Location strategies and value creation of international mergers and acquisitions

Paul HERMELIN, Chief Executive Officer, Capgemini Les Echos, April 5, 2011 “Acquisitions constitute an essential axis of the profitability growth plan of Rexel and we will keep investing

International Mergers and Acquisitions

Series Editor

Paul-Jacques Lehmann

Location Strategies and Value Creation of International Mergers

and Acquisitions

Ludivine Chalençon

First published 2017 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers,

or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address:

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Library of Congress Control Number: 2016961402

British Library Cataloguing-in-Publication Data

A CIP record for this book is available from the British Library

ISBN 978-1-78630-049-2

Contents

Acknowledgements ix General Introduction xi Part 1 Location and Performance

of Mergers and Acquisitions 1

Introduction to Part 1 3

Chapter 1 Characteristics and Location

of Mergers and Acquisitions 5 1.1 Modes of conduct of mergers

and acquisitions 6 1.1.1 The characteristics of mergers

and acquisitions 6 1.1.2 Mergers and acquisitions as modes

of entry on foreign markets 18 1.2 International development by means

of mergers and acquisitions 32 1.2.1 Geographic distance and

economic growth 33 1.2.2 Quality of institutions and

cultural differences 38 1.3 Conclusion 47

Chapter 2 Analysis of the Performance

of Mergers and Acquisitions 49

2.1 Theoretical perspectives 50

2.1.1 The perspective of industrial economy 50

2.1.2 The perspectives of informational efficiency and organizational finance 57

2.2 Performance of mergers and acquisitions 68

2.2.1 Measuring the performance of mergers and acquisitions 68

2.2.2 Value creation factors 77

2.3 Conclusion 99

Conclusion to Part 1 103

Part 2 Methodology of the Empirical Study 105

Introduction to Part 2 107

Chapter 3 Research Methodology 109

3.1 Methodological choices 109

3.1.1 Epistemological stance 110

3.1.2 Event studies 113

3.2 Statistical analysis 140

3.2.1 Simple and multiple linear regressions 140

3.2.2 Logistic regressions 145

3.3 Conclusion 151

Chapter 4 Presentation of the Empirical Study 153

4.1 The constitution of the sample 154

4.1.1 The selection of the sample contents 154

4.1.2 Data collection 158

4.2 Descriptive analysis of the sample 171

4.2.1 The main sample 171

4.2.2 A focus on “clustered” announcements 193

4.3 Conclusion 195

Conclusion to Part 2 197

Part 3 Location and Value Creation

of Mergers and Acquisitions

by French Acquirers 199

Introduction to Part 3 201

Chapter 5 Determinants of Location of Mergers and Acquisitions 203

5.1 Geographic distance and economic growth 207

5.1.1 The impact of geographic distance 208

5.1.2 The role of economic growth 212

5.2 The quality of institutions and cultural differences 216

5.2.1 The influence of the quality of institutions 216

5.2.2 The impact of cultural differences 220

5.2.3 The global research model 224

5.3 Conclusion 227

Chapter 6 Determinants of Value Creation of Mergers and Acquisitions 231

6.1 Value creation and acquirer focus 232

6.1.1 The analysis of the reaction of financial markets 232

6.1.2 Characteristics of the acquirer 244

6.2 Target focus and operation 257

6.2.1 Characteristics of the target 258

6.2.2 Characteristics of the operation 277

6.3 Conclusion 292

Conclusion to Part 3 297

General Conclusion 299

Appendices 315

Appendix 1 317

Appendix 2 319

Appendix 3 321

Appendix 4 323

Appendix 5 325

Appendix 6 327

Appendix 7 329

Appendix 8 331

Bibliography 333

Index 363

Acknowledgments

I wish to express my most sincere gratitude to, first and foremost, my PhD supervisors Professors Alain Marion and Ulrike Mayrhofer They have been great guides, helping me progress along this doctoral process, which finds its accomplishment in this book Their support, availability and goodwill have been fundamental for me to achieve this work

I also wish to thank Professors Isabelle Martinez, Patrick Sentis and Philippe Very for their comments and advice during this research I feel honored by the interest they have shown in my work

My gratitude also goes to Professor Tao-Hsien Dolly King from the University of Charlotte (USA) as well as to Professors Diane-Gabrielle Tremblay, Jean-Yves Filbien and Diego Amaya from the University of Quebec (Canada) for welcoming me at their work place and advising me in the progress of my research

I warmly thank all the professors and doctorate students of the Magellan Research Center of the IAE Lyon (France) Their comments and remarks guided me throughout the various stages of this work, from the onset of the research project to the successive choices that resulted in the publication of this work

Last but not least, I heartfully thank my spouse, parents, family and friends who listened, probably more often than reasonable, to me telling them about my research I wish to especially thank Anne-Joëlle, Caroline and Aurélien who spent long hours proofreading my chapters Many thanks

to you all

General Introduction

“One needs two legs to walk Globalization encourages us to search beyond our borders, but one also needs to strengthen one’s capacity at home, on

one’s historical market sectors”

Paul HERMELIN, Chief Executive Officer, Capgemini

(Les Echos, April 5, 2011)

“Acquisitions constitute an essential axis of the profitability growth plan of Rexel and we will keep investing in emerging markets as well as in mature

Bruno LAFONT, Chief executive Officer of Lafarge

(Les Echos, May 7, 2014) These quotes from economic and finance journals highlight how important it is for the performance of companies to develop internationally, especially via means of mergers and acquisitions

