cross-border mergers and acquisitions · cross-border m&as are one of the strategies that...

1

CROSS-BORDER MERGERS AND ACQUISITIONS:

PATTERNS IN THE EU AND EFFECTS

by: Grazia Ietto-Gillies (South Bank University, London)

Meloria Meschi (formerly South Bank University and currently LECG, London)

Roberto Simonetti, Open University, Milton Keynes

This paper has been prepared as part of the project ‘Technology, Economic Integration and

Social Cohesion’, sponsored by the European Commission under the TSER programme

This paper can be obtained at http://meritbbs.unimaas.nl/tser/tser.html

1. Introduction

As highlighted in chapter one of this book, in recent years mergers and acquisitions

(M&As) have accounted for the majority of foreign direct investment (FDI), with the share

of M&As in FDI even reaching 87% in the industrialized countries. It is reasonable to

argue, therefore, that the recent growth in FDI is mainly due to the increase in

international M&A activity. The rise in international M&As has been one of the most

important factors behind the emergence of new global oligopolies in many industries.

Cross-border M&As are one of the strategies that companies follow for market

penetration in foreign countries. Other well known strategies include exports, franchising,

and direct investment via greenfield. The official data on FDI does not distinguish

between greenfield and M&As type of investment. It therefore does not distinguish

2

between capacity that is new and additional to both the host country and the acquiring

company, and capacity that is already in existence in the host country though additional

to the acquiring company. In one case we have increase in productive capacity for both

the host country and the acquiring TNC - a situation which is similar to domestic capital

formation - in the other we have simply a change in ownership of existing capacity.

Conceptually, therefore, the data on FDI take a micro point of view - the point of view of

the investing TNC - in assessing the level of additional capacity. For the TNC both

greenfield and M&As FDI represent new capacity; however, only the first one - greenfield

- is additional capacity for the host country1.

The market strategies of companies have various aspects of which the entry mode is one.

Another important aspect in the context of this book is the wider issue of world-wide

locational targeting. Are companies targeting regional or global markets in their various

entry strategies? Specifically, in the context of our study, are TNCs from European

countries targeting the EU market and locations or are they aiming at world wide markets

and locations? Are they following an integrated production strategy within Europe or at

the global level in their pattern of M&As?

An analysis of the dynamics of globalisation and European integration must take into

account the role of M&As. An in-depth analysis of the role of M&As in globalisation and

European integration, however, would require at least a book of its own. This chapter only

aims to identify the main patterns of M&As that involve European companies, and to

1 While the analysis of FDI as a whole, is beyond the scope of this chapter, the interested reader canconsult Cantwell (1991) and Ietto-Gillies (1992) for a survey of theories on FDI, and Clegg (1992) for asurvey of the applied literature. Interesting applied papers are also Graham1(992); Cantwell and Sanna-Randaccio (1992); and Barrell and Pain (1997).

3

explore some issues that relate to the economic performance of M&As. Throughout this

chapter the emphasis will be on international M&As rather than on domestic ones.

Many explanations have been supplied as to why mergers occur; there is no agreement

either on theoretical explanations or reliability of the results of applied investigations.

Companies may join forces in order to improve their productive, distributive, or financing

capacity by achieving economies of scale and/or scope. A merger may take place to

enhance the market power of the merging partners and, in some cases, cut down excess

capacity in the industry; or to exploit the cost efficiencies and synergies deriving from the

acquisition of technology or intangible assets, such as the knowledge of the markets.

Firms in oligopolistic industries may decide to merge simply to counteract similar moves

by other companies in the industry (Cantwell, 1992). Finally, when two companies

operating in different countries merge they may do so in order to establish a presence in

a foreign market; or to counteract various forms of trade barriers in the foreign country; or

to exploit tax and other financial advantages (Harris and Ravenscraft, 1991); or to exploit

information synergies. An acquisition will give the acquiring company access to valuable

information on the target market as well as on local production conditions. Thus the

acquisition will overcome one of the barriers to entry into foreign markets. Whatever the

specific companies’ motivations and objectives for M&As ex-ante, ex-post some of the

consequences highlighted above as well as other effects not part of companies’

objectives may apply cumulatively.

While there have been many theoretical and empirical studies on the causes and

consequences of domestic mergers, less is known about cross-border mergers,

especially those involving EU partners. Empirical work by Davis, Thompson and Shore

4

(1993) shows that domestic mergers are motivated by different reasons to cross-border

mergers. The authors find that domestic mergers are undertaken mainly to pursue

expansion, diversification and economies of scale. In contrast, cross-border mergers are

motivated mainly by the need to enter new markets, and to grow. Other motivations

mentioned above - including the enhancement of market power - may apply to both

domestic and cross-border M&As.

With the completion of the Single European Market (SEM) at the end of 1992 and the

consequent removal of all barriers to trade, EU domestic firms faced increased

competition in their product markets. In the run-up to the establishment of the SEM,

companies across Europe as well as in the rest of the world prepared themselves to the

challenges posed by operating in a more competitive environment. To this end, some

companies concentrated their operations by divesting or selling off non-core lines of

business; while other companies rationalised their production, and tried to achieve cost

synergies and efficiencies by merger (European Commission, 1994). Moreover, many

companies strengthened their market position by undertaking cross-border acquisitions:

between 1983 and 1987 the increase in merger activity involving EU companies as both

buyers or targets was enormous (Geroski and Vlassopoulos, 1993), despite the fact that

cross-border as compared to domestic merger activity was small.

