An Analysis of Foreign Takeovers in the United States

Author(s): M. Wayne Marr, Jr., Sanjeev Mohta and Michael F. Spivey

Source: Managerial and Decision Economics, Vol. 14, No. 4 (Jul. - Aug., 1993), pp. 285-294
Published by: Wiley
Stable URL: https://www.jstor.org/stable/2487980
Accessed: 17-03-2019 07:02 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Wiley is collaborating with JSTOR to digitize, preserve and extend access to Managerial and
Decision Economics

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
 MANAGERIAL AND DECISION ECONOMICS, VOL. 14, 285-294 (1993)

An Analysis of Foreign Takeovers

in the United States
M. Wayne Marr, Jr, Sanjeev Mohta
and
Michael F. Spivey
Clemson University, SC, USA

Using a sample of 96 US companies taken over by foreign companies during the period 1975-
87, we assess foreign takeovers in two stages: pre-takeover and takeover. We find evidence that
foreign firms target US firms whose operations are related to their own operations and that have
low market-to-book ratios, suggesting foreign bidders acquire firms that provide a greater
opportunity for market entry and synergistic gains. The synergistic gains appear to result from
the foreign buyer using its own intangible assets (e.g. managerial skills) to improve the target.
We also find that foreign takeover activity is aimed primarily at US industries that themselves
make high levels of foreign direct investments, implying that the bidders use takeovers as a
quick way to counteract rival firms' moves. We find evidence that foreign takeovers take place
in relatively mature, low-growth industries and that foreign targets are, on average, smaller
than the non-targets. The wealth effect on the announcement of a takeover is significantly higher
for foreign takeovers than for takeovers by domestic firms. Also, we find that foreign bidders
pay a slightly higher premium for targets whose operations are related to their own.

INTRODUCTION US assets reflects confidence in the nation's long-

In the late 1970s the United States entered a new era
of industrial deregulation that brought on one of
the largest waves of mergers in its history. The
merger boom grew to much larger proportions in
the 1980s and renewed interest concerning the
causes and effects of mergers. The deregulation also
prompted a massive increase in foreign direct in-
vestment activity in the United States.
Mergers and acquisitions, especially those that
are hostile,' have always been controversial. Jensen
(1988) argues that regulators are under immense
pressure from the anti-takeover lobby to restrict
takeovers. The boom in foreign direct investment
activity has also been very controversial and emo-
tional. Critics argue that foreign direct investment
has focused on acquiring access to high-technology
industries in the United States. For example,
Goldstein (1988) reports a fear that US firms may
be liquidating their technological edge at bargain
prices. Proponents of foreign direct investment
activity, in contrast, argue that foreign ownershipand
of the empirical evidence have supported the view
term economic outlook.
Economic theories argue that opportunities in
either the real sector or the financial sector motivate
foreign direct investment. Theories based on the
real-sector perspective assert that foreign takeovers
in the United States are intended (1) to acquire
specific targets that offer the opportunity to capture
synergistic gains, and (2) to enter into or expand
existing operations in the US market. Theories
based on the financial-sector perspective, in con-
trast, imply that a foreign takeover is simply
portfolio investment. The business press has argued
that strategic goals drive foreign takeovers; that is,
foreign takeovers attempt to exploit real-sector
opportunities. For example, the participants in a
recent merger and acquisitions roundtable
(Roundtable: Perspectives of Strategic Transac-
tions in 1990, Mergers and Acquisitions, May/June
1990) were eight business personalities, all of whom
agreed that foreign buyers believe in strategic trans-
actions. Since the mid-1960s, moreover, the theories

0143-6570/93/040285-10$10.00
X? 1993 by John Wiley & Sons, Ltd.

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
286 M. W. MARR Jr, S. MOHTA AND M. F. SPIVEY

