Cross-Border Acquisitions: An Examination of the Influence of Relatedness and Cultural

Fit on Shareholder Value Creation in U.S. Acquiring Firms

Author(s): Deepak K. Datta and George Puia
Source: MIR: Management International Review , 4th Quarter, 1995, Vol. 35, No. 4 (4th
Quarter, 1995), pp. 337-359
Published by: Springer

Stable URL: https://www.jstor.org/stable/40228285

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Management International Review

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mlr vol. 35, 1995/4, pp. 337-359 - ^^ #_^

MonoQOinont
Internotional Review
© Gabler Verlag 1995

Deepak K. Datta/George Puia

Cross-border Acquisitions:
An Examination of the Influence of
Relatedness and Cultural Fit on Shareholder
Value Creation in U.S. Acquiring Firms1
Abstract

■ This study examines shareholder value creation 112 large cross-border acqui-
sitions undertaken by U.S. firms between 1978 and 1990. In addition to empir-
ically examining the wealth effects of acquiring firms, the study examines the
impact of relatedness and cultural distance on such wealth effects. Implications
of study findings for academic researchers and managers are discussed.

Key Results

■ Findings suggest that cross-border acquisitions, on average, do not create value

for acquiring firm shareholders. Results also indicate that, while the influence
of acquisition relatedness on value creation is unclear, cultural fit does have an
important impact. Acquisitions characterized by high cultural distance were ac-
companied by lower wealth effects for acquiring firm shareholders.

Authors

Deepak K. Datta, Associate Professor and Co-Director, Center for International Business, School of
Business, University of Kansas, Lawrence, KS, U.S.A.
George Puia, Assistant Professor, College of Business, University of Tampa, Tampa, FL, U.S.A.

Manuscript received August 1993, revised February 1995.

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Deepak K. Datta/George Puia

Mergers and acquisitions have attracted the attention of scholars in a number of

business disciplines, especially the areas of strategic management, international
business, finance and industrial economics. However, past research in the U.S.
has almost exclusively been confined to the study of domestic acquisitions (Datta,
Narayanan and Pinches 1992). Surprisingly little attention has been paid to inter-
national or cross-border acquisitions despite a significant increase in the number
and value of such transactions in the last decade - according to Directors and
Boards (1991, p. 54), "...the tilt towards cross-border dealmaking is expected to
be one of the leading M & A forces during the 90s". The dearth of research on
cross-border acquisitions also comes as a surprise, in light of the increased re-
search focus on global strategies in recent years.
The objectives of this paper are twofold. First, this paper addresses the issue
of shareholder wealth creation for U.S. acquiring firms in cross-border acquisi-
tions. Although a few studies have addressed the above question (Conn and Con-
nell 1990, Doukas and Travlos 1988, Fatemi and Furtado 1988, Markides and
Oyon 1991), their findings have been equivocal. The findings of this research are,
therefore, expected to shed additional empirical light on the general appropriate-
ness of cross-border acquisitions as a foreign direct investment strategy. Second,
the study examines how relatedness and cultural distance impact wealth effects
in individual acquisitions. The role of relatedness in mergers and acquisitions has
been emphasized in the strategic management literature on domestic acquisitions
- this study examines whether such relatedness influences shareholder value crea-
tion in cross-border acquisitions. Also, while cultural fit has been acknowledged
as a key determinant of success in cross-border acquisitions, empirical examina-
tion has been lacking. This study provides empirical evidence on the influence
that cultural differences have on shareholder value in acquiring firms.
The paper is structured as follows: first, the existing literature on the poten-
tial benefits associated with cross-border acquisitions is briefly discussed. Also
discussed is the literature pertaining to the likely impact of relatedness and cul-
tural distance on shareholder value creation in such acquisitions. In addition, the
section identifies the hypotheses examined in the study. The next section describes
the research method adopted, including, sample identification, sample character-
istics, variable operationalization, and a brief discussion of the event study meth-
odology used in analyzing the data. Finally, the results of the study are presented
and discussed, followed by a discussion of their implications from the viewpoint
of both researchers and managers.

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 Cross-border Acquisitions

Wealth Effects in Cross-border Acquisitions:

Literature Review and Research Hypotheses

Shareholder Wealth Effects

Literature on cross-border acquisitions identifies a number of benefits for acqu

ing firms associated with such transactions. Cross-border acquisitions are mot
vated by the same strategic considerations and potential benefits that drive ot
direct foreign investment decisions: the availability of new markets, availabil
of scarce specialized resources, opportunity to achieve production efficiencies
as a means of reducing political risk (Cooke 1 988). Cross-border acquisitions ha
been associated with helping acquiring firms overcome traditional trade and i
vestment barriers (Mergers and Acquisitions 1990) allowing firms to exploit f
eign market opportunities more quickly than other direct investment strateg
(Root 1987). For example, while member countries of the European Communit
(EC) have reduced or eliminated tariffs within the community, significant tari
still exist for outsiders. Such barriers provide an added incentive to foreign fir
to establish operations within the EC; cross-border acquisitions provide one su
mechanism. Also, investments via acquisitions in critical foreign markets of k
global rivals may be critical in improving a firm's competitive position by ke
ing such rivals "at bay".
Potential benefits to acquiring firms in cross-border acquisitions can also st
from reduced market risks. International market diversification has the effec
stabilizing overall firm returns because economic conditions, market returns a
major political climates tend to be uncorrelated across different international mar-
ket areas (Caves 1982). Cross-border acquisitions which result in geographic
versification should benefit investors of the diversifying (acquiring) firm by
ducing risks (given restrictions in capital markets which can make it difficult
individuals to replicate such diversification in their personal portfolios). Ho
ever, to the extent that investors are in a position to effect such diversification on
their own, such risk reduction may not be very meaningful. In addition, as an
try strategy, cross-border acquisitions have the advantage of speed and, at tim
lower costs. Given that the costs of developing a new market in a foreign cou
try can be substantial, the acquisition of an established firm can be less risky
the target firm has a track record that can be evaluated. Moreover, a cross-bor
acquisition provides almost instant access to a new market with an establish
sales volume.
If the above mentioned benefits do indeed accrue in cross-border acquisitions,
they should manifest themselves in the U.S. acquiring firm's market value when
the information on a potential acquisition becomes publicly available. In other
words, if such benefits are viewed by investors to be in excess of the price paid
for the acquisition, it should translate into shareholder wealth creation. However,

