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The Effect of Global Diversification on Long-Term
Acquiring Firm Valuation
Eric C. Tsai, Assistant Professor of Finance, State University of New York, Oswego, USA
ABSTRACT
It is almost a consensus in the M&A literature that domestic mergers and acquisitions destroy acquiring firm
value upon the announcement, but the seemingly unresolved issue is the acquirers’ long-term post-merger performance,
although many studies find negative wealth effect in the long run. Little research, however, is done on the long-term
performance of bidding firm in international M&A. This paper, consequently, takes the initiative to examine whether
acquirers in foreign M&A also experience the long-term post-acquisition underperformance phenomenon. Even though
cross-border M&A creates enormous announcement wealth effect for the acquiring firms during the latest merger wave,
the gain evaporates very quickly and a multiple-year underperforming period follows. The sharp contrast between the
announcement wealth effect and the long-term underperformance is consistent with the notion that, at the time of
announcement, investors may be too optimistic toward the potential global diversification gains which may take
significant amount of time to consummate or may never will.
Keywords: international mergers and acquisitions, long-term performance, shareholder wealth, wealth effect, corporate
valuation, international corporate diversification, global diversification [JEL code: G3, F2]
INTRODUCTION
Firm valuation following major corporate events has always been closely scrutinized. Among them, the corporate
wealth effect associated with mergers and acquisitions (M&A) is one of the most intriguing valuation issues in finance.
Nonetheless, the proliferation of the M&A studies following the major merger waves in the 1980s and 1990s does not
necessarily provide conclusive evidence in some critical areas of this issue. Some clear patterns from the research,
however, do provide better understanding on corporate M&A behaviors and their consequences.
At the center of the issue clearly is whether mergers and acquisitions create value for shareholders. If a positive
shareholder wealth effect could not be verified as a consequence of M&A activities, it is not consistent with the goal of
financial management given the drastic increase of M&A activities in recent decades. After all, the lack of firm value
gain would suggest corporate diversification decisions ill-conceived and poorly implemented. It is well documented in
the literature that mergers and acquisitions do not necessarily create value for shareholders (e.g., the survey of recent
M&A literature by Martin and Sayrak (2003)). It is attributed to factors such as the presence of agency costs,
operational inefficiency, and ineffective integration. Martin and Sayrak (2003) group latest studies at the corporate
level into two categories. The cross-sectional research on the link between M&A and shareholder wealth gain generally
indicates a firm value discount owning to corporate diversification. The other group of the longitudinal studies of
patterns in corporate diversification through time tends to show a downward trend. It is worth noted, though, that
diversification discount are mostly found on the acquirers while the targets tend to enjoy sizable firm value gain. It is
logical to interpret that acquirers tend to aim at undervalued firms and the market responds accordingly toward the
targets. However, it is less clear and somewhat puzzling why the value gain does not transfer to the acquirers and why
the acquirers’ ability in recognizing undervalued targets is not well-perceived by the market. Consequently, transaction
characteristics are closely examined (e.g., payments methods, successful versus unsuccessful bids, glamour versus value
acquirers, geographic versus industrial diversification, mergers versus tender offers, and lately the research
methodology itself, among others). Nonetheless, there do not seem to emerge conclusive reasons for the acquirers’
lackluster wealth effect associated with their corporate diversification.
On the other hand, despite the intensive research on M&A activities, the focus is primarily on bidders acquiring
domestic targets. International Business theories suggest that acquirers in international M&A tend to realize more
diversification benefits and thus better firm value gains through globalization. The relatively sporadic international
M&A studies do reveal more favorable wealth effect for the bidders. Nonetheless, a significant and positive wealth
gain for cross-border acquirers is neither ubiquitous nor prevailing. Certainly, the acquiring firm valuation issue is no
more resolved in international diversification area and many questions are left unanswered. The M&A literature also
consists of studies focusing more on the immediate announcement wealth effect. The announcement wealth effect,
however, can be short-lived if setbacks occur in the lengthy process of integrating the targets and improving operating
efficiency that hinder the realization of diversification benefits. The long-term performance of the acquiring firms
obviously should not be taken lightly. This paper intends to address the two less researched areas, the international
M&A and the acquirers’ long-term post-merger performance. In fact, the impact of cross-border diversification on
acquirers’ long-term firm valuation has not yet been fully investigated. In addition, the nature of the global geographic
diversification indicates the importance of examining the link between the long-term wealth effect and the choice of
target location and countries. It should then shed light on whether international diversification follows the pattern of
domestic M&A for the acquirers which show substantial long-term underperformance after acquisitions.
