THE LONG-RUN PERFORMANCE OF CROSS-BORDER MERGERS AND ACQUISITIONS: EVIDENCE TO SUPPORT THE INTERNALIZATION THEORY
Claude Francoeur* Abstract Our study contributes to improving the understanding of cross-border M&As in two domains: evaluation of the long-term financial performance of acquiring firms in cross-borderM&As and detection of the determinants of their long-term success. Our results show no sustained gains or losses during the post-acquistion period for Canadian acquirers. In contrast to their performance in domestic M&As, Canadian firms carrying out crossborder M&As do generate enough value to keep up with stockmarket requirements, relative to their risk level as determined by the Fama & Frenchthree-factor model and the level of returns generated by peer firms in their main industrial sector. Our findings agree with the internalization theory and suggest that acquiring firms engaged in cross-border M&As can indeed realize efficiency gains and create long -term value for their shareholders, but only under certain conditions: namely, when they possess high levels of R&D and a strongcombination of R&D and intangibles. Keywords: mergers & acquisitions, cross-border, internalization theory, long-run performance
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Introduction Cross-border mergers and acquisitions (M&As) have become increasingly popular in recent years.According to the 2004 world investment report published by the United Nations Commission on Trade and Development (UNCTAD), the total world value of cross-border M&As peaked at over one trillion US$ in the year 2000. In 2000, Canada ranked eighth in cross-border M&A value, with a total of close to $40 billion in deals, which represents an annual compounded growth of 28.9% over the last decade,outstripping growth both in the U.S. (19.1%) and on a global scale (22.5%).1In addition to generating efficiency gains, cross-border M&As may enable firms to meet international competition and to generate value in foreign markets through the use of
Contrary to what is seen in the U.S., ownership of Canadian firms tends to be concentrated in the hands of large, and often familylinked,shareholders. According to Rao and Lee-Sing (1996), most Canadian firms are owned by either one shareholder or by a small group of shareholders controlling, directly or indirectly, more than 50 percent of the company’s voting shares. Moreover, the size of Canadian firms is, on average, smaller. Agency problems between managers and shareholders are less of an issue in Canada. The Canadian corporateenvironment seems to offer firms more of the flexibility they need to engage in cross-border M&As and also to adjust quickly to changes in the global economy.
their intangible assets (e.g., trademarks, specialized labour and technologies). Despite the growth in crossborder M&A activity, researchers are struck by the lack of studies examining their impact on the wealth of shareholders. Our study helpsfill a void by evaluating the long-term financial performance of acquiring firms and by identifying factors that determine their long-term success. Our specific aim is to test the internalization theory. Do shareholders increase their wealth when their corporate managers carry out cross-border M&As? What key factors determine the long-term success of the acquiring firm’s financial performance in across-border M&A? This study will attempt to answer these questions. Our sample contains 551 cross-border M&As initiated by Canadian firms. The temporal horizon of these events is spread over eleven years, i.e. from 1990 to 2000 inclusively. Several methodologies are used to ensure the robustness of the results. Our paper is organized as follows: the first section presents the conceptual framework...