that real-sector opportunities motivate foreign dir- BACKGROUND INFORMATION AND

ect investment. THE DATA
In this paper we investigate whether real-sector
Foreign Takeovers: a Real Sector Perspective
opportunities motivate foreign takeovers of US
firms by assessing whether foreign bidders target A firm that wishes to invest directly in a foreign
US firms that offer possible synergistic gains and country can establish a new subsidiary there, or it
that provide an opportunity to enter or expand can acquire an existing firm. Thus, foreign take-
existing operations in the target's market. We ana- overs are a distinct alternative to new establishment
lyze these takeovers in the pre-takeover stage (we for entry or expansion in foreign countries (Yip
develop and test hypotheses about the expected 1982). Foreign firms have relied heavily on take-
characteristics of the foreign takeover targets) and overs as a strategy for direct investment in the
takeover stage (we examine the announcement ef- United States. In dollar terms, their acquisitions far
fects of foreign takeovers on the wealth of target outweigh the amount spent on new establishments.
firms' shareholders and then test the effects of Numerous considerations influence the decision
specific characteristics on the wealth gain from the to acquire a foreign firm. Takeovers are generally
takeover). quick and can affect a foreign firm's revenue and
We find evidence that foreign firms acquire US market share immediately. Quick entry could be
firms whose operations are related to their own, and
especially important if the takeover motive is to
US firms with low market-to-book values. Both counteract a rival's move. The foreign firm may
these characteristics are associated with greater desire access to a stock of valuable information and
opportunity for market entry and synergistic gains. an existing distribution network, or to local operat-
The synergistic gains appear to result from the ing managers who understand the national market
foreign buyer using its own intangible assets environment. These factors reduce the uncertainty
(e.g. managerial skills) to improve the target. We about how well the subsidiary will do. The avail-
find, too, that foreign takeover activity is aimed at
ability of suitable foreign targets is another major
US industries that themselves make high levels of consideration. Yip (1982) argues that more acquisi-
foreign direct investments, suggesting that the bid- tion candidates should be available in relatively
ders may use takeovers as a vehicle of quick entry to mature, low-growth markets, because firms tend to
counteract rival firms' moves. Foreign takeovers reorganize and consolidate as the market growth
tend to take place in more mature, low-growth slows. This reorganization makes more acquisition
industries, involving targets that are of smaller candidates available.
average size than non-target firms. We find the The choice of an appropriate target also depends
wealth effect on the announcement of a takeover is on the bidder's motives for a takeover. Morck
significantly higher for foreign targets than for et al. (1988) categorize takeover motives into two
targets of domestic firms. Foreign bidders pay a broad categories: synergistic and disciplinary. Syn-
slightly higher premium for targets whose oper- ergy occurs when the value of two combined firms
ations are related to their own. becomes grater after the merger than the individual
Similar to studies of takeovers by domestic ac- values of the two firms before it. Jensen and Ruback
quirers, our results suggest that shareholders of (1983) identify economies of scale, vertical integra-
target firms are the biggest winners. They also tion or better techniques as sources of synergies.
indicate that foreign bidders increase competition Bradley et al, (1983, 1988) show that mergers result
in the market for corporate control and seek out in synergies. Synergy may be attained if the foreign
firms that provide greater opportunity to capture buyer is able to use its own intangible assets to
synergistic gains through the use of their own improve the target, or if the buyer uses the acquired
managerial and other operating skills. firm's intangible assets to improve its own position.
The next section of the paper presents back- Thus, the choice of the specific target is influenced
ground information on factors that may influence by whether the bidder wants to use its own intan-
foreign takeovers and the data used in our study. gible assets or to buy intangible assets. The synerg-
The third section analyzes the pre-takeover stage of istic motive will cause the bidder to seek firms
foreign takeovers. The fourth section discusses producing related products, in the hope that the
the takeover stage and the final section presents assets of the participants can be reconfigured more
conclusions. efficiently.

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
 FOREIGN TAKEOVERS IN THE US 287

Other factors, such as transactions costs and Antitrust Act, the Clayton Act, the Hart-
government regulations, will also affect the choice Scott-Rodino Act, the National Co-operative Re-
of an appropriate target. Transactions costs for a search Act and the Webb-Pomerene Act. While
bidder in a takeover include cost of integration of foreign firms that acquire firms in the United States
the target and the possible cost of dealing with an are subject to the same laws as domestic firms,
unco-operative target. Palepu (1986) states that federal law prohibits or restricts foreign direct
these transactions costs are likely to increase with investment in certain areas. Foreign direct invest-
the size of the target. Other things equal, therefore, ament is prohibited in the nuclear, radio, television,
larger target is less appropriate for takeover. telegraph and telephone, coastal and inland ship-
Takeovers prompted by the disciplinary motive ping, domestic air transportation and hydroelectric
aim to eliminate the inefficiencies created by the industries. In addition, foreign involvement is re-
existing management, which may arise from either astricted on classified government contracts or min-
divergence between the managers and the share- ing on federal lands. Finally, The Exon-Florio
holders in terms of goals, or a lack of managerial Amendment (part of an omnibus trade bill passed in
skill. Jensen and Ruback (1983) view the market for late 1988) allows the President to restrict foreign
takeovers as one for corporate control that discip- mergers or acquisitions on the grounds of national
lines inefficient management just as do the internal security.
and the external managerial labor markets. Manne
(1965) argues that the market of corporate control
The Data
largely mitigates the agency problems arising from
the separation of ownership and control. Palepu In the next two sections we analyze the two stages of
(1986) provides empirical evidence that supports the foreign takeover process in the United States
the operation of a disciplinary motive. He finds that using a sample of 96 publicly traded US firms that
negative returns (a measure of inefficiency) increase were taken over by foreign firms during the period
a firm's chance of becoming a target. In reality, 1975-87. We define 'taken over' as acquisition of at
because managerial skills are an intangible asset, least 50% of the target's voting stock. Our data
the disciplinary motive is consistent with the sources are Mergerstat Review, Mergers and Ac-
synergistic motive if the foreign bidder possesses quisitions and The Wall Street Journal. The sample
superior management skills and applies them to an does not include target firms for which the foreign
inefficient target. firms held a majority stake before 1975. Table 1
Acquisitions in the United States are restricted by summarizes the countries of origin for the acquiring
antitrust and securities laws, such as the Sherman firms (panel A) and the frequency distribution of