The remainder of this paper is organized as follows. The next section reviews relevant work in the literature
concerning acquiring firm long-run post-merger performance. Section III discusses the data sources and estimating
methodologies. The empirical results and their interpretations are presented in Section IV. Section V summarizes the
main findings of this paper.
LITERATURE REVIEW
The related work in the literature regarding long-term post-acquisition bidding firm valuation is reviewed first in
this section and then the relevant literature concerning international M&A will also be addressed. The prevailing U.S.
evidence has shown that there is normally significant target firm value increase upon M&A announcement while the
value gain for their acquirers is ambiguous at best, commonly negative, insignificant, or merely small positive (see
literature review by Weston, Cheung, and Sin (2001)). The evidence on the less researched long-run post-merger
acquiring firm performance remains just as inconclusive. Furthermore, the acquirers do not seem to fare better over the
long-run. Table 1 summarizes the domestic M&A studies on long-run wealth effects for U.S. acquirers and their results
are mixed. About half of these studies find significant declines in share returns over long-term event windows.
However, almost an equal number of findings show insignificant negative results. Only very few exceptions exhibit
significant positive long-term performance for acquirers.
In particular, more recent studies do not seem to indicate a reversal of such dismal long-term performance by
acquiring firms after their corporate diversification but new explanations are offered. For instance, Doukas and
Petmezas (2007) find mostly negative long-run stock returns for acquirers from one to three calendar years after their
acquisitions. It is attributed to the managerial overconfidence. Specifically, not only do overconfident bidders realize
lower announcement wealth gain than rational bidders but also exhibit poor long-term performance. Five or more deals
within a three-year period are associated with lower wealth effects than the very first deals. Managers appear to
attribute the initial success to their own capability and thus become overconfident and engage in more M&A deals
leading to subsequent poor performance. By examining newly public firms, within a year of their IPO, Wiggenhorn,
Gleason, and Madura (2007) report negative stock returns, although not significant, for acquirers up to 24 months after
their acquisitions compared to those not making any acquisition.
Table 1: Summary of Long-Term Wealth Effects for U.S. Acquirers
in Recent Domestic M&A Studies
This table summarizes long-term post-acquisition stock returns for U.S. acquiring firms over the selected event windows from studies
on domestic mergers and acquisitions in the U.S.
Post-acquisition stock return is measured as cumulative abnormal return (CAR) unless noted otherwise. Significant CARs or post-
acquisitions returns at the 10%-level or better are in bold. Cumulative abnormal return per month is shown if CAR over the event
interval is not available. Event window is (beginning event day, ending event day). If noted month, it shows beginning and ending
event month. Otherwise, it is indicated by the number of months or years.
