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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