International Mergers (CBR project)

Overview

Aims and objectives

This project was concerned with the econometric analysis of the determinants and effects of mergers in an international setting. Particular attention was paid to data development and appropriate modelling techniques drawn from an industrial organisation and financial perspective. Increasing attention was being paid to organisational learning and strategy issues in the interpretation and modelling of takeover outcomes and this was reflected in the pattern of dissemination.

Results and dissemination

The paper entitled “Why must all good things come to an end? The performance of multiple acquirers”, by Conn, Cosh, Guest and Hughes was further developed and presented at the Annual Meeting of the Academy of Management (New Orleans, August 2004) and the European Financial Management Association (Basle, Switzerland, June 2004). It was well received at both conferences and was shortlisted for the prestigious Carolyn Dexter award at the Academy of Management Conference.

This paper finds that for multiple acquirers, short and long run performance declines significantly with each subsequent acquisition. The pattern is robust to controlling for bid characteristics that are known to impact takeover performance. Various hypotheses are tested, and the paper shows that the decline only occurs for acquirers whose first acquisitions are successful. For acquirers whose first acquisition is unsuccessful, the bid order effect is positive. These results are consistent with a hubris effect, mean reversion effect, or diminishing returns effect for successful first acquirers and with some learning effects for unsuccessful first acquirers.

Dessyllas and Hughes completed two working papers on international samples of over 9,000 mergers. These were on The Revealed Preferences of High Technology Acquirers: An Analysis of the Characteristics of their Targets (CBR Working Paper 306);and R&D and Patenting Activity and the Propensity to Acquire in High Technology Industries (CBR Working Paper 298). The first shows that financial and technology related variables explain only a modest part of the probability of becoming a target but that in general, targets have a relatively larger stock of accumulated knowledge, relatively higher R&D inputs (R&D-intensity), but they are less likely to generate R&D output (citation-weighted patent-intensity) before they are acquired. It concludes that the characteristics of target firms reflect a process which is primarily driven by acquirers wishing to exploit the potential for turning around financially and technologically inefficient target firms. The second paper finds some support for the view that the propensity to acquire new knowledge-related assets through acquisitions is driven by declining returns from the on-going exploitation of a firm’s existing knowledge base, and strong evidence in favour of the make-or-buy theory that acquisitions are employed by high technology firms as a means for sourcing knowledge externally as a substitute for in-house R&D activity. The results are also in accordance with the theoretical argument that a large stock of accumulated knowledge is essential if the acquirer is to have the necessary absorptive capacity to identify the appropriate target and to fully exploit its innovative potential. These papers were successfully submitted for presentation to the European Academy of Management Conference and the Academy of Management Conference respectively.

Three of the PhD students working on this project successfully defended their dissertations were awarded their PhDs and were appointed to Lectureships or post doctoral fellowships at leading UK universities. Costas Constantinou’s thesis examined the determinants and effects of domestic and cross border acquisitions within the oil industry. Charalambos Constantinou examined the choice of entry mode for cross-border acquirers within the automobile industry. Panayotis Dessyllas examined the relationship between mergers R&D and patenting activity in high technology industries using a large dataset on mergers in the OECD economies.

Principal investigators

• Charlie Conn (University of Miami)
• Andy Cosh
• Paul Guest
• Alan Hughes

Research associate

• Panayotis Dessyllas (Manchester Business School)

Project status

Completed

Project dates

2001-2004