This chapter is thus structured. Following a section on the data, section three looks at the

possible tensions between European integration and globalisation. Are EU firms creating

Europe-wide networks through M&As in order to better exploit the opportunities offered by

the single market, or are they more interested in going global? Has 1992 had an impact

on the M&A activity in the EU? Section four focuses on the pattern of M&As at the level

5

of individual countries. It looks in particular at the UK, which is responsible for the largest

share of European M&As. It deals specifically with the dynamics of European integration

within each EU country and it investigates whether integration is occurring evenly or

whether different patterns are emerging due to the influence of geographical or cultural

factors. We shall then briefly consider the effects of M&As on economic performance by

drawing on existing literature (section five) and on a case study of the UK (section six) to

illustrate some of the issues. Section seven concludes.

2. The dataset

The empirical analysis presented in the next sections is based on a dataset created from

the SDC International Mergers & Acquisitions database provided by Securities Data

Company. The data is available for the period 1986-97, and it is broken down by country

and by industry for both bidder and target firms. Information for both the number and

values of deals is available, although the values are disclosed only for a subset of the

deals. For this reason, the results have been presented mainly using the number of deals

while information based on the value of deals has been used when different patterns

have emerged.

As it happens with the statistics on FDI, also for our data on M&As the nationality of

bidders and targets is defined as the nationality of the firm involved in the deal, i.e. it

does not reflect the nationality of the parent companies. So if, say, the Irish subsidiary of

a US corporation acquires a French subsidiary of a German corporation, the country of

the bidder is Ireland and the country of the target is France in our data set. On one hand,

6

this might lead to some over-estimation of the M&A activities of EU countries within the

EU as it is possible that some European subsidiaries of American and Japanese TNCs

have acquired European companies; the deal would appear as "intra-EU" and the

increase in foreign- owned capital stock in Europe would be neglected. On the other

hand, some subsidiaries of EU TNCs could buy other firms outside the EU, and this would

not be reflected in the data.

The dataset includes all the deals for which a European company was either the bidder or

the target, and it only refers to bids that have been completed - the date of each deal is

the completion date.

The deals have been classified into three main groups, according to the nationality of

bidders and targets:

- Intra-EU: If both bidder and target are companies of EU countries. We are not analysing

the pattern of domestic M&As and therefore they are not included in this definition.

- EU Global Bids: If the bidder is a company from the EU and the target is from a country

outside the EU

- EU Global Targets: If the bidder is a company from outside the EU and the target is from

a country of the EU

The analysis will be conducted by considering trends in the geographical patterns of

deals and targets as well as by the use of some indices designed to assess the

7

propensity to regionalisation and the clustering within the EU region. The indices will be

introduced in the relevant sections. We shall use the data at the aggregate level for the

whole EU countries and for each EU country separately.

3. Main aggregate patterns of integration and globalisation

A visual analysis of the number of deals that involve EU companies, as reported in figure

1, shows that M&A activity has grown very fast since the mid-1980s. While some of the

reason for the dramatic growth might be a better coverage of the existing deals, there is

little doubt that the actual EU M&A activity has grown at a fast pace in the period

considered. Figure 1 also shows that the years around 1992 saw firms concentrating on

gaining a good position in the Single European Market through M&As. Both the number of

Intra-EU deals and the number of EU Global Targets peak in 1991. Moreover, the number

of EU Global Bids falls in the run up to 1992 - which confirms that the attention of EU

firms was mainly directed towards the EU itself.

This trend is even clearer from figure 2, which shows the number of Intra-EU deals as a

percentage of all deals where the bidder was from the EU (Intra-EU plus EU Global Bids).

The ratio clearly peaks in 1992 and decreases steadily until 1996.

Insert Figures 1 and 2 here

So 1992 had a clear effect on M&A activity in the EU. In the run up to the SEM, EU firms

tried to become increasingly pan-European by buying companies in other EU countries.

8

In addition, the growth of EU Global Targets in figure 1 suggests that firms from outside

the EU rushed to buy EU firms in order to gain a foothold and/or strengthen their position

in the huge EU market. The situation seems to have changed in the most recent years,

which have witnessed an explosion in the number of EU Global Bids (figure 1) which

contrasts with a (mild) decline in intra-EU M&As2.

A breakdown by main sector is presented in figures 3 and 4 and shows the increasing

contribution to M&As made by service companies for both targets and bids. Nonetheless,

the majority of target companies were in manufacturing throughout most of the period in

our analysis. There has been a change in 1995 and 1996 with a reversal back to previous

position in 1997. As regards bids, the upward trend in services met the downward trend in

manufacturing in 1992; there have been oscillations since then. The M&As activity in the

primary sector has been very low and steady throughout.


A caution on data must be made here. As with many companies’ data with a sectoral

breakdown, services activities may be underrecorded because companies are classified

according to their main line of activity. Many manufacturing companies have gradually

moved into services; however, they are recorded under their original/main activity that is

under manufacturing. This bias against service industries, however, is mitigated by the

2 It would be interesting to investigate these trends in greater detail to see whether the aggregate patternsare mostly generated by the same firms that first acquired an EU base around 1992 in order to expand lateror whether some newcomers are going directly for global market skipping the EU stage.

9

fact that the industry classification of the deal refer to the unit whose ownership has been

transferred rather than to the whole industrial group (the parent company).

4. Country-level analysis

The previous two chapters have shown that EU countries differ substantially in their FDI

activity. Not surprisingly, this is also true in the case of M&As. A number of factors

influence the volume of M&As in each country, from the structure of the financial market

to the level of industrial concentration. In this section we analyse three aspects of

differences between EU countries: (a) the special position of the UK; (b) the possible

divergencies in patterns of integration versus globalisation for each EU country; and (c)

the possible clustering within countries of the EU.

The role of the UK in the EU patterns of M&As

We already noted in the introduction that the UK exhibits a different pattern of FDI

compared to other EU countries. A priori, one would therefore expect a different pattern of

M&As for the UK compared to other EU countries. Various reasons account for this. The

UK is more heavily involved in FDI in general and has a long history of such involvement

(see chapters two and four in this volume). It has also a tradition of more liberal attitude

towards FDI both on the inward and outward sides. This means that the UK has provided

a welcoming and strategic location for TNCs from the US and Japan wishing to avoid the

EU trade barriers in reaching European markets.

