Cross-Border Mergers and Acquisitions - Literature review Example

Cross- Border Mergers and Acquisitions Name Course Date Literature Review The past two decades has seen great changes in the global market attributed to the mergers and acquisitions. The domestic mergers and acquisitions pioneered. When the cross-border mergers and acquisitions that enabled investment to be made beyond borders, many firms encouraged its use. This enabled many organizations to spread from one country to another. This could be done regardless of the differences in both culture and location. Studies have consequently ensued to address the characteristics, advantages and challenges presented by the cross-border merger and acquisition. This has been done in a bid to develop policies and strategies that will make their agenda achievable and successful over the years. Agrawal et al. (1992) while researching on the post‐merger performance of acquiring firms: a re‐examination of an anomaly proves that the size of a firm and the summation of problems have no great effect on the loss they incur. After mergers are formed, many parties tend to underperform. There are prior studies that have been carried out to come up with solution to these problems. Some of the prior studies on the same required an adjustment in the firm size and this was applied in this research---these include Gorg et al. (2007). After completion of the merger, it is noticeable that the individual stockholders experience a loss of about 10% after 5 years. Betas that occur after the merger have no significant association with this loss; a number of specifications are, therefore, to be blamed. Despite the large numbers of research that have been conducted to give more information about this occurrence, it is evident that there is no valid resolution that addresses this loss nor identify the precise chronology of events accountable for this change. As opposed to Gorg et al. (2007), there is no bias since there is no tendency of leaning more to specific attributes. According to their point of view, it is possible to come up with resolutions. This shows how specific they are. Such reasons are likely to change with time since time is a key phenomenon in business, especially where mergers have been used. The main method used by the authors was as per a preexisting successful study that was used to evaluate abnormal performances in different firms. Analysis was done on the results obtained periodically then the grand total and average measure was establish to help in drawing conclusions. The other method involved association of what was obtained with the size of the firm. The methodology gives a reason to regard the research as fully relevant and reliable. Rusinski (2000) assesses Cross-Border Mergers and Acquisitions and Development from the perspective of world investment report. This relies much on the framework of the organization. The authors of this piece from three different universities put the dissimilarity of different cultures into consideration to evaluate the effectiveness of transferring organizational across these borders. This is done with a key interest of planning and making explorations of the future. Shimizu et al. (2004) have proved how important and necessary organizational knowledge is to the society and the organization itself. This research article gives the knowledge more meaning and interest as it burrows into the cultural aspect to establish how it affects the knowledge. It is difficult to transfer across borders some knowledge that are either systemic, complex or tacit. Effectiveness of the transfer of knowledge, therefore, to an extent depend on the type. Even the global organizations that cover large geographical area present a lot of challenges when it comes to cross-border transfer of organizational knowledge. Individualism and collectivism also play various role in this transfer. Each of them has a seminal importance to play in the variation of cultures. The understanding of such components aid the transfer and absorption of knowledge across borders. The verticalness and horizontalness have similar impacts on this passing of knowledge. They also interact with one another in the process involving organizational knowledge. The cognitive styles in which parties involved react to the transfer, whether with moderation or not, are facts that the organization must be mindful of. Many of the findings of this paper bear considerably adequate amounts of evidence, however, the authors have given it a high theoretical approach that may be inaccurate. The field of business involves exchange that occurs daily. Therefore, to avoid losses, it is better that any move made is the best at that moment and can bring to the organization funds that are worth the costs incurred (Rossi and Volpin 2004). Further research would therefore require that an evidence based practice be conducted and enacting of policies be done based on facts gathered from the market. Organizations are quickly expanding so that they can reach the entire population of a region or the globe; organizational knowledge can help them aid the transfer of knowledge across borders and communities. Erel et al. (2012) conducted a study to identify and explore the determinants of cross-border mergers. Working on determinants of cross‐border mergers and acquisitions the study noted that most of the private firms that are outside US always opt for cross-border merger of the firms in those areas. It is clear that the mergers can be either domestic (within the country) or international (involving firms of different countries). Out of every three mergers that occur globally, one of them