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Deepak K. Datta/George Puia

as argued by Barney (1988), a competitive market for acquisitions results in the

knowledge of the existence of such benefits bidding up the price of the target firm
until potential gains to the acquiring firm are negated. Positive market returns for
acquiring firms are therefore likely to occur if markets are imperfectly competi-
tive - for example,"when a target is worth more to one bidder than it is to any
other bidder" (Barney 1988; p. 74).
Work by Dunning (1988) and Krugman (1987) suggest that might indeed be
the case. They argue that foreign acquisitions are often pursued by firms looking
to internationalize actions that would be more costly to transact through the mar-
ket mechanism. This may result in a foreign firm being more valuable to a U.S.
firm rather than to another local firm. Using similar arguments, Fatemi and
Furtado (1988) suggest that cross-border acquisitions may permit U.S. acquiring
firm's to exploit imperfections or inefficiencies in the market for corporate con-
trol in foreign markets. Such cases provide an U.S. buyer with a "bargain" - in a
situation where a bid for a local firm is below the expected net benefits of the mer-
ger, yet does not attract competing bids from other firms (Adler and Dumas 1975).
In either case, such cross-border acquisitions should result in value creation for
the U.S. acquiring firm's shareholders.
In summary, the literature on cross-border acquisitions suggests a number of
potential economic benefits for acquiring firms. The announcement of such ac-
quisitions can, therefore, be expected to result in shareholder value creation. Thus,
the first hypothesis was as follows:

HI: Cross-border acquisitions will be associated with positive shareholder

wealth effects for U.S. acquiring firms.

Acquisition Relatedness and Value Creation

The literature in strategic management on corporate diversification emphasizes

the importance of relatedness.2 Relatedness is typically associated with operating
synergies, the pursuit of which is often mentioned as an important consideration
and justification for mergers and acquisitions (Lubatkin 1983, Porter 1987, Salter
and Weinhold 1978). As with domestic acquisitions, operating synergies in cross-
border acquisitions can take the form of economies of scale and scope (in areas
such as R & D, marketing and production) resulting in a firm being able to secure
a cost advantage over its global competitors (Cooke 1988). For example, a related
cross-border acquisition can create value for the acquiring firm by allowing it to
spread its fixed costs of R & D over a greater number of national markets, a ben-
efit not typically available in an unrelated acquisition (Harris and Ravenscraft
1991). Similarly, value for an U.S., firm can be created in related acquisitions
through management skill transfer when the U.S. firm makes the foreign firm

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 Cross-border Acquisitions

more competitive by improving the range and depth of its management skills and
abilities. In addition, the combination of specialized (often, complementary) re-
sources of the acquiring and acquired firms should contribute to value creation in
cross-border acquisition. For example, the special knowledge of local market con-
ditions that a acquired firm may possess is likely to be a particularly valuable as-
set from the perspective of an U.S. firm seeking competitive advantage in the for-
eign market.
Benefits in related cross-border acquisitions may also be the outcome of a
firm gaining access to needed technology, patents and trademarks or, alternatively,
by allowing a technologically superior firm opportunities to exploit its technol-
ogy abroad. In addition, related acquisitions are likely to exhibit superior perfor-
mance given that the acquiring firm already has considerable knowledge of the
products of the acquired firm. Related acquisitions can also contribute to wealth
creation when they enhance the market power of the acquiring firm. Such market
power, which depends on the size of the firm and the firm's resources and capa-
bilities, can be an important source of competitive advantage allowing the com-
bined firm to compete more effectively in the global marketplace. Moreover,
shareholder value creation can be expected to be higher in related acquisitions be-
cause of the familiarity that the acquiring firm has of the acquired firm industry.
Given superior knowledge of the industry the acquiring firm is likely to be more
adept at integrating the two organizations and contribute to synergistic benefits.
The effects of relatedness on value creation has been extensively examined in
studies on domestic acquisitions. The findings have been mixed - while Singh and
Montgomery (1987) and Shelton (1988) provide some support for the relatedness
hypothesis, studies by Lubatkin (1987) and Seth (1990) found no association be-
tween relatedness and value creation. In the context of cross-border acquisitions
empirical evidence on the effects of relatedness is limited. However, a survey by
Bleeke and Ernst ( 199 1 ) found that, while cross-border acquisitions have less than
a 50% overall success rate, acquisitions focussing on existing (i.e., closely related)
markets have a much higher success ratio than unrelated acquisitions.
Given the theoretical arguments which suggest superior wealth effects in re-
lated acquisitions and associated evidence, the second hypothesis examined in
this study was as follows:

H2: Shareholder wealth effects of U.S. acquiring firms will be higher in related
than in unrelated cross-border acquisitions.