10

As regards the M&As component of FDI there are also additional reasons to expect a

different pattern for the UK compared to other EU countries: the structure of its capital

markets. The UK capital market is highly sophisticated and plays a dominant role in the

whole economy, as it happens in the US. Thus one would expect M&A activities to have a

stronger role in the UK compared to other EU countries particularly those where families

holdings or regulation make corporate acquisitions more difficult (Tylecote, 1998).

We have used our data to analyse whether the UK does indeed exhibit a different pattern

from other EU countries. Figure 5 shows the weight of the UK in the EU bids. The UK

accounted for around 60% of EU Global Bids and 40% of Intra-EU bids in the late 1980s.

Although these shares have fallen substantially, the UK still accounts for nearly 40% of

EU Global Bids and more than 20% of Intra-EU M&As. Figure 6 also suggests that UK

firms prepared earlier for EU integration than the rest of EU firms: the peak for the UK

bids in the rest of the EU countries (EU14) is in the 1980s while that for the EU as a

whole is in the early 1990s, as it appears from figure 1 above. Figure 5 concentrates on

the EU Global Bids broken down by UK and EU14. It shows a strong level of involvement

by the UK in Global Bids, much stronger than for the other 14 countries, although the

trend is stationary for the UK and rapidly growing for the EU14 in the 1990s.


11

Integration versus globalisation

To what extent have the various countries of the EU tended to gravitate within the region

in terms of their M&As’ activity? And to what extent have they spread their wings globally?

In order to help us answer these questions we use an intensity index of M&As3. The

index has been calculated for both bids (B) and targets (T). The following formula is used

for bids:

I B i E U = B i E U / B i W ( B W E U - B i E U ) / ( B W W - B i W - B W i )

where BiEU is the number of bids from country i in the rest of the EU (we ignore domestic

deals), BiW is the number of bids from country i in the rest of the world (including the EU -

the subscript W therefore includes the EU), BWEU is the number of bids from the rest of

the world in the EU, BWW is the total number of international deals in the world and BWi

is the number of bids from the rest of the world in country i4. In words, the index

compares the share of EU bids on the total international bids of the country i (in the

numerator) with the share of EU bids on the total international bids of the rest of the world

(in the numerator). In the denominator the country whose index is calculated has been

excluded from the data.

The index IBiEU is designed to measure the propensity to regionality (the EU) versus

globality for each country i with reference to the bids. For targets the index is:

3 Petri (1994) applies the formula to trade and FDI of various world regions4 Note that the denominator can also be expressed in terms of targets. Conceptually, the bids from the restof the world to the EU can be seen as EU targets from the rest of the world – that is, BWEU=TEUW. Note, in

12

I T i E U = T i E U / T i W ( T W E U - T i E U ) / ( T W W - T i W - T W i )

Values for the index above one indicate strong gravitation towards the region; values

below one indicate a propensity towards globality more than regionality in the activity

used in the measurements, which in our case is M&As. Given that the overall total of

international M&As in the world (BWW or TWW) used to calculate the index is slightly

underrepresented,5 the values of the indices for all countries are underestimated. This,

however, should have a very limited impact on the value of the indices given the

difference in the orders of magnitude between each country's total and the world total

number of M&As.

The indices for the each EU country for four sub-periods are presented in table 1 for bids

and in table 2 for targets. Table 1 shows that for most countries and most sub-periods the

indices are well above one indicating a tendency to gravitate towards the region. Values

below unity occur sporadically and only relate to small countries, in which the activity of

few large firms can influence the overall result. It is interesting, however, that most of the

values below unity occur in the last period: in 1995-7 there are three out of a total of five

for all the sub-periods. This finding is in line with the observed trend

addition, that the total number of bids in the world is the same as the total number of targets in the worldbecause every deal has one and only one bid and one and only one target by definition – that is, BWW=TWW.5 The main dataset used for this chapter only includes all international M&As in which EU companies areinvolved. The totals for the world also include all international deals that refer to the US, Japan, other NorthAmerican countries, and Eastern European countries. The overwhelming majority of deals in the databaseinvolves a country of the triad, so the bias is not significant.

13

towards a greater orientation towards acquisitions outside the EU after 1992 (see figure 2

above), which also explains the decreasing values of the index observed over time in

various countries, such as France, Austria, Finland, Sweden, Spain and Portugal. Indeed,

Spain and Portugal, together with Greece, are responsible for the three values below

unity, which suggest that some small countries might be privileging global links to EU

integration. The other countries show stable values over time, with Germany and the UK

even experiencing modest increases (although from a lower initial level) while the

remaining countries show the highest values of the index.

Insert Table 1 here

The results of our indices for targets are in table 2. The most noticeable result is the

extremely low and decreasing value of the index for the UK. It is apparent from the value

of the index that the UK has progressively become the favourite target of global (more

than regional) FDI in the form of M&As. Various reasons can account for this, from the

ease of acquiring UK companies, given the M&A culture and supporting institutions that

exist in the UK, to the high level of deregulation of the British economy of which the opt-

out clause in the Social Chapter is an example. Moreover, from the bidder’s point of view,

a foothold in the UK provides an easy entry into the EU markets and production locations

as already pointed out.

No significant trends appear from the data relative to all the other countries. The other

pattern that it is possible to identify is the general tendency for the index to be higher for

small economies - i.e., small countries are mainly targeted by EU firms while global non-

EU TNCs prefer to locate in larger economies such as France and Germany. Relatively

14

low values of the index are also found for Ireland and, not surprisingly, the Scandinavian

countries.

