Selection and Valuation of Cross-Border
Mergers and Acquisition – Literature Review
(c) copyright 2009
The longstanding debate over the efficacy of M&A as a mode of business growth continues to separate practitioners and academics. While M&A global volume looks likely to return to US$2 trillion levels following a rebound from year 2000 lows, the largely economics-oriented research literature overwhelmingly concludes that M&A at best achieves zero real gains for the average acquiring firm, with effectively all value creation being transferred to the shareholders of the acquired entity. Dispersion of results about the mean is significant, representing considerable investment risk. The literature shows that most acquisitions fail to achieve their stated or implied financial objectives, with up to two-thirds being described as failures. Either these analyses are flawed, or else hidden causal factors are at work. Researchers are divided on the issue, providing only limited guidance to the practitioner evaluating M&A opportunities.
Seen as a process rather than as an investment event, M&A becomes better understood. One critical part of that process is the acquisition target selection and valuation phase, the immediate precursor to the difficult, protracted, expensive and risky implementation stage. Assessments of strategic and organisational fit, resource dependencies, human capital demands and access to new technologies and markets, are generic drivers for M&A as a strategic step, but they do little to inform target selection. At the discrete decision stage, however, when a particular target is being selected and evaluated in order to offer a price, the decision-maker faces the highly specific questions of who to buy and how much to pay, in many cases setting the path for the largest single business decision in a chief executive’s career. The M&A literature is largely silent on the selection issue.
The lack of empirical guidance for the practitioner is accentuated in the innovation-driven sectors, where value is largely intangible and at least partly embedded in a fragile social network. Much of the literature is split between pre-acquisition considerations, grounded in strategic theory and analysed financially, and post-acquisition, based in organisational theory and focused on integration risk avoidance. This study contributes to the literature by showing that it is essential to identify and evaluate the multi-faceted integration issues as a key input to the prior M&A target selection and valuation decision process. It uses a pluralistic theoretical lens to identify a number of these issues and for the first time explores a real options-based framework as a heuristic device for the M&A selection and evaluation decision process.
TABLE OF CONTENTS
Rationale for this research
M&A Effectiveness Is Problematical
Approach and Scope of this Review
ANTECEDENTS TO M&A DECISIONS
Knowledge Based Competition
Knowledge Transfer and Integration Issues
Rationale for Cross-Border M&A
1 Rationale for this research
Despite a three year hiatus due to the end of the dot-com era and a profusion of revealed corporate scandals, enthusiasm for the ‘fifth wave’ of merger activity appears to have recovered with the value of transactions in 2005 likely to exceed the prior year’s US$1.8 trillion mark, representing 21 thousand transactions (KPMG, 2005). The same source cites cross-border Mergers and Acquisitions (M&A), defined as permanent organisational combinations between companies headquartered in two different countries, as also accelerating, growing by 25% in 2004. Hitt et al. (2001) report that over 40% of completed M&A in 1999-2000 were cross-border in this sense. Continuing...
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