Megginson, Morgan, and Nail (2004) also find negative wealth effects across the board in announcement
abnormal return (AR), year 1, year 2, and year 3 buy and hold abnormal return (BHAR) for acquirers and that the long-
term performance is associated with corporate focus. Specifically, 3 years after merger, focus-decreasing mergers lead
to significantly negative long-term performance, such as the average of 18% loss in stockholder wealth, 9% loss in firm
Study Post-Acquisition
Return
Event
Window
Sample
Size
Sample
Period
Focus
Doukas and
Petmezas (2007) 0.93%a
1.42%
0.26%
1.72%
3 Years 2,986
1,180
199 592
19802002 Single acquirers
Multiple acquirers
Multiple acquirers’ 1st deals
Multiple acquirers’ higher-order deals
(aBased on Fama-French 3-factor model)
Wiggenhorn, Gleason, and
Madura (2007)
0.36%b
0.06%
0.32%
0.58%
6 Months 12 Months
18 Months
24 Months
277 277
277
277
19922001 Newly public firms (bAAR: Monthly Average Abnormal
Return)
Megginson,
Morgan, and Nail
(2004)
2.58;9.86;9.86%c
2.38;1.89; 3.11%
8.61;19.6;18.5%
Year 1; 2; 3
204
112
92
19771996 Full Sample
Focus Preserving or Increasing (FPI)
Focus Decreasing (FD) (cBHAR: Buy & Hold Abnormal Return)
Rau and Vermaelen
(1998) 4.04%
+8.85%
(0,36)
Month
2,823
316 19801991
Mergers
Tender offers
Loughran and Vijh
(1997) 0.10%
14.20%
+61.30%
(1,1250)
534
434
100
19701989
Full Sample
Mergers
Tender offers
Agrawal,Jaffe, and
Mandekler (1992) 10.26% (0,1250) 765 19551987 Mergers (5-year post-merger returns)
Loderer and Martin
(1998)
+1.50% (0,1250) 1,298 19661986 Mergers and tender offers (5-year post-
merger returns)
Franks, Harris, and
Titman (1991) 0.11%
(per month)
(0,36)
Month
346 19751984 Mergers and tender offers
Magenheim and
Mueller (1988) 42.20%
49.09%
27.34%
(3,36)
Month
78
78
78
19761981
Full Sample
Mergers
Tender offers
Bradley, Desai and
Kim (1983) 7.85% (0,365) 94 19621980 Unsuccessful tender offer bids
Dodd and Ruback (1977)
1.32%
1.60%
(0,365)
124 48
19581978
Successful tender offer bids
Unsuccessful tender offer bids
Asquith (1983) 7.20%
9.60%
(0,240)
196
89 19621976
Successful mergers
Unsuccessful mergers
Malatesta (1983) 2.90%
13.70%
7.70%
(0,365)
121
75
59
19691974
19711974
19691974
Full Sample
Subsample after 1970
Small Bidders
Langetieg (1978) 6.59% (0,365) 149 19291969 Successful mergers
Mandelker (1974) 1.32% (0,365) 241 19411963 Successful mergers
value, and significant declines in operating cash flows, while focus preserving or increasing mergers result in marginal
improvements in long-term performance. The U.K. evidence in the literature is found to be similar to that of the U.S.
For instance, using a sample of 519 acquisitions from 1983 to 1995, Sudarsanam and Mahate (2003) report +41 to +750
day buy and hold abnormal return (BHAR) ranging from 8.71% to 21.89% based on various benchmark models
including market-, mean-, size- and MTBV-adjusted BHAR. They also find Value acquirers outperform glamour
acquirers over the 3-year post-acquisition period. Glamour firms with overvalued equity are more likely to exploit their
status by using it more often than cash to finance their acquisitions. Value acquirers tend to do the opposite with a
greater use of cash in their transaction. Their findings are vastly consistent with those for the U.S. reported by Rau and
Vermaelen (1998).
As for the announcement wealth effect, it is well documented in the literature that acquirers tend to be the “losers”
suffering firm value loss, when announcing the acquisition of domestic targets which, in contrast, often emerge as the
“winners” enjoying shareholder wealth gain (e.g., Walker, 2000; Graham, Lemmon, and Wolf, 2002). On the other
hand, the announcement wealth effect for the two sides in cross-border M&A may not be as different but acquiring
firms tend to experience little or insignificant firm value gain. For instance, Doukas and Travlos (1988) find U.S.
acquirers gain insignificant positive firm value on the acquisition announcements for the period of 1975-1983.
However, Morck and Yeung (1992) discover modest but significant abnormal returns surrounding the event day for U.S.
acquiring firms for 1978-1988. Datta and Puia (1995) report negative cumulative share returns for U.S. acquirers
during 1978-1990, while Cakici, Hessel and Tandon (1996) fail to find any positive wealth effect for U.S. bidders for
1983-1992. Seth, Song and Pettit (2000) report small positive, statistically insignificant gains for acquiring U.S. firms
during the period of 1981-1990. Amihud, DeLong and Saunders (2002) report significantly negative abnormal returns
to acquirers for cross-border bank mergers during 1985-1998. Kiymaz (2003) presents a finding of moderate but
significant wealth gain for U.S. acquirers during the period of 1989-2000. Moeller and Schlingemann (2005) find that
international acquisitions trade at a discount during the period of 1985-1995.