Mergers and acquisitions activity is characterized, timewise, by waves of increased activity The last of such waves peaked in 2007 to recede with the economic crisis of 2008 To date, 2007 is the year during which the largest

number of operations occurred, for a total sum of 4,130 billion dollars [THO 14] Although the economic context can explain the relative slowdown of external growth operations of companies, their activity remains high and the public announcements of 2014 suggest a new wave may be forming French companies are particularly active as they account for 4% of the total number and value of operations completed globally They, therefore, reach the third rank, just after the American and British companies (ranking established on the basis of the information available in the

databases of Securities Data Company (SDC) Platinium on Line, from 1990

to June 2014) During the first 6 months of 2014, the French market displayed a strong growth, registering operations that sum up to a value of 107.7 billion euros This sum is four times greater than that of the first

semester of 2013 (an article in Thomson Reuters, published on July 1, 2014)

Moreover, the study of merger and acquisition dynamics shows an increase in the number of operations involving different nationalities For example, such operations haves increased by 53% in 2011 [CNU 14] Furthermore, companies from emerging countries account for an increasing part in merger and acquisition activity The fraction of operations completed

in these countries shows a clear growth in volume, contrary to these in mature countries: from only 6% in 1990, they rose to 24% in 2011 and even

to 26% in 2013 [CUN 14]

This significant recourse to external growth strategies can be explained

by the fact that such strategies enable a company to meet various objectives

in a limited amount of time [SLA 08] The literature, however, often highlights the risks carried by such operations Since they have multiple characteristics and motivations, they are very complex in a financial, strategic, as well as a human perspective Most studies about the relevance

of such acquisitions report a lowering of the performance of company or, at best, a stagnation after the merger and acquisition operation [AGR 92, DEV 09] In the same vein, authors estimate that the rate of failure of such acquisitions can reach above 50% [VAZ 12] However, these works also showed that, although the profitability of abnormal acquisitions is effectively low, null or even negative for the buyer, they are strongly positive for the target when the acquisition is announced [MOE 05]

Globalization created new opportunities as well as new constraints regarding the expansion of companies, as their location can be a source of competitive advantage [GOE 10] Indeed, companies must adjust their

investments with regard to the operation and be especially careful about the location of their activity [COL 11] This can be explained by the evolution of the law, which makes international trade easier, as well as by the growing importance of emerging countries in the global economy These mutations of the international economical context offer new perspectives for external growth strategies For example, gaining access to foreign markets seems to

be the most commonly expressed cause for merger and acquisition operations [GRA 11] They indeed constitute an efficient mode of entry into foreign markets

This novel economic context raises many questions about the merger–acquisition activity: Which are the criteria according to which a company chooses to complete a merger–acquisition operation abroad and especially

in emerging countries? How good is the performance of national and international mergers and acquisitions? How do we evaluate it? International management researchers have been interested primarily in the strategical choices of modes of entry into foreign markets and in the location of investments of companies Finance researchers, for their part, have mainly been interested in the motivation and value creation of such operations

In the context of a global environment undergoing multiple transformations, the study of the internationalization of companies has generated the development of several new concepts A research field has thus been created, which investigates the modes of entry that companies use for their international development Mergers and acquisitions are one

of the means they can use to penetrate foreign markets It is the most committing as it usually bears irreversible characteristics International mergers and acquisitions, therefore, signal a long-term strategy of location

in territories foreign to the company This high level of commitment in a foreign country involves high risks, but these risks are compensated by privileged access to local resources Therefore, the risks and performance

of internationalization strategies depend on the chosen mode of entry This

is why such decisions are considered as some of the most crucial for the international development of a company

Location strategies are, therefore, considered together with the choice of the mode of entry [DUN 08a] Company location is one of the three pillars

of the eclectic development paradigm developed by Dunning [DUN 98] His theoretical framework explains the choices of modes of entry into foreign markets along three advantages, the OLI: advantages specific to the

company (0 – ownership advantages), location (L – location advantages) and internalization (I – internalization advantages) It, therefore, draws

attention to the elements that must be taken into account in the process

of internationalization of a company The eclectic paradigm therefore not only considers the specifics of companies; it also encompasses the local characteristics of countries On this basis, the mergers and acquisitions should combine the three advantages Furthermore, in the revised version of the eclectic paradigm, Dunning and Lundan [DUN 08a] also integrate local institutions because they inevitably influence the activities of companies These developments led researchers to investigate the consequences of the variations between the country of the acquirer and that of the target, along all their dimensions: geographic distance, economic growth, quality of institutions and cultural differences [GOE 10, MAL 14]

The appetite of companies for international markets and especially for emerging countries seems to indicate that there are strong incentives for companies to take long-term positions in foreign countries by means of mergers and acquisitions There is ample literature about the choices of modes of entries and internationalization of companies But, as far as we know, little research has investigated internationalization while simultaneously considering the effects of the various dimensions of opportunities and constraints opened by foreign markets on the decision to accomplish a merger or acquisition in a mature or emerging country This is the reason why this work first studies how the specifics of the target country influence the decision to conduct a merger and acquisition in a mature country or in an emerging one

Since the question of the performance of mergers and acquisitions plays

an essential role in the choice of an internationalization strategy, we chose to develop our research by studying this theme [AKD 11, MOE 05] There is a review of the literature of works concerning mergers and acquisitions in the finance domain that highlights two main general issues: the internal as well

as external reasons that lead the company to develop such operations, on the one hand, and the performance of such operations, on the other hand Of course, these two issues are mutually dependent, as research works have shown that the performance of an operation depends on the intentions of the acquirer [HAS 91, HOB 10]