Insert Table 2 here

Geographical clusters of Intra-EU M&As

Figure 2 above shows that Intra-EU international M&As peaked before 1992 and then

decreased, but only rather slightly. This indicates that there was a rush towards

integration through M&As just before 1992, and after that date the process of integration

has continued at a slightly lower pace. Although EU companies are acquiring relatively

more outside the EU, integration through merger is still a significant phenomenon

possibly because EU firms want to establish a solid base in the EU upon which they can

build with global acquisitions.

As we have just seen, however, the EU is a highly heterogeneous region and it is

therefore important to investigate whether the process of integration is taking place

evenly across countries, or whether some blocks are emerging within the EU. In order to

investigate the pattern of Intra-EU M&As, a matrix has been created to examine the flows

of M&As (number of deals) between every pair of countries. The matrix (not presented

here) does not indicate clearly whether some flows are particularly significant because

the values in the cells are influenced by the overall M&A activity of the two countries to

which the cell refers (the row and column totals). Thus an indicator of 'abnormal' M&A

15

activity (either more or less than expected), based on the chi-square statistic, has been

developed using the following methodology.

The two-way matrix has been compared with another matrix which contains the

theoretical frequencies that would appear in absence of any particularly strong link

between two countries6. The theoretical matrix represent the M&A flows that would occur

in absence of any factors that favour particular relationships (i.e., particularly high or low

flows) between countries7. The two matrices have been compared using an indicator

based on the chi square statistic. Such indicator, Aij, is the square value of the difference

between the observed flow, Oij, and the theoretical flow, Tij, divided by the theoretical

flow. The formula used is the following:

A i j = O i j - T i j

T i j

2

Particularly high values of the indicator associated with positive differences - that is,

observed flows greater than theoretical flows – are represented with a plus sign (+); very

high values of the indicator are indicated with two plus signs (++); particularly weak flows

between two countries - which are associated with a high value of the indicator coupled

with a negative difference between observed flows and theoretical flows - are indicated

with a minus sign (-).

6As in the case of the chi-square statistic the theoretical frequency for each cell is calculated by multiplyingthe row and column totals relative to the cell and then dividing the product by the overall total.7As in all our calculations, domestic M&As have been excluded. The cells on the diagonal of the theoreticalmatrix have been replaced by their theoretical values in order to calculate the theoretical values of theother cells.

16

The results are reported in table 3, which refers to the number of deals8. The figure

shows that geographical and historical factors, both in terms of physical distance and

cultural links (e.g., common language), are important. The table also reveals the

existence of regional processes of integration that are occurring between nearby

countries. The links between Germany and Austria, Ireland and the UK, Belgium and

France or Belgium and the Netherlands, Spain and Portugal and the Scandinavian

countries are not surprising. The geographical factor also emerges in the case of the UK,

which has stronger links with nearby countries (Ireland, France and the Netherlands). The

three Scandinavian countries also have tight links between themselves.

Insert Table 3 here

5. Effects of M&As

The consolidation of the European production structure via the process of merger has,

allegedly, resulted in the creation of companies that; (a) can exploit economies of scale

or scope better; (b) have spread production technologies beyond the borders of the

home country and are therefore producing knowledge spillovers; and (c) are better able

to exploit information synergies.

8Another matrix based on the value of deals has also been calculated though it is not reported here. Thetwo matrices offer substantially the same picture, although the one based on values captures the influenceof few large deals. When the values of deals are taken into account, the picture alters slightly as new linksappear, such as the strong link between Germany and the UK or a link between Italy and Luxembourg.

17

There are, however, wider effects of M&As on the companies, industry and the

macroeconomy. What do we know and can infer on such effects of M&As? Let us start by

considering who and what may be affected by companies’ strategies on M&As.

There are four groups of subjects that are affected by a merger or acquisition. These are:

the shareholders and employees of the merging partners; the other firms in the industry;

and consumers.

The effects of mergers on shareholders have been analysed in many empirical studies.9

If the shareholders of the acquired and acquiring firms gain positive abnormal returns

post merger, then the merger can be said to have had positive effects on shareholders.

There is, however, plenty of evidence that this can hardly be considered the case. The

existing empirical work for the UK and USA shows that mergers actually result in negative

or, at best, neutral returns for the shareholders of the acquiring company; and that only

the shareholders of the acquired company gain as a result of the merger. The overall

impact of UK and US mergers on shareholders’ welfare has been at best neutral and at

worst negative (Hughes, 1993). This is because the management of acquiring firms

usually pays a premium in order to secure the merger (Alberts and Varaiya, 1989), and,

ironically, this to the detriment of those shareholders whose interests the management is

supposed to look after. When the ownership of a company is spread across many

shareholders, managerial actions are difficult to monitor and control. It is therefore very

difficult to stop the management of a company from embarking in an acquisition that will

ultimately

9 See Meschi (1997) for a survey of the existing empirical literature.

18

damage the interests of the owners of that company (the shareholders). In view of these

issues some authors call for intervention by the authorities in order to: (a) secure more

information to the shareholders (Caves, 1989); and (b) encourage the return profits to

shareholders in the form of dividends rather than their use for acquisitions.

It is sometimes maintained that one outcome of mergers is the displacement of inefficient

management; Thus merger activity is seen by some authors as a form of disciplinary

device operated by the market for corporate control (Manne, 1965). In this perspective,

the low M&A activities in some countries including some EU countries and Japan, is seen

as leading to long term negative outcomes as inefficient management cannot be punished

(Franks and Mayer, 1993).

While the issue of the effects of mergers on shareholders has been widely analysed,

surprisingly little is known on the exact effect of mergers on employment. Whenever two

companies merge, job losses usually follow whether the rationalization process involves

only the elimination of duplicating departments or also the reduction of total production

capacity. It is sometimes argued that in terms of overall welfare the negative effects of job

losses are counter balanced by efficiency gains. However, even if this is the case, the

fact is that the groups who bear the consequences of job losses – the workers and the

governments – are not the same as those who benefit from efficiency gains – mainly the

relevant firms, its management and shareholders.

