is more likely to be from a country whose currency has appreciated relative to the target?s currency and whose country?s stock market has outperformed the target firm?s country?s market. In addition, if the companies are public, the acquirer?s firm-specific abnormal performance is likely to be better than the target?s. The estimated effects are fairly large: Our estimates imply that a 100% difference in country-level stock returns between two countries leads to a 17.4% increase in the expected number of acquisitions of the worse performing country?s firms by the better-performing country?s firms. Similarly, a 75% appreciation of one country?s currency relative to another?s leads to a 50.4% increase in the number of acquisitions of firms in countries with relatively depreciated currency.

There are two potential (though not mutually exclusive) explanations for the stock-return differences between acquirer and targets prior to the acquisitions. First, the returns can affect changes in the relative wealth of the two countries. Second, the returns can reflect differential divergence from fundamentals. Our evidence is more consistent with the wealth explanation than the misvaluation explanation.

The full paper is available for download here.

Full post as published by The Harvard Law School Corporate Governance Blog on July 13, 2009 (boomark / email).