Table 1. Summary Information for the Sample of 96 US Firms

Acquired by Foreign Firms
Panel A: Country of origin for foreign acquirer
Country Number of takeovers

United Kingdom 39
Canada 21
Europe (Continent) 27
Japan 3
Other 6
Total 96

Panel B: The frequency distribution of purchase price of foreign takeover targets

Purchase price ($m) Number of takeovers Average purchase price ($m)

Less than 100 53 41.09

100-500 25 244.43
500-1000 9 633.57
More than 1000 7 2718.57
Total 94a 351.28

a The purchase price was not available for two takeovers.

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
288 M. W. MARR Jr, S. MOHTA AND M. F. SPIVEY
purchase prices of the foreign takeovers in the
sample (panel B). Of the 94 foreign takeovers for
which we know the purchase price, more than half
(53) commanded less than $100 million; only 16
commanded more than $500 million. The highest
price paid by a foreign firm in the sample was $3.7
billion (Campeau's purchase of Allied Stores); the
lowest was $2.1 million (Ancorp National Services
Inc.'s purchase). We obtained balance sheet and
income statement information on these firms from
Standard and Poor's Industrial Compustat files.
For our pre-takeover-stage analysis we compile a
control sample of non-target firms obtained from
the Standard and Poor's Industrial Compustat files.
This sample does not include firms in the industries
classified by Standard Industrial Classification
(SIC) numbers between 4000 and 4999, because
such companies are not allowed to be taken over by
foreigners. The non-targets are those firms that had
not been taken over as of 1987. After deleting the
firms in the 4000-4999 SIC industries and those for
which values are not available for all the variables
used in our analysis, we obtain a sample of 363 non-
targets. (The variables are discussed later for each
stage of our analysis). We also use a sample of 87
US firms taken over by domestic bidders during the
period 1979-87 in our takeover-stage analysis.
(Here, too, we define 'taken over' as acquisition of at
least 50% of the target's voting stock). Our data
sources and selection criteria for this sample are the
same as for the foreign takeover sample.
THE PRE-TAKEOVER STAGE
As a first step, we observe the major lines of business
of the target and the bidder to determine whether or
not they operate in related areas. Out of 94 trans-
actions in which the industries of the target and the
foreign bidder could be identified, 78 (82%) were in
related industries. By related, we mean that the
merger should be either horizontal or vertical. In
other words, the participating firms should be oper-
ating either in the same kind of business activity or
in different stages of production. A bidder that
wants to enter the United States market is more
likely to acquire a target that has operations related
to its own. Also, as Harris and Ravenscraft (1991)
point out, foreign buyers are better able to capital-
ize on market imperfections in the industry in a
related takeover. A merger of two related firms,
moreover, can permit a more efficient reorganiza-
This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
tion of assets and reduce operating costs. In addi-
tion, the realization of synergy generally requires
the integration of the participating firms' business,
which is more likely if their business are related.
Relatedness in many cases allows firms to cut
operating costs.
A foreign bidder that has operations similar to
those of the target is better able to overcome
barriers to entry than a company that operates in
an unrelated area. Related takeovers can be used to
enhance market share. Thus, a related takeover
should be highly valued by foreign bidders since it
both enables the company to enter a new geo-
graphic market and may offer synergistic gains.
We continue our analysis by estimating the fol-
lowing logit model
Ln[Pi/(l -Pi)]=O+flMTBi +f2ADVINDi
+f 33RNDINDi +f34FOREIGNi
+f 5INDGROWi + 36FIRMSIZEi +Ei (1)
where Pi = the probability that the firm is b
taken over by a foreign firm; MTB measures the
market-to-book value of the target; ADVIND the
average industry level of advertisement expenditure
as percentage of total sales; RNDIND
the average industry level of research and develop-
ment expenditure as a percentage of total sales;
FOREIGN the average level of foreign taxes paid as
a percentage of total sales by an industry; IN-
DGROW the average nominal growth in industry
sales; FIRMSIZE the book value of the target's
assets and ? is the error term. The industry-specific
variables are calculated using four-digit SIC codes,
and the industry-specific variables are matched
with the corresponding firm-specific variables by
year. Following Palepu (1986), all the variables are
calculated as five-year averages using the Standard
and Poor's Compustat tapes. For the takeover
targets, the variables are averaged for five years
before the takeover. For the non-targets the variab-
les are averaged over the period 1982-6.
Discussion of the Variables and Expected Signs
We use the market-to-book value (MTB) as a
proxy for the firm's intangible asset level. A firm
may become multinational either to use its intan-
gible assets or to acquire intangible assets. Foreign
bidders that can exploit their own superior intan-
gible assets to function in local markets should be
more willing to acquire firms with lower levels of
intangible assets. Other bidders will need to acquire
 FOREIGN TAKEOVERS IN THE US 289

