Abstract
We produce new evidence on whether management which is keen to make foreign acquisitions can benefit from consultation with information-intensive institutional investors who have expertise in the target foreign markets. This research suggests that, in such instances, management should recognise the benefit of effective two-way communication before embarking on such costly strategies. Consistent with theoretical literature, we propose that this can be explained by the fact that complex valuation information is dispersed among many economic agents and management may only have limited access to such data. This research shows that the likelihood of both cross-border deal completion and medium-term cross-border deal success through time depends upon management learning from and getting the support of key institutional investors with regional (foreign) expertise. The theoretical information economics model presented by Dye and Sridhar in 2002 states that the information flow between management and capital markets should be viewed as two way. This study offers empirical evidence in support of their theory. This study offers insights into the positive effect of establishing a proactive investor relations programme for the recruitment of dedicated foreign institutional investors before embarking on cross-border M&A. The results indicate that management should closely monitor the share register and identify those investors who are transient and those who are, in contrast, dedicated. Attention then needs to be directed to establishing effective communication with the dedicated investors with regional expertise.
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Notes
Recorded on numerous press wires at the time, including: Financial Post (National Post), 14 November 2000, ‘Hewlett shelves PWC deal’ by David Akin, with files from Simon Avery.
We recognise that geographic proximity is likely to be only one reason why informational advantages may exist.
See also Gietzmann (2006).
We use the Factset database classification as explained in The Sample section below.
In most transactions, the acquirer is also the ultimate parent but there are some cases in which the two are separate entities. These are usually structured as an acquisition of the target by a subsidiary, often domiciled in the same country as the target, of the ultimate parent. Thus, in the end, the ownership lies in the hands of the ultimate parent’s shareholders. There are a few instances in the database in which the acquirer is a foreign publicly-listed entity, although none in our final sample.
The acquirer’s market value is obtained at 4 weeks prior to the announcement of the deal in order to exclude any reaction in the announcement run-up period.
FSA Handbook, Release 113, May 2011, pp 146 and 161.
Note that for some acquirers only quarterly data is available, however, the same methodology is applied.
Factset uses the address of the registered head office to identify an institutional investor’s regional home.
Specifically, we have estimated the correlation coefficient between the independent variables used in our model illustrated in Appendix 1. The results show that none of the independent variables used in our current model are significantly correlated. In addition, we estimate the variance inflation factors (VIFs) corresponding to our model of acquirer post-merger performance, illustrated in Appendix 2. In line with the rules of thumb typically applied by analysts, none of the VIFs are individually greater than ten and the average VIF is close to one.
Note that the BHAR analysis uses the Total Returns of a company, i.e. it includes the share price appreciation or depreciation as well as the return from reinvesting the paid dividends.
The significance and sign of these regression results was tested with alternative BHAR periods, such as from 3 and 6 months before the announcement of a deal to 24 months after, and the results hold throughout.
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Acknowledgments
The contents of this report reflect the views of the M&A Research Centre and do not necessarily reflect the views of the sponsors of the Centre. The M&A Research Centre would like to express grateful thanks to its sponsors, Credit Suisse, Ernst & Young and Mergermarket for their support and practical guidance.
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Appendices
Appendix 1
Appendix 2
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Faelten, A., Gietzmann, M. & Vitkova, V. Learning from your investors: can the geographical composition of institutional investors affect the chance of success in international M&A deals?. J Manag Gov 19, 47–69 (2015). https://doi.org/10.1007/s10997-013-9268-3
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DOI: https://doi.org/10.1007/s10997-013-9268-3