The effects on the industry’s competitive environment - and through it on the consumers -

tend to be top of the agenda on any discussion on concerns over M&As. Traditional anti-

trust laws, including European law is, indeed, centered on the assessment of the effects

19

of a merger on consumers and on the industry structure. It is considered to be a main aim

of the antitrust authorities to assess whether a proposed merger can result in a

substantial increase of market power on the behalf of the merged entity. Mergers that are

likely to result in much increased market power - with all the consequent negative effects

for the industry and the consumers – may not be allowed. There are, of course, many

theoretical as well as empirical problems in trying to assess the effects ranging from

definition of the product to the geographical scope of the market.

The European merger policy is centered around the issue of the creation or abuse of a

dominant position by the merging partners; cost-efficiency arguments cannot be invoked

(Bensaid et al., 1994). This contrasts with the US policy, where the cost efficiencies

arising from a merger can be used by the merging partners in the case they present to the

Department of Justice. There have been several criticisms of the structural approach to

M&As particularly if the impact of cost efficiencies is ignored. Farrell and Shapiro (1990)

point out that if firms are not equally efficient and/or if there are economies of scale,

welfare increases whenever large or more efficient firms take over smaller or less efficient

ones, even if the acquisitions increase concentration.

Another critique to the structural approach is that forbidding mergers on market power

grounds could have negative long run effects on welfare by discouraging investment in

R&D. Large expenditure on R&D is undertaken in the hope of gaining market power

(Groenewegen and Beije, 1992). It is claimed that if a merger might create a rich enough

firm to invest in R&D, then this efficiency consideration should be taken into account and

weighed against market power considerations, especially in industries with short-lived

technology (Ordover and Baumol, 1988). On the other hand it could be argued that

20

excessive marker power may discourage innovation. Considerations of efficiency versus

market power have also been analysed in respect of mergers between firms with different

capital vintages in a market dominated by excess capacity and declining demand (Dutz

1987).

6. A case study on the performance of M&As: business establishments in Britain 10

A study based on data from the 1990 Workplace Industrial Relations Survey (WIRS)

reveals interesting results on the performance of mergers. The WIRS is an establishment-

level survey of public and private establishments located in Britain and employing more

than 25 workers. The survey sample contains 2061 observations and is representative of

the population of British establishments. There are hundreds of questions - some

expressing the managers’ perceptions - from which relevant variables can be derived.

The data available allowed the authors to discriminate between merged and non-merged

establishments according to various measures of performance as well as several other

features whose results are not reported here. We just mention that some of these results

show that merger activity is higher in manufacturing compared to services. This result is,

indeed, consistent with the pattern on intra-EU M&As presented in figure 3 above.

Moreover, the probability that an establishment is merged is higher for foreign-owned

establishments than for UK-owned ones. The large majority of merged establishments is

of small to medium size.

10The results presented here are part of a larger study (Ietto-Gillies and Meschi, 1998) which wasundertaken as part of the same EC TSER project which funded the research leading to this book.

21

The WIRS gives us information on a variety of elements of performance and in particular

on productivity, employment, capacity utilization changes in demand and financial

performance. The relevant variables and statistical results are presented in table 4.

The share of establishments recording higher, lower, or the same level of productivity as

compared to three years ago is statistically not different between merged and non-

merged establishments (variable 1 table 4). Some 83.1 percent of merged and 78.2

percent of non-merged establishments show productivity growth. The corresponding

percentage for single establishments is 54.4.

Fewer independent establishments, compared to those belonging to wider organizations,

reduced their workforce during the past calendar year (variable 2). Moreover,

considerably more merged than non-merged establishments reduced employment (44.1

versus 31.1 percent); thus mergers are associated with job losses.

The reduction in employment appears to be due, to some extent, to the adoption of

changes in capital endowement on the part of the companies whose establishments have

been included in the sample. Variable 3 shows that negative effects of capital investment

on employment are declared in 64.4 per cent of merged versus 52.7 of non-merged

establishments. The worst hit by job cuts were recently acquired establishments in the

manufacturing sector, which experienced the largest productivity gains, particularly in

merged establishments.

In the sample as a whole (variable 4) a significantly larger proportion of merged than non-

merged establishments (10.9 versus 6 percent) is operating considerably below full

22

capacity. Moreover, the proportion of merged establishments experiencing a fall in

demand (variable 5) is 22.2 percent, almost three times as large as that of non-merged

establishments (8 percent).

The latter results are consistent with the answers to questions on financial performance

(variable 6). The percentages of managers in non-merged multi-establishment that report

performances a lot better and a little worse than in similar establishments are 29.5 and 4

percent respectively. In contrast the figures for merged establishments are 19.5 and 10

percent respectively. Overall, fewer merged than non-merged multi-establishments report

a better than average financial performance (50 versus 56.9 percent). While merged

establishments appear to be under-performing compared to merged ones in multi-plant

organizations, they perform better than single establishments; only 40 percent of the

latter ones have a declared above-average performance.

Insert Table 4 here

These overall results could be a sign of internal organizational difficulties and

inefficiencies linked to the mergers; they could also point towards the hypothesis that

underperforming establishments are more likely to be the target of mergers in the ex-ante

expectation of a turn around which does not materialize ex-post or not within the three

years period considered in the survey. It may also be that improvements in performance

can only be realised over a longer period than the three years considered in the survey.

23

These results corroborate those usually found in the literature, where industry-adjusted

estimates of accounting profitability show very disappointing results11. We must,

however, take account of the fact that the WIRS results express the manager's perception

of what the financial performance of similar establishments is, and managers may after all

deceive themselves and/or the interviewers12.