firms with higher levels of intangible assets to
operate successfully in local markets. Intangible
assets entail the firm's managerial and other operat-
ing skills. If the market-to-book ratio is low because
these skills are deficient, a foreign firm may acquire
the target and use its own highly developed skills to
increase the acquisition's operating efficiency. If
foreign bidders seek firms with lower intangibles,
then the coefficient of MTB should be negative. If
the motive of the foreign bidders is to acquire the
target's intangible assets, the coefficient should be
positive.
AD VIN'D proxies industry marketing or product
differentiating skills and RNDIND proxies industry
technological skills. A takeover is a mode of stra-
tegic entry into a foreign market. Caves and Mehra
(1988) suggest that a takeover would be attractive
in a high-research industry if the target's research
capacity helps to adapt the bidder's technological
assets to the local market. Alternatively, Cebenoyan
et al. (1989) suggest that foreign direct investment
in the US economy reflects the need of multina-
tional corporations to acquire information and
knowledge in technology and marketing areas. In
addition, high levels of marketing and technological
expertise may act as barriers to entry in an industry.
Yip (1982) argues that an acquisition is the best way
to overcome a barrier to entry; therefore, foreign
takeovers may particularly be attractive in in-
dustries with high levels of these intangible assets.
We therefore expect positive signs for both
AD VIND and RNDIND.
We use the variable FOREIGN to proxy the
average level of foreign direct investment by a
particular industry. Knickerbocker (1974) asserts
that part of foreign direct investment can be ex-
plained as a reaction to the strategies of the other
firms in the industry. In other words, a firm under-
takes foreign direct investment to counter the strat-
Variable'
egies of its competitors. Therefore, an industry that
itself engages in relatively extensive foreign direct
investment can expect to receive a high level of
reverse foreign direct investment. Takeover should
be a preferred route for countering moves of com-
petitors if time is a very important strategic factor.
We expect a positive sign for FOREIGN.
As a market matures and growth rates fall, Yip
(1982) indicates that firms tend to reorganize and
consolidate. This pattern increases the availability
of acquisition candidates resulting in more takeover
sample of 363
activity in low-growth industries. We expect a takeover target
negative sign for INDGRO W. The size of the target
are at value 0.)
also may be influential. In a takeover, the bidder's
transactions costs include integration of the target
and the possible cost of dealing with an unco-
operative target. Palepu (1986) argues that these
transactions costs are likely to increase with
the size of the target. We expect a negative sign
for FIRMSIZE.
The Results
Table 2 presents the coefficients from the estima-
tion of Eqn (1). Although we have hypothesized the
signs for all the variables except MTB, we report the
two-tailed p-values. The firm-specific variables,
market-to-book value (MTB) and firm size (FIR-
MSIZE), are highly significant and FIRMSIZE
has the hypothesized sign. The signs of the industry-
specific variables FOREIGN and INDGROW are
consistent with the hypothesized signs and are
statistically significant at the 0.10 level. AD VIND is
not significant but the sign is as hypothesized;
RNDIND is not significant and is opposite the
hypothesized sign.
Earlier, we reported that over 80% of the foreign
bidders acquired targets operating in businesses
related to their own. The results from the logit
model show that the foreign takeover targets, when
compared with non-targets, have very low levels of
intangible assets, as measured by the market-to-
book (MTB) values. This result suggests that
foreign buyers are more likely to use their own
Table 2. Logit Model Estimation of Foreign
Takeovers versus a Control Sample of
Non-targets
Predicted sign Coefficient P-value
CONSTANT -0.324 0.309
MTB ? -0.573 0.000
ADVIND + 0.042 0.478
RNDIND + -0.120 0.116
FOREIGN + 0.576 0.096
INDGROW - -0.016 0.096
FIRMSIZE - -0.069 0.011
-2 Log Likelihood 353.74
N 436
a Complete data
over by foreign
f