Cultural Fit

In addition to relatedness, the literature on mergers and acquisitions has empha-

sized the importance of cultural fit in influencing acquisition performance (e.g.,

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Deepak K. Datta/George Puia

Chatterjee, Lubatkin, Schweiger, and Weber 1992, Datta 1991, Jemison and Sit-
kin 1986). Culture can be viewed as the collective programming of the mind that
distinguishes the members of one group or category of people from another (Hof-
stede 1990). Studies indicate that organizational cultures are to a very large ex-
tent influenced by national cultures (Terpstra and David 1991, Schneider and
Meyer 1991, Langlois and Schlegelmilch 1990). We can, therefore, reasonably
expect that the greater the cultural distance between two countries, the more dif-
ference we are likely to see in organizational characteristics and practices (Kogut
and Singh 1988). For example, it is well recognized that the organizational cul-
tures in Japanese and U.S. organizations are very different, differences that can
be largely attributed to differences in national cultures.
Empirical studies focussing on domestic acquisitions indicate that difficulties
experienced by an acquiring firm in managing a merger can be directly related to
differences in organizational cultures between merging firms (Buono, Bowditch,
and Lewis 1985, Chatterjee, et al. 1992, Datta 1991, Sales and Mirvis 1984). These
studies provide support to the argument that "organizational differences", partic-
ularly differences in organizational culture and management styles, have a signif-
icant negative impact on acquisition performance. Sales and Mirvis (1984) doc-
ument in detail the administrative conflicts following an acquisition when in-
volved firms differed strongly in their cultures. Similarly, Buono et al. (1985) ob-
serve that significant differences in corporate cultures often resulted in feelings
of discomfort and hostility in the post-acquisition assimilation phase. They argue
that organizational members are so strongly embedded in their own culture that
the process of integrating two organizations with different cultures can pose
serious problems - that resultant cultural "collision" can disrupt the entire work-
ings of the newly formed firm (Buono and Bowditch 1989). In addition, Datta
(1991) and Datta, Grant, and Rajagopalan (1991) found that differences in man-
agement styles (an element of organizational culture) between merging firms were
negatively related to post-merger performance. Finally, Chatterjee et al.'s (1992)
findings indicate that cultural differences between acquiring and acquired firms
are negatively associated with shareholder wealth creation in acquiring firms.
As in domestic aqcuisitions, cultural fit can be expected to play an important
role in influencing the performance of cross-border acquisitions. Indeed, Kogut
and Singh (1988) argue that "due to the difficulty of integrating an already exist-
ing foreign management, cultural differences are likely to be especially impor-
tant" (p. 414). Similarly, Davis, Shore, and Thompson (1991) emphasize that "any
cross-border merger plan must recognize the importance of differences in busi-
ness culture" (p. 60). Additionally, Madura, Vasconcellos, and Kish (1991) stress
the role of cultural and language differences, emphasizing the resultant difficul-
ties in making acquisitions across international borders.
Cultural differences in cross-border acquisitions can be the source of target
firm management resistance at the time of the acquisition, thereby increasing the

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 Cross-border Acquisitions

costs of the acquisition (Cartwright and Cooper 1992). Shane (1992) posited cul-
tural differences in trust levels resulted in perceived higher transaction costs, per-
ceptions that in turn moderated business strategy across borders. In addition, cul-
tural differences in cross-border acquisitions add to difficulties in post-acquisi-
tion assimilation and in the transfer of distinctive competencies between the ac-
quiring and acquired entities (Geringer, Beamish, and daCosta 1989). Many dis-
tinctive competencies, particularly those in functional areas such as marketing
and labor relations are often culture specific and, given cultural differences, can-
not be easily transferred. In addition, the greater the cultural distance, the less is
the likelihood that knowledge about local markets is readily available to the ac-
quiring firm management. This increases coordination costs associated with mon-
itoring foreign operations, adversely effecting a firm's market value at the time
of the acquisition (Doukas and Travlos 1988, Hisey and Caves 1985).
In summary, the lack of cultural fit between the acquiring and acquired firms
can be expected to have a negative impact on the performance of cross-border ac-
quisitions, lowering wealth effects for acquiring firm's shareholders. Thus, the fi-
nal hypothesis examined in this study was as follows:

H3: Shareholder wealth effects of U.S. acquiring firms in cross-border acquisi-

tions will be lower when cultural distance is high than when it is low.

Research Methodology

Sample Selection and Sample Characteristics

The sample for this study consisted of completed cross-border acquisitions be-
tween 1978 and 1990. Details on such acquisitions were obtained from Foreign
Acquisitions Rosters (section titled "U.S. Acquisitions Abroad") in the quarterly
publication Mergers and Acquisitions. In order to be included in the sample, an
acquisition had to meet certain additional criteria. First, the study was limited to
only those acquisitions where the public announcement regarding the acquisition
was reported in the Wall Street Journal. Second, the common stock returns for the
U.S. firm had to be available on the CRSP (Center for Research on Security Prices)
daily returns tapes. Third, only acquisitions where the acquisition value or the
revenues of the acquired firm exceeded $ 10 million were included in the sample.
Finally, partial acquisitions (for example, a situation where the U.S. firm acquires
only 15% of a foreign firm) and acquisitions with "contaminated" announce-
ments 3 were excluded. The above criteria resulted in a final sample of 1 12 acqui-
sitions.