Given their UK and domestic focus, these results from WIRS should not be extrapolated

readily and fully to the EU international M&As. However, the fact that poor results are

found on all aspects of performance and that this is in accordance with the results in the

wider literature should not be ignored.

7. Conclusions and policy implications

This chapter has analysed the pattern of M&As in the EU, looking at both bids and

targets. We have particularly looked at the following: (a) the possible tension between EU

integration and globalization in the mergers activity with regard to the EU as a whole and

to single EU countries; (b) the patterns of different EU countries with respect to their intra-

11See Meschi, 1997 for a survey of results.12However, it appears that managers perceptions and expectations are a good predictor of actual results(see Anderson and Narus, 1990).

24

EU activity: to what extent can clusters be observed? We have also considered briefly the

possible effects of M&As.

The results show that M&As patterns were greatly affected by the run up to the SEM.

Moreover, for intra-EU M&As the share of deals involving services has increased steadily

through the last twelve years. As regards integration versus globalization patterns, we

have observed differences between the 15 EU countries. In particular the UK exhibits a

strong propensity to globalisation.

Mergers and acquisitions flows between the EU and the US are boosted by the historical

links between the two countries. The highly international character of the two Anglo-

Saxon economies and the level of development of their stock markets account for the

high M&A activity in those two countries. Because of its high level of internationalisation

at the beginning of the period considered, the UK does not show the same strong positive

trend in global acquisitions that the rest of the EU experience as EU companies gradually

acquire a global dimension. The data show that after a rush towards the acquisition of a

European dimension, EU companies are recently concentrating relatively more on the

global dimension. Intra-EU M&As, however, continue to be a significant phenomenon,

and they have almost reached the peak of 1991 again.

The specificity of the UK position within the EU is corroborated by our results on each EU

country (tables 1 and 2) which shows that the UK has low values of the intensity index for

both bids and (especially) targets. The indices confirm the picture of the UK as an

outward looking economy although the index for bids shows a stationary trend, while the

rest of the EU countries have shown a great increase in Global Bids especially after

25

1992. The relatively global character of the British economy, however, is dramatically

confirmed by the analysis of the targets of non-EU TNCs: the UK is the favourite (and

increasingly so) target by a long way.

Another interesting pattern that emerges from the analysis of the intensity indices is that

firms in small peripheral countries such as Greece, Spain and Portugal are becoming

increasingly inclined towards global markets while their countries are the targets mainly of

EU firms.

The process of corporate integration through M&As within Europe, however, is not evenly

distributed. Firms tend to merge with other firms of nearby countries, especially when

strong cultural ties, such as a common language, are present, as in the case of the UK

and Ireland, the Scandinavian countries, Belgium and Holland and Germany and Austria.

Moreover, when the flows take into account the value of the deals, the data for the last

twelve years reveal significant links between the larger economies, such as in the case of

Germany and the UK, as large firms seek presence in all the main EU economies.

We report results of various studies on performance. All together they reveal a rather

bleak picture on the company and industry performance of M&As. We have included

some details of the results of the performance of M&As in business establishments in

Britain as from the WIRS 1990 (Ietto-Gillies and Meschi, 1998). Poor performance of

merged establishments compared to the non-merged ones, comes out from all the

variables on which there was information and particularly from capacity utilisation, growth

in demand and financial performance. Moreover, merged establishments appear to

experience more reduction in employment.

26

There are policy implications from the overall results. The poor performance of mergers at

the micro and industry level is worrying. This is particularly so when seen in the context of

increased M&As activity in countries with a traditional strong propensity towards it (such

as the UK or US) as well as the increased propensity in countries relatively new to merger

activity (such as Italy).

In this perspective stronger tests on the short and long term effects of mergers should be

carried out before mergers are allowed. Schenk (1999) shows that there are far-reaching

consequences of competition policies and argues that the authorities should start with a

general policy presumption against merger unless the case for wide-ranging efficiency

gains can be made.

27

References

Alberts, W.W. and N.P. Varayia (1989), Assessing the Profitability of Growth by

Acquisition: A Premium Recapture Approach, International Journal of Industrial

Organization, 7: 136-55.

Anderson, J.C. and J.A. Narus (1990), A Model of Distributor Firm and Manufacturer Firm

Working Partnership, Journal of Marketing, 54: 42-58.

Barrell, R. and Pain, N. 1997, Foreign Direct Investment, Technological Change and

Economic Growth Within Europe, The Economic Journal, 107, 445:1770-86.

Bensaid, B., D. Encaoua and A. Winckler (1994), Competition, Cooperation and Mergers:

Economic and Policy Issues, The European Economic Review, 38: 637-650.

Cantwell, J., ed. (1992), Multinational Investment in Modern Europe, Strategic Interaction

in the Integrated Community, Alershot: Edward Elgar.

Cantwell. J. (1991), A survey of theories of international production, in Pitelis, C.N. and

Sugden, R. Eds. The Nature of the Transnational Firm, London: Routledge.

28

Cantwell, J. and Sanna-Randaccio, F. 1992, Intra-Industry Direct Investment in the

European Community: Oligopolistic Rivarlry and Technological Competition, in Cantwell,

J. ed. Multinational Investment in Modern Europe. Strategic Interaction in the Integrated

Community, pp.71-106, Aldershot: Edward Elgar.

Caves, R.E. (1989), Mergers, Takeovers and Economic Efficiency: Foresight vs. Insight,

International Journal of Industrial Organization, 7:151-174.

Clegg, J. 1992, Explaining Foreign Direct Investment Flows, in Buckley, P. J. and

Casson, M., eds. Multinational Enterprises in the World Economy. Essays in Honour of

John Dunning. Aldershot: Edward Elgar.

Davis, E., G. Shore and D. Thompson (1993) Continental Mergers Are Different, in

Bishop, M. and J. Kay, eds., European Mergers and Merger Policy. Cambridge:

Cambridge University Press, pp. 328-347.

