Cross-Border Mergers Threaten Share Prices

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Cross-border mergers threaten share prices, BYU professor's research shows

PROVO, Utah -- Executives closed an increasing number of cross-border mergers in the 1990s, hoping to boost the value of their companies by decreasing vulnerability to economic swings in any one geographic market. But even as mergers increased, share prices declined relative to non-merger companies, according to a new study by Brigham Young University professor Ervin L. Black.

"To say that some of these companies' mergers didn't do very well wouldn't be right, because some did," says Black, an accounting professor in the Marriott School of Management's School of Accountancy and Information Systems, which was ranked third in a national poll of top accounting schools in 2000. "But on average, less than 50 percent of the companies were successful. In other words, these merged firms did worse -- their stock price didn't increase in the long run percentage-wise -- after the merger."

The study, which sampled 361 mergers between international target companies and U.S.-based companies like General Motors, J.P. Morgan, Dow Chemical, Whirlpool and Sara Lee from 1985 to 1995, found that the merged companies' share prices rose in the short term relative to similar companies, but that they underperformed their sector by 22.9 percent, on average, over the five-year period. Previous studies have shown domestic mergers exhibiting a similar effect, says Black.

"This research explores a topic of great interest to both corporate executives and investors," says Linda Vincent, an associate professor of accounting information and management at Northwestern University's Kellogg Graduate School of Business. "The authors have done some nice work and I predict an increasing academic and industry interest in exploring this important research question.

"Because we expect that the volume of cross-border mergers -- currently estimated at more than $1 trillion -- will continue to increase as barriers to such transactions continue to fall, it is important for corporate decision-makers as well as their advisors to be aware of the performance of and reasons for past transactions," Vincent continued. "Likewise, the providers of capital for such transactions, both lenders and shareholders, are interested in these results."

Typically, U.S.-based companies merge with international businesses to increase their reach, diversify and enter new economic markets. Problems often arise when management and investors underestimate the challenges associated with cross-border mergers, says Black, as reflected in the results of the study.

"This understanding shouldn't be seen as discouragement -- after all, some mergers are successful," says Black, who has presented the results of his research at the American Accounting Association's Globalization Conference. "Instead, it's a 'heads up' to companies to keep certain things in mind when they are considering a merger."

Those considerations include ensuring that the acquiring company knows what cultural factors will come into play before and after the merger, understanding the way the foreign market functions and guarding against paying too much for the acquisition.

"Sometimes egos get involved during mergers and negotiators get to the point where they figure they've got to have the other company at any cost," says Black. "That hurts in the long run when the merged company tries to recoup that money."

At the beginning of his study, Black hypothesized that accounting procedure differences from country to country might also be a factor in valuing companies. But deals in countries with standards similar to those in the U.S. produced the largest share price losses, possibly because the cost of capital is higher in those countries, says Black.

Almost 25 percent of the acquired companies were from the United Kingdom and a fifth from Canada. The study included target companies from 17 countries, with firms in Canada and Hong Kong posting the worst returns. In future research, Black and co-authors Tommy Carnes and Tomas Jandik of the University of Arkansas plan to look at what features make some mergers successful.

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