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7. Conclusion
Cross-border M&A have increasingly evolved into an effective strategy used by a large number of companies with global presence. Over the last couple of decades, cross-border M&A have continued to intensify significantly as capital reallocation between firms has increasingly been facilitated through interactions between financial liberalization policies and regional agreements. Our paper contributes to the growing interest around this trend which is important but much less understood since the driving forces underlying the patterns of cross-border M&A are complex in nature.
Using a general equilibrium model of oligopoly, we show that local competition matters for cross-border M&A in a vertically integrated industry.
In particular, we show that the incentives for cross-border mergers rise with vertical integration in an industry when the pre-merger concentration in that industry is sufficiently high relative to the concentration in the same industry in a foreign country. We also show that the incentives for a merger between a foreign firm and a vertically integrated home firm will be higher than that for a merger between a foreign firm and a disintegrated home firm, when the pre-merger concentration at home is low relative to the pre-merger concentration in the foreign country.
Logistic regression analyses of cross-border M&A observations, on firms from 86 countries over the years 1990 – 2012, provide strong empirical support for the significant impact of industry concentration on firms’
cross-border M&A decisions. We believe that the relevance of our findings will capture the attention of future researchers with the growing consensus that “a new wave” of cross-border mergers is imminent. Some interesting extensions, of our work, may involve the allowance for technology transfer á la Mukherjee and Pennings (2006), greenfield foreign direct investment á la Mukherjee and Suetrong (2009), and urban unemployment á la Oladi and Gilbert (2011).
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Chapter II References
Ahern, K. R., Daminelli, D., and Fracassi, C., 2013. “Lost in Translation? The Effect of Cultural Values on Mergers around the World,” Journal of Financial Economics, forthcoming.
Alfaro, L. and Charlton A., 2009. “Intra-industry Foreign Direct Investment,”
American Economic Review, 99, 2096-2119.
Beladi, H., Chakrabarti, A., and Marjit, S., 2013. “Cross-border mergers in vertically related industries,” European Economic Review 59, 97-108.
Bernile G., Lyandres E., Zhdanov A., 2012. "A Theory of Strategic Mergers", Review of Finance, 16, 517-575.
Chari, A., Ouimet, P., and Tesar, L. L., 2010. “The Value of Control in Emerging Markets,” Review of Financial Studies, 23, 1741-1770.
Erel, I., Liao, R. C., and Weisbach, M. S., 2012. “Determinants of Cross-border Mergers and Acquisitions,” Journal of Finance, 67, 1045-1082.
Falvey, R., 1998. “Mergers in Open Economies”, The World Economy 21, 1061-1076.
Fan, J. P. H., and Goyal, V., 2006. “On the Patterns and Wealth Effects of Vertical Mergers,” Journal of Business, 79, 877-902.
Finkelstein, S., 1999. “Safe Ways to Cross the Merger Minefield” in Tim Dickson ed., Financial Times Mastering Global Business: The Complete MBA Companion in Global Business, London: Financial Times Pitman Publishing, 119-123.
Giovanni J. D., 2005, “What Drives Capital Flows? The Case of Cross-border M&A Activity and Financial Deepening”, Journal of International Economics, 65, 1, 127-149.
Head, K. and J. Ries, 1997. “International Mergers and Welfare under Decentralized Competition Policy”, Canadian Journal of Economics, 30, 1104-1123.
Jovanovic, B., and Rousseau. P. L., 2008, "Mergers as Reallocation." The Review of Economics and Statistics, 90, 765-776.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. W., 1997. “Legal Determinants of External Finance,” Journal of Finance, 52, 1131-1150.
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La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. W., 1998, “Law and Finance,” Journal of Political Economy, 106, 1113-1155.
Lipton, M., 2006. “Merger Waves in the 19th, 20th and 21st Centuries”, The Davies Lecture, mimeo, York University.
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Melicher, R. W., Ledolter J., and D'Antonio L. J.., 1983, "A Time Series Analysis of Aggregate Merger Activity.", The Review of Economics and Statistics, 65, 3, 423-430.
Mukherjee, A. and E. Pennings (2006): "Tariffs, Licensing and Market Structure." European Economic Review, 50, 7, 1699-1707.
Mukherjee, A. and K. Suetrong (2009): “Privatization, Strategic Foreign Direct Investment and Host-country Welfare”, European Economic Review, 53(7), 775-785.
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Neary, J. P., 2007. “Cross-border Mergers as Instruments of Comparative Advantage,” Review of Economic Studies, 74, 1229-1257.
Nocke V. and Yeaple S., 2007, “Cross-border Mergers and Acquisitions vs.