In order to explain these motivations, some research works start from the industrial economy [BAI 56, MAN 39] They study the financial and economic environment to more precisely understand the determining factors of the decisions regarding the strategies of external growth Mergers and acquisitions would, in that theory, develop more significantly when changes occur in the international environment Companies would be encouraged to conduct mergers and acquisitions by technological innovations, the stock exchange context or regulatory changes [SUD 10] The main motivations for mergers and acquisitions thus seem to arise from the will to increase market power or to build synergies [HOB 10] Such strategies indeed base their rationale on the idea that the combined value of the companies is greater than the sum of the values of each individual company involved [ERE 12] In parallel, the theory of agency and its extensions highlight the influence of managerial behavior on this process [JEN 76] In this framework, recourse to mergers and acquisitions can

be explained by opportunist behaviors of managers who attempt to take

personal advantages from these operations [FUL 02] and by hubris issues,

when managers overestimate their ability to create value out of a merger and acquisition [AKT 09, ROL 86] Furthermore, the theory of free cash flows [JEN 86] points out that mergers and acquisitions can only be performed when the acquiring company owns a significant amount of liquid assets and plans very little investments In such a situation, they allocate the cash flow to buying overestimated or strategically irrelevant companies [OUI 13]

A significant part of the literature focuses on the performance of mergers and acquisitions This concept of evaluation refers to several notions; it has several different meanings As soon as they are announced, these operations can be evaluated in terms of their future performance They can also be evaluated on a longer time period, starting from their effective completion The most commonly used criteria are the stock exchange performance measures and the measures of economical and organizational performance

on a short or long period [HEA 92] Later in this work, in the review of the literature, we will justify our choice to measure stock market performance on the basis of abnormal returns of acquirers, evaluated at the time of the announcement of the merger and acquisition operation Although these measures are affected by several biases, many authors consider that abnormal profitabilities, measured with the methodology of event studies, are the most statistically reliable [AKT 09, AND 01] This measure therefore

is inescapable, both for researchers [SUD 10] and for the managers of listed

companies [ALB 06] Here, we must point out that this indicator is limited

by its dependency on issues related to the prediction and anticipation of events [CAI 11] Although many research works attempted to evaluate the value creation of the acquirer at the time of announcement of a merger and acquisition operation, very few authors focused on operations that do not involve English-speaking companies These would seem to report less volatile performance Similarly, international mergers and acquisitions are little studied and those that usually involve American companies [SUD 10] Ultimately, the literature review shows that there is a lack of research

on French companies conducting international merger and acquisition operations, despite France being the third country in the world by number and volume of companies proceeding to external growth strategies, in a context of global environment changes that favor the conduct of operations abroad So, our research project focuses on the value creation of mergers and acquisitions performed by French acquirers during the latest, short time period

I.1 General issue and research questions

This doctorate work draws on two domains of research: finance and international management On the basis of these two fields, we analyze the location choices and value creation associated with mergers and acquisitions Therefore, the main issue we investigate in this research is the following:

– General research issue: Which are the determining factors of location

choices and value creation of mergers and acquisitions?

After reviewing the literature on the location and performance of mergers and acquisitions, we understand that this general research issue can be tackled with two specific questions:

– Research question 1: Which characteristics of the target country

influence the location of mergers and acquisitions in mature and emergent

countries?

– Research question 2: Which determining factors influence the value

creation of national or international mergers and acquisitions located in

mature or emergent countries?

Our research work follows two main goals: We first study how the specific characteristics of target countries influence the decision of the acquirer to initiate operations in mature or emergent countries In the international management literature, mature and emergent countries are often differentiated into two groups in order to build samples of similar-characteristics countries Our empirical study, therefore, investigates how geographical distance, economic growth, quality of institutions and cultural differences influence the decisions regarding the locations of mergers and acquisitions

The second goal of this research is to discern the determining factors of value creation of mergers and acquisitions To do so, we use indicators associated with characteristics of the acquirer, the target and the operation We test the influence of these factors on the whole sample as well as on subsamples such as the French subsample, the foreign subsample, the mature country and the emergent country subsamples We attempt to measure to what extent financial markets, when they estimate the performance of mergers and acquisitions upon their announcements, consider the determining factors of the choices of location of operations, choices which are linked to the target country’s characteristics

Figure I.1 provides a description of the research model, which is made up

of two sides that enable the elaboration of answers to the two mentioned questions

above-Figure I.1 Synthetic outline of research model

I.2 Research methodology

Throughout this research project we keep true to a positivist stance and to

a hypothethico-deductive approach After having reviewed the literature on the subject, we formulate hypotheses We test them on a sample of mergers and acquisitions performed by French acquirers during a recent period

These acquirers are listed in the SBF 120 index (Société des Bourses

Françaises) This stock market index with the 120 most actively traded

stocks listed in Paris includes the 40 companies of the CAC 40 index and a

selection of 80 additional companies listed on the Premier Marché and

Second Marché under Euronext Paris In order to evaluate the value creation

of mergers and acquisitions, an event study is realized and performed on the basis of a market model

The selection of the sample was done in several steps In a first step, we gathered the list of initiated operations with their main characterizing

indicators from the SDC database The DataStream databases then provided

us with the financial and stock exchange data about the acquirer Lastly, we

reviewed the economic and financial journals, from the Factiva database, in

order to clean our sample and to gather qualitative information Our empirical study is thus based on a sample constituted of 395 operations announced between 2010 and 2012 by 90 French acquirers listed on the SBF

