Cross‐border mergers and acquisitions: The role of private equity firms

• Author: Zacharias Sautner,Jo‐Ann Suchard,Mark Humphery‐Jenner
• DOI: http://doi.org/10.1002/smj.2623
• Date: 01 August 2017
• Published date: 01 August 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 1688–1700 (2017)

Published online EarlyView 13 January 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2623

Received 24 September 2014;Final revision received15 September 2016

CROSS-BORDER MERGERS AND ACQUISITIONS:

THE ROLE OF PRIVATE EQUITY FIRMS

MARK HUMPHERY-JENNER,1*ZACHARIAS SAUTNER,2and JO-ANN

SUCHARD1

1UNSW Business School, UNSW Australia, Sydney, Australia

2Frankfurt School of Finance & Management, Frankfurt am Main, Germany

Research summary: We show that private equity ownership (“PE backing”) of the acquirer

is a signal of deal quality in cross-border takeovers. As such, PE-backed acquirers experience

higher announcement returns in cross-bordertakeovers, but only if targets are in poor information

environments.We show that PE backing is a positive market signal because of PE rms’ experience

and networks that result from prior deals in target countries. We document that the market

correctly anticipates that operating performance of PE-backed acquirers increases as a result

of cross-border mergers and acquisitions (M&A).

Managerial summary: We study cross-border acquisitions by acquirers that are partially

owned by private equity rms (“PE backing”). Cross-border acquisitions are challenging

as acquirers often have little information about targets. We document that investors react

positively to cross-border deals of PE-backed acquirers— their stock prices increase upon deal

announcements. However, this is only the case if targets are in countries with poor information

environments. This is because PE backing allows acquirers to access PE rms’ deal experience

and networks. This makes it easier to identify and evaluate good targets, making it more (less)

likely that a deal eventually creates (destroys)value. Consistent with this, we nd that earnings of

PE-backed acquirers increase after buyingtargets in poor information environments. Copyright

© 2016 John Wiley & Sons, Ltd.

INTRODUCTION

Cross-border mergers and acquisitions (M&A)

have become increasingly important, comprising,

in terms of deal value, about 40 percent of all M&A

(Bloomberg, 2015). Yet, cross-border deals are

exposed to severe problems of adverse selection, as

acquirers usually hold worse information than sell-

ers1. As a result, stock prices of foreign acquirers

Keywords: takeovers; acquisitions; mergers; private

equity; cross-border

*Correspondence to: Mark Humphery-Jenner, UNSW Busi-

ness Building, UNSW, NSW 2052, Australia. E-mail:

mlhj@unsw.edu.au

1The reason is that cross-border acquirers need to navigateforeign

legal regimes, languages, accounting rules, or corporate cultures,

all with the hindrance of geographic distance.

Copyright © 2016 John Wiley & Sons, Ltd.

often respond negatively to acquisition announce-

ments, reecting concerns among investors about a

transaction (e.g., Moeller and Schlingemann, 2005).

Theoretical work has shown that information

signals can reduce adverse selection problems

(Spence, 1974). In turn, empirical research has

studied the effectiveness of signals also in the M&A

market, focusing primarily on the benecial role of

target signals (Wu, Reuer, and Ragozzino, 2013).

We extend this literature by documenting that

signals conveyed by acquirers can create benecial

effects too. While target signals are helpful in

overcoming the risk of adverse selection, we show

that acquirer signals can be equally important by

signaling to current and future shareholders of the

acquirer that a deal is likely to create more, or

destroy less, value compared to other transactions.