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Following the (M&A) Example of Others

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.


Bottom LineAcquiring a company in an emerging market carries a considerable amount of risk for U.S. firms. But carefully watching the decisions and outcomes of other companies leads to substantially better postmerger performance for acquiring firms.

Following in another firm’s footsteps doesn’t usually make for an effective business plan. But as the world’s economies continue their steady march toward integration, a new study finds that U.S. companies can better plan and execute mergers in developing markets by monitoring other firms’ previous acquisitions in the same countries.

Cross-border M&A activity in developing countries represents an ideal lens through which to examine whether firms can benefit by learning from others, the authors note. Unlike deals that occur in established countries, acquisitions in emerging nations typically entail a high level of uncertainty and complexity. This is partly because of the acquiring firm’s comparatively limited knowledge of the distant market. And developing economies with limited freedom of the press, or an underdeveloped media, can be difficult to work in because a thorough assessment of the economic, legal, and political landscape becomes difficult. So there’s much to learn, potentially, from those that have gone before.

Valuable information can flow from one firm or industry to another through a variety of channels, including their common links with consultants, financiers, and M&A advisors. Industry networks, shared board directors, and geographic proximity can also enable firms to learn from one another without actively pursuing more formal exchanges of knowledge. If even some of this information spillover can reduce the negotiation and transaction costs that come with the risky plunge into an emerging market, companies should shape their business efforts to take whatever advantage they can from this additional knowledge.

Valuable information can flow from one firm or industry to another through a variety of channels.

The authors of this study, the first to measure the effects of learning by observing in a sample that focused on more than one industry, considered several indicators of an acquiring firm’s performance: accounting profitability, short- and long-term stock returns, and whether or not the deal went through. They analyzed a sample of 317 cross-border acquisitions in 43 developing markets, as classified by the International Monetary Fund, that were made by U.S. firms from 1993 through 2010.

After controlling for characteristics of the deal and target country, as well as the acquirer’s past experience in M&A, the authors found consistent evidence that firms exhibit improved postmerger financial performance when they can learn from their predecessors’ experience. These positive effects were most strongly pronounced in culturally different, far-flung markets, underscoring the fact that learning from others’ triumphs or mistakes carries the most benefit in locations that are intrinsically dissimilar to the United States.

Delving deeper, the authors found that when many of a firm’s industry peers had previously pulled off an acquisition in a particular market, that firm was more likely to complete its own deal—especially when those peers were also based in the United States.

But the overall number of prior mergers and acquisitions in a target market didn’t have as powerful an effect on a company’s decision to strike a deal as did the actions of firms with similar traits. Indeed, the authors found a significant relationship between the number of deals conducted by a firm’s industry peers, especially those in the U.S., and the average change in its postmerger operating performance. In the three to five years following an acquisition, the spike in a firm’s return on assets could be as high as 5.6 percent, the authors calculated.

Media coverage also played an important role. A higher number of financial press releases about the outcome of previous M&A activity in the same target market correlated with better accounting performance for acquiring firms. Although this suggests the media is an especially effective conduit of other firms’ experiences, it additionally highlights the importance of tracking not only the M&A decisions of predecessors, but also the outcomes of those deals.

And the stock market takes note. The authors documented a strong and positive link between “an acquirer’s long-term stock performance, the prevalence of press release events about the outcome of prior M&As, and past acquisitions made by local [U.S.] industry peers in the same target country.” An acquirer that could observe the experiences of U.S. peers received a 1.9 percent boost to its abnormal returns over a five-year period after the bid announcement, compared with acquirers that had no similar learning opportunities—whereas those that could monitor their industry peers got a 6.2 percent boost.

Investors, for the most part, seemed rather ho-hum in their recognition of the importance of learning by observing—except in the high-tech industry. There, risk-averse investors showed themselves willing to pay higher stock prices for firms that could glean information from others. Uncertainty and complexity inherently swirl around high-tech targets and developing markets as it is, so it makes sense that investors in this sector would especially reward new mergers in emerging economies that can draw on information spilling over from recent deals.

“An organizational structure flexible enough to encourage such learning thus appears highly desirable, especially in developing-market, culturally distant acquisitions,” the authors conclude.

Source: Can Firms Learn by Observing? Evidence from Cross-Border M&As, by Bill B. Francis (Rensselaer Polytechnic Institute), Iftekhar Hasan (Fordham University), Xian Sun (Johns Hopkins University), and Maya Waisman (Fordham University), Journal of Corporate Finance, Apr. 2014, vol. 25




Following the (M&A) Example of Others