DATA AND METHODOLOGY
The standard event study procedure is used to measure the market-based wealth effects on a sample of 369 U.S.
corporations acquiring foreign targets between 1992 and 2000. Stock prices and other variables are retrieved from
CRSP, the Standard and Poor’s CompuStat North America, PDE, and ExecuComp datasets as well as Compact
Disclosure CDs. The full sample is formed by first including all U.S. firms conducting international mergers and
acquisitions, as listed in Mergers and Acquisitions, in the initial sample over the period from 1992 to 2000. We then
exclude any partial acquisitions, cleanups, or increasing stakes of previous partial acquisitions. The event date, t = 0, is
the date when the news of international acquisitions first appears in the Wall Street Journal. Given the publication lag
of one day, this means that t = –1 is the day when the firm actually makes an announcement. The acquisition cases not
reported in the Wall Street Journal are eliminated from the sample. To ensure a “clean” sample, free from any
confounding effects, acquirers with any major concurrent corporate event occurring within the 15-day period prior to
the acquisition announcement also are excluded. The Wall Street Journal Index is again consulted for this purpose.
Finally, the remaining acquisitions will be retained only if stock prices for the acquirers are available on CRSP tapes.
The final sample consists of a total of 369 U.S. acquisitions overseas completed over the period of 1992–2000. Table 2
provides a brief descriptive statistics for the sample.
Table 2: Descriptive Sample Statistics
International M&As by U.S. Firms: Number of Cases by Year, Country/Region, and Industry
Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total
Frequency 37 28 37 34 42 42 62 59 28 369
Country/Region
Asia
Africa
Canada
Central/
South
America
UK
Western
Europe
Eastern
Europe
Australia/
New
Zealand
Total
Frequency 15 3 54 35 115 116 15 16 369
Two-Digit SIC 01-
09
10-
19
20-
29
30-
39
40-
49
50-
59
60-
69
70-
79
80-
89
99 Total
Frequency 1 16 83 117 31 27 24 57 11 2 369
This study follows the standard event method and uses the U.S. market index in calculating abnormal returns of
U.S. acquiring firms. Firm i's abnormal return on each trading day t, (ARit) is measured by:
mtiiitit RbaRAR , (1)
where Rit is stock i's daily return and Rmt is the return on the equally weighted U.S. market index from the Center for
Research in Security Prices (CRSP). The market model parameters, ai and bi, are estimated by regressing each firm’s
returns on the market returns over a 200-day interval starting from the 260th
to 61st trading day prior to announcement at
day 0. The daily average abnormal return (ARt) for each day t for the entire sample of N firms is calculated by:
N
i
itt ARN
AR
1
1. (2)
For the purpose of calculating Z-statistics, the average standardized abnormal return (ASARit) is computed first as:
N
i itS
itAR
NtASAR
1
1. (3)
Sit is the estimated standard deviation for firm i, obtained by:
2
1
1
2
21
12
L
kmRmkR
mRmtR
LiSitS ’ (4)
where S2 is the residual variance for stock i from the market model regression, L is the number of observations during
the estimation period, Rmk is the return on the market portfolio for the kth day of the estimation period, Rmt is the return
on the market portfolio for day t, and mR is the average return of the market portfolio over the estimation period. The
Z-statistics are calculated as:
tASARNtZ , (5)
2
1112
2,1
t
ttASAR
tt
NttZ . (6)
Zt is used to test whether the average standardized abnormal return is equal to zero, while 21 ,ttZ tests whether the
average cumulative standardized abnormal return over the interval t1 and t2 is equal to zero.
EMPIRICAL RESULTS
Before reporting acquiring firms’ post-merger long-term performance, it is essential to first examine how the
market responds to their foreign M&A announcements. Column 1 of Table 3 shows that the daily abnormal returns
(AR) surrounding the announcement are significant at the 1%-level over day –1 and day 0, at 0.77% and 0.31%,
respectively. Most existing studies have not been able to find significant announcement acquiring firm value gain (e.g.,
Doukas and Travlos, 1988). The handful of papers with significant gain report AR over the same two days in the range
of 0.1% to 0.2% (e.g., Morck and Yeung, 1992; Markides and Oyon, 1998; Markides and Ittner, 1994; Kiymaz, 2003).
