Source of data: Thomson Financial Securities Data Corporation, Mergers and Acquisitions Database.
DRIVERS OF CROSS-BORDER M&A
A large body of research illuminates the forces behind cross-border M&A activity: exploiting market imperfections, intangible assets, risk reduction through diversification, exchange rates, financial market conditions, and tax rates.
Exploit Market Imperfections
A venerable stream of research in economics suggests that foreign direct investment through cross-border acquisition seeks to take advantage of market imperfections and failures8 in foreign countries. The theory is that the buyer will recognize profitable opportunities to take advantage of cheap labor and raw materials, unmet consumer demand, deregulation, trade liberalization, and country integration of capital and product markets into global markets. Exhibit 5.4 presents a list of 17 large cross-border deals from 1997 to 2002. The forces of change are evident in the makeup of this list:
Telecommunications. Seven of the 17 deals originate in the telecommunications industry and suggest these forces at work: rapid technological change and government deregulation. Vodafone/Mannesmann and Vodafone/AirTouch, both in the wireless segment of the industry, are notable for their size. Also, Vodafone initiated one of the few hostile offers ever to occur in Germany—and won.
Pharmaceuticals/chemicals. Rising R&D expense and the desire to achieve distribution economies motivated the Astra/Zeneca and Hoechst/Rhône-Poulenc deals.
Consumer foods. Two deals (acquisitions of BestFoods and BAT Industries) were driven by the desire for portfolio diversification across product categories, perceived benefits of global branding, perceived undervaluation of brands in the home capital markets, and an expectation of greater economies of scale in distribution.
Automobiles. Rising new product development costs and the consequent consolidation in the industry motivated the combinations of Daimler/Chrysler, Ford/Volvo, and others.
In short, the surging volume in cross-border M&A is driven by the many of the same fundamental economic forces outlined in Chapter 4. From this perspective, cross-border M&A activity is not a curious sideshow to the large domestic U.S. volume, but is sizable and linked integrally with it.
Extend the Reach of the Buyer’s or Target’s Intangible Assets
Researchers9 observe the heavier investment in manufacturing and speculate that cross-border M&A represents an effort of firms with significant intangible assets (such as brand names, patents, and managerial know-how) to broaden the scale of their use and preempt others who might be tempted to imitate or appropriate those intangible assets. Similarly, a foreign buyer may seek to acquire intangible assets of a foreign target with the intent of bringing the benefits of those assets back home. Eun et al. (1996) found that foreign acquirers benefit from targets’ R&D. Morck and Yeung (1991) found that “the positive impact of spending for research and development and for advertising on market value increases with a firm’s multinational scale, but that multinationality per se does not have any significant impact…. Intangible assets are necessary for direct foreign investment to make sense.” (Page 185)
EXHIBIT 5.4 Seventeen Largest Cross-Border Deals, 1997–2002
| Date Announced | Target Name | Target Nation | Acquirer Name | Acquirer Nation | Transaction Value ($ Millions) | Enterprise Value ($ Millions) | Equity Value ($ Millions) | Asset Value ($ Millions) |
|---|---|---|---|---|---|---|---|---|
| 11/14/99 | Mannesmann AG | Germany | Vodafone AirTouch PLC | U.K. | 202,785 | 180,033 | 179,861 | 21,442 |
| 4/18/99 | Telecom Italia SpA | Italy | Deutsche Telekom AG | Germany | 81,528 | 74,613 | 66,801 | 52,744 |
| 1/18/99 | AirTouch Communications | U.S. | Vodafone Group PLC | U.K. | 60,287 | 65,770 | 60,212 | 17,262 |
| 8/11/98 | Amoco Corp. | U.S. | British Petroleum Co. PLC | U.K. | 48,174 | 54,768 | 47,902 | 32,274 |
| 5/30/00 | Orange PLC (Mannesmann AG) | U.K. | France Telecom SA | France | 45,967 | N/A | N/A | 2,901 |
| 5/17/99 | US WEST Inc. | U.S. | Global Crossing Ltd. | Bermuda | 41,105 | 51,097 | 41,098 | 18,709 |
| 5/7/98 | Chrysler Corp. | U.S. | Daimler-Benz AG | Germany |
40,467
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