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Deepak K. Datta/George Puia

Of the 112 acquisitions, 38 of the acquired companies were domiciled in the

U.K., 24 in Canada, 1 1 in W. Germany, 7 in France, 6 in Australia, 5 each in Italy
and Netherlands and 2 each in Switzerland, Spain and Belgium. The rest were
from other countries. The yearwise breakup of the acquisitions was as follows:
17 were undertaken in 1990, 18 in 1989, 8 in 1988, 14 in 1987, 6 in 1986, 8 in
1985, 7 in 1984, 4 in 1983, 4 in 1982, 4 in 1981, 9 in 1980, 10 in 1979 and 3 in
1978. The average value of the acquisitions (where available) was $228.4 mil-
lion and the average size of the acquired firm (previous year's revenues) was
$ 178.5 million.

Variable Operationalization

Relatedness

The sample of acquisitions was classified into related and unrelated acquisit
based on product descriptions provided in the Wall Street Journal news item
the acquisition as well as the descriptions of the products/services of the two firm
in Mergers and Acquisitions. Acquisitions were classified as being related if
acquiring firm was already in the same business as the acquired firm (horizo
acquisition) or if the business of the acquired firm was in an buyer or supplie
dustry with respect to the acquiring firm (vertical acquisition). All other acq
tions were categorized as being unrelated. This operationalization is consist
with the one adopted by Harris and Ravenscraft ( 1 99 1 ) in their study of the wea
effects of U.S. target firms. The categorization was undertaken independentl
the researchers involved in this project - the inter-rater reliability was very high
In the few cases where initial categorization differed, consensus was arrive
through the collection and examination of additional information on the acq
ing and acquired firms.

Cultural Fit

Cultural fit was measured using the variable "cultural distance" - i.e., the gre
the cultural distance the lower the cultural fit. "Cultural distance" was compu
in the manner suggested by Kogut and Singh (1988), Erramilli (1991) and Sh
(1992), using a composite index based on differences between the acquired
country and the U.S. along the four cultural dimensions identified by Hofst
(1980)4. The four dimensions are power distance, uncertainly avoidance, indi
uality, and masculinity/femininity. Power distance basically refers to the na
of the distribution of power within the organizational system. Uncertainty av
ance relates to a country's level of intolerance for uncertainty or ambiguity.

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 Cross-border Acquisitions

third dimension, individualism is a measure of how an individual perceives his or

her relationship with the rest of collectivity or other people in the environment.
Finally, femininity refers to the primary goals and objectives that societies have
for their progress - some cultures have a need to be machismo while others have
a need to be marianismo. Hofstede (1980) developed indices to measure the four
dimensions. Hofstede's study has also been successfully replicated more recently
by Shackleton & Ali (1990). Also, correlations between Hofstede's measures and
indices of other researchers have indicated they are valid beyond the original sam-
ple (Kogut and Singh 1988, Shane 1992).
The composite index for cultural difference was formed using the deviations
along the four cultural dimensions of the acquired firm country from the U.S.
ranking (Kogut and Singh 1988, Erramilli 1991). The deviations were then cor-
rected for differences in the variances of each dimension and then arithmetically
averaged. The index was calculated as follows:

CDj = l{(lij-Iiu)2Vi}/4,
where,

Iy = index of the ith cultural dimension and jth country at time 't'
Vj = variance of the index of the ith dimension.
CDj = cultural difference of the jth acquired firm country from the U.S.

Countries with small values of distance (CDj) are similar to the U.S.; larger
values signify increasing dissimilarity. Data on the index of the various cultural
dimensions for each acquired firm country and the U.S. were obtained from Hof-
stede (1980).

Data Analysis

Testing the hypotheses proceeded in two stages. The first stage involved the cal-
culation of the cumulative excess returns (or cumulative abnormal returns) for
U.S. acquiring firm's for each acquisition in the sample. This was done using the
event study methodology and the market model. This methodology (which has
been extensively used in the study of shareholder wealth effects in acquisitions)
is based on the assumption that the capital market forms unbiased expectations of
the potential for value creation in acquisitions (Brown and Warner 1985, Fama,
Fisher, Jensen, and Roll 1969). The event study methodology focuses on the ex-
cess returns (ERs) to shareholders around the day the acquisition is publicly an-
nounced (often referred to as the event date).5 The market model is represented
by:

Rjt = o$+/}jRmt+£jt

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Deepak K. Datta/George Puia

where,

Rjt = observed returns of acquiring firm j

Rmt = rate °f return on the value weighted market portfolio
05 & j3j = market model coefficient for acquiring firm 'j'
£jt = residual return on firm 'j' in period 't'
The day on which the first press report regarding the cross-border acquisition
is made in the Wall Street Journal was taken as the announcement date. Next the

ex-post security excess returns (ERjt) were computed as follows:

ERjt = Rjt-(dj + $Rmt)

where, 6^ and jSj are estimates of the intercept and slope of the market model.
These parameters were estimated using a 150 day estimation period returns be-
ginning day t=- 180 and ending with day t =-31 i.e., 31 days before the acquisi-
tion announcement. Excess returns represent the deviation between the realized
return at date 't' and the expected return as per the model and represents the mar-
kets' (i.e., investors) evaluation of the impact of the cross-border acquisition on
the acquiring firm. The sample cross-sectional average cumulative excess returns
(CER) for the various event periods were then calculated as follows:
t2

CER = £
t, N j=l
and 'N' is the number of observations.
The choice of the time periods used in our study to examine the significance
of excess returns or abnormal gains was based on the past literature on value crea-
tion in mergers and acquisitions. These consider the returns to be acquiring
firm's shareholders around the time of the event (in our study, announcement of
the acquisition). The idea is to see whether the returns were "abnormal" or dif-
ferent than would otherwise have been expected, based on the assumption that in
an efficient market the returns should adjust (positively or negatively) to reflect
new information (in this study, the announcement of the cross-border acquisition).
The adjustment process is fairly quick if the information is unambiguous and freely
available. Data regarding security returns and prices used in computing the ex-
cess returns and the test statistics were obtained from the CRSP data base.