Since the majority of these studies focus on international M&A in the 1970s and 1980s, my finding indicates that
foreign M&A activities in the last decade appear to create substantial announcement wealth effect for the U.S. acquirers.
This evidence is consistent with the assertion by Holmstrom and Kaplan (2001) that U.S. corporations have increasingly
pursued more shareholder value friendly policies in the 1990s and hence raised investor’s confidence regarding their
international M&A decision.
The announcement wealth effects measured by cumulative abnormal returns (CAR) are also presented in Column
1 of Table 3. The typical two-day measure of CAR (-1,0), +1.08%, is high significance at the 1%-level. In comparison,
most of the existing papers find insignificant results in CAR. The few exceptions report the much smaller CAR (-1, 0)
in the order of 0.3% at the much lower significance (5% or 10%) level (e.g., Markides and Oyon, 1998; Markides and
Ittner, 1994). However, more recent studies seem to obtain better results (e.g., 0.57% in Kiymaz, 2003). Again, the
international M&A announcement wealth effect appears to be quite substantial during the latest merger wave, 1992-
2000. The market seems to respond to the notion that strategic alliances such as foreign M&As enable firms to compete
and perform better in the global economy of the 1990s.
Since international mergers and acquisitions are location-oriented, it is also of interest to check whether
announcement wealth effect varies with location choice, and later on to examine whether the wealth effect across
different locations is preserved, increases, or evaporates in the long run. The results, based on the degree of country
development, reported in Column 2 and 3 of Table 3, show that the market tends to respond more positively toward
bidders acquiring targets in the developed countries. This result is consistent with the reverse-internalization hypothesis,
as acquirers benefit from their targets’ know-how or technologies. Moreover, target firms in the developed countries
are more likely to be compatible with U.S. firms, thus incurring lower cost of coordination, control and monitoring
(Myerson (1982)). Consequently, the positive wealth effect for acquisitions in the developed countries reflects this
advantage. In addition, developed countries as a group have a better legal tradition for investor protection than
developing regions (La Porta, et. al., 1998). Furthermore, the greater degree of uncertainty and complexity associated
with acquisitions in the less developed countries may also play an important role
As for specific countries or regions, wealth effect may be affected by culture difference, legal system similarity,
and geographic distance approximating factors such as information cost and global diversification. The last four
columns of Table 3 reports little value gain for acquiring Canadian firms and only slightly better for bidding on non-
U.K. European firms. However, acquiring firms in U.K. or other developed countries (e.g., Asian and Pacific) creates
much more significant wealth effect. The non-existing gain in Canada may be due to geographic proximity and many
acquisitions related to raw materials. The largest gain in acquisitions in Pacific and Asian developed countries possibly
because greater geographic distance signals potentially greater international diversification benefits. Similarly, the
modest gain in continental European countries is probably due to the moderate geographic distance and hence modest
diversification benefits. For the U.K., the wealth effect is well above the average and is likely due to cultural or legal
system similarity and language convenience. The relation between low cultural distance and high wealth effect is
consistent with Datta and Puia (1995) and Duru and Reeb (2001). The results in Table 3 seem to suggest that investors
prefer acquisitions in countries with lower cultural/legal system difference or greater geographic distance.
Table 3: Announcement Wealth Effect of U.S. International Mergers and Acquisitions
This table shows results for sample groups based on the location of target firms. The results for acquiring firms include daily average
abnormal returns (AR) surrounding announcement day, and cumulative abnormal returns (CAR) and their corresponding Z-values
(two-tail test) for specific time intervals based upon the standard event study methodology.
Event Day/
Interval
Full
Sample
(N=369)
Degree of Development . Major Destinations .
LDC
(N=60)
DC
(N=309)
Canada
(N=54)
U.K.
(N=115)
Non-U.K.