Greenfield Foreign Direct Investment: The Role of Firm Heterogeneity”, Journal of International Economics, 72, 2, 336-365.
Oladi, R. and J. Gilbert (2011): “Monopolistic Competition and North-South Trade”, Review of International Economics, 19, 3, 459-74.
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Journal of International Business Studies, 35, 19–32.
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Rose, A. K., 2000, “One Money, one Market: Estimating the Effect of Common Currencies on Trade,” Economic Policy 30, 7-45.
Weinberg, M. C., and Hosken D., 2013, "Evidence on the Accuracy of Merger Simulations." Review of Economics and Statistics, forthcoming.
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Appendix 1.A Variable definitions and data sources for Chapter II
This table provides detailed definitions and data sources for all the variables used in Chapter II.
Variables Definition Source
CrossBorder A dummy variable that equals one if the deal is
cross border M&A and zero otherwise.
SDC Platinum HomeVertical A dummy variable that equals one for targets that
were vertical merged at domestic market and zero otherwise.
DealScan
Market Concentration
Target_HHI Calculated as is the Herfindahl-Hirschman Index
of target’s industry. BankScope
Acquirer_HHI Calculated as is the Herfindahl-Hirschman Index of acquirer’s industry.
BankScope
RelativeHHI Calculated as the Herfindahl-Hirschman Index of target’s industry/the Herfindahl-Hirschman Index of acquirer’s industry.
BankScope
Control Variables: Market Condition Measures
Distance Calculated as the bilateral distance between target and acquirer country.
CEPII
Market Size
Target_LogMarketSize Calculated as the natural logarithm of GDP per
capita in U.S. dollars of target’s country. WorldBank Acquirer_LogMarketSize Calculated as the natural logarithm of GDP per
capita in U.S. dollars of acquirer’s country.
WorldBank
MarketSize_Ratio Calculated as the natural logarithm of GDP per capita in U.S. dollars of target’s country/the natural logarithm of GDP per capita in U.S.
dollars of acquirer’s country.
WorldBank
Country Skill
Target_CountrySkill Calculated as the high school enrollment years of schooling per worker of target’s country.
WorldBank
Acquirer_CountrySkill Calculated as the high school enrollment years of schooling per worker of acquirer’s country.
WorldBank
CountrySkill_Ratio Calculated as the high school enrollment years of schooling per worker of target’s country/the high school enrollment years of schooling per worker of acquirer’s country.
WorldBank
Industry Skill
Target_IndustrySkill Calculated as number of workers in the target’s industry.
WorldScope
Acquirer_IndustrySkill Calculated as number of workers in the acquirer’s
industry. WorldScope
CountrySkill_Ratio Calculated as number of workers in the target’s industry/number of workers in the acquirer’s industry.
WorldScope
Others
Proximity Calculated as a ratio of the direct to the total
inputs used by the firm. WorldScope Closeness Calculated as the absolute difference if four-digit
SIC between target and acquirer
WorldScope
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Appendix 1.B Model and Propositions
Consider a stylized world, containing 2 countries (Home and Foreign), where (upstream) production requires capital (K at home and
K
*in the foreign country) and skilled labor (LS at home and L*Sin the foreign country).Capital and skilled labor are assumed to be homogeneous and mobile within but immobile across borders. The product space is dense with a continuum of varieties which are indexed byz[0,1]. The market for a given variety
z
is characterized by Cournot competition betweenn
firms from home and n* firms from the foreign country. For any givenz
, producers in a given location face identical Cobb-Douglas unit cost of production: c A(z)w1s(z)r(z) at home and foreign respectively. Downstream producers can purchase a varietyz
at a price p(z)from the upstream market and employ unskilled labor (homogeneous and mobile within but immobile across borders), denoted by LU at home and L*U in the foreign country, to produce a homogeneous output that is freely traded across the borders. We assume that each unit of output requires one unit of a given varietyz
and each country’s access to production technology is reflected by unit requirements of their unskilled labor denoted by
and
* with wagesw
u and w*u at home and foreign respectively. The world inverse demand curve for a given varietyz
is)
respectively.