Results

Overall Wealth Creation

Studies on the wealth effects in acquisitions have used a variety of event periods.
One of the most common is the two-day (-1,0) period or the total excess returns

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 Cross-border Acquisitions

over event days -1 and 0, where 0 identifies the day the news of the acquisition
first appeared in the Wall Street Journal. The two day window (-1, 0), is used to
identify the immediate market reaction to the acquisition announcement, based
on the assumption that all relevant information regarding an acquisition becomes
public on the day of the announcement and the market adjusts fully to that infor-
mation. However, arguments have been made that markets are not always capable
of predicting the full consequences of the acquisition immediately upon learning
of it (Magenheim and Mueller 1988). Thus, studies have used broader windows
around the announcement date. Commonly used periods include (-5, +5), i.e.,
eleven trading days or approximately 15 calendar days (e.g., Black and Grund-
fest 1988, Doukas and Travlos 1988, Travlos 1987, Varaiya 1986) and the broader
(-10, +10) time period (20 trading days or typically a calendar month). These have
been used to examine the market reaction over a longer period - to capture the
impact of any additional information that becomes available to the "market" af-
ter the announcement date. Studies that have used the (-10, +10) period include
Black and Grundfest (1988), Bradley, Desai, and Kim (1983), Sicherman and Pett-
way (1987) and Varaiya (1986), among others. Others have used still longer time
periods (broader windows) such as (-20, +20), or (-30, +30) (e.g., Asquith, Bruner,
and Mullins 1983, Bradley 1980, Sicherman and Pettway 1987).
Hence, in addition to the narrow (-1,0) time period this study employed a
number of longer time periods, namely, (-5, +5), (-10, +10), (-15, +15), (-20,
+20) and (-30, +30), on the assumption that they provide more realistic pictures
of wealth effects in cross-border acquisitions. Table 1 a provides the average ex-
cess returns (ERs) and cumulative excess returns (CERs) for the different event
days for all the 1 12 acquisitions in the sample. Also provided in Table 1 b are the
CERs and associated t-statistics for selected time periods. As can be seen the cu-
mulative excess returns (CERs) in the (-1, 0) period were negative (-0.42%) and
statistically significant at p<0.10. In addition, the cumulative wealth effects were
significant in 4 of the other 5 time periods examined. If was significant at the 0. 10
level in the (-5, +5), (-15, +15) and (-20, +20) periods. Also, in the (-30, +30)
time period the cumulative abnormal returns were also negative (-2.54%) and also
statistically significant at p<0.05.

Impact of Acquisition Relatedness and Cultural Fit on Wealth Effects

Additional analysis was undertaken to identify the influence of acquisition relat-

edness and cultural distance on returns across individual acquisitions analyzed in
the study. In order to examine the impact of relatedness acquisitions in the sam-
ple were classified based on the relatedness between the acquiring and the ac-
quired firms. Of the 1 12 acquisitions, 91 were related - supporting the notion that
most cross-border acquisitions (which are not affected by antitrust laws) fall into

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Deepak K. Datta/George Puia

Table la. Excess Returns and Cumulative Excess Returns for U.S. Acquiring Firms in Cross-bor-
der Acquisitions

Event Day ER (%) CER (%) Event Day ER (%) CER (%)

-30 -0.03 -0.03 1 0.00 -1.61

-20 -0.19 -0.23 2 -0.12 -1.73
-10 0.00 -1.12 3 -0.07 -1.80
-9 0.08 -1.04 4 -0.19 -1.90
-8 -0.25 -1.29 5 -0.08 -2.07
-7 0.07 -1.22 6 0.01 -2.06
-6 -0.13 -1.35 7 -0.01 -2.07
-5 0.15 -1.20 8 -0.11 -2.18
-4 -0.08 -1.28 9 0.10 -2.08
-3 -0.13 -1.15 10 0.16 -1.92
-2 -0.04 -1.19 20 -0.18 -2.22
-1 -0.49 -1.68 30 -0.17 -2.54
0 0.07 -1.61

Table 1 b. Cumulative Excess Return

ment

Period CER (%) t-statistic

(-1,0) -0.42 -1.82*

(-5, +5) -0.72 -1.53*
(-10, +10) -0.79 -1.07
(-15, +15) -1.39 -1.63*
(-20, +20) -1.90 -1.83*
(-30, +30) -2.54 -2.01**

* Significant at the 0.10 level.

** Significant at the 0.05 level

that category. The excess

related and unrelated acqu
the Table 2 b provides th
ods. Results indicate that
negative and significant f
(-20, +20) and (-30, +30).
To investigate the impact of cultural distance (H3), acquisitions were classi-
fied into two subgroups - a low cultural distance group (where cultural difference
was less than or equal to the median value) and the high cultural distance sub-
group (where the cultural difference measure was greater than the median value).
The low cultural distance group consisted of 68 acquisitions in the U.K., Canada
and Australia. All other countries fell into the high cultural difference category
(a total of 44 acquisitions). The excess returns and cumulative excess returns for
the high and low cultural distance subgroups are provided in Table 3 a. In addi-

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 Cross-border Acquisitions

Table 2a. Excess Returns and Cumulative Excess Returns for U.S. Acquiring Firms Classified
Based on Relatedness