Europe (N=116)
Other DC
(N=24)
Daily Abnormal Return (%) AR (–1) 0.7728*** 0.4102 0.8432*** 0.2985 1.1031*** 0.6599* 1.938***
(4.3363) (0.6692) (4.4438) (0.6632) (3.5495) (1.9571) (3.2420)
AR (0) 0.3070*** 0.2960 0.3091*** 0.3818 0.3312*** 0.0679 1.0985
(2.7817) (-0.1404) (3.1017) (1.2403) (2.8516) (0.6274) (1.5211)
AR (+1) -0.2493 0.2132 -0.3392 -0.5837 -1.044*** 0.4044 -0.1721
(-0.8158) (1.0694) (-1.3627) (-0.1605) (-3.5411) (1.5347) (-0.3741)
AR (+2) -0.4227* -0.0833 -0.4886** -0.3022 -0.3582 -0.6415** -0.9228
(-1.8187) (0.0769) (-2.0214) (-0.7700) (0.0972) (-2.3387) (-1.3571)
AR (+3) -0.0348 0.5660*** -0.1515 -0.6538** -0.1797 0.1026 -0.1335
(0.6904) (3.0246) (-0.5784) (-2.0921) (-0.0372) (0.4181) (0.3268)
AR (+4) 0.0898 -0.3341 0.1721 0.3052** 0.3318 -0.1552 0.4565
(0.7584) (-0.5268) (1.0609) (1.9692) (0.5024) (-0.5584) (0.6432)
AR (+5) 0.1530 0.4290 0.0994 0.5707 0.0614 0.1254 -0.7511
(1.0445) (1.0074) (0.6974) (0.4901) (0.0431) (1.1828) (-0.5825)
Cumulative Abnormal Return (%)
CAR (–1, 0) 1.080*** 0.7062 1.152*** 0.680 1.4342*** 0.7278* 3.036***
(5.0332) (0.3739) (5.3354) (1.3459) (4.5263) (1.8275) (3.3681)
CAR (–1, 1) 0.830*** 0.9193 0.813*** 0.0966 0.3900* 1.1322** 2.8642**
(3.6386) (0.9228) (3.5696) (1.0063) (1.6515) (2.3782) (2.5340)
CAR (–1, 5) 0.616*** 1.4969* 0.4445** 0.0166 0.2453 0.5635 1.5133
(2.637) (1.9580) (2.0188) (0.5066) (1.3098) (1.0675) (1.2924)
The country designations (DC and LDC) are based on the United Nations Conference on Trade and Development (UNCTD).
*** Denotes significance at the 1%-level. ** Denotes significance at 5%-level. * Denotes significance at 10%-level.
One major unresolved issue in domestic M&A research is the potential long-term underperformance of acquirers
after mergers and acquisitions, but it has rarely been examined in foreign M&As. Since international mergers and
acquisitions are location-oriented and might also be driven by the nature of their business, the present paper not only
examines the long-term post-acquisition performance but also investigates whether it is affected by location choice and
industrial affiliation. It is of great interest to determine whether there is a parallel similarity between domestic and
foreign acquisitions on this issue. The results of one to five year post-merger performances in domestic M&A studies
are mixed as reported in Table 1. Although, some studies find no significant post-merger underperformance for
acquiring firms in their full sample (e.g., Wiggenhorn, Gleason, and Madura, 2007; Loderer and Martin, 1998; Franks,
Harris, and Titman, 1991; Loughran and Vijh, 1997; Dodd and Ruback 1977; Malatesta, 1983; Mandelker, 1974), many
others do. For instance, Magenheim and Mueller (1988), among others, show a staggering –42% cumulative average
abnormal return over the interval of 3 months prior to and 36 months after acquisition. It is, however, criticized by
Bradley and Jarrell (1988) for overestimation. In a more thorough analysis by Agrawal, Jaffe, and Mandelker (1992),
negative five year cumulative abnormal returns after domestic acquisitions are found in four out of the five periods
studied, at -3, -15, -19, and –23%, respectively, while the entire sample shows about a 10% wealth loss (with firm size
and beta risk adjusted). Many other papers obtain similar negative results (e.g., Bradley, Desai and Kim, 1983; Asquith,
1983; Langetieg, 1978). Consequently, Ruback (1988) pessimistically states that long-term post-merger
underperformance may have to be regarded as a fact.