120, involving 55 countries

I.3 Book structure

Our book has a three part structure: (1) a literature review, (2) a description of the research methodology and (3) the analysis and discussion

of results

The first part aims to draw a synthetic account of the literature on mergers–acquisitions and to use it to build the research model Chapter 1 thus presents the main types of mergers and acquisitions and details their current dynamics It highlights the great variety of strategies enabled by such operations, and then describes the general trends of their activity The research findings on the internationalization of companies and on the modes

of entry are also presented This account leads us to the formulation of our hypotheses regarding the decisions of conducting mergers and acquisitions

in mature or emerging countries Chapter 2 analyzes the research about the

performance of mergers and acquisitions It begins with a summary of the main motivations of companies to conduct such operations To do so, accounts of industrial economy, as well of accounts of informational efficiency and organizational finance, are presented Once the context of the mergers and acquisitions is understood, reflections on their performance can

be developed A literature review of empirical studies is thus detailed in order to identify the classical measures and their associated results The chapter concludes with the formulation and development of the hypotheses regarding value creation of mergers and acquisitions

The second part presents the methodological choices and the database we built Chapter 3 focuses on the epistemological paradigm we chose to base our work on and on the methodology we used Specific attention is given to the choices made to carry out the study of events This study enables us to estimate the abnormal returns, as an approach to measuring the value creation of operations The end of the chapter consists of detailing the statistical tests performed to verify the research hypotheses Chapter 4 discusses how the sample was elaborated and details the collected data Databases were used, but we also searched economic and financial journals for information of a more qualitative nature We then justify our choice to limit the study to the operations performed, between 2010 and 2012 by French acquirers listed in the SBF 120 Lastly, we present a descriptive analysis of the sample in order to provide an estimation of how representative it is and to identify its main specific features

In the third part, the results of the empirical study are analyzed and discussed Chapter 5 is devoted to the analysis of the factors that encourage companies to conduct mergers and acquisitions in emerging countries rather than in mature countries (first research question) Statistical tests are applied

to the indicators that describe the target country in order to evaluate their role in the decision of the acquirer to conduct operations in mature or emerging countries The results of the study are interpreted with regard to results of previous research carried out in this field Chapter 6 is devoted to the analysis of the determining factors of value creation of mergers and acquisitions (second research question) It presents a detailed analysis of daily returns that are estimated upon announcement of the operation, and then proceeds with the statistical tests Our empirical study evaluates how the characteristics of the acquirer, the operation and the target influence value creation, for the whole sample as well as in the national and international subsamples, and in the emerging or mature countries Obtained

results are analyzed and interpreted with regard to previous works on the performance of mergers and acquisitions

Finally, the general conclusion looks back on the rationale and issues at stake in our research work, summarizes its main results and relates the findings presented in Chapters 5 and 6 It also details the contributions and limitations of the study presented here We conclude by outlining the main directions of investigation that emerge from this doctorate work

Location and Performance

of Mergers and Acquisitions

Introduction to Part 1

We begin with a literature review of research on mergers and acquisitions We then retrace the reflection that led us to elaborate the research model we used to investigate our research issue

In Chapter 1, we present the characteristics of mergers and acquisitions as well as the current dynamics of their location To do so, we begin with detailing the modes in which mergers and acquisitions are performed, and

then investigate the issues of international development via mergers and

acquisitions In a context of economies becoming increasingly global, mergers and acquisitions become a mode of entry of choice for companies wishing to establish themselves in foreign markets However, despite the significant growth opportunities they offer, mergers and acquisitions also involve a significant level of risk In this chapter, we base our thinking on the current stakes involved in mergers and acquisitions and formulate research hypotheses, aiming to identify the key factors that lead companies

to conduct mergers and acquisitions in mature countries rather than in emerging countries

Chapter 2 investigates the performance of mergers and acquisitions It begins with an overview of the main theories that explain the underlying motives for such operations Such motives are internal as well as external to the company Research works from industrial economy, informational efficiency and organizational finance are thus detailed The aim of this part

is to discern the main leverages of performance of the current mergers and acquisitions Our conclusion of this chapter consists of detailing the empirical studies that focus on estimating the performance of mergers and

acquisitions We present an overview of the state of the art of measures and results that can be found in the literature Throughout the development

of this chapter, we formulate our research hypotheses about the factors that explain the value creation of mergers and acquisitions

1

Characteristics and Location

of Mergers and Acquisitions

That which is sought is found; the unheeded thing escapes

Oedipus the King, Sophocles

This chapter focuses on the characteristics of mergers and acquisitions, a mode of development frequently used by companies This chapter recalls the many research works that have been carried out on the subject in order to better our understanding of the main modes of conduct of mergers and acquisitions We present their typology and dynamics, which enables the reader to get a grasp of their specific features and to apprehend the diversity

of form, nature, and characteristics that such operations can have Our work then focuses more specifically on international mergers and acquisitions The current trends of this mode of entry into foreign markets are thus presented The theories about the internationalization of companies and especially the eclectic paradigm enable us to explain, at least partly, the strategic choice to internationally expand by means of mergers and acquisitions

The second section highlights the stakes involved in international mergers and acquisitions in the current economic environment Such operations are a mode of entry of choice for companies that wish to approach

a new country or strengthen their position in a country where they are already established The motivations must therefore be investigated in a broader perspective than that of the essential characteristics of the target

Location Strategies and Value Creation of International Mergers and Acquisitions, First Edition.