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
290 M. W. MARR Jr, S. MOHTA AND M. F. SPIVEY

intangible assets than to buy intangible ones. This

result is consistent with empirical evidence on
domestic acquisitions (Hasbrouck, 1985; Servaes,
1988). Since intangible assets include the firm's
Table 3.
Panel A: Average purchase price of all foreign acquisitions of US companies
compared with average purchase price of all acquisitions in the United States, 1985-9
($ millions)'

managerial skills and other operating skills, low Year Foreign takeovers All takeovers

market-to-book values may motivate foreign firms 1985 136.0 136.2

to acquire the target to use their highly-developed 1986 157.1 117.9
skills to increase its operating efficiency. This result 1987 315.4 168.4

is consistent with Servaes' (1988) finding that bid- 1988 301.4 215.1
1989 231.4 202.5
ders generally have significantly higher operating
efficiency than their targets. Both these findings Panel B: Average percentage premium p
support the synergistic gains motive for foreign compared with the overall takeover activity in the United States, 1977-89a

tak'eovers. Year Foreign takeovers All takeovers Difference

The results for the industry-specific variables are 1977 49.7 40.9 8.8
less informative regarding the market-entry motive 1978 50.5 46.2 4.3
for foreign takeovers. The marginal significance of 1979 56.9 49.9 7.0
1980 55.1 49.9 5.2
FOREIGN is consistent with Knickerbocker's
1981 46.6 48.0 -1.4
(1974) finding that foreign acquisitions are a good
1982 42.1 47.4 -5.3
vehicle for entry or expansion into markets, espe- 1983 45.7 37.7 8.0
cially when the bidder is reacting to the strategies of 1984 40.2 37.9 2.3
rival firms. The insignificant coefficients of AD- 1985 53.9 37.1 16.8
1986 33.0 38.2 - 5.2
VIND and RNDIND, however, are not consistent
1987 39.4 38.3 1.1
with a market-entry motive. Perhaps foreign bid-
1988 56.2 41.9 14.3
ders' marketing and technological skills cannot be 1989 38.9 41.0 -2.1
easily adapted to the US industries, and hence they
do not specifically seek such industries. Our insigni- a Source: Mergerstat
takeover is defined as a purchase of at least 10% interest in
ficant results may also reflect the fact that our
another firm, private or public. Our sample, by contrast, is
sample is not limited to manufacturing industries, defined by acquisition of at least 50% interest in a publicly listed
in which some past researchers have found signific- firm.

ant coefficients for these variables.

The significance of INDGRO W suggests that the
availability of targets constrains takeovers. As we of at least 50% interest in publicly traded firms. The
suggested earlier, more mature, low-growth in- acquisitions here reflect purchases of at least 10%
dustries have more takeovers because of reorgan- interest of any public or private firm. A more
izations and restructurings. Finally, the significancemeaningful comparison, the premium paid over
of FIRMSIZE indicates that the larger a firm, the market value by foreign bidders relative to all
more difficult it is to acquire.2 bidders, in shown in panel B of Table 3 for the
period 1977-89. In nine of the 13 years, foreigners
paid a higher than average premium when com-
THE TAKEOVER STAGE pared with overall takeover activity.
Real-sector theories suggest that foreign bidders
In this section we analyze the wealth effects of will pay higher premiums for targets from which
foreign takeovers on the acquired firms to see ifthey theyexpect higher gains due to real-sector oppor-
systematically vary with characteristics of the take- tunities. We test this hypothesis by examining the
over. Panel A of Table 3 compares the average premiums paid by the foreign bidders for their
purchase price of foreign acquisitions of US firms targets. In perfect financial markets the sum of
during the period 1985-9. For every year, except takeover wealth effects of the target's shareholders
1985, foreigners paid a higher average purchase and the bidder directly reflects the gains from
price than the average for all acquirers. The average takeover. Unfortunately, data on foreign firms'
purchase price is lower than for our sample (repor- wealth effects are not readily available. The empir-
ted in panel B of Table 1) because our sample ical evidence from previous studies show that the
considers only transactions that involved purchases gains to bidders are negligible (Jarrell et al., 1988;

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
 FOREIGN TAKEOVERS IN THE US 291