participates in a merger involving a firm in a different country. Their essential nature in the society is becoming higher with time because the global economy is becoming integrated more. Many studies have been conducted regarding mergers. Unfortunately, most always focus entirely on the domestic types. The same researches have also limited themselves to the public firms and those that are enclosed within US. Geography and currency movements determine how the cross merger occurs or rather how it is acquired. A clear outline of the patterns of distribution, frequency, nature and reasons for the mergers are thereby easily identified with little help from members of the organizations involved in the merger (Erel et al. 2012). For those mergers involving organizations from different countries, the macroeconomic performance and the currency appreciation will have an impact the success of a merger and a reason to go for or against a merger proposal. Assessment during this exercise of research involved the analysis of sampled 56,978 cross-border mergers over the duration between 1990 and 2007. This has helped in the identification of total merger save for the required determinants. It can be identified how cross-merger rates have increased from 23% in 1998 to 45% a decade later. The major proposed determinants revolve around geography, disclosure of secrets and bilateral trade. Inasmuch as this sector appears narrow with little room for more exploration, the study of cross border merger needs more research. The business field faces many modifiable drawbacks that need to be addressed using the causality principle. This will then improve partnership among organizations leading to growth of economy in various globally. A research on Buying and Selling: Cross-border mergers and acquisitions and the US corporate income tax conducted by Building a Better Working World (n.d) similarly gives more information about cross border mergers. Their focus is mainly on the income tax rates in the US as a developed country. Cross border merger and acquisition finds it a challenge to press on due to a universal system of taxation and a high corporate income tax. There is very little or no taxes imposed on companies that involve two or more countries. The U.S. corporate income tax has suppressed international market giving less room for the cross border mergers and acquisition. Among developed countries, the statutory corporate income tax by the U.S. government is higher than that of any other country – above 30%. For that reason, foreign investors find it easier in bidding for acquisitions within the U.S. than the U.S. natives and companies. The article, therefore, attempts to evaluate the extent to which this phenomenon has disfavored the local companies in the cross merger and acquisition. In a thorough analysis and scrutiny, it is determined how reducing the statutory income tax by as low as 5% will have a great impact on the level to which the local companies develop and benefit from their products or services. In these mergers, there are lots of funds transferred in small amounts that can amount to trillions in a single decade. The mergers and acquisition has been found out to be as important as any other essential component of business since it is a mode of transfer of funds in the global market and beyond borders. This elevates the productivity and satisfies the demands across the world. The study methods used for this research are satisfactory since it conducts a complete assessment of the global market, especially the countries that participate more. Some negligible exchange or trade by meagre plans are ignored. Erel et al. (2012) supplements this research. The research states how disadvantageous the mergers may affect the American economy due to the taxes imposed. It, therefore, gives a reason for refining the taxes and making the U.S. companies active in the mergers and acquisition to supplement inadequate economic levels in some locations. Rossi and Volpin (2004) equally explores the determinants of mergers and acquisition. However, this focuses more on the legislation and legal terms of countries, zones and communities. There are different laws and regulations in each country that guide how mergers should be conducted and how they are supposed to be run. There are bodies that keep these law in check so that no company can go against the laws; failure to follow them as required is always accompanied by penalties and unpleasantly actions. It is observable that countries with advanced and well developed legislation experience more merger and acquisition activities. In these countries, the shareholders are protected and they have no risk of being victims of circumstances in case of any unlikely event. The shareholders also have their all-cash bid decreased when acquiring shares from the country. An analysis is conducted on a sampled mergers and acquisitions announced in 1990s and completion arrived at in the year 2002. The analysis covers 49 active countries that have a well advanced legal structure that handles mergers and acquisitions. These active countries are the best hotbed for studying how legal issues can affect the mergers and acquisitions throughout the world. The countries have a direct trade link with smaller countries and any oppression to their market will directly affect other countries that benefit from the same. The more the mergers and acquisitions by certain stakeholders the higher the protection offered for their investments. The legal experts ensure they are kept away from hostile takeovers and dubious deals across borders. Using the products of a company to pay for goods rather