Ludivine Chalençon © ISTE Ltd 2017 Published by ISTE Ltd and John Wiley & Sons, Inc

company, as all the specifics of the whole country of location can prove to

be determining factors In other words, geographic distance, economic growth, the quality of institutions and cultural differences all influence the decision to endeavor an international merger and acquisition These influence are investigated in this chapter, which results in us elaborating and formulating our research hypotheses

1.1 Modes of conduct of mergers and acquisitions

Mergers and acquisitions have adapted to the changes in the global economic environment Throughout the past few decades, they have evolved and differentiated so that they now invoke various characteristics and motivations If we want to refine our understanding of the main characteristics of such external growth and development strategies, we need

to elaborate a typology of mergers and acquisitions Authors have developed several theoretical foundations to account for the goals and objectives of such operations Their theoretical developments discern that, despite the attractive growth opportunities offered by a merger and acquisition, a company which commits to such a strategy must also face significant risks inherent to international mergers and acquisitions Throughout the development of this section, we elaborate our research hypotheses about the modes of conduct of international mergers and acquisitions

1.1.1 The characteristics of mergers and acquisitions

The term “mergers and acquisitions” in fact lumps together a variety of operations that have very heterogeneous forms, natures and characteristics Their goals in terms of realizations as well as their legal, fiscal and accounting requirements can be specific to each merger and acquisition Sudarsanam [SUD 10, pp 2–3] defines them as follows: “In a merger, the corporations come together to combine and share their resources to achieve common objectives The shareholders of the combining firms often remain

as joint owners of the combined entity An acquisition resembles more of an arm’s-length deal, with one firm purchasing the assets or shares of another, and with the acquired firm’s shareholder ceasing to be owners of that firm

In a merger a new entity may be formed subsuming the merging firms, whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer” Even if mergers and acquisitions are two forms of external

growth, the characteristics of which can diverge, their significant similarity led researchers to study them jointly [SUD 10] Furthermore, mergers and acquisitions usually induce similar results, whereby one company takes over control of another [VAR 12]

1.1.1.1 The typology of mergers and acquisitions

Mergers and acquisitions encompass diverse strategies in terms of the motivations of the acquirer The acquirer can put them to work in order to simply strengthen its competitive position or as a defensive or aggressive reaction to changes in the firm’s environment The most common typology

of mergers and acquisitions discerns four main modes of strategic development: the horizontal mode, vertical mode, concentric mode (also called linked diversification) and conglomerate mode (also called unlinked diversification)

1.1.1.1.1 The four modes of development

A horizontal merger and acquisition associates firms of a same business

sector, which therefore compete with each other It follows a specialization logic, the will of the firm being to increase the value its assets and skills by confirming its position within its domain(s) of activity The mergers and acquisitions in the sector of large retailers, such as that of Carrefour and the Turkish group Ipek (which run the Alpark stores) in 2010, as well as that of Casino Guichard-Perrachon and Monoprix in 2012, are good representative examples Such a horizontal strategy enables management practice to keep a relatively low level of complexity because of the homogeneity of the merged parties It also enables the concentration of investments on a single activity and the creation of a specialized identity and image Although it increases the vulnerability of the company to the fluctuation of its sector, specialization enables a better control of the specific economic risks Profits are expected to rise upon a horizontal merger and acquisition because of economies of scale and range, experience effects, synergies and the increase

in market power of the company Horizontal mergers and acquisitions are the most common type of operation; in North America and Europe, they account for more than half of all mergers and acquisitions

A vertical merger and acquisition is characterized by the concentration of

firms whose activities are different but pertain to the same business sector Such an operation strengthens the solidity of the merging firms within the business sector The resulting firm can be seen as diversifying its activity

For example in 2012, CGG Veritas acquired the GeoScience division of the dutch firm Furgo This acquisition enabled CGG Veritas to become a fully integrated company in the GeoSciences domain Another example is the merger and acquisition of Ingenico and the Belgian company Ogone The objective there was to become able to offer the full range of services in the field of online payment Classically, this strategy is used to attempt to increase control over sources of supply and outlets and leads to a reduction

of the transaction costs [WIL 75] It can therefore consist either of an upstream integration – with a provider – or in a downstream one, with a customer Such a form of merger and acquisition increases flexibility and strengthens control over the whole chain of value production of a product It furthermore increases the independence from other actors of the sectors, achieves economies of integration (the costs of production, organization and transfer of products, for example) and increases the market power of the company

A concentric merger and acquisition, also called a linked diversification

operation, integrates two firms that were considered complementary However, since they did not operate on the same market segment, they could not be seen as competitors It follows a strategy of concentric diversification, which means that it seeks to develop activities that, although they are different, use similar technologies One example epitomizes this type of strategy: the acquisition of Gymnase Club by Club Méditerranée in 2001 Although the activities of the two entities are different, promotional offers can be proposed, which contribute to the development of both entities Firms, thus, expect synergies to develop through their sharing of complementary industrial, organizational or distribution know-hows They also expect major economies of scale because of the sharing of their resources and abilities; in such a framework, the development of one entity should favor the growth of its partner This form is often used when the demand is changing – in order to make the range of products evolve quickly and to gain the necessary technological abilities – or when the competition pressures become so strong that companies need to intensify their marketing power