Franks and Harris, 1989; Doukas and Travlos, After estimating the CARs, we run the following
1988). Furthermore, Bradley et al. (1988), in a study regression using ordinary least squares (OLS):
of tender offers during the period 1963-84, find that
CARi =Io +f31 RELATEDi +fl2MTBi
target shareholders capture most of the gains from
tender offers. Therefore, the wealth effects to target +f33ADVINDi +fl4RNDINDi
shareholders should be a good measure of the
+J35FOREIGN, +I36CULTURE,
premium from a takeover. To examine the wealth
effects, we first estimate the abnormal return of +fl7HOSTILEi +ej (4)
stocks of the takeover targets using the standard
where (for the ith firm) CAR is the cumulative
market model:
abnormal returns, or the wealth effect accruing to
the shareholders of the takeover target around the
Rit = oji + fiRmt + eit ... (2)
announcement of the takeover. RELATED is a
where dummy variable that equals 1 if the bidder and
R it = the return on firm i's stock at day t taken target operate in related areas, and 0 otherwise.
from the Center for Research in Security Related mergers mean that the merger is either
Prices (CRSP) tapes; horizontal or vertical, in that the participating firms
are operating either in the same kind of business
Rmt = the market return (the return of the equally
activity or in different stages of production. A
weighted index of the CRSP data tapes);
bidder that wants to enter the US market is more
Bit = the random error. likely to acquire a target that has operations related
to its own. Also, as Harris and Ravenscraft (1991)
To estimate the parameters of the market models oX
point out, foreign buyers are better able to capital-
and ,B, we use least-square regression and returns
ize on market imperfections in the industry in a
for the 150-day period that runs from 210 to 60
related takeover. MTB is the market-to-book value
trading days before the announcement of the take-
of the firm, averaged over, at most, 5 years before
over. The abnormal return for firm i on day t (t
the takeover for each firm; AD VIND is the average
extends from 59 trading days before the announce-
industry level of advertisement expenditure as a
ment to 20 days following the announcement) is
percentage of total sales; RNDIND is the average
then computed as
industry level of research and development ex-
ARit =Rit-(cLi +fiRmt) (3) penditure as a percentage of total sales; FOREIGN
is the average level of foreign taxes paid by an
AR it is the difference between the actual R it and the
industry as a percentage of total sales; CULTURE
return predicted from the market model. Cumulat-
is a dummy variable that equals 1 if the bidder is
ive abnormal returns (CAR) for each firm i are then
from a non-English-speaking country, and 0 if the
computed by summing the abnormal returns ARit
bidder is from an English-speaking country (the
for four different event windows around the an-
United Kingdom, Canada, or Australia); HOS-
nouncement day (0) of the takeover. The event
TILE is a dummy variable that equals 1 if the bid is
windows that we examine are (1) from 60 days
resisted, and 0 otherwise; and e is the random error.
before through the announcement day, CAR (-60,
0); (2) from the day before the announcement and
Discussion of the Variables and Expected Signs
the announcement day, CAR (-1, 0); (3) from day
1 until 20 days after the announcement day, CAR Our ( previous discussion concerning RELATED,
+ 1, + 20); and (4) 60 days before through 20 days MTB, ADVIND, RNDIND and FOREIGN also
after the announcement day, CAR (-60, + 20). applies here. On the basis of that discussion, we
Multiple announcement bids sometimes occur in except positive signs for RELA TED, AD VIND,
the takeover process. These bids may come from RNDIND and FOREIGN. As before, we are unsure
several bidders or all from the ultimate acquirer. We as to the expected sign of MTB. If the motive of the
use the wider windows to span all announcements foreign bidders is to acquire intangible assets, the
in the situations where multiple bid announcements coefficient should be positive. If foreign bidders'
occurred (about 25% of the time). This approach is replace the intangibles of the acquired firm with
similar to that used by Harris and Ravenscraft their own superior intangible assets, then the coeffi-
(1991). cient may be negative. The CULTURE variable

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
292 M. W. MARR Jr, S. MOHTA AND M. F. SPIVEY

controls for systematic differences in the

Empirical Resultscultures of
the participants. By making it more costly to oper-
ate in a foreign environment, cultural differences Panel A of Table 4 compares the cumulative abnor-
deter foreign direct investment. Kogut and Singh mal returns experienced by targets of successful
(1988) argue that cultural differences make it more foreign and domestic takeovers. Though not re-
difficult to integrate the operations of the target andported, all the CARs, with the exception of the CAR
the bidder. The existing empirical evidence suggests (+ 1, + 20) for the domestic sample, are signific-
that the premium received by the target share- antly different from zero at the 5% level.3 For the
holders is larger if the offer is resisted (that is, if 81-day period around the announcement of the
HOSTILE = 1). Although earlier studies have takeover (-60, + 20), the average CAR is 45.05 %
for the
shown that premiums to targets are much higher forforeign takeover targets. The CAR (-60,
cash offers than for mergers involving exchange of + 20) ranges from a low of -34.64% to a high of
securities, this issue is not a problem in this study, 116.95%. For the two-day period (-1, 0), the
because only one bid was not a cash offer. (Sycor average cumulative abnormal return is 11.82% for
Inc. and Northern Telecom merged through a stock the foreign takeover sample; the CAR (-1, 0)
exchange.) ranges from a low of -4.2% to a high of-77.8 %. For