than funds is regarded as the best way of protecting an investment (Dikova et al. 2010). Focusing on cross-border acquisition abandonment and completion Dikova et al. (2010) observed that the stocks can be easily protected in form of materialistic items rather than many that can unfortunately be unaccounted for when it gets into untrustworthy hands. It is also detectable that domestic investment is safer than the foreign one considering the diversity in laws and the way of conducting business from country to country. Their investments tend to be more effective and competitive in the view of the clients and the merger and acquisition market. Shimizu et al. (2004) look back into how cross-border mergers and acquisitions establishment. This is used to come up with recommendations for the betterment of the market and business field. The merging of companies has taken route for over 10 years and there are many advancements that have taken place. Some have improved the market whereas other have led to the lagging behind in terms of trade and economy. It is ironical how diversification does not measure up to the age of this part of the economic growth. The mergers and acquisitions are faced by multiple challenges that leads to its fragmentation results into a whole lot of issues to be addressed by researchers. This article attempts to evaluate these challenges as they focus on each of them at a foreign perspective. This is a strength of the methodology used. It definitely explains that there is no favoritism and influence the researchers want to impose on the market; therefore, there is no room for bias. The research focuses on three issues: the entry mode into the foreign market, how learning takes place in a foreign culture and creation of strategies. There are also major findings that initiate and act as guide for future researches. The strategy of cross-border mergers and acquisitions has been largely used by several companies to expand, gain entry into a region and get more returns for their goods and services. There are a lot of issues that they share with the domestic mergers and acquisition, but still there are unique features that make them totally different in many aspects. Research on the domestic type has been more than the cross border. Over the last decade, the cross-border mergers have been very popular and used across companies without the participants understanding finer details about it. The major goal of this research was to develop findings about the cross-border type in order to pave way for future researches. It is better for future researchers to understand more about it. This is ideal in coming up with viable topics that assist in strategy development in future. World Investment Report (as cited in Rusinski 2000) conducted a study under the UNCTAD UN chapter that focused on international associations and bodies that have an impact on the production of items in different firms and companies worldwide. The UN data by then identified 63,000 primary firms with almost 700,000 affiliated firms. The research identifies actively involved countries as developed countries and the others as developing countries. There are a number of objectives that drive how activities take place between firms that will determine the development of mergers and acquisitions. The developed countries are far much fewer than the developing countries. This means that to make an entry into a merger, there must be a guided channel towards coming up with the most effective strategies to make a stronger approach into the market. During the entry process, there are lots of shorter and longer direct and indirect effects that participate in determining how events will turn out. The host country must be studied exhaustively and their reactions actively predicted in the process of making this entry. The policies made in the initial process affects the general turnout of events. The mergers and acquisitions have become the best way restructuring companies and reshaping the firms in a bid to globalize the market. This is how an international production system is developed and put into practice. The cross-border mergers and acquisition is roughly an advancement of the domestic mergers and acquisition, now takes a different approach since the environment of application is totally different. Collins et al. (2009) describe the influence of the experience from previous merging and acquisitions to the future involvement of those companies in the same activities. The difference in the types of acquisition resulted in the varied significance of their impact on future acquisition activities. Previous international mergers had more impact on subsequent international acquisition as compared to the impact of past domestic mergers. Similarly, prior merger experience within a host country had more effect to future acquisitions within the country as compared to previous non-host country international merger experience. The study uses data from all the S&P 500 companies. Since there is little information about cross-border acquisitions, the research proves to be important by addressing this inadequacy. Moreover, the study clarifies the particular influence that each kind of merger has to future purchases. Contrarily, the study provides little information on companies based in other foreign countries. Although international acquisitions involve businesses that are based in foreign countries too, the study should have provided more information about them. Tian et al. (2010) conducted a similar study on the influence of previous Merger and Acquisition experience to the future related activities. The study examined the effects