Dutz, M.A. (1989), Horizontal Mergers in Declining Industries: Theory and Evidence,

International Journal of Industrial Organization, 7:11-34.

European Commission (1994), Competition and Integration: Community Merger Control

Policy, European Economy, 57.

Farrell, J. and C. Shapiro (1990), Horizontal Mergers: An Equilibrium Analysis, American

Economic Review, 80: 107-126.

29

Franks, J. and C. Mayer (1993) European Capital Markets and Corporate Control, in

Bishop, M. and J. Kay, eds., European Mergers and Merger Policy. Cambridge:


George, K. and A. Jacquemin (1992), Dominant Firms and Mergers, Economic Journal,

102: 148-157.

Gerosky, P. and A. Vlassopoulos (1993) Recent Patterns of European Merger Activity, in

Bishop, M. and J. Kay, eds, European Mergers and Merger Policy. Cambridge:


Graham, E.M. 1992, Direct Investment between the United States and the European

Community Post-1986 and Pre-1992, in Cantwell, J. ed. Multinational Investment in

Modern Europe. Strategic Interaction in the Integrated Community, pp 46-70, Aldershot:

Edward Elgar.

Groenewegen, J. and P.R. Beije (1992), The European Answer to the Dilemma of

Competition, Cooperation, and Mergers, Journal of Economic Issues, 26: 493-511.

Harris, R.S. and D. Ravenscraft (1991) The Role of Acquisitions in Foreign Direct

Investment: Evidence from the US Stock Market, Journal of Finance, 46:825-844.

Hughes, A. (1993), Mergers and Economic Performance in the UK: A Survey of the

Empirical Evidence 1950-90, in Bishop, M. And J. Kay (Eds.), European Mergers and

Merger Policy, Oxford: Oxford University Press, pp. 9-95.

30

Ietto-Gillies, G. 1992, International Production: Trends, Theories, Effects. Cambridge:

Polity Press.

Ietto-Gillies, G. and Meschi, M. 1998, The characteristics, Performance and Strategic

Behaviour of Merged versus Non-merged Business Establishments in Britain. The Review

of Industrial Organization

Manne, H.G. (1965) Mergers and the Market for Corporate Control, Journal of Political

Economy, 73: 693-706.

Meschi, M.M. (1997), Analytical Perspectives on Mergers and Acquisitions: A Survey,

Centre for International Business Studies Research Papers in International Business No

5-97. London: South Bank University.

Milward, N., M. Stevens, D. Smart, and W. Hayes (1992), Workplace Industrial Relations

in Transition: the ED/ESRC/PSI/ACAS Surveys, Aldershot: Dartmouth Publishing.

OFarrell, P.N. (1995), Manufacturing demand for business services, Cambridge Journal

of Economics, 19:523-43.

Ordover, J. and W.J. Baumol (1988), Antitrust Policy and High Technology industries,

Oxford Review of Economic Policy, 4: 13-34.

31

Petri, P.A. (1994), The regional clustering of foreign direct investment and trade,

Transnational Corporations, 3: 1-24.

Phelps, N.A. (1997), Multinationals and European Integration. Trade, Investment and

Regional Development. London: Regional Studies Association and Jessica Kingsley

Publishers.

Pitelis, C., ed. (1993), Transaction Costs, markets and Hierarchies, Oxford: Blackwell

Salop, S.C. (1987), Symposium on Mergers and Antitrust, The Journal of Economic

Perspectives, 1: 3-12.

Schenk, H., 1999, “Industrial Policy Implications of Competition Policy. Failure in

Mergers”, ch. 11 in Cowling, K, (ed.) Industrial Policy in Europe: Theoretical Perspectives

and Practical Proposals. London: Routledge.

Stevens, M. (1992), Workplace Industrial Relations Survey, 1980- [computer file]. 3rd ed.

Colchester: ESRC Data Archive.

Thomsen, S. and S. Woolcock (1993), Direct Investment and European Integration.

Competition among Firms and Governments. London: The Royal Institute for International

Affairs and Pinter Publishers.

32

Tylecote, A. (1998) "Financial systems and innovation", in Trigg, A., S. Himmelweit, N.

Costello, G. Dawson, M. Mackintosh, R. Simonetti and J. Wells (eds) Markets, Milton

Keynes: Open University.

United Nations Conference on Trade and Development (1996), World Investment Report,

1996. Investment, Trade and International Policy Arrangements. New York and Geneva:

United Nations.

United Nations Conference on Trade and Development (1992-97), DCTI, World

Investment Reports, annex table 9.

Williamson, O.E. (1968), Economies as an Anti-Trust Defence: The Welfare Trade-Off,

American Economic Review, 58: 18-36.

33

Figure 1M&As involving European companiesNumber of deals

Source: Securities Data Company, 1998

Figure 2European Bids: Integration versus globalisationCross-border Intra-EU bids as a % of total international Bids