Event day Related Unrelated

ER(%) CER(%) ER(%) CER(%)

-30 0.02 0.02 -0.23 -0.23

-20 -0.01 -0.18 -0.99 -1.68
-10 0.06 -0.35 -0.26 -4.47
-5 0.18 -0.20 -0.05 -5.49
-4 -0.12 -0.32 0.10 -5.39
-3 0.09 -0.23 0.30 -5.09
-2 -0.11 -0.34 0.26 -4.83
-1 -0.42 -0.76 -0.77 -5.60
0 0.00 -0.76 -0.38 -5.22
1 -0.01 -0.77 -0.03 -5.19
2 -0.14 -0.91 -0.03 -5.22
3 0.06 -0.85 -0.62 -5.84
4 -0.17 -1.02 -0.25 -6.09
5 _0.03 -1.05 -0.3 -6.39
10 0.22 -0.93 -0.12 -6.15
20 -0.08 -0.88 -0.63 -7.96
30 -0.21 -1.01 0.02 -9.10

Table 2 b. Cumulative Excess

ment

Period Related Unrelated

CER (%) t-statistic CER (%) t-statistic

(-1,0) -0.42 -1.76* -0.39 -0.69

(-5, +5) -0.67 -1.20 -0.85 -0.65
(-10, +10) -0.52 -0.67 -1.95 -1.08
(-15, +15) -0.66 -0.69 -4.50 -2.04**
(-20, +20) -0.65 -0.59 -7.27 -2.87***
(-30, +30) -1.01 -0.76 -9.10 -2.95***

* Significant at the 0.10 level.

** Significant at the 0.05 level.
*** Significant at the 0.01 level.

tion, Table 3 b provides the CERs (and

riods.
Table 3 b indicates that CERs in acqu
distance subgroup were -1 .65% (p<0.
for the period (-10, +10), -3.88% (p
(p<0.05) for the period (-20, +20), an
riod. The corresponding CERs for the

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Deepak K. Datta/George Puia

Table 3a. Excess and Cumulative Excess Returns for U.S. Acquiring Firms Classified Based on
Cultural Distance

Event Day High Cultural Distance Low Cultural Distance

ER(%) CER(%) ER(%) CER(%)

-30 -0.20 -0.2 0.09 0.09

-20 0.21 -0.87 -0.45 -0.23
-10 -0.07 -1.66 0.04 -0.76
-5 0.06 -2.10 0.21 -0.61
-4 -0.14 -2.24 -0.05 -0.66
-3 -0.09 -2.33 0.28 -0.38
-2 0.06 -2.27 -0.10 -0.48
-1 -0.25 -2.52 -0.63 -1.11
0 0.04 -2.48 0.09 -1.02
1 -0.16 -2.64 0.10 -0.92
2 -0.21 -2.85 -0.06 -0.98
3 -0.31 -3.16 0.08 -0.90
4 -0.56 -3.72 0.06 -0.84
5 -0.09 -3.81 -0.08 -0.92
10 -0.37 -4.17 0.50 -0.45
20 -0.36 -5.12 -0.07 -0.34
30 -0.19 -5.85 -0.15 -0.39

Table 3 b. Cumulative Exces

ment

Period High cultural distnace Low cultural distance

CER (%) t-statistic CER (%) t-statistic

(-1,0) -0.21 -0.57 -0.54 -2.00**

(-5, +5) -1.65 -1.89 -0.09 -0.15
(-10, +10) -2.58 -2.14** 0.37 0.42
(-15, +15) -3.88 -2.58** 0.18 0.18
(-20, +20) -4.08 -2.36** -0.52 -0.43
(-30, +30) -5.85 -2.84*** -0.39 -0.25

* Significant at the 0.10 level.

** Significant at the 0.05 level.
*** Significant at the 0.01 level.

statistically significant. Table 4 provi

tween the different subgroups and th
periods - i.e., (-5, +5), (-10, +10), (-
The graphic representation of the cum
(based on relatedness and cultural dis
-30 to +30) is depicted in Figures 1 an
lative excess returns across different

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 Cross-border Acquisitions

Table 4. Difference in CERs Across Subgroups for Various Periods Surrounding the Acquisition
Announcement

Factor Time period Findings Difference t-statistic

(CER%)

1. Relatedness (-30, +30) Unrelated<Related 8.10 3.55***

(-20, +20) Unrelated<Related 6.62 2.66**
(-15, +15) Unrelated<Related 3.84 1.92*
(- 1 0, + 1 0) No significant difference 1 .43 0.93
(-5, +5) No significant difference 0.18 0.14

2. Cultural distance (-30, +30) High cultural distance 5.48 2.28**

<Low cultural distance

(-20, +20) High cultural distance 3.56 1.84*

<Low cultural distance

(-15, +15) High cultural distance 4.08 3.09***

<Low cultural distance

(-10, +10) High cultural distance 2.95 2.44**

<Low cultural distance

(-5, +5) No significant difference 1.56 1.48

* Significant at p<0. 10
** Significant at p<0.05
*** Significant at p<0.01

Figure 1. Plot of Cumulative Excess Returns for U.S. Acquiring Firms in Related
Acquisitions

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Deepak K. Datta/George Puia

Figure 2. Plot of Cumulative Excess Returns for U.S. Acquiring Firms in Acquisitions Character-
ized by High and Low Cultural Distance

CARS: CROSS-BORDER ACQUISITIONS

^ High and Low Cultural Distance

Q -10 1 III Illl III III! ■!■ ■!■ Ill Illl ■■■ !■■> ■!■ l»l ll. ■■!. ■»■ !»■! Ill
-30 -25 -20 -15 -10 -6 0 5 10 15 20 25 30