of performance, past acquisition performance, and their interaction to the likelihood of subsequent merger and acquisition activities. They based on the data from the commercial banking industry in America between 1988 and 2001. This research focused on the organizational level of analysis to evaluate variables such as acquirer size, acquired slack resources, gained firm performance, and acquire financing capability. According to the study, the organizations need to manage their merger experience and have co-operate activities for the success of their acquisitions. Although the focus of Haleblian, Kim and Rajagopalan's study to one industry improved the accuracy of the research's findings, the specialization limited the study's generalizability to the banking sector and the related industries. Organizations should carefully evaluate their merging and acquisition experience and performance since they determine the companies' future purchase decisions. Bevan and Estrin (2004) describe the factors that determine the foreign direct investments into European Union transitions economies as the gravity factors, unit labor costs, and the announcement about European Union Accession proposal, market size and proximity. The study arrives at these factors from the analysis of the panel data on bilateral flows between a source and a host economy. This research occurred between 1994 and 2000 and involved secondary data from international Direct Investment Statistics Year Book, the United States Chamber of Commerce and central banks and central statistical offices in the Baltic States. Creditably, the article explains the benefits of foreign direct investment to the transition economies. According to Bevan and Estrin, the investment improves their economy and determines their membership to the European Union for better business deals. Conversely, the relevance of the information in the article varies with time (Tian et al. 2010). Time influences the impact of factors such as unit labor cost and market size. The recipient countries would also have changed their status to more economically stable economies. Thus, the information would be irrelevant to the countries few years after the study. According to a similar study by Janicki and Wunnava (2004) the major determinants of foreign direct investment to the central and east European candidates are the size of the host economy, labor cost in the host country, host country risk, and openness to trade. Furthermore, the research noted host transportation infrastructure as another determinant of foreign direct investment in the transitioning countries. Eight central and east European candidates and European Union member states formed the basis of the study on bilateral foreign direct investments. Janicki and Wunnava (2004) suggest that the countries with fewer investors could focus on using the determinants in the research to attract more investors. They also concentrated on the importance of political stability in attracting more investors to the central and east European countries. Although the determinants of Foreign Direct investments are almost similar, European countries with transitioning economies should focus on improving their market size and unit labor cost to the investors since the two are the most common determinants than the rest. Breinlich (2008) illustrates how mergers and acquisitions can lead to the restructuring of the trade industry after trade liberalization. Detailing research data on trade liberalization, industrial restructuring through mergers and acquisitions, it bases on the study of both American and Canadian companies after the Canada–United States Free Trade Agreement (CUSFTA) of1989. According to Breinlich (2008), trade liberalization increased the domestic Merger and acquisition activities in the Canadian market. This changes affected the Canadian firms more than the American companies. Furthermore, the study notes that the organizations that participated in the merger and acquisition quickly adjusted to freer trade as compared to the businesses that resolved to closure, contraction or internal expansion. The study is important since the research provides essential information to firms on the possible outcomes of merging and acquisition activities on their organizational structures. This information is relevant to the organizations' policy makers, particularly if the effects of restructuring could cause significant financial challenges. On the other hand, the study has shortcomings such as a small sample size. The research only focused on the effect of merger and acquisition activities of companies in one continent. This little size limits the usefulness of the findings since the variables in other regions of the world could lead to different outcomes. A similar study by Bhagat et al. (2002) suggested that small organizations that are adversely affected by liberalization should merge with big ones for their survival. This findings base on the information the research obtained from a two country Cournot model. The organizational adjustment in the larger organizations to include the small ones after a Meger and acquisition activity exposes the small firms to larger markets. Although the small businesses may lose their domestic markets due to the resultant changes in their structure, the businesses benefit more from the foreign market. Moreover, the acquirer organization can reorganize the small businesses structures into more economical and efficient models. The merger and acquisition activities lead to changes in of organizational structure to enable them to adjust to the freer market. In analysis of the cross-border mergers