A conglomerate merger and acquisition, also called an unlinked or

diagonal diversification operation, seeks to combine two firms that operate

in different business sectors and for which synergy effects are expected to

be relatively insignificant Such an operation often follows a logic of diversification of the panel of activity of a company The objective can be

the simultaneous development, on a new market, of new products that have little in common with the initial trade of the firm Let us mention, for example, how the Vivendi group developed through acquisitions in various business sectors (construction industry, public work, real estate, energy, recycling, transports, telecommunications, television, cinema, publishing and press) In 2011, for instance, the group proceeded through a merger and acquisition with SFR This form of operation mainly relies on the will to increase market power and on the expectation of financial synergies The strategies consist of seeking to increase the profitability of resources by investing them in high potential business sectors even if they are relatively far from the core trade of the acquirer At the end of the day, such companies seek to diversify the sources of risk within their organization and to balance their offer according to the lifecycles of their product panel

This classical typology of mergers and acquisitions reveals how diverse the forms of such operations can be Firms often have recourse to this form

of development because it enables the implementation of multiple strategies within a limited timescale [SLA 08]

1.1.1.1.2 The nature (defensive versus offensive) and attitude

(friendly versus hostile) of mergers and acquisitions

The nature and attitude of mergers and acquisitions are two other significant features They must be taken into account in order to better understand their characteristics The nature of these operations refers to the general motivations that presided over their implementation In short, they have been initiated either in order to develop the competitiveness of the company or to maintain it in response to strategic moves of competitors or to changing environments The attitude describes whether the operation results from a joint decision of the acquirer and target to join forces or is forced by the acquirer against the will of the target

Offensive versus defensive mergers and acquisitions

Offensive mergers and acquisitions encompass the proactive strategies of

strengthening and development of the competitive advantages of firms They include bettering the product panel, resources, abilities and skills and markets on which the company is already positioned Four main motives can

be identified for an offensive logic: (1) to increase one’s dominating power and influence, (2) to grab specific resources, (3) to take position on a new market and (4) to develop skills and abilities

Defensive mergers and acquisitions are implemented in order to respond

to an event that might undermine the competitive advantages or alter the position of a company on its market Such event can originate from changes

in the regulatory environment, from the development of new technologies, from the strategic moves of competitors, etc Five main motives for a defensive logic have been identified: (1) to strengthen a position in a mature sector, (2) to adapt to technological progress, (3) to reach a critical mass, (4) to hinder the moves of an interfering competitor and (5) to prevent new entries in the sector by raising the cost of entry into the market

Friendly versus hostile mergers and acquisitions

Friendly mergers and acquisitions occur when the two firms mutually

agree to commit to a merger and acquisition This means that the two managerial teams wish to join forces The agreement is reached during a negotiation phase This stage is crucial, as this is the moment when the two firms state their understanding of the operation and the motives behind their will to undertake it They are often supported by consultancy firms The conditions in which the association is initiated and completed arise from this negotiation stage

Hostile mergers and acquisitions, also called unfriendly operations, are

completed without the agreement of the managing team of the target firm The negotiation with the target having failed to reach a mutual agreement, the acquirer reaches over this recommendation and directly offers the acquisition to the shareholders At the upstart of the negotiation phase,

an operation considered to be friendly can then become so complex that it encourages one party to make the information public and propose to purchase This involves the target being listed and the acquirer publicizing a tender offer Therefore, drawing a clear line between friendly and hostile operations can somehow, sometimes be tricky

The complexity of mergers and acquisitions quickly becomes obvious to anyone working on an overview of the various approaches to present the typologies that characterize mergers and acquisitions In this work, we chose

to focus on the elements that most frequently occur in the literature: their four main forms, their nature and their attitude By developing only these main four elements, we catch a glimpse of the wide panel of strategies that can be involved in this type of company expansion The first wave of mergers and acquisitions was observed in the United States at the beginning

of the 20th Century These operations aimed to increase the market share of the acquirer The majority of them were national and friendly acquisitions involving firms of the industrial sector In 2008, the sixth wave of mergers and acquisitions ended Their specifics have drastically changed over the 20th century, as the economic and financial environment has undergone great transformations Nowadays, mergers and acquisitions occur in all business sectors and can be offensive as well as defensive This type of association of companies therefore involves novel dimensions and perspectives

1.1.1.2 Current trends of mergers and acquisitions

The study of the mergers and acquisitions of the past few years shows that they are tightly linked to the economic context We thus propose an inventory of the motivations for these operations, and then detail the main tendencies to be seen in the activity of mergers and acquisitions

The motivations for mergers and acquisitions

The motivations for conducting such operation are valuable items of knowledge for one who wishes to understand them, because they influence the characteristics of their implementation and subsequent performance The classification proposed by Trautwein [TRA 90] identifies five mains motives: synergies, market power, wealth transfer (shareholders), opportunity gains (undervalued target, for example) and the will to build empires

Nguyen et al [NGU 12] note two types of motivations According to

them, motives either stem from value creation – market power, response to industrial shocks, economies of scale, financial synergies, fiscal matters and the exploitation of asymmetries of information between acquirer and target –

or they are generated by other goals – agency issues, hubris or market timing

issues (overevaluation on the part of the acquirer)

Figure 1.1 provides a summary of these motivations The figure groups motivations according to their economic relevance or irrelevance When such motivations do not fit in the general strategies of company development, the author identifies three types of situation A merger and acquisition can be conducted from the perspective of developing an empire

or in order to satisfy the interests of the managing team It can also be a defense strategy to counter a public tender offer The authors also draw our attention to the fact that some firms implement external growth strategies merely as a behavior that mimics the action of their competitors

