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The role of earnout financing on the valuation effects of global diversification

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Abstract

This article examines the impact of earnout financing on the value of acquiring firms engaged in cross-border acquisitions (CBAs), using a dataset of UK, US, Canadian and Australian firms from 1992 to 2012. The results show that firms initiating international business operations via earnout-financed CBAs enhance their value more than acquirers in (a) domestic acquisitions and (b) remaining CBAs by established multinational corporations (MNCs). Our findings demonstrate the superiority of earnout financing in CBAs announced by acquirers that have no prior international business experience. The results are robust to the firms’ endogenous choice to diversify globally and to the use of earnout financing. We contend that earnouts contribute to the reduction of valuation risk faced by firms acquiring a foreign target firm for the first time. Our empirical findings contribute to the existing debate on the merit of international expansion through CBAs and the role of earnout contingent payment.

Résumé

Cet article étudie l’impact du financement par earnout sur la valeur des acquéreurs engagés dans des acquisitions transfrontalières (ATF), utilisant un échantillon de firmes britanniques, américaines, canadiennes et australiennes de 1992 à 2012. Les résultats montrent que les firmes qui initient des opérations en international business via des ATF financées par earnout améliorent plus leur valeur que les acheteurs concernés par (a) des acquisitions domestiques et (b) d’autres ATF par des entreprises multinationales (EMN) établies. Nos résultats démontrent la supériorité du financement par earnout des ATF annoncées par des acquéreurs qui n’ont pas d’expérience antérieure en international business. Les résultats sont robustes pour le choix endogène des firmes de se diversifier à l’échelle globale et l’utilisation du financement par earnout. Nous soutenons que les earnouts contribuent à la réduction du risque d’évaluation auquel font face les firmes qui acquièrent une cible étrangère pour la première fois. Nos résultats empiriques contribuent au débat existant sur le bénéfice de l’expansion internationale par des ATF et le rôle du paiement contingent par earnout.

Resumen

Este artículo examina el impacto de la financiación basada en ganancias futuras (earnout) en el valor de adquirir empresas dedicadas a adquisiciones transfronterizas (CBA por sus iniciales en inglés), usando una base de datos de empresas del Reino Unido, Estados Unidos, Canadá y Australia en desde 1992 al 2012. Los resultados muestran que las empresas empezando sus operaciones de negocios internacionales mediante financiación basada en el earnout de adquisiciones transfronterizas aumentan más su valor que los adquirientes en (a) adquisiciones nacionales and (b) las empresas dedicadas a adquisiciones transfronterizas restantes de corporaciones multinacionales establecidas. Nuestros hallazgos demuestran la superioridad de la financiación basada en el earnout de las empresas dedicadas a adquisiciones transfronterizas anunciada por los adquirientes que no tienen experiencia previa en negocios internacionales. Los resultados son robustos con la elección endógena de las empresas a diversificar globalmente y a usar financiación basada en el earnout. Sostenemos que el earnout contribuye a la reducción del riesgo de valoración enfrentado por las empresas que adquieren una empresa extranjera objetivo por primera vez. Nuestros hallazgos empíricos contribuyen al debate existente en el mérito de la expansión internacional mediante empresas dedicadas a adquisiciones transfronterizas y el papel del pago contingente con earnout.

Resumo

Este artigo examina o impacto do financiamento de earnout sobre o valor das empresas adquirentes envolvidas em aquisições transfronteiriças (CBAs), usando um conjunto de dados de empresas do Reino Unido, EUA, Canadá e Austrália de 1992 a 2012. Os resultados mostram que as empresas que iniciam operações de negócios internacionais por meio de CBA com financiamento de earnout aumentam seu valor mais do que os adquirentes em (a) aquisições domésticas e (b) demais CBAs de empresas multinacionais estabelecidas (MNCs). Nossos achados demonstram a superioridade do financiamento de earnout em CBAs anunciadas por adquirentes que não possuem experiência anterior em negócios internacionais. Os resultados são robustos para a escolha endógena das empresas para se diversificar globalmente e para o uso de financiamento de earnout. Nós afirmamos que os earnouts contribuem para a redução do risco de valoração enfrentado por empresas que adquirem uma empresa estrangeira pela primeira vez. Nossas descobertas empíricas contribuem para o atual debate sobre o mérito da expansão internacional por meio de CBAs e o papel do pagamento contingente a earnout.

概要

本文使用1992年至2012年期间英国、美国、加拿大和澳大利亚公司的数据集,研究了对赌融资对从事跨境收购(CBAs)的收购公司价值的影响。结果显示,通过CBA对赌融资启动国际业务的公司比(a)国内收购及(b)已建立的跨国公司(MNCs)剩余CBA的收购者提升了其价值。我们的研究结果展示了对事先没有国际业务经验的收购方所宣布的CBA的对赌融资的优势。本结果对于公司在全球实现多样化的内生选择以及对采用对赌融资来说是稳健的。我们认为,对赌融资有助于降低首次收购外国目标公司的公司所面临的估值风险。我们的实证研究结果对现有的关于通过CBA进行国际扩张的优点以及对对赌附随支付作用的辩论做出了贡献。

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Figure 1

Data obtained from the Thomson Reuters SDC ONE Banker database.

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Acknowledgements

We are grateful for comments and suggestions from Lemma Senbet (Area Editor), two anonymous reviewers, Samer Adra, William G. Christie, François Cocquemas, Nicholas G. Crain, Rita Gunn, Susan Hancock, Micaela Maftei, Benjamin Munyan, Kishore Narayanan, Steven Kay, Craig M. Lewis, Luca Savorelli, Berk Sensoy, Sudi Sudarsanam and Nickolaos G. Travlos and to participants at the BAM Corporate Governance (Nottingham, 2017), EFMA (Athens, 2017) and INFINITI (Valencia, 2017) conferences for their feedback and constructive suggestions. We are also grateful for comments and constructive suggestions offered by participants of the seminar series at Vanderbilt University (Owen Graduate School of Management) and at the University of Birmingham (Birmingham Business School). All remaining errors are our own. Jo Danbolt holds the Baillie Gifford Chair in Financial Markets, and his research is partially funded by a Baillie Gifford endowment held by the University of Edinburgh Business School. Baillie Gifford has no role in or influence over the research conducted.

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Authors and Affiliations

  1. Adam Smith Business School, University of Glasgow, University Avenue, Glasgow, G12 8QQ, UK

    Leonidas G Barbopoulos

  2. University of Edinburgh Business School, University of Edinburgh, Edinburgh, EH8 9JS, UK

    Jo Danbolt

  3. Independent Researcher, London, UK

    Dimitris Alexakis

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  1. Leonidas G Barbopoulos
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Correspondence to Leonidas G Barbopoulos.

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Accepted by Lemma Senbet, Area Editor, 4 December 2017. This article has been with the authors for two revisions.

Appendix: Variable Definitions

Appendix: Variable Definitions

See Table 7.

Table 7 This table defines the variables used in the empirical analysis and indicates the data source used
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Barbopoulos, L.G., Danbolt, J. & Alexakis, D. The role of earnout financing on the valuation effects of global diversification. J Int Bus Stud 49, 523–551 (2018). https://doi.org/10.1057/s41267-017-0142-4

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