Characteristics of Acquirers and Targets in Domestic and Cross‐border Mergers and Aquisitions

• DOI: http://doi.org/10.1111/rode.12044
• Author: Larry D. Qiu,Qing Liu
• Date: 01 August 2013
• Published date: 01 August 2013

Characteristics of Acquirers and Targets in Domestic

and Cross-border Mergers and Aquisitions

Qing Liu and Larry D. Qiu*

Abstract

To help understand mergers and acquisitions (M&As), this paper utilizes the most recent M&A data

(1991–2007) to establish empirical facts on a variety of performance measures for M&A acquirers, targets,

and non-participants. Unlike the finance literature which mainly focuses on abnormal returns, our perfor-

mance measures include firm size, technology, productivity, and profitability. Generally, in domestic

M&As, in cross-border M&As, in the pre-merger period and in the post-merger period, acquirers perform

better than targets, whereas targets perform better than non-participants. Firms’ performance is improved

after the M&As. We also find that in the pre-merger period, US firms that acquire foreign firms in develop-

ing countries are significantly better than those that acquire foreign firms in developed countries.

1. Introduction

Mergers and acquisitions (M&As) have been an active economic activity since the

1980s. They have played an important role in shaping industry structures and eco-

nomic growth. Important questions that need to be addressed are as follows: Why do

firms engage in M&As? What causes M&As? Do M&As create value? How?1Eco-

nomic theory has provided some answers to these questions. For example, mergers

create synergies, result in economies of scale, and increase market power. Empirical

research has also tried to address some of these questions but failed from giving satis-

factory answers.2This paper aims to contribute to empirical literature by investigating

individual firms’ performance before and after their M&A activities and comparing

them with non-participants, that is, firms that do not engage in M&As.

We will paint a complete portrait of the M&A participating firms called M&A par-

ticipants. In particular, we will explain how M&A participants are different from non-

participants and how acquiring firms (called acquirers) and target firms (called

targets) are different. Our empirical study has a number of distinguishing advantages

compared with the existing literature. First, we use the most recent M&A data and

cover a longer time span (1991–2007). Second, we examine a comprehensive set of

performance measures, such as size, technology, productivity, and profitability. Third,

we examine the difference between domestic M&As and cross-border M&As and

explore the role of the economic development level of the countries where the

merging firms belong to. The goal of this paper is not to provide a theory or test any

existing theory but to present a set of empirical regularities about acquirers, targets,

and non-participants. Results from the present study will enhance our understanding

of M&A activities and will be useful for future theoretical studies and empirical inves-

tigations. Although we have provided explanations to some of the results, full expla-

* Qiu: School of Economics and Finance, University of Hong Kong, Hong Kong. Tel: +852-2859-1043; Fax:

+852-2548-1152; E-mail: larryqiu@hku.hk. Liu: University of International Business and Economics,

Beijing, China. We thank financial support from HKU’s Seed Funding.

Review of Development Economics, 17(3), 474–493, 2013

DOI:10.1111/rode.12044

© 2013 John Wiley & Sons Ltd

nations require extensive reviews of existing theories and introduction of new

theories, which are beyond the scope of this study.

Our findings show that compared with non-participants, M&A participants are

larger in size (measured in terms of sales, total assets, number of employees, and

research and development (R&D) expenditure, respectively); have better technol-

ogies (measured in terms of asset to labor ratio, and R&D expenditure to labor ratio,

respectively); have higher productivity (defined as sales per worker); and have higher

profitability (defined as total earning). For the participants, acquirers are better than

targets in all these performance measures.

Firms participating in cross-border M&As are different and their performance is

correlated with the foreign countries’ economic development levels. We find that

in the pre-merger period, the US firms that acquire foreign firms in developing

countries are significantly better than those that acquire foreign firms in developed

countries.

We also provide a dynamic analysis of firm characteristics and performance,

enabling us to see how firms are different from another perspective. Our general

findings are as follows: (i) acquirers’ growth in most performance measures is faster

in the pre-merger period than in the post-merger period; (ii) targets’ growth in

the pre-merger period and in the post-merger period generally do not differ

significantly; (iii) in the pre-merger period, acquirers, targets, and non-participants

do not have statistically significant differences in their growth rates with regard

to all performance measures; and (iv) in the post-merger period, their growth rates

are not significantly different either.3These findings have clear implications on

the impacts of M&As. It is important to make it clear that our results are mainly

about the correlations between the firm performance and the selection of the firms

(i.e. as acquirers, targets, or non-participants), but not about causal effects. It is

important to investigate the causal effects, but which is beyond the scope of any

single paper.

Although this study is the first to provide a systematic analysis of M&A firms’ per-

formance, it is closely related to a large literature of empirical studies on M&As. In

their survey article, Andrade et al. (2001) point out that mergers occur in waves and

have strong clusters by industries. This pattern is observed based on aggregate-level

(country and industry level) data and has been explained largely by technological

innovations, supply shocks, and deregulations. This line of research has improved our

understanding of why and when mergers occur. In contrast, our study uses micro-level

(firm level) M&A data to provide a detailed and complete picture of the merging

firms. Hence, our study supplements this line of research and enhances our under-

standing of who engages in mergers. Some studies (e.g. Andrade and Stafford, 2004;

Bradley and Sundaram, 2006; and Breinlich, 2008) have also compared acquirers,

targets, and non-participants, but they focused on a much smaller set of performance

measures than that covered in our study.4

In finance literature, there are numerous studies on returns to M&As, as surveyed

by Andrade et al. (2001), Bruner (2002), and Betton et al. (2008). This literature is

mainly concerned about how M&As affect the acquirers’ and targets’ stock prices,

and whether they generate abnormal profits.5In contrast, we compare acquirers,

targets, and non-participants based on a set of performance measures and examine

the changes in growth rates of those measures from the pre-merger period to the post-

merger period. Our analysis allows us to see the impacts of M&As in a broader set of

financial aspects.6Although there are several studies on merger impacts using firms’

reported financial data, they were conducted based on different samples of mergers

CHARACTERISTICS OF ACQUIRERS AND TARGETS 475

© 2013 John Wiley & Sons Ltd