Monday, October 5, 2009
Continuing the international M&A theme from last week, here's an interesting new paper from the National Bureau of Economic Research by Isil Erel, Rose C. Liao, and Michael S. Weisbach, World Markets for Mergers and Acquisitions. Turns out that geography matters (that's a familiar refrain) and that acquirers tend to be from developed countries. Not surprising that currency movements matter -- when a country's currency appreciates, its firms respond by going on acquisition sprees. Along the same vein - where stock markets are outperforming the average, firms from those markets (likely using their stock like an over-appreciated currency) tend to be net acquirers.
Abstract: Despite the fact that one-third of worldwide mergers involve firms from different countries, the vast majority of the academic literature on mergers studies domestic mergers. What little has been written about cross-border mergers has focused on public firms, usually from the United States. Yet, the vast majority of cross-border mergers involve private firms that are not from the United States. We provide an analysis of a sample of 56,978 cross-border mergers occurring between 1990 and 2007. We first characterize the patterns of who buys whom: Geography matters, with firms being much more likely to purchase firms in nearby countries than in countries far away. Purchasers are usually but not always from developed countries and they tend to purchase firms in countries with lower investor protection and accounting standards. A significant factor in determining acquisition patterns is currency movements; firms tend to purchase firms from countries relative to which the acquirer’s currency has appreciated. In addition economy-wide factors reflected in the country’s stock market returns lead to acquisitions as well. Both the currency and stock market effect could reflect either misvaluation or wealth explanations. Our evidence is more consistent with the wealth explanation than the misvaluation explanation.