is the world marginal utility of income which we choose as the numeraire. We will, hereinafter, normalize the factor prices to Ws
ws,For the same
z
, each firm in the foreign country will
* 1 1 * * *‧
In equilibrium, each firm yields(A.3)
not exceed a weighted average of the demand intercept and the unit cost of a foreign firm, where the weight attached to the former is decreasing in the number of foreign producers:(A.5) c0a'
10
c*Analogously, it will be profitable for a foreign firm to produce
z
iff its unit cost does not exceed a weighted average of the demand intercept and the unit cost of a home firm, where the weight attached to the former is decreasing in the number of home firms:(A.6) c a
*0
cThe aggregate output and price are
(A.7)
The profit each firm earns is
(A.9)
i( n , n
*) b ' y
i( n , n
*)
2 i
1,2,...,n
(A.10)
*i( n , n
*) b ' y
i*( n , n
*)
2 i1,2,...,n* Skilled labor markets clear if(A.11)
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foreign country respectively, and)
Capital markets clear if (A.13)
country respectively, and)
essentially a General Equilibrium analogue of the traditional Herfindahl-Hirschman index ( HHI ), for an industry with multi-product firms operating in an open economy, operating in each of the regions
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Figure A.1 Concentration and Trade
Figure A.1 above captures the distribution of production and trade.
When the cost of every producer exceeds '
a
, in region O, then the variety is not produced at all. In region H only the home firms can compete and inFigure A.2 Increase in the number of Foreign Firms, Concentration, and Trade
0‧
foreign firms on the distribution of production and trade. When the number of foreign producers rises, the extensive margins of trade expand with regionF (where exclusively foreign firms can compete) expanding and the cone of
diversification HF (where both foreign and home firms can co-exist) shrinking.In effect, the HHI falls in F, rises in HF, but remains unchanged in H.
Figure A.3 below captures the effect of a merger between a foreign firm and a firm on the distribution of production and trade. In the post-merger equilibrium, the extensive margins of trade expand with regions F (where exclusively foreign firms can compete) and H (where exclusively home firms can compete) expanding and the cone of diversification HF (where both foreign and home firms can co-exist) shrinking. In effect, the HHI rises in F and H but falls in HF.
Figure A.3 Merger, Concentration, and Trade
Starting from the equilibrium industrial structure in autarky, with
n
firms at home and n* firms in the foreign country, let us (for ease of exposition, without loss of any generality) assume hereinafter that foreign firms are relatively cost-efficient i.e. cc*.The net gain from a takeover of a home firm by a foreign firm is
(A.18)
1 1 *
‧
The same logic can be applied, mutatis mutandis, to a takeover of a foreign firm by a home firm which will be profitable iff
c
When an upstream firm is integrated with a downstream firm at home, the net gain from a takeover of the integrated home firm by a foreign firm is (19)
G
* N
0 2 ( c c )
*y
1( n , n
*) b y
1( n , n
*)
2 N
0 ( n n
* 2 )
When an upstream firm is integrated with a downstream firm at home, the net gain from a takeover of a disintegrated home firm by a foreign firm is
(20)
*
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Our main propositions follow from (A.18) through (A.21).
Proposition I. Vertical integration at home increases the gains from
In other words, the incentives for cross-border mergers rise with vertical integration when the pre-merger HHI at home is sufficiently low relative to the HHI in the foreign country. Intuitively, this follows from an interaction between efficiency and concentration as a merger between a high-cost and a low-cost firm increases efficiency by eliminating the high-cost firm. The larger the cost differential, the greater is the gain from a low cost firm taking over a high cost firm. Vertical integration affects relative costs through its effects on competition in the input market. The profits of the downstream unit of the integrated firm rise with a rise in its rivals’ costs and the integrated firm is better off withdrawing from the input market. The withdrawal of a vertically integrated firm from the input market weakens upstream competition. This raises the input price which, in turn, leads to a higher cost for the non-integrated downstream firms.
Proposition II. When an upstream firm is integrated with a downstream firm
at home, a relatively efficient foreign firm will have an incentive to acquire a) a disintegrated home firm iff
3 3 *
significantly to justify its taking over a high-cost home firm. When this cost differential is sufficiently large, the foreign firm has a greater incentive to merge with the integrated home firm than to merge with a disintegrated home firm. Vertical integration at home makes foreign downstream firms more competitive and the disintegrated domestic downstream firms less competitive. As such, a vertical integration at home changes the strategic advantages for foreign firms. With the vertically integrated home-firm operating at a lower cost relative to the disintegrated home firms, the increase in the profits of a foreign firm from a merger with an integrated home firm exceeds the increase in its profits from a merger with a disintegrated home firm when there are fewer disintegrated firms at home in the pre-merger equilibrium. In other words, the incentives for a merger between a foreign firm and a vertically integrated home firm will be higher (lower) than that for a merger between a foreign firm and a disintegrated home firm, when the pre-merger HHI at home is high (low) relative to the pre-merger HHI in the foreign country.‧ 國
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