Over the past two decades, cross-border M&As have totaled over eight trillion dollars and have ﬂuctuated widely from year to year. In this paper, I establish four key facts about the dynamic patterns of cross-border mergers and the factors that drive them: (1) Cross-border mergers come in waves that are highly correlated with business cycles. (2) Most mergers occur when both the acquirer and the target economies are booming. (3) Merger booms have an industrylevel component (productivity shocks), a country-level component, and a worldwide component (ﬁnancial shocks). (4) Across one million observations of listed ﬁrms, acquirers tend to be more productive and targets tend to be less productive, compared to their industry peers. These facts are consistent with the neoclassical theories of mergers where productive ﬁrms expand overseas to seize new investment opportunities, but not with the widely held views that most cross-border mergers occur when the target economies are in a recession or face a ﬁnancial crisis. I also ﬁnd that cross-border M&As, both during booms and busts, do not worsen operating performance of the participating ﬁrms.
JEL Classiﬁcations: F23, F44, G15, G34
Keywords: Cross-border Mergers, Merger Waves, Capital Flows
In the past two decades, 26% of worldwide M&A activities involve acquirers and targets from diﬀerent countries. The aggregate volume of cross-border mergers from 1989 to 2008 totals more than 8 trillion dollars. In spite of such a large volume, most of the M&A literature focuses on domestic mergers. Moreover, the amount of cross-border mergers varies greatly from year to year. For example, the volume of worldwide M&A deals dropped by 62% from 2000 to 2003 but bounced back by 158% in 2006.1 Despite such a large year-to-year ﬂuctuation, most papers on cross-border M&As study the eﬀects of long-run determinants like corporate governance and capital market development. These gaps in the literature motivate the research questions that are at the core of this paper: what are the dynamic patterns of cross-border mergers, and what are the factors that drive them? Using the data from 50 countries over the period of 1989-2008, I document the following facts about international M&As:
(1) International mergers come in waves that are highly correlated with business cycles. Merger booms coincide with booms in the real sector and in the ﬁnancial market. While the literature on merger waves shows that domestic mergers are pro-cyclical, I ﬁnd that cross-border mergers are even more pro-cyclical than domestic mergers.
(2) Mergers are more likely to occur when both the acquirer and the target economies are booming. This is true even when I eliminate the eﬀects of global booms. My ﬁnding refutes the widespread belief that most cross-border mergers occur when the target economies are in a recession or face a ﬁnancial crisis, and that acquirers are vulture investors taking advantage of liquidity-constrained targets (Krugman, 1998; Aguiar and Gopinath, 2005; Desai, Foley, and Forbes, 2007; Acharya, Shin, and Yorulmazer, 2009). Although such “ﬁre sale” mergers can happen under speciﬁc circumstances, most mergers do not follow this pattern.
(3) Merger booms have an industry-level, a country-level, and a worldwide component. Given that productivity shocks are better measured at the industry level and that ﬁnancial shocks, such as changes in monetary policy or liquidity crises, are more of a country-wide or a worldwide phenomenon, this ﬁnding is consistent with the notion that M&As are driven by productivity shocks and facilitated by macro liquidity shocks (Harford, 2005).
(4) Across one million observations of listed ﬁrms, acquirers tend to be more productive than industry peers in their own countries. Targets tend to be less productive than industry peers in their own 1
See Table 1 and Figure 1 for details