Does Bilateral Trust Matter During Mergers and Acquisitions Negotiations?
| Published date | 01 October 2023 |
| Author | Muhammad Farooq Ahmad,Nihat Aktas,Saqib Aziz |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12692 |
British Journal of Management, Vol. 34, 2212–2233 (2023)
DOI: 10.1111/1467-8551.12692
Does Bilateral Trust Matter During
Mergers and Acquisitions Negotiations?
Muhammad Farooq Ahmad,1Nihat Aktas2and Saqib Aziz3
1SKEMA Business School – Université Côte d’Azur, Avenue Willy Brandt, Euralille, Lille, 59777, France,
2WHU Otto Beisheim School of Management, Burgplatz 2, Vallendar, Rheinland-Pfalz, 56179, Germany, and
3Rennes School of Business, 2 Rue Robertd’Arbrissel, Rennes, 35065, France
Corresponding author email: nihat.aktas@whu.edu
We examine the effect of bilateral trust on cross-border mergers and acquisitions
(M&As). Using a large European M&A sample, we nd that bilateral trust facilitates
deal announcement and completion. Bidder and target bilateral trusts towards each other
are both important for deal announcement, but only bidder trust towards the target rm
matters for deal completion. The effect of bilateral trust on deal completion is ampli-
ed in more complex transactions and when bidders face severe liability of foreignness.
Moreover,bilateral trust between the parties is also associated positively with merger per-
formance. These results support the importance of bilateral trust as a deal facilitator in
negotiation settings characterized by contract incompleteness and liability of foreignness.
Introduction
Mergers and acquisitions (M&As) are major cor-
porate events,shaping rm boundaries and requir-
ing important managerial attention and involve-
ment. The M&A process is complex (Cartwright
and Schoenberg, 2006), and its implementation
from private initiation until closing takes time. It
is also associated with uncertainties for the in-
volved companies and entails challenging negotia-
tion rounds between the parties (for a detailed de-
scription of the takeover process, see e.g. Boone
and Mulherin, 2007; Welch et al., 2020; Aktas
et al., 2021).
An important consequence of this complexity
is that not all initiated takeover processes lead
to a takeover agreement, and not all announced
agreements are completed. The prior literature
indicates that a typical bidder fails to close 29%
of the processes that have entered the negotia-
tion/due diligence phase (Aktas et al., 2021), and
the proportion of agreed and publicly announced
transactions that fail to close is between 8% and
15% (see e.g. Bereskin et al., 2018; Jacobsen,2014;
Ofcer, 2003). The failure to close an M&A deal
may have major consequences: it may damage
the reputation of the unsuccessful bidder (Luo,
2005) and negatively affect its stock price (Jacob-
sen, 2014; Savor and Lu, 2009). It is therefore
important for bidders not only to anticipate po-
tential deal breakers, but also to identify factors
favouring deal announcement and completion.
This paper focuses on one important factor that
has so far received scant attention, namely the role
of bilateral trust between the parties in an M&A
negotiation. Adopting a rational economic per-
spective (i.e. the rm value maximization princi-
ple), we hypothesize that bilateral trust between
the parties is expected to favour better communi-
cation and information sharing, thereby mitigat-
ing uncertainties and risks associated with deal
completion. We focus on cross-border deals be-
cause, in comparison with domestic deals, they
are associated with more uncertainties for the in-
volved companies owing to the liabilityofforeign-
ness (Shimizu et al., 2004; Zaheer, 1995). In an
important departure from prior literature focus-
ing on cultural factors explaining M&As (see e.g.
Ahern, Daminelli and Fracassi, 2015; Ahmad,
Aziz and Dowling, 2022; Dikova, Sahib and van
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf ofBritishAcademy
of Management.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distri-
bution and reproduction in any medium, provided the original work is properlycited.
Does Bilateral Trust Matter During Merger and Acquisition Negotiations?2213
Witteloostuijn, 2010; Popli et al., 2010; Teerikan-
gas and Very, 2006), we adopt a dyadic approach
that gives equal emphasis to both parties in a nego-
tiation (that is,the bidder and the target rm), and
assess whether bilateral trust between bidders and
targets facilitates deal announcement and comple-
tion. To better gauge the importance of bilateral
trust in merger negotiations, we further assess set-
tings in which bilateral trust is likely to be more
valuable to deal completion.