Although post-acquisition long-term performance has not yet been fully studied in international M&A, this paper
shows that when the CAR event windows are extended to multiple years after foreign M&A announcement, there
exhibits a double digit wealth effect decline in each of the first two years. The results for the full sample are reported in
the first column of the top panel in Table 4. Not only does the initial announcement wealth effect vaporize, but it also
takes some time for the acquirers to turn it around. The yearly performance only turns positive after three years, in year
four and five. This seems to suggest that it is a lengthy process to integrate the targets and to realize the international
diversification benefits envisioned and welcomed by the market at the time of the announcement. In particular,
although, acquiring targets in developed countries (DC) creates sizable announcement wealth effect, it also creates more
disappointments for the investors in the long run. Individual developed country results (e.g., U.K.) also follow this
pattern. It seems that the benefits of acquiring targets in developed countries (e.g., reverse-internalization, the ease of
integrating with targets, and better investor protection) anticipated on the announcement is slow to materialize.
Acquiring targets in less developed countries (LDC) general little buzz on the announcement, but it turns out to be a
more successful strategy in the long run. There are apparently much greater potentials of diversification in LDC than
what investors can recognize at the time of the announcement. Overall, the substantial differences between the
announcement wealth effect and the long-term performance indicate that the global diversification benefits investors
envision on the announcement do not realize immediately and that they may also fail to recognize where the true
international diversification benefits reside.
Nevertheless, Fama (1998), in defending market efficiency, argues that long-term abnormal returns are often the
result of the methodology implemented, but with modifications to the methodology they tend to disappear. To account
for that and since it is well documented that GARCH (1,1) models can capture financial news reasonably well, a
GARCH (1,1) specification is also used in this study to allow for time-varying volatility over the extended event
window period. After the estimation methodology is modified for the possible existence of heteroskedasticity, the
long-term negative abnormal returns are substantially lowered, as shown in the bottom panel of Table 4. The argument
by Fama (1998) appears applicable to international M&As as well. It follows that, in terms of estimating the
performance of foreign M&A acquirers in the long run, methodologies do matter. Nevertheless, the patterns discussed
above based on the standard methodology remain broadly similar.
CONCLUDING REMARKS
The long-term post-acquisition performance for acquirers in international M&A has not yet been fully examined
in the existing literature. This paper takes the initiative to investigate whether there is a parallel similarity between the
domestic and foreign mergers and acquisition on this issue. It is found that, similar to their domestic counterparts, the
acquirers in cross-border M&A also experience long-term underperformance problem. However, different measures by
a different methodology show a lesser degree of underperformance severity, although it is still persistent. The
lackluster long-run performance appears to indicate what a daunting and time-consuming task it is to fully integrate the
target and to materialize the potential global diversification benefits. Furthermore, the sharp contrast between the
significant announcement wealth effect and the long-term post-merger underperformance seems to suggest that the
global diversification benefits the investors envision on the announcement may not even realize. The results also show
that investors tend to be too overly optimistic toward certain type of acquisitions (e.g., those in the developed countries)
while too pessimistic on the other at the time of announcement.
Table 4: Long-Term Post-Foreign-Acquisition Wealth Effect for U.S. Acquiring Firms
This table shows long-term cumulative abnormal returns and their corresponding Z-values (in parenthesis) for sample acquiring firm
groups, according to acquirer’s industrial classification and destination countries, for the specific intervals based upon the domestic
market model (the standard event study methodology) and GARCH (1,1) model.
Interval
Full
Sample
(N=369)
. Industry Classification . . Acquisition Target Countries .
Manufacturing
(N=200)
Other
(N=144)
LDC
(N=60)
DC
(N=309)
Canada
(N=54)
U.K.
