Alberto Pezzi

Cross-border Mergers and Acquisitions: Theory and Empirical Evidence

Table of contents Chapter 1 - The M&A phenomenon Chapter 2 - Cross-border M&As: theory and strategic process Chapter 3 - Cross-border M&As and performance: empirical evidence Chapter 4 - Cross-border mergers and acquisitions and stock market performance: evidence from medium-sized US and European firms

Financial Performance and Sustainability of Strategy

Performance measurement plays a key role in developing and implementing strategic plans and evaluating the achievement of firm’s objectives, with crucial implications on rewarding managers and providing them the correct incentives. As firms began focusing on shareholder value as the primary long-term objective of the organization, the measurement of a strategy’s financial performance uses value-based metrics that explicitly incorporate the cost of capital into calculations. In this chapter, the most important value-based measures are discussed and compared, by focusing on their measurement logic and highlighting their differences and similarities. Their application in measuring the value creation of a strategy, developed consistently with the Strateco Dashboard approach, is therefore presented. Finally, the financial sustainability of a strategy is discussed, presenting the most widespread models that connect potentially conflicting strategic objectives such as profitability and growth.

Cross-border M&As: Theory and Strategic Process

The best ways to enter an international market and develop a company’s presence abroad are fundamental strategic decisions that firms choose, or should choose, after careful consideration of the company’s objectives and resources. Internationalization strategies have a long-term horizon and firms have to identify a methodology that weighs the trade-offs between different possible alternatives in order to maximize efficiency in the long term (Anderson and Gatignon, 1986) and the firm’s value. These assessments should be complemented by additional, more in-depth investigations into the environmental and industry costs and risks.

Cross-border M&As and Stock Market Performance: Evidence from Medium-Sized US and European Firms

Over the last few decades, the intensity of the internationalization process in small- and medium-sized enterprises (SMEs) has dramatically increased as a result of a combination of a number of external trends such as globalization, evolution of information and communication technology, transportation cost reduction, development of policies by supranational institutions aimed at fostering SME international growth, etc. (Wright et al., 2007; Knight and Kim, 2009). International diversification strategies have become particularly important strategic options for SMEs whose business scope has been geographically confined by nature. SMEs adopt internationalization strategies to seize new opportunities for growth in terms of markets and profitability. However, numerous researchers have observed that the implementation of internationalization strategies of SMEs is strictly affected by liabilities of foreignness (Hymer, 1976), newness (Stinchcombe, 1965), entrepreneurial behavior (Jones and Coviello, 2005), and lack of resources and capabilities (Buckley, 1989; Jarillo, 1989; Beamish, 1999). As a result, the complexities of international operations are likely to be more challenging for SMEs than for their larger established counterparts (Czinkota, 1982; Craig and Douglas, 1996). The level of risk becomes higher when SMEs attempt to adapt knowledge and capabilities that have developed in a domestic context to a host market with different operational, political, economic, and cultural barriers (Oviatt and McDougall, 1994; McDougall and Oviatt, 1996).

Cross-border M&As and Performance: Empirical Evidence

One of the most interesting, intriguing, and puzzling questions raised by the literature on cross-border M&As is whether these deals are associated with improved market- and accounting-based performance of the firms involved in the transaction. A large number of contributions have tried to answer the question with mixed, and at times unclear, results. This section proposes a critical discussion of the main evidence that has emerged by analyzing papers and manuscripts published over the last 30 years. The purpose is to build an integrated framework that may explain (1) the outcomes of these deals, (2) the conditions that make a cross-border deal either a successful or a failed transaction, and (3) those who benefit the most from these deals.

The M&A Phenomenon

Mergers and acquisitions (M&As) can conventionally be defined as the purchase of entire companies or their specific assets by another company. M&A transactions therefore imply that existing assets are combined in a new shape. In a frictionless world, asset recombination occurs whenever corporate assets are not used in the best possible way. The new asset combination should therefore be more productive than the old one. This means that corporate assets should be channeled toward those combinations that assure their highest productivity. Put differently, the combination of two or more assets should be more valuable than the sum of its parts. M&As have their theoretical foundation in three well-recognized theories: neoclassical theory, redistribution theory, and behavioral theory.

Corporate Strategy: Diversification and Management of Multiple SBUs

This chapter, integrating more in depth the issue of corporate strategy, i.e. the company’s presence in multiple businesses, briefly discussed in the first book of this series, addresses the various forms of diversification that can shape the development of that presence over time, their advantages and disadvantages, and their implications for management. Specifically, it describes the most relevant differences among the main configurations of diversification (vertical, horizontal, geographic, and unrelated), and addresses in particular, with the support of several conceptual and operational models, the issue of geographic differentiation, that is becoming more and more important for most companies, constrained by the stagnation of their domestic markets. Finally, through a description of a simplified business simulation, it attempts to show how companies could manage, in practice, one of the most relevant strategic problems, i.e. the selective allocation of scarce resources among and within different businesses.

Organization, Ownership and Collaboration Strategies

This chapter analyzes the companies’ organizational and structural design, starting from the basic organizational structures that represent the firm’s architecture. Then, we highlight the essential elements for designing or upgrading an organizational structure, such as the division of labor, the coordination mechanisms, and the formation of organizational units. We also discuss how strategic choices and changes can affect structure, technology, human resources policies and interorganizational linkages. At the same time, we analyze how the current organizational contexts may affect and constrain the definition of goals and the related strategic decisions and changes. Finally, we address the issues of ownership versus transaction alternatives, and the various forms of agreements and cooperation among firms.

Introduction to the Second Volume

The first part of this second volume addresses more specifically the issue of “business strategy” (within a single strategic business unit), expanding the analysis of the strategic decisions, emphasizing the importance of a sustainable competitive advantage, and proposing an integrated conceptual and operational framework (the “Strateco Dashboard”), that complements and significantly improves the recent and well-known Blue Ocean approach to strategy development.

Business Strategy: Formulation, Development and Control

Focusing on the major issues related to strategic management of a single strategic business unit (SBU), the first part of this chapter will discuss the most relevant aspects that should be addressed in strategy formulation. After an overview of different perspectives on the behavioral process that conducts to the formation of strategies, we will then focus our attention on the importance of creating and maintaining a competitive advantage. We will finally present a systematic logical and operational framework for conceiving, developing and controlling a sound strategic plan that integrates and complements the famous Blue Ocean approach to strategy development.