U of Ideas of General Interest -- August 1999 University of Illinois at Urbana-Champaign
Contact: Mark Reutter, Business & Law Editor (217) 333-0568; [email protected]
FOREIGN TAKEOVERS Study analyzes whether fears about corporate mergers are justified
CHAMPAIGN, Ill. -- Is the purchase of U.S. companies by foreign firms good or bad for American stockholders?
The pace of such acquisitions, known as "cross-border takeovers," has accelerated greatly over the last decade. In 1996, $73.5 billion worth of assets were acquired in foreign takeovers, up from $5.1 billion in 1982, representing 15 percent of total U.S. takeover activity. And the urge to merge only seems to be growing with such recent high-profile pairings as that of carmakers Daimler-Benz and Chrysler.
To examine the economic dynamics behind cross-border takeovers, Anju Seth, a business professor at the University of Illinois, examined 100 acquisitions by foreign firms. She and two colleagues examined the extent of shareholder value created by the takeovers, the distribution of gains between the acquirers and targets, and how competition to acquire a U.S. firm affected the value of the combined firm.
"There have been expressions of fear about foreign takeovers of U.S. firms," she said. "We developed empirical methods to try to understand the value and competitive consequences of these acquisitions."
In 74 of the 100 takeovers studied, there was an average gain to the combined firm of $249 million, or 7.6 percent, from 10 days before the first announcement of the acquisition to 10 days after the successful bid. The average gain to the target was $182.8 million, representing a 38 percent increase over pre-acquisition value. The acquiring firms, by contrast, gained only $66.7 million. This amounted to 0.11 percent of the pre-acquisition value because of the relatively large size of the bidding firm.
"On the whole, there were more winners than losers among the acquiring foreign firms," Seth said. "Large acquiring firms generally fared better than small ones. But when there was a bidding contest between two or more firms, the successful bidder suffered a small loss."
For the 26 transactions in which there was a loss in total value of the combined company, the breakdown between target and acquirer changed somewhat. The target firm averaged a $41 million gain, while the acquiring firm lost an average of $124 million, for a net loss of $83 million. However, since the acquiring firms tended to be large, their losses typically amounted to only a small fraction of their total value.
"In general, U.S. firms targeted by foreign companies appear to gain more value than those taken over by American firms," Seth said. "Instead of expressions of fear, it appears that international acquisitions should be welcomed as a source of wealth for stockholders."
Kean P. Song, an economist at Prairie View A&M University, and Richardson Pettit, a finance professor at the University of Houston, co-wrote the study.
-mr-
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