Event Day
-«_ All Acquisitions -*- High Cultural Distance
-*- Low Cultural Distance

Discussion

The objectives of the study were twofold. First, to assess if cross-bord

tions create value for shareholders of acquiring firms. Second, to exam
extent of value creation was dependent on the relatedness between the
and acquired firms and also the cultural distance between them. Findi
sented in Tables 1 a and 1 b indicate that, contrary to what had been hypoth
cross-border acquisitions do not result in positive wealth effects to sha
of U.S. acquiring firms. Instead, the statistically significant negative w
fects in the (-1, 0), (-5, +5), (-15, +15), (-20, +20) and (-30, +30) per
rounding the acquisition announcement seem to suggest that cross-bord
sitions, on average, destroy value for shareholders of U.S. acquiring fir
findings present a paradox - while cross-border acquisitions have incr
popularity, such acquisitions are not necessarily viewed by investors as
itive net present value investments.
What explains the negative shareholder wealth effects observed in th
The negative wealth effects (significant negative CERs) associated with
border acquisitions would lead us to believe that such acquisitions are,

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 Cross-border Acquisitions

age, poor investments for acquiring firms. The results seem to fit the hubris hy-
pothesis put forward by Roll (1986) which predicts that bidders inadvertently
overbid and overpay for target firms. Such overpayment could occur if managers
overestimate their ability to manage the target firm due to hubris and, thereby
overestimate the benefits of such acquisitions. However, in cross-border acquisi-
tions, overpayment may stem from difficulties associated with pricing target firms
in relatively unfamiliar markets under conditions of limited information availabil-
ity (Davis, Shore, and Thompson 1991). In addition, there are difficulties in de-
termining a reference price to set a fair value for a target firm given differences
in accounting conventions across countries (and consequential problems in inter-
preting and reporting earnings and asset values). Finally, overpayment can be the
result of escalating commitment (Jemison and Sitkin 1986) - an acquiring firm
management which has invested substantial time and resources in target selection
may feel they have more to lose if the acquisition is not consummated.
Our findings are in close agreement with those of Fatemi and Furtado (1988),
who found negative CERs of -2.68% and -7.07% for the (-5, +5) and (-60, +60)
periods respectively. They are, however, different from those of Doukas and Trav-
los (1988) and Conn and Connell (1990) who found that U.S. bidders experienced
no significant returns in cross-border mergers. In explaining the differences be-
tween the results of this study and those in three prior studies, we provide two
possible explanations. First, while most of the acquisitions in the sample (69%)
belonged to the period 1984- 1990, studies by Doukas and Travlos (1988) and
Conn and Connell (1990) analyze acquisitions in the pre-1984 period. One can
hypothesize that the increased competitiveness of the cross-border acquisitions
market (resulting in fewer situations where assets stand at a discount) in recent
years might have been a factor which contributed to the lower shareholder wealth
effects observed in the sample. Second, unlike the other two studies, we limit our
analysis to large acquisitions. Given that most cross-border acquisitions are typ-
ically small, the observed excess returns are likely to be significantly diluted.7 Fi-
nally, it can be argued that larger acquisitions are more likely to attract the atten-
tion of other potential acquirers, resulting in fewer situations where assets stand
at a discount. An auction type process often results in the price being bid up, low-
ering wealth effects for acquiring firm shareholdes.
While the negative wealth effects certainly raise questions regarding the
desirability of acquisitions as an investment vehicle, it may be argued that the re-
sults do not necessarily portray an accurate picture. Wealth effects represent in-
vestor expectations (in an efficient market such expectations should be reflected
fully in the share price); however, acquisitions are planned and executed by man-
agers who may have superior information about the target's value than investors,
including possible advantages to be derived from combining the target's business
with their own. These benefits may not be necessarily clear to market investors
at the time of announcement; once more information becomes available (possibly

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Deepak K. Datta/George Puia

in the post-acquisition integration phase) the stock price will adjust to more ac-
curately reflect the true value of the acquisition.
The significant difference in the cumulative excess returns for the (-10, +10),
(-15, +15), (-20, +20) and (-30, +30) time periods between the high cultural dis-
tance and the low cultural distance subgroups (Table 4) lends credence to the the-
ory that cultural fit plays a key role in cross-border acquisitions. Cultural differ-
ences, resulting in an inadequate understanding of a foreign market and the for-
eign firm, can result in an acquiring firm overpaying for an acquisition. In addi-
tion, as previously discussed, the existence of significant cultural differences may
be perceived as a factor in increasing post-acquisition administrative and consol-
idation problems. The findings suggest that investors and analysts do recognize
the importance of cultural differences in cross-border acquisitions. An efficient
market uses all available information in determining the impact of an acquisition
on a firm's share price and our results indicate that potential costs associated with
likely post-acquisition difficulties in the presence of cultural differences is fac-
tored in such an evaluation process. Moreover, the results also suggest that man-
agers involved in cross-border acquisitions tend to discount the impact of cultu-
ral differences - this is consistent with the findings of a survey by the British In-
stitute of Management in 1986 that managerial underestimation of the difficulties
of merging two cultures is a major contributory factor in M & A failure (Cart-
wright and Cooper 1992).
The impact of relatedness on shareholder value creation is not clear from the
results of our study. As Table 4 indicates, no significant differences were observed
in the (-5, +5) or the (-10, +10) periods. However, when longer time periods such
as (-15, +15), (-20, +20) or (-30, +30) are used there were significant differences
between related and unrelated acquisitions (in the predicted direction). However,
as evident from Figure 1 , much of the difference can be attributed to the pre-an-
nouncement period (-30, -2). These puzzling findings suggest that the effects of
relatedness needs further investigation.