(N=115)
Cumulative Abnormal Return (%): The Standard Domestic Market Model Methodology
1 Year -22.50*** -12.66*** -35.36*** -0.0192 -26.88*** -15.62** -24.80***
(-7.6236) (-3.0931) (-7.6612) (0.0358) (-8.3465) (-2.3019) (-4.1706)
2 Years -39.83*** -14.92** -74.36*** -4.8010 -46.69*** -16.24** -60.07***
(-9.4215) (-2.0622) (-11.587) (-0.5058) (-10.0848) (-2.0253) (-7.5033)
3 Years -41.19*** -14.53** -80.28*** -7.750 -47.67*** 7.7602 -73.48***
(-8.2494) (-2.1524) (-10.229) (-0.5516) (-8.7694) (-0.8449) (-8.0761)
4 Years -39.33*** -17.16* -73.78*** -1.7093 -46.86*** 22.15 -68.27***
(-5.9390) (-1.8591) (-7.2541) (0.9854) (-7.0348) (-0.7673) (-5.4735)
5 Years -32.37*** -7.47 -70.97*** 17.33*** -43.30*** 33.22 -70.98***
(-3.6119) (-0.3738) (-5.4650) (2.9838) (-5.5776) (-1.2167) (-4.1682)
2nd Yr Only -17.34*** -2.26 -39.00*** -4.7815 -19.81*** -0.6119 -35.28***
(-5.7398) (0.0467) (-8.6471) (-0.7187) (-5.9730) (-0.6202) (-6.2944)
3rd Yr Only -1.3538 0.39 -5.92* -2.9497 -0.9782 24.00 -13.41***
(-1.4587) (-0.8477) (-1.9422) (-0.2448) (-1.4939) (1.0344) (-3.4565)
4th Yr Only 1.8555 -2.63 6.50* 6.0410** 0.8034 14.39 5.2061*
(1.3099) (-0.1384) (1.6236) (2.4895) (0.1964) (-0.1223) (1.7155)
5th Yr Only 6.9613** 9.69** 2.81 19.04*** 3.567 11.07 -2.7062
(2.2832) (2.0727) (0.8988) (3.8253) (0.5611) (-0.8886) (0.5937)
Cumulative Abnormal Return (%): GARCH(1,1)
1 Year -11.93*** -10.80*** -14.104* -10.169* -12.86*** -10.846 -13.686*
(-3.5427) (-2.8183) (-1.7707) (-1.7585) (-3.1494) (-0.9244) (-1.8014)
2 Years -11.70*** -12.40** -11.345 -14.326* -11.63** 0.530 -15.064*
(-2.6995) (-2.1381) (-1.3555) (-1.7375) (-2.2152) (0.0125) (-1.8606)
3 Years -10.16* -14.61* 1.461 -12.149 -9.278 -14.706 -6.849
(-1.6882) (-1.7458) (-0.1230) (-1.1567) (-1.2610) (-0.5192) (-0.9595)
4 Years -9.22 -15.48 4.100 -12.957 -7.555 -20.277 10.392
(-1.4738) (-1.6073) (-0.1140) (-0.7056) (-1.2370) (-0.5523) (-0.4488)
5 Years -15.10* -24.91** 6.985 -16.867 -14.187* -17.750 10.283
(-1.8919) (-2.2366) (0.0034) (-0.6746) (-1.7459) (-0.6474) (-0.4246)
2nd Yr Only 0.23 -1.595 2.759 -4.157 1.238 11.375 -1.379
(-0.2686) (-0.20023) (-0.1430) (-0.6966) (0.0228) (0.9458) (-0.8279)
3rd Yr Only 1.54 -2.214 12.806* 2.178 2.347 -15.236 8.215
(0.8937) (-0.0001) (1.7039) (0.4538) (0.9487) (-0.9169) (0.9693)
4th Yr Only 0.94 -0.866 2.639 -0.809 1.723 -5.571 17.241
(-0.0222) (-0.1896) (-0.0148) (0.5941) (-0.2893) (-0.2053) (0.7662)
5th Yr Only -5.88 -9.433* 2.885 -3.910 -6.632 2.527 -0.108
(-1.2835) (-1.7877) (0.2360) (-0.0969) (-1.4309) (-0.3430) (-0.0516)
Intervals are the specified years since the M&A announcement unless noted as one particular year only. Other industries are firms
not in manufacturing (SIC 2000 – 3999) and financial industries (SIC 6000 – 6999). The country designations (DC and LDC) are
based on the United Nations Conference on Trade and Development (UNCTD).
*** Denotes significance at the 1%-level. ** Denotes significance at the 5%-level. * Denotes significance at the 10%-level.
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