and acquisitions as well as the role of trade costs, Ramasamy et al. (2012) found out that as much as the trade costs impacts negatively on the cross merger activity across the horizontal and the no-horizontal mergers, the impacts are more on the horizontal mergers. A number of direct investment has been as a result of mergers and acquisition and not due to Greenfield investment. This has necessitated the need for further studies into determining the policy making processes. As a way to get to the foreign market, the best mechanism is through exportation and investments abroad. Several stages are involved in the talks to make agreements on the mergers or takes overs or in this case Acquisition. These stages contribute to the actual measures that are undertaken prior to the final decisions. Other studies that have been conducted into the filed are among others, Neary of 2007 that created a model of merger that analyzes trade liberalizations and with increased cross-border mergers. Sun et al. (2012) analyzed how important literature is in the view of studying effects of regional trade agreements. Considering the failures realized with the talks towards actualization of the deals for mergers and take overs, Hijzen et al. (2004) concluded that the internal pre-emptive mergers have reduced in significance. Additionally, Dikova et al. (2010) found out that horizontal M & A contributes to 42% of the world total mergers. Dikova et al. (2010) was interested in finding the premerger deals that occur in the acquisition and mergers of companies by the dominant groups. From this paper, the trio state that it’s important to understand that pre-merger talks are critical as it has emerged that just before the conclusion of the merger or the acquisition talks, the submitting firm already has less than 25% left in their possession that they finally surrender. This implies that the pre-merger talks are the most important. In very rare incidences, the deals can be terminated just before the final agreements and this would follow court rulings as a result of either breach of contracts. The research also examines what occurs the intermediary stages of the agreement. As such the intermediary stages are examined as the particular stage where most of the deals are done, unfortunately some deals are seen as have failed. The methodology used by the researchers is the acquisition transactions through which the company’s publications on their transactions are used to generate the available data for the research. This is essential because multiple transactions can be analyzed, the researchers are also able to account for within-firm correlations. The shortcoming for the methodology is that the data only analyzes the specified duration but not the entire transactions narrowed evaluation. Other studies that have been done on the same include the research by Bevan and Estrin (2004) that revealed that several deals have ever failed during the intermediary stages. The included is the raw deal between the Telecom Corporation and the Sweden Company that ended several months into the final face of the agreement. Another study into the objectives is a research study by Collins et al. (2009) that proved that most of the companies peg their deals on their previous experiences and as such would base all their merger deals on the past experiences. Therefore, failures and successes are based on the literature and are key features in determining the potential deal to be undertaken. Ramasamy (2012) in their review of the effects of location choice and firm ownership The success of major businesses has been attributed to increased FDI from the developing world and the opportunities taken by the multinationals in the developing countries to develop abroad. This has resulted into increased FDI. Chinese is taken as an example due to its increased market and broader sales. This owes to the Chinese decision to start investing into the third world countries. The third world countries have a broader market and is also rich in untapped resources that can be utilized by the Chinese for production. Other studies conducted into the field include among others Cheng & Ma in 2008 considers China’s geographical location as a factor that contributes majorly to China’s increased market. A contribution made by Rusinski (2000) explains how the government presence in a market would lead to a double sales and profits. Chinese companies are surprisingly attracted to high risks countries in which operations are at high costs. It’s location at the central point of the East and the West enables it to expand its borders from within outwards. Chinese maintains its existing markets as it also make advances into the new markets. The Methodology used for the study is that which tries alternatives to come up with a new hypothesis. As such, the variations and the proxies are utilized to test and disapprove the null hypothesis. The data that was used during the study is therefore sourced for from the annual reports and provided for a clear comparison to be made. The challenges to such a method however, is the consideration of the data as a count series thus Chinese is used to generate a model that is supposed to work for other countries as well amidst the diversities. There is also exclusion of countries that are not part of the recipients of China’s FDI. Even though the private companies make advances into the market, they are often perceived as a lot for the rich countries. This therefore means that the private sectors have a narrowed market of the few rich people compared to the Chinese public firms. The methodology used in this study is empirical analysis that