Relying on a large sample of European cross-
border M&A deals,we provide new evidence about
the effect of bilateral trust in M&A negotiations.
To account for the conceptual distinction between
trust (or trusting) and trustworthiness (or being
trustworthy) emphasized in Glaeser et al. (2000),
we adopt a dyadic approach and distinguish be-
tween the trust of the bidder towards the target
rm (i.e. trust or trusting) and the trust of the
target rm towards the bidder (i.e. trustworthi-
ness or being trustworthy). Empirically, we mea-
sure trust at the country-pair level following the
approach developed in Guiso, Sapienza and Zin-
gales (2009) with Eurobarometer dataand recently
used by Bottazzi, Da Rin and Hellmann (2016)
and Pursiainen (2022) in the context of venture
capital investments and equity analyst recommen-
dations, respectively.
Our M&A sample includes the countries cov-
ered by the Eurobarometer survey and contains
all announced cross-border deals between them
during the period 1990–2018, totalling an ag-
gregate deal value of $US 2,103.57 billion. We
start the empirical examination with the deal
announcement analysis at the country-pair level.
Estimating rst separate models with trust (i.e.the
perceived trust of the bidder towards the target
rm) and trustworthiness (i.e. the perceived trust
of the target rm towards the bidder), our results
indicate that both trust variables positively and
signicantly affect M&A activity between the
corresponding country pair. In terms of economic
signicance, we nd that a one standard devi-
ation increase in trust or trustworthiness raises
the M&A intensity by about 2 percentage points.
These are substantial economic effects, given that
the average M&A intensity is 12% in our sample.
We uncover a similar pattern with country-pair
M&A volume as a dependent variable. We then
include both trust and trustworthiness in the same
specication. The results indicate that both trust
and trustworthiness continue to matter for deal
announcement at the country-pair level, even after
controlling forthe bilateral trust oftheother party.
Next, we turn our analysis to the deal level and
examine the effect of bilateral trust on deal com-
pletion. When included independently in the spec-
ication, both trust and trustworthiness matterfor
deal completion. In the full model, however, only
the trust of the bidder towards the target is statisti-
cally signicant. In terms of economic effect, a one
standard deviation increase in bilateral trust is as-
sociatedwitha2percentagepointsincreaseindeal
completion. Relative to the mean completion rate
of 89% in our sample, this economic effect trans-
lates into a 2.24% increase in the completion rate.
Taken collectively, our results resonate with the
ndings documented in the qualitative study of
Graebner (2009). She focuses on the acquisition of
entrepreneurial rms and emphasizes that sellers
are more disciplined in selecting trustful partners
during the initiation phase, while bidders appear
not to eliminate all distrusted partners at the early
stage. Our results are consistent with these obser-
vations, as we also document an asymmetry in the
importance of bilateral trust for deal completion.
We also emphasize that our specications system-
atically controlfor cultural determinants identied
in prior M&A literature (such as cultural distance,
same language, same colony, shared border, and
geographical distance), and therefore the indepen-
dent trust effect that we document goes beyond
these cultural values.
To further support that trust really matters in
cross-border M&A negotiations, we implement
several cross-sectional tests and examine settings
in which trust is likely to be more valuable to the
M&A negotiation process. Relying on a rich set of
proxies borrowed from the prior literature, we con-
rm that the positive effect of trust on deal com-
pletion is amplied in complex deals and when bid-
ders face severe liability of foreignness.
We also conduct various robustness tests to en-
sure that our ndings are not affected by potential
endogeneity issues related to reverse causality and
omitted variable biases. Werst emphasize that re-
verse causality is less likelyto be an issue in our set-
ting. As emphasized in Bottazzi, Da Rin and Hell-
mann (2016), the use of country-level measure as a
proxyfor bilateral trust allows us to dismiss reverse
causality in the rm-level analysis.1Concerning
1Trust between the countries may affect the bidder’s
decision whether or not to close the corresponding
© 2022 The Authors.British Journal ofManagement publishedby John Wiley & Sons Ltd on behalf ofBritish
Academy of Management.
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