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Determinants of the share of equity sought in cross-border acquisitions

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Abstract

The extent of ownership in foreign market entry is an important topic in the entry mode literature. Yet the determinants of the share of ownership sought in cross-border acquisitions (CBAs) have not received much research attention. Drawing on multiple theoretical explanations, we develop and test hypotheses on factors influencing the share of equity sought by foreign firms in CBAs. Findings based on a sample of CBAs by US firms show that the share of equity sought is influenced by many factors, including the cost of valuing local firm assets, difficulty in integrating local firm managers in culturally distant countries, the cost of separating desired assets from the rest of the local firm, and the cost of resource commitment under exogenous uncertainty.

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Notes

  1. Firms sometimes acquire equity in a new entity (a joint venture) created in part by carving out assets of a local partner's existing business unit. Our focus is not on such entries, but on entry by acquiring equity ownership in local firms in their entirety. Also, we use the terms “share of equity” and “share of ownership” synonymously in the paper.

  2. UNCTAD reports that CBAs have accounted for over 50% of FDI worldwide in 11 of the 12 years between 1995 and 2006 and over 60% of FDI in 8 of those 12 years.

  3. Barkema and Vermeulen (1998) is an exception where, as a post hoc analysis to their study of entry through acquisition vs startup, they also disaggregate their sample into traditional JVs and acquired JVs (partial acquisitions), and compare these JVs, along with wholly owned startups, with wholly owned acquisitions.

  4. The number of board seats and therefore the level of control obtained would in general vary with the share of equity acquired.

  5. Our argument here is consistent with Luo's (2001: 51) argument for the necessity of using a multi-theoretic approach to study equity shares in a different context – international joint ventures.

  6. In addition, when used together in the same model, it is important to interpret the results carefully, factoring in the overlap between the explanations. Specifically, one cannot reject the ex ante valuation costs explanation when support for the ex post separating desired assets and non-desired assets explanation is found, even if other “direct” indicators of ex ante valuation costs are found to have an insignificant effect (Reuer & Koza, 2000).

  7. The Merriam-Webster Online Dictionary defines “complementary” as “serving to fill out or complete” or “mutually supplying each other's lack,” and “competing” as being “in a state of rivalry.” It is in the spirit of this meaning that we use the terms “complementary” and “competing.” Specifically, we expect that each of the four theoretical explanations will “serve to fill out” or “supply each other's lack,” such that the theoretical explanations together will more completely explain the share of equity sought in CBAs. That is, empirically, each theoretical explanation will account for additional variation in the share of equity sought, beyond what is accounted for by the other theoretical explanations. Put differently, all four theoretical explanations will be significant in explaining variation in the share of equity sought when used together in the model. A competing relationship between two theoretical explanations, on the other hand, implies that only one of the two explanations is “right.” Empirically, therefore, a competing relationship among the theoretical explanations suggests that only a subset of the four explanations, rather than all four, will be significant in explaining variation in the share of equity sought when the four explanations are used together in the model.

  8. The definition of up to 80% as partial, and 80% or above as full acquisition, is rather arbitrary, as acknowledged by Chen and Hennart (2004: 1133).

  9. Interestingly, unlike Chen and Hennart (2004), Barkema and Vermeulen (1998) did not provide a definition for partly owned or partial acquisitions.

  10. When the target is divisionalized, assuming desired assets are contained within a division, the separation costs may be lower, as Hennart and Reddy (1997) argued. However, Hennart and Reddy (1997) also found that their results for measuring separation costs using a combination of target size and divisionalized status replicated well when separation costs were measured using only target size. Also, reliable data on the divisionalized status of targets are not available for most of our sample, thus prohibiting its use in our study.

  11. The Tobit regression model we use accounts for both left- and right-censoring of our dependent variable.

  12. A total of 508 unique firms accounted for the 730 acquisitions in the sample.

  13. Our results did not change when we used an alternative measure based on comparing both primary and secondary SICs.

  14. Since we pool data over a 7-year period, we need to account for local firm size differences due to inflation. We do this by scaling all local firm market values to 2002 dollars.

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Acknowledgements

The authors thank the Departmental Editor, Professor Yadong Luo, and three anonymous reviewers for their insightful and constructive reviews.

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  1. School of Business and Economics, Indiana University South Bend, South Bend, USA

    Murali DR Chari & Kiyoung Chang

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  1. Murali DR Chari
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Correspondence to Murali DR Chari.

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Accepted by Yadong Luo, Departmental Editor, 14 March 2008. This paper has been with the authors for three revisions.

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Chari, M., Chang, K. Determinants of the share of equity sought in cross-border acquisitions. J Int Bus Stud 40, 1277–1297 (2009). https://doi.org/10.1057/jibs.2008.103

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