0

100

200

300

400

500

600

700

800

900

1,000

1986

1988

1990

1992

1994

1996

Year

Num

ber

of d

eals EU global targets

EU global bids

Cross-borderIntra-EU

0%

10%

20%

30%

40%

50%

60%

70%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

34

Figure 3Industry trends: Bidder industryPercentage of deals in the sector


Figure 4Industry trends: Target industryPercentage of deals in the sector


0%

10%

20%

30%

40%

50%

60%

70%

1986

1988

1990

1992

1994

1996

Primary

Manufacturing

Services

0%

10%

20%

30%

40%

50%

60%

70%

1986

1988

1990

1992

1994

1996

Primary

Manufacturing

Services

35

Figure 5The role of the UK in EU bids


Figure 6UK and EU14 global bidsNumber of deals


0%

10%

20%

30%

40%

50%

60%

70%

80%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

a) UK Global Bids as a % of EU Global Bids

b) c+d: UK-EU14 M&As as a % of Intra-EU M&As

c) UK Bids in EU14 as a % of Intra-EU M&As

d) EU14 Bids in UK as a % of Intra-EU M&As

0

100

200

300

400

500

600

1986

1988

1990

1992

1994

1996

Year

Num

ber

of d

eals

UK global bids

EU14 global bids

36

Table 1: Intensity Index: Bids

Country 1986-88 1989-91 1992-94 1995-97

Austria 2.13 1.23 0.81 1.06

Belgium 1.17 1.46 1.51 1.44

Denmark 1.40 1.31 1.22 1.40

Finland 1.54 1.25 1.28 1.13

France 1.59 1.37 1.43 1.26

Germany 1.12 1.18 1.21 1.21

Greece n.a. 0.82 1.05 0.94

Ireland 1.95 1.53 1.34 1.57

Italy 1.54 1.25 1.11 1.42

Luxembourg 1.74 1.50 1.40 1.45

Netherlands 1.32 1.34 1.28 1.38

Portugal n.a. 1.93 1.47 0.76

Spain 1.25 1.20 1.13 0.62

Sweden 1.43 1.32 1.27 1.12

UK 1.09 1.09 1.01 1.11

Source: Elaborations on data by Securities Data Company˝

˝

37

Table 2: Intensity Index: Targets

˝

˝

Country˝

1986-88 1989-91 1992-94 1995-97

Austria 1.70 1.32 1.55 1.59

Belgium 1.78 1.57 1.63 1.55

Denmark 1.65 1.38 1.46 1.35

Finland 1.10 1.12 1.37 1.25

France 1.04 1.40 1.36 1.35

Germany 1.34 1.29 1.19 1.23

Greece 1.09 1.56 0.98 1.21

Ireland 1.37 1.35 1.43 1.30

Italy 1.37 1.42 1.27 1.40

Luxembourg 1.75 1.64 1.66 1.86

Netherlands 1.52 1.51 1.45 1.43

Portugal 1.87 1.52 1.46 1.69

Spain 1.71 1.64 1.47 1.64

Sweden 1.32 1.26 1.16 1.23

UK 1.01 0.81 0.68 0.66


38

Table 3: Intra-EU M&A flows between countries: number of deals

˝

Targets

Bidders AUT BEL DEN FIN FRA GER GRE IRE ITA LUX NET POR SPA SWE UK

Austria n.a. ++

Belgium n.a. + +

Denmark n.a. + ++

Finland n.a. ++

France n.a. ++ + +

Germany ++ n.a.

Greece n.a.

Ireland - n.a. - ++

Italy ++ n.a.

Luxembourg

n.a.

Netherlands ++ + n.a.

Portugal n.a. ++

Spain ++ n.a.

Sweden ++ ++ n.a.

UK - ++ ++ ++ n.a.


39

Table 4

The performance of merged versus non-merged business establishments in Britain

Variables Merged Unmerged Establishments

Establishm. Multi-Establish. Single Establish.

% (a) % (a) c21 (b) % (a) c21 (b)

[ 1] Changes in Productivity Over 3 Years

-Lot Higher 39.1 34.6 0.7 24.9 7.6 **

-Little Higher 44.0 43.6 0.0 29.5 7.2 **

-About the Same 14.2 20.4 1.9 39.7 21.6 **

-Little Lower 2.7 1.2 1.0 5.9 1.7

-Lot Lower 0.0 0.2 0.2 0.0 0.0

[ 2] Employment Reduced During Past Year

-Total 44.1 31.3 5.8 ** 25.4 12.7 **

-Due to Lack in Demand 16.1 11.8 1.3 14.2 0.2

-Due to Automation/New Equipment 3.6 5.2 0.4 4.0 0.0

-Due to New Working Methods/Integrat. 26.0 10.5 16.8 ** 5.3 36.6 **

-Due to Effic./Competitiv./Cost Red. 11.3 11.8 0.0 5.0 4.9 **

-Due to Cash Limits/Budget Reduction 2.4 3.9 0.5 2.3 0.0

[ 3] Changes Affecting Jobs

-Changes in Capital Endowments 64.4 52.7 3.9 ** 37.2 19.1 **

[4] Capacity Utilization

- Operates at Full Capacity 48.6 53.9 0.9 n.a. n.a.

- Operates Somewhat Below Full Cap. 40.5 40.1 0.0 n.a. n.a.

-Operates Considerably Below Full Cap. 10.9 6.0 2.9 * n.a. n.a.

[5] Change in Product Demand Over the Year

-Demand Has Been Rising 55.9 64.6 2.6 * n.a. n.a.

-Demand Has Been Falling 22.2 8.0 17.4 ** n.a. n.a.

[6] Financial Performance Compared to Similar Establishments

-Lot Better Than Average 19.5 29.5 3.7 * 15.3 0.9

-Little Better Than Average 30.5 27.4 0.4 23.8 1.7

-About the Same 31.4 31.2 0.0 34.7 0.3

-Little Worse Than Average 9.8 3.9 5.6 ** 3.9 5.0 **

-Lot Worse Than Average 0.1 1.0 0.7 1.0 0.7

Source: Ietto-Gillies and Meschi, 1998. Adapted from the Workplace Industrial Relations Survey 1990Notes: (a) Weighted Percentage of merged, unmerged and single establishments falling in the categorydefined in the Variables column; (b) Kruskal-Wallis non-parametric test of the alternative hypothesis that themean scores between the two samples differ. Under the null hypothesis the test is distributed as a c2 with onedegree of freedom. Column (4) lists test results for the hypothesis that the mean scores for merged andunmerged establishments differ. Column (6) lists test results for the hypothesis that the mean scores formerged and single establishments differ;* indicates 10% significance level; ** indicates 5% significance level

cross-border mergers and acquisitions · cross-border m&as are one of the strategies that...

Documents