Equity Ownership in Cross‐border Mergers and Acquisitions by British Firms: An Analysis of Real Options and Transaction Cost Factors
| Published date | 01 April 2017 |
| DOI | http://doi.org/10.1111/1467-8551.12215 |
| Date | 01 April 2017 |
British Journal of Management, Vol. 28, 180–196 (2017)
DOI: 10.1111/1467-8551.12215
Equity Ownership in Cross-border Mergers
and Acquisitions by British Firms: An
Analysis of Real Options and Transaction
Cost Factors
Mohammad F. Ahammad, Vitor Leone,1Shlomo Y. Tarba,2
Keith W. Glaister3and Ahmad Arslan4
International Business Division, Leeds University Business School, University of Leeds, UK, 1Leicester Castle
Business School, De Montfort University, UK, 2Department of Strategy & InternationalBusiness, Bir mingham
Business School, University of Birmingham, UK, 3Warwick Business School, University of Warwick, UK, and
4Business School, Edge Hill University, UK
Corresponding author email: raselengland@yahoo.com
The authors investigate the factors influencing the share of equity ownership sought in
cross-border mergers and acquisitions (CBM&As). Drawing on real options theory and
transaction cost economics (TCE), they address and hypothesize key factors linked to
commitment under exogenous uncertainty and the separation of desired and non-desired
assets’ influence on share of equity sought by acquiring firms in CBM&As. Empirical
analysis based on 1872 CBM&As undertaken by British firms in both developed and
emerging economies shows that British MNEs are more likely to pursue a partial acqui-
sition in a target foreign firm when those foreign firms are from culturally distant coun-
tries. Further, findings support the view that the high cost of separating desired assets
from non-desired assets motivatesfir ms to makea partial acquisition rather than acquire
the target completely. This is one of the first studies to use realoptions theory to address
the cost of commitment under exogenous uncertainty, as well as TCE logic to addressthe
separation of desired and non-desiredassets in the target fir mwhile analysing equity own-
ership sought in CBM&As. Empirically, this paper contributes by examining CBM&As
by British firms in both developed and emerging markets.
Introduction
Cross-border mergers and acquisitions
(CBM&As) are being used increasingly as a
foreign market entry strategy by multinational
enterprises (MNEs) to create and penetrate new
markets, gain synergy benefits, facilitate portfolio
diversification, access technological assets and
reduce taxation (Arslan, Tarba and Larimo 2015;
Junni et al., 2015; Pablo and Javidan, 2009). In
2014, the total value of CBM&As reached approx-
imately US$384bn (UNCTAD, 2015). During the
first three quarters of 2014, the value of M&As
involving British firms reached approximately
£11bn (ONS, 2014). Because of their increased
global prevalence, CBM&As are clearly impor-
tant for international business (IB) scholars to
understand better.
It has been established in prior literature that
CBM&As are risky (Hitt and Pisano, 2009;
Shimizu et al., 200) and their failure rates are
relatively high. Moreover, when MNEs acquire
foreign target firms, they tend to face significant
challenges due to dierences in institutional
environments (Dikova, Sahib and Witteloostuijn,
2010) and cultures (Dikova and Sahib, 2013)
© 2017 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Equity Ownership in Cross-Border Mergers 181
between home and host countries. Some prior
IB studies have suggested that alignment in goals
of acquiring MNE and target firm can reduce
problems associated with the management of
CBM&As (Chen, 2008; Das and Kapil, 2012;
Nadolska and Barkema, 2007). In this context, we
contend that the equity ownership in CBM&As
is an aspect that can help to align the goals of
acquiring MNE and target firm, as well as reduce
the diculties associated with post-CBM&A
management. This is especially the case when
both acquired and acquirer firms see ownership
structure as a mechanism to reduce uncertainties
associated with the external environment.
An MNE may acquire 100% share capital or eq-
uity of the target firm. A full acquisition transfers
the ownership and control of the target firm to the
acquiring firm. However, an MNE may partially
acquire the target firm. Partial acquisition is a form
of acquisition where an acquiring firm purchases
an equity stake or part of the share capital in the
foreign organization (Jakobsen and Meyer, 2008).
Forinstance, Ogilvy and Mather Worldwide, a unit
of WPP Group plc in the UK, acquired 40% equity
in Empresa Tecnica de Communicacao, a provider
of marketing and advertising services in Brazil, for
US$18.83in 2004. Thus, we observe severalpartial
CBM&As, rather than all CBM&As being fully
owned.
A limited literature (e.g. Arslan and Larimo,
2012; Chari and Chang, 2009) has examined own-
ership choice in CBM&As, specifically by dis-
tinguishing between full acquisitions and partial
acquisitions. The ownership choice in CBM&As
specifically has been ignored in most previous mar-
ket entry studies, owing to the tendency to anal-
yse both full and partial CBM&As together in
the case of general establishment mode (greenfield
investment vs. acquisition) and ownership mode
(wholly owned vs. partially owned subsidiaries) fo-
cused analysis (Arslan and Larimo, 2012; Chen
and Hennart, 2004). Therefore, our paper aims
to develop new insights by analysing factors in-
fluencing MNEs’ choice between full and partial
CBM&As.
Our paper extends the workof Chari and Chang
(2009). First, unlike Chari and Chang (2009), our
paper examines CBM&As by British firms in both
developed and emerging markets. Therefore, our
study sample is more heterogeneous, and findings
are more generalizable. Second, Chari and Chang
(2009) examine two dimensions of Hofstede’s
national cultural index, i.e. uncertainty avoidance
and individualism. In contrast, we examine four
dimensions of the GLOBE Project’s national
cultural index, i.e. uncertainty avoidance, power
distance, institutional collectivism and in-group
collectivism. Third, Chari and Chang (2009) argue
that uncertainty avoidance is a more powerful
determinant than other dimensions of culture
in explaining the ownership choice in CBM&A.
However, we found thatuncertainty avoidancehas
no significant impact on the choice between partial
and full acquisitions. Our finding tends to suggest
that British MNEs are more likely to choose a
partial acquisition in the foreign target firm in the
face of high institutional collectivism distance.
The empirical context of our paper further en-
riches the literature in several ways. First, prior
studies analysing ownership structure have con-
centrated on CBM&As undertaken in Central
and Eastern Europe (Jakobsen and Meyer, 2008),
Japanese CBM&As (Chen and Hennart, 2004),
and American CBM&As in developed countries
(Chari and Chang, 2009). Prior work has found
that ownership preferences vary betweenUS fir ms
and those from other countries (Erramilli, 1996).
Consequently, new research is required examin-
ing the factors influencing ownership choice in a
non-US context. We argue that, despite some sim-
ilarities between US MNEs and British MNEs,
British MNEs dier from US MNEs in terms of
pre-and post-M&A management practices.For in-
stance, British and American buyers dier in some
of the control mechanisms that they exercise over
acquired firms, with these practices being in line
with their respective administrative and national
heritage (Calori, Lubatkin and Very, 1994, p. 373).
Further, Calori, Lubatkin and Very (1994) found
British management to be very ‘hands-o’, with
tremendous faith placed in the quality of the ac-
quired local management. In contrast, US man-
agement style is more ‘hands-on’. Unlike Chari
and Chang (2009), our paper focuses on British
MNEs’ choice between full and partial acquisi-
tions. Thus, our paper contributes in the British
context.
Literature review
Background
A review of extant IB literature reveals that very
few studies (see e.g. Arslan and Larimo, 2012;
© 2017 British Academy of Management.
To continue reading
Request your trial