incorporates all the dimensions. This pattern has the potential of explaining several dimensions and distinguishing different types of cross-border M & As. Calculation of the regression is thus possible with the use of these data. It also provides for the calculation of the real data rather than just that pure number only. The data collected would be a subject to plagiarism and biasness and thus the calculated data would not be perfectly correct. The challenges to this formula is rather incorrect data entry and calculations. Other industries dummies were not used and as such t would not be proper making the comparisons. Finally, Sun et al. (2012) made a comparison of the cross-border merger in India and China. This research comes almost a decade later than the others. It is prompted by the aggression that has followed the great progress in the cross-border merger and acquisition. The activity has raised eyebrows in the global market and has become a bone of contention. Each firm or country has its own approach to this activity. The ownership advantage for the cross border merger and acquisitions depend on reconfiguration of value chain, dynamic learning, institutional constraints and facilitations, value creation and the national industrial factors. These are tested properly to establish the role they play in the ownership advantage framework. This research involves 1526 merger and acquisitions by Indians and Chinese between 200 and 2008. This selection is equally relevant for the study. The time span is adequate for the easy management of findings and accurate data collection. The research established that the two countries have begun venturing deeply into overseas markets and explore their chief interests via the mergers and acquisitions. This has made the cross border type their preference. The patterns shown in the piece is not adequate enough to prove why this is so – this is the situation in the contemporary society. China and India as separate countries are also creating lots of cross-border mergers between themselves. It is beyond doubt that the two countries are likely to grow much economically and socially over time. This can be the onset of an idea of creating a common market to serve both countries equally. This has been practiced in some nations. In conclusion, the cross border merger has grown mysteriously in the past 20 years. Developed countries have used this strategy not only to exploit the ready market in developing countries but to build a rapport that is associated with ability to invest without limit. Partnerships have been developed that rank highly in the national list of income generating tasks. Better strategies should, therefore, be set to address any challenges. References Agrawal, A., Jaffe, J.F. and Mandelker, G.N., 1992. The post‐merger performance of acquiring firms: a re‐examination of an anomaly. The Journal of finance, 47(4), pp.1605-1621. Bevan, A.A. and Estrin, S., 2004. The determinants of foreign direct investment into European transition economies. Journal of comparative economics, 32(4), pp.775-787. Bhagat, R.S., Kedia, B.L., Harveston, P.D. and Triandis, H.C., 2002. Cultural variations in the cross-border transfer of organizational knowledge: An integrative framework. Academy of management review, 27(2), pp.204-221. Breinlich, H., 2008. Trade liberalization and industrial restructuring through mergers and acquisitions. Journal of international Economics, 76(2), pp.254-266. Building a Better Working World (2015). Buying and Selling: Cross-border mergers and acquisitions and the US corporate income tax. Prepared for the Business Roundtable. Dikova, D., Sahib, P.R. and Van Witteloostuijn, A., 2010. Cross-border acquisition abandonment and completion: The effect of institutional differences and organizational learning in the international business service industry, 1981–2001. Journal of International Business Studies, 41(2), pp.223-245. DIKOVA, J.D., Holcomb, T.R., Certo, S.T., Hitt, M.A. and Lester, R.H., 2009. Learning by doing: Cross-border mergers and acquisitions. Journal of business research, 62(12), pp.1329-1334. Erel, I., Liao, R.C. and Weisbach, M.S., 2012. Determinants of cross‐border mergers and acquisitions. The Journal of Finance, 67(3), pp.1045-1082. Gorg, H., Hijzen, A. and Manchin, M., 2007. Cross-border mergers & acquisitions and the role of trade costs. Janicki, H. P., & Wunnava, P. V. (2004). Determinants of foreign direct investment: empirical evidence from EU accession candidates. Applied Economics, 36(5), 505-509. doi:10.1080/00036840410001682214 Ramasamy, B., Yeung, M. and Laforet, S., 2012. China's outward foreign direct investment: Location choice and firm ownership. Journal of world business, 47(1), pp.17-25. Rossi, S. and Volpin, P.F., 2004. Cross-country determinants of mergers and acquisitions. Journal of Financial Economics, 74(2), pp.277-304. Rusinski, M., 2000. World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development. Pol. Q. Int'l Aff., 9, p.132. Shimizu, K., Hitt, M.A., Vaidyanath, D. and Pisano, V., 2004. Theoretical foundations of cross-border mergers and acquisitions: A review of current research and recommendations for the future. Journal of International Management, 10(3), pp.307-353. Sun, S.L., Peng, M.W., Ren, B. and Yan, D., 2012. A comparative ownership advantage framework for cross-border M&As: The rise of Chinese and Indian MNEs. Journal of World Business, 47(1), pp.4-16. Tian, J. J., Haleblian, J. J., & Rajagopalan, N. (2010). The effects of board human and social capital on investor reactions to new CEO selection. Strategic Management Journal, 32(7), 731-747. doi:10.1002/smj.909 Read More