The operations that are indeed motivated by economic strategy can be classified into two types: those that seek to create value and those that seek

to extract value The first type of motivation seeks to develop synergies that increase the overall company’s performance, while the second type enables taking advantage of opportunities arising from undervalued assets, from the implementation of a better management system or from fiscal benefits

Figure 1.1 The motivations for mergers and

acquisitions (source [LEH 13 p.447])

During the last decade of the 20th Century, the study of motivations for mergers and acquisitions generated an abundant literature The authors often highlighted the specifics of operations aiming at diversification, as opposed

to these seeking to refocus on the core trade of the company However, there remain yet unknown motivations for mergers and acquisitions to discover, especially in the case of international operations

In fact, according to a study carried out on 6,000 companies by the Grant Thornton consultancy firm, the primary motivations for conducting a merger and acquisition are access to a new geographic area and the achievement of economies of scale Following these are the motivations pertaining to the acquisition of new technologies, and the access to targets at reduced costs

[THO 11] A study led by the Boston Consultancy Group (BCG) in 2010 on

179 European senior executives covering 23 business sectors identified 11 motivations for the conduct of a merger and acquisition in 2011:

– to extend the panel of offered services or products (59% of responding participants);

– to reach new consumers or new distribution channels (35%);

– to gain access to a new geographic area (32%);

– to achieve cost reduction (28%);

– to gain access to intellectual property rights, to research and development or to a brand (13%);

– to increase share profitability (13%);

– to respond to the changes of a consolidating sector (12%);

– to complete a restructuring or refocusing of activity (9%);

– to gain access to human resources (3%);

– to pre-empt ahead of predatory competitors (3%);

– to increase negotiating power (2%)

We see in that study that expanding the activity of the firm to novel geographic areas and achieving economies of scale seem to be the main motivations of nowadays’ leaders for mergers and acquisitions The conduct

of mergers and acquisitions, be they national or international, therefore responds to specific strategic issues and their characteristics reflect the motives that underlie their development The fact that companies often have recourse to this mode of development can be partly explained by the number

of objectives that can be quickly reached as well as by the variety of opportunities offered by the international dimension [SLA 08]

The activity of mergers and acquisitions

The literature has devolved a significant amount of energy to the study of the dynamics of the various waves of mergers and acquisitions The last of these waves started in 2003 and ended with the economic crisis of 2008 Some signs of recovery can be discerned since

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number of operations reaching its lowest since 2005, and decreasing by 2%

(Thomson Reuters, December 22, 2013) In 2014, however, the activity of

mergers and acquisitions shows a revival that convinces analysts that a new wave of mergers and acquisitions is about to begin: the economic context seems to have emerged from the crisis at last, companies having regained significant financial means and giant operations being announced According

to Jean-François Sablier, associate manager of Ricol Lasteyrie & Associates,

“The deleveraging phase is behind us The momentum is nowadays more firmly set on risk taking As evidence to support my opinion, we could mention the recently announced large maneuvers (Authors Note: Microsoft/Nokia, Publicis/Omnicom, etc.) stirred up by the major technological advances to come” [LES 13, p.6]

France seems to be on the forefront of this new wave of mergers and acquisitions It is particularly active in the domain, being the third country by number and total value of operations, just after the United States and the United Kingdom (see Table 1.1) It also attracts numerous investors, being the fifth country by amount of firms acquired by foreign companies

Figure 1.3 clearly shows the two most recent waves of mergers and acquisitions and the 2010 regain of activity of the three most active countries; 43% of the value and 32% of the total number of mergers and acquisition conducted during that period originated from the United States The U.S is followed by the United Kingdom (10% in value and number) and

by France (4% in value and number) The trend in the French groups is however slightly different The number of mergers and acquisitions has remained relatively stable since 2009 This trend is confirmed by the study completed by PricewaterhouseCoopers (PwC) and the Association des Responsables de Fusions-Acquisitions (the French association of mergers and acquisitions managers of CAC 40 companies, 2012)

We must note that in 2013, the recovery of activity in France has been stronger than in the World and in Europe: the value of operations increased

by 49% in France, which is clearly greater than the American figure (+14%) and in sharp contrast with the drop experienced in Europe (−23%, the worst

figure of the past 10 years) (Thomson Reuters, March 28, 2013)

Target’s country

Value (million euros) Number

Number (%)

1 United States 16,038,303 199,264 32 1 United States 16,626,061 189 484 30

2 Kingdom United 3,776,976 59,899 10 2 Kingdom United 3,537,949 57,941 9

9 Spain 825,779 12,710 2 9 NetherlandsThe 726,166 10,024 2

10 NetherlandsThe 788,987 12,008 2 10 Spain 708,252 14,397 2

16 Sweden 403,833 11,925 2 16 South Korea 382,184 7,868 1

17 South Korea 355,719 7,443 1 17 Hong Kong 344,672 8,023 1

18 Belgium 324,168 4,581 1 18 Belgium 310,541 4,587 1

19 Singapore 276,602 7,489 1 19 Mexico 288,156 2,772 0

20 Mexico 246,316 1,612 0 20 Norway 228,422 6,069 1

Table 1.1 Twenty most active countries in terms of mergers

and acquisitions (source: Figures were compiled from data on the number and value of mergers and acquisitions conducted and announced between January 1, 1990 and June 30, 2014, and from the SDC database)

The growth in France can be explained by the completion of giant operations such as the acquisition of Invensys by Schneider Electric The recovery in France confirms its positive tendencies in 2014 and has even