Table 4
Panel A: Cumulative abnormal returns to the US firms taken over by foreign bidders versus US firms taken over by domestic
bidders, 1975-87

Period relative to Wall Street Journal announcement day (0)

Sample (-60, 0) (-1, 0) (+1, +20) (-60, +20)

Foreign targetsa 39.01% 11.82% 6.04% 45.05%

(n = 90) (n=90) (n=90) (n=90)
Domestic targetsb 34.02% 6.27% 0.24% 34.26%
(n = 87) (n = 87) (n = 87) (n = 87)
IZ-difference statistic IC 1.27 2.44 2.75 2.33

Panel B: OLS estimates for cross-sectional analysis of wealth gains of the targets in foreign acquisition of US corporations in
the period 1975-87. The dependent variables are the two-day cumulative average daily abnormal returns CAR (- 1, 0) and
61-day cumulative average daily returns CAR (-60, 0) before the takeover

Dependent variable CAR (-1, 0) Dependent variable CAR (-60, 0)

Variabled Pred. sign Coef. P-value Coef. P-value

CONSTANT 2.541 0.704 28.150 0.006

RELATED + 10.912 0.100 16.253 0.077
MTB ? -0.334 0.900 -2.668 0.461
ADVIND + 0.390 0.763 -0.955 0.613
RNDIND + -1.377 0.254 2.408 0.198
FOREIGN + 0.916 0.897 -2.191 0.804
CULTURE + -2.724 0.595 -3.318 0.645
HOSTILE + 9.219 0.105 0.993 0.907

R2 0.129 0.088
N 71e 71

aThe sample perio

b The domestic sa
'Each of the CARs for both the foreign and domestic samples is significantly different from
zero at the 5% level except CAR (+1, +20) for the domestic sample. The Z-difference
statistics test for group differences in the CARs. The Z-difference statistic = (V/Ndomestic
Zforeign - /NforeignZdomestic)A /Ndomestic+ Nforeign). All but CAR (-60, 0) are significantly
different across the foreign and domestic samples at the 5% level of confidence.
d The variables are defined in the text.
e Complete Compustat and returns data were available for 71 of the 96 takeovers.