Implications and Directions for Future Research

This study focused on the shareholder value creation only from the perspective
of the U.S. acquiring firm. Given lack of data, the gains to the shareholders of ac-
quired firms could not be examined in this study. However, studies on domestic
acquisitions indicate that the gains in such transactions accrue primarily to the
stockholders of the acquired firm. Our sample involved acquired firms in 18 dif-
ferent countries - difficulties associated with obtaining stocks returns for these
firms that would allow similar kind of analysis is, to say the least, considerable.
The potential wealth effects for target firms are, undoubtedly, an interesting re-
search question (along with "total" wealth effects in cross-border acquisitions)

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 Cross-border Acquisitions

that needs to be addressed in future studies. However, from a pragmatic stand-

point such studies would definitely have to limit the sample to acquisitions in a
few countries (e.g., U.K.) where stock returns are more readily available to a re-
searcher.
The findings of this study also have important managerial implications. This
study seems to indicate that, despite their increasing popularity, cross-border ac-
quisitions, on average, do not create shareholder value, findings which should be
of interest to managers involved in such acquisitions. At the very least, they should
alert managers to the fact that, in making cross-border acquisitions, they should
pay close attention to factors influencing valuation and also be prepared to back
away from an acquisition if the price required to affect the transaction becomes
too high. Finally, study findings also highlight to managers the importance of cul-
tural fit in their evaluation of potential acquisition candidates. Franke, Hofstede,
and Bond (1991) argue that profiles of national culture can become tools for stra-
tegic choices in corporate boardrooms and, as this study illustrates, cross-border
acquisitions are no exception.
The findings of this study also have important implications for future research
on cross-border acquisitions. The first deals with the issue of whether cross-bor-
der acquisition create value for firms undertaking such acquisitions. While this
study found statistically significant negative wealth effects, no significant effects
were found in two previous studies (Doukas and Travlos 1988, Conn and Connell
1990). Given mixed findings, the question of wealth effects in cross-border ac-
quisitions for acquiring firms needs additional investigation in future studies. Sec-
ond, while this study focussed on relatedness and cultural fit as factors influenc-
ing value creation, future research should extended the same to include other fac-
tors. Such factors would include those directly associated with the transaction,
namely, target firm resistance/hostility and the way in which the transactions were
financed. In addition, an important factor is likely to be the experience of an ac-
quiring firm both in terms of the number of cross-border acquisitions it has been
involved in and also its experience in prior acquisitions (i.e., whether it had been
successful or unsuccessful). Acquiring firms with considerable previous experi-
ence in cross-border acquisitions might be more successful in creating value for
their shareholders by being more selective in their choice of acquisitions. On the
other hand, an acquiring firm which had been unsuccessful in previous acquisi-
tion attempts might tend to overpay, thereby destroying value for their sharehold-
ers. Other factors of interest include those related to the context in which the trans-
action took place (including the time period in which the acquisitions were under-
taken) - a factor that might explain the differences in findings of this study from
that of Doukas and Travlos (1988).
The measure used to assess the desirability of an acquisition is shareholder
value creation at the time of announcement. The wealth effects represent a meas-
ure of market expectations, not actual performance. Based on the notion of mar-

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Deepak K. Datta/George Puia

ket efficiency it assumes that stockholders can assess how a firm's strategy will
evolve and thus be able to value the acquisition. However, it would be interest-
ing to examine the influence of relatedness and cultural distance on post-acquisi-
tion performance. For example, the full potency of culture becomes apparent in
the implementation phase when interaction on two, often disparate, cultures take
place. The result can be culture shock, often accompanied by negative effects on
implementation and performance, as was observed in a recent study on interna-
tional joint ventures (Meschi and Roger 1994). In a study of post-acquisition per-
formance, factors in addition to relatedness and cultural distance may prove im-
portant. Such factors may include the extent of autonomy given to the acquired
firm's management, ability of the firms to transfer competencies, the process by
which the acquisition is implemented (Jemison and Sitkin 1986) as well as the
interactions of these characteristics with acquisition relatedness and cultural dis-
tance. Future research which examines these and other related issues can contrib-
ute significantly to our understanding of cross-border acquisitions and their per-
formance. Such understanding is critical in the context of increasing incidence
and importance of such transactions.

Footnotes

1 The authors thank Krishnan Ramaya, Elaine Jones and an anonymous reviewer for help
ments on the paper. Partial funding for this project was provided by the University of
General Research Fund. Research was undertaken by the first author while on sabbatica
2 Relatedness has been equated with "strategic fit" by some researchers (e.g., Harris and R
craft 1991)
3 Contaminated announcements were those in which another news item on a different issue was
featured along with the acquisition in the Wall Street Journal during the 1 1-day period surround-
ing the acquisition announcement.
4 Hofstede's study involved two surveys and 88 000 questionnaires administered over a four-year
time period.
5 The rationale for focusing on the period of time around the announcement of the acquisition
comes from the efficient market hypothesis. Once an acquisition is announced the present value
of the acquisition is considered to be immediately incorporated into the share price of the ac-
quiring firm.
6 In addition to examining the effects of relatedness and cultural distance separately we examined
the interactive effects of these two variables were examined for each of the time periods in the
study. The interaction terms were not significant for anv of the periods.
7 The impact of the dilution effect has been discussed by Singh and Montgomery (1987).

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 Cross-border Acquisitions

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