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The first semester of 2014 confirmed this trend: the value of acquisitions conducted by French acquirers raised by 153% to reach 43.6 billion euros,

an amount higher than that of the first semester of 2011, when the recorded activity of mergers and acquisitions was the highest since the 2008 economic crisis [THO 14]

Mergers and acquisitions thus have various characteristics and motivations Such a mode of external growth enables companies to maintain their size or quickly increase it Studying the activity of mergers and acquisitions shows that it is not steady Its intensity varies rhythmically in

waves that depend on the economic context France is the third country in

terms of number of mergers and acquisitions and shows some specific patterns within the recent trends of the market

1.1.2 Mergers and acquisitions as modes of entry on foreign

markets

The globalization of markets generates new opportunities of expansion for companies but simultaneously creates new constraints More precisely, these evolutions arise for a large part from regulations that increasingly favor internationalization and from the increasingly significant role played by emerging countries in the international economy “Product and capital markets continue to become more integrated, new markets are emerging, and globalization has become an important strategic issue for corporations” [MOE 05, p 534] Internationalization is thus on the increase and is one of the major issues of company development Since 1980, when works on the subject multiplied, the research field concerning the internationalization of firms has become prolific Before we proceed to a literature review of this domain, we detail the current trends of the international mergers and acquisitions activity

1.1.2.1 The dynamics of international mergers and acquisitions

International mergers and acquisitions show a clear growth pattern over the past decade Let us then study the location and evolution of the operations engaged in abroad

The location of mergers and acquisitions

The changes in the economic environment gave rise to a prolific literature about the role played by location in the conduct of domestic as well as international mergers and acquisitions [DAN 12]

The first wave of mergers and acquisitions was observed in the United States at the beginning of the 20th Century The aims of these early operations was mainly to gain larger shares on the American, domestic market European firms waited until the year 1960 to start developing with external growth strategies The gradual maturation of these markets and the evolution of regulations toward easier international trade were strong incentives for companies to extend their scope beyond the borders of their original country; thus national operations, although they remain the majority, are not the only ones anymore

The first international mergers and acquisitions were conducted from the United States in 1980 During the same period, European firms initiated their international expansion with cross-border mergers and acquisitions, involving mainly agents of the European Economic Community (now become the European Union) Nowadays, in a constantly changing international context, the internationalization of companies bears risks but can also offer attractive growth opportunities [MAY 11] Companies increasingly use this type of operations to internationally develop

Figure 1.4 illustrates the evolution of the number and value of international mergers and acquisitions, showing a net growth on the analyzed period The figure also highlights several waves of mergers and acquisitions Furthermore, in 2010, the recovery was strongly influenced by the sharp increase (36%) in value of international mergers and acquisitions This trend

is confirmed in 2011, as the number of international mergers and acquisitions increased by 53%, because of the increase in the numbers of

megadeals [UNC 14], which significantly contributed to the continuation of

the global growth rate of 19% in value [BCG 12] International mergers and acquisitions thus seem to be a mode of entry favored by companies that wish

to expand beyond the borders of their original countries “Furthermore, companies are now ready to get back on the track of acquisitions, to find

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Table 1.2 Geographic distribution of the number of international

mergers and acquisitions (2003–2013) (source: Figures were extracted from the data available on the UNCTAD Web site www.unctad.org)

Moreover, the proportion of mergers and acquisitions conducted in mature countries steadily diminished between 2000 and 2010 in favor of targets localized in emerging countries (it reached 24% in 2010, whereas only 6% of mergers and acquisitions were conducted in emerging countries

in 1990 and 17% in 2001) In 2001 and 2013, however, this growth seems to stagnate, showing only a small increase of about 4% between 2010 and 2012 and then, in 2013, a 3% drop in operations conducted in emerging countries

In the ranking of countries conducting the most mergers and acquisitions, one finds six emerging countries Ahead of them all, China is the 12th most

acquiring country in the world (see Table 1.1) Similarly, six emerging countries appear in the first 20 countries ranked by the number of foreign companies entering the country via mergers and acquisitions Once again, China is the first of them, ranked 11th globally After China, the most attractive emerging countries are Brazil, Russia, South Korea and Mexico The companies of emerging countries are also increasingly dynamic in terms

of mergers and acquisitions, attracting many investors Mature countries, and especially the United States and United Kingdom, nevertheless, remain the most attractive in that aspect We will now present and apply the contributions of the eclectic paradigm in order to better understand why such operations constitute a favored mode of entry into foreign markets and, as such, are often used

1.1.2.2 Modes of internationalization of companies

Theories concerning the internationalization of companies focus in particular on the modes of entry companies use to penetrate a foreign market A mode of entry can be defined as a form of organization and governance that provides a company with the possibility to apply control to its activities abroad [AND 86] Mergers and acquisitions are one of the possible means of internationalizing the activity of companies In the light of market globalization and the increase in the amount of international operations, understanding the elements that convince companies to choose this mode of entry is essential In this section, we first provide an overview

of the various modes of entry that a company can choose for its international expansion The eclectic theory of multinational companies is then presented

in order to better understand the decision to undertake a merger and acquisition

The various modes of entry on foreign markets

The choice of a mode of entry into a market is a crucial decision for companies It is the keystone of their international development The level of implication in the target country, access to local resources, the level of control and the future performance, but also the risks involved, all depend on the choice of the mode of entry

Many classifications of the modes of entry into foreign markets have been elaborated in the international management literature Pan and Tse [PAN 00], for example, establish a typology aligned with the various degrees

of capital shares owned They contrast the modes of entries involving the