This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
 FOREIGN
the 61-day period around the announcement day,
the average cumulative abnormal return is 39.01%.
The domestic sample also shows high cumulative
abnormal returns, but smaller than those for foreign
takeover targets in each of the four time periods
considered. Panel B of Table 4 presents the OLS
estimates of Eqn (4). The results suggest that only
relatedness (RELATED) may affect the abnormal
returns. The R-squares are low but similar to those
in a related analysis by Harris and Ravenscraft
(1991).
Finding the cumulative abnormal returns for
foreign targets are higher than those for domestic
targets corroborates recent studies on similar data
sets by Harris and Ravenscraft (1991) and Ceben-
oyan et al, (1989). The slightly higher premium paid
for related targets versus unrelated targets supports
the findings of the previous section. As mentioned
earlier, relatedness eases market entry and contrib-
utes greatly to synergistic gains. The results for
MTB are insignificant, but the negative sign offers
minimal support for the argument that foreign
bidders feel that potential gains are greater from
replacing the intangible assets of the acquired firm
with their own intangible assets.
CONCLUSIONS
This paper has asked whether foreign
US companies to enter or expand into the US
market and to obtain synergistic gains. Using a
sample of 96 companies taken over during the
period 1975-87, we empirically examine foreign
takeovers in two stages: pre-takeover and takeover.
We find evidence that foreign firms take over US
firms whose operations are related to their own and
US firms with low market-to-book values. These M. Bradley, A. Desai and E. H. Kim (1983). The ration-
results suggest that foreign bidders seek firms that
provide a greater opportunity for market entry and M. Bradley, A. Desai and E. H. Kim (1988). Synergistic
synergistic gains from the use of their own intan-
gible assets (e.g. managerial skills and other operat- between the stockholders of target and acquiring firms.
ing skills). We also find some evidence that foreign
takeover activity is concentrated in US industries
that themselves make many foreign direct invest-
ments, implying that the bidders use takeovers as a
quick way to counteract rival firms' moves. Foreign
takeovers take place in relatively mature, low-
growth industries, and the targets of foreign take-
S. Cebenoyan, G. Papaionnou and N. Travlos (1989).
over are, on average, smaller than non-targets. The Foreign acquisition of U.S. firms: shareholder wealth
wealth effect on the announcement of a takeover is
significantly higher for targets of foreign bidders
This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
TAKEOVERS IN THE US 293
than for domestic targets. In addition, foreign bid-
ders pay a slightly higher premium for targets
whose operations are related to their own.
Acknowledgements
We are grateful for helpful comments on earlier drafts received
from Scott Barnhart, Jim Brickley, Don Gordon, Yataka Hor-
iba, Mark Hirschey, Mark Kennet, Yong-cheol Kim, Mike
Maloney, John Martin, Robert McCormick, Dennis Sheehan,
Murray Weidenbaum, workshop participants at Tulane Univer-
sity and Clemson University, and an anonymous referee. We also
thank Nancy Jackson for editorial assistance. As usual, we
accept responsibility for any errors.
NOTES
1. See Morck et al. (1988), who say integration of the
bidder's and target's business is essential to realize
synergistic gains that come from greater market po-
wer, combined technology or marketing networks, or
elimination of common functions.
2. One problem with this estimation may be strong
correlation among the independent variables; multi-
collinearity may lead to unstable estimates with large
standard errors. To examine whether multicollinearity
significantly altered our results, we estimated the logit
model using various combinations of the independent
variables. Although the size of our estimated coeffic-
ients affected, the significance of the variables do not
markedly change.
3. We specifically test if the average standardized abnor-
firms malacquire
return for each our samples (foreign and domestic)
over the four specified intervals of trading days are
equal to zero using the standard Z-statistic from
Brown and Warner (1985).
REFERENCES
ale behind interfirm tender offers: information or syn-
ergy. Journal of Financial Economics 11, 183-206.
gains from corporate acquisitions and their divisions
Journal of Financial Economics 21, 3-40.
S. Brown and J. Warner (1985). Using daily stock returns:
The case of event studies. Journal of Financial Eco-
nomics 14, 3-31.
R. Caves and S. Mehra (1988). Entry of foreign multina-
tional into U.S. manufacturing industries. In Competi-
tion in Global Industries (edited by M. Porter), Boston,
Harvard Business School Press, pp. 449-8 1.
effects and reverse foreign direct investment theories.
Memo.
294 M. W. MARR Jr, S. MOHTA AND M. F. SPIVEY
J. Doukas and N. Travlos (1988). The effect of corporate
multinationalism on shareholders' wealth: evidence
from international acquisition. Journal of Finance,
December, 1161-75.
J. Franks and R. Harris (1989). Shareholder wealth effect
of corporate takeovers: The U.K. Experience 1955-85.
Journal of Financial Economics 23, 225-49.
D. J. Goldstein (1988). Foreign direct investment in the
United States and national security policy. Compara-
tive Strategy 7, 143-58.
J. Hasbrouck (1985). The characteristics of takeover
targets: q and other measures. Journal of Banking and
Finance 9, 351-62.
R. S. Harris and D. Ravenscraft (1991). The role of
acquisition in foreign direct investment: evidence from
the U.S. stock market. Journal of Finance 46, 825-44.
G. A. Jarrell, J. A. Brickley and J. M. Netter (1988). The
market for corporate control: The empirical evidence
since 1980. Journal of Economic Perspectives 2, 48-68.
M. C. Jensen (1988). The takeover controversy: analysis
and evidence. In Knights, Raiders and Targets: The
Impact of Hostile Takeover, (edited by J. Coffee, Jr,
L. Lowenstein and S. Rose-Ackerman), Oxford:
Oxford University Press, pp. 314-54.
This content downloaded from 112.133.207.66 on Sun, 17 Mar 2019 07:02:22 UTC
All use subject to https://about.jstor.org/terms
M. C. Jensen and R. S. Ruback (1983). The market for
corporate control: the scientific evidence. Journal of
Financial Economics 11, 5-50.
F. T. Knickerbocker (1974). Oligopolistic Reaction and
Multinational Enterprise, Cambridge, MA: Harvard
Business School Division of Research.
B. Kogut and H. Singh (1988). The effect of national
culture on the choice of entry mode. Journal of Interna-
tional Business Studies, Fall, 411-32.
H. G. Manne (1965). Mergers and the market for corpor-
ate control. Journal of Political Economy 73, 110-20.
R. Morck, A. Shleifer and R. W. Vishny (1988). Charac-
teristics of targets of hostile and friendly takeovers. In
Corporate Takeovers: Causes and Consequences. (edited
by A. A. Auerbach), Chicago: University of Chicago
Press, pp. 101-34.
K. G. Palepu (1986). 'Predicting takeover targets: a meth-
odological and empirical analysis. Journal of Accoun-
ting and Economics 8, 3-35.
H. Servaes (1988). Tobin's q, agency costs and corporate
control: an empirical analysis of firm-specific para-
meters. Memo.
G. S. Yip (1982). Barriers to Entry: A corporate strategy
perspective, Lexington, MA: Lexington Books.