When the Poor Buy the Rich: New Evidence on Wealth Effects of Cross-Border Acquisitions
Round 1
Reviewer 1 Report
The authors propose a very interesting topic of study considering the extent of cross-border mergers and acquisitions. Considering the complexity of this phenomenon, the research focuses on acquisitions made by companies from developing countries. I appreciate both the scientific approach made by the authors and the title chosen for the article. The research is well documented and adds value to the international scientific literature given the topic.
I noticed the very well-structured presentation of the main conclusions of articles published in the international literature.
My recommendations focus on the following:
1. in abstract, the authors should mention the originality and novelty of the work, as they do very well in lines 50-55 of the article.
2. Conclusions need to be expanded to present the results in extended manner .
3. some bibliographic references need to be rebuilt because they do not meet the journal's standard (ex references 383, 389, 447, 452)
Author Response
Hanoi, Vietnam, June 17, 2019
Dear the reviewer,
We would like to present below the main points in our revision of the research manuscript titled “When the poor buy the rich: New evidence on wealth effects of cross-border acquisitions.” We sincerely thank you for your consideration and suggestions to improve this manuscript. Please be noted that all changes in the document are highlighted yellow while newly-written sentences or paragraphs are highlighted green. Your comments are in italic texts while my answers are in normal texts.
The authors propose a very interesting topic of study considering the extent of cross-border mergers and acquisitions. Considering the complexity of this phenomenon, the research focuses on acquisitions made by companies from developing countries. I appreciate both the scientific approach made by the authors and the title chosen for the article. The research is well documented and adds value to the international scientific literature given the topic.
I noticed the very well-structured presentation of the main conclusions of articles published in the international literature.
My recommendations focus on the following:
1. in abstract, the authors should mention the originality and novelty of the work, as they do very well in lines 50-55 of the article.
Thank you for your recommendation. We have added a brief discussion on the originality and novelty of the work in the abstract.
“The growing trend of merging and acquisition (M&A) investments from emerging to developed market economies over the last two decades motivates the question on the long-run effects of M&A on the wealth of emerging markets. This paper contributes to the current literature on cross-border M&A (CBMA) by focusing on the long-term effects of this event on the bidder’s stock return in emerging markets. To address the challenges of finding an accurate measure for the effects, this study applies the Propensity Score Matching framework in tandem with difference-in-differences on a comprehensive dataset in the 1990-2010 period. The results show evidence of systematic detrimental impacts of cross-border M&A on shareholders’ welfare in the long run, to a certain extent, diverging from the existing literature on the positive effects for certain types of M&A. The striking finding is that such strong negative effects remain persistent even when various factors previously known as capable of suppressing underperformance are considered. Our study is in line with the growing landscape of cross-border mergers and acquisitions from the “poor” to the “rich” countries.”
2. Conclusions need to be expanded to present the results in extended manner.
Thank you for your comments. we have expanded our conclusions to create a better dialogue with the literature as well as highlighting the lessons for firms from emerging markets who might consider M&As in developed market in the future.
“This study sets out to examine the wealth effect of cross-border M&A from emerging to developed countries on the acquiring firm. Using a comprehensive sample in the 1990-2010 period, we find strong, statistically significant evidence for the negative wealth effects of M&A event. The negative wealth effects are consistently estimated in three, four, and five-year event window and reach approximately -69% after five years. This evidence highlights the difficulty to achieve synergies in cross-border M&As from emerging to advanced markets, in which, even a time window of five-year would not mitigate the negative effects. This result suggests conflicts that come from differences in culture, institution, market, business practice, etc. (Dunning et al. 2007, Gallo and Sveen 1991, Vuong 2016a, b) present considerable challenges for emerging market acquirers to benefit from M&As deals in mature markets.”
More importantly, this study finds that the negative effects remain persistent even when we control for factors presumably have potentially positive impacts such as industry relatedness, method of payment (Mitchell and Stafford 2000, Sudarsanam and Mahate 2003) , acquisition for control (Cosh and Guest 2001, Franks and Harris 1989), prior experience (Aggarwal and Samwick 2003, Barkema et al. 1996), and structure break (Jarrell and Bradley 1980). We find that M&As with non-cash financing method shows a strong negative wealth effect after three and five years. This observation lends support to the signaling theory (Connelly et al. 2011) for no significant negative abnormal return is revealed in the cash-financing subsample. Furthermore, our study shows the power to control, especially to mitigate the negative impacts of incomplete contract, or to control strategic assets are not enough to overcome the post-merger problems (Agrawal et al. 1992, Rau and Vermaelen 1998). As for the structure break and prior experience aspects, the analyses indicate similar trends: there is no statistical evidence for positive effects. This result sheds light on the predominance of post-acquisition issues over acquirer’s experience and favorable changes in business environment during the second period of the merger.
Our strong evidence highlights the remarkable nature of value destruction of inter-country M&A investments from emerging to the developed world, which could serve to admonish companies in emerging countries to consider their future M&As deals in advanced markets more carefully.
Future research could choose a particular factor to focus on or replicate the research in a more recent period. As the research is based on key assumptions such as “bigger is better,” “heavy bureaucracy,” and dominance of state control in big companies, the results are bound to change if these assumptions change. Another suggestion is to cover further analysis by using Bayesian network modeling with the “bayesvl” R package (La and Vuong 2019, Vuong and La 2019). Last but not least, the arrival of Industry 4.0 and the rapid change of globalization, the landscape of entrepreneurial finance has shifted remarkably, especially, for emerging markets (Block et al. 2018). This shifting business landscape can lead to new findings and possibly positive long-run performance for firms engaged in cross-border M&As. As such, future studies should extend the research period to cover more recent events, further scientific understanding in this area will be vital to preventing policy failure (Vuong 2018).”
3. some bibliographic references need to be rebuilt because they do not meet the journal's standard (ex references 383, 389, 447, 452)
We have double-checked on all the references and make sure they follow the journal’s style. Thank you for your comments.
Once again, thank you very much for your time and consideration. Due to your comments, our paper can become more logical and coherent. Please accept my sincere thanks for your great contributions to the advancement of sciences in the world.
Yours sincerely,
Reviewer 2 Report
The whole paper is well-constructed. The inner-logic is easly to follow. Unfortunately, the main disadvantage of this paper is the research period. Ending the research in 2010 indicates that this paper is "out of date" and might not be relevant to the current situation.
The literature review is impressing.
I strongly recommend enlarging the research period and developing the section conclusions, which tell us nothing about the policy implications or practical dimensions of this research.
There is also no research question what should be added, because it increases the value added of the paper.
Author Response
Hanoi, Vietnam, June 17, 2019
Dear the reviewer,
We would like to present below the main points in our revision of the research manuscript titled “When the poor buy the rich: New evidence on wealth effects of cross-border acquisitions.” We sincerely thank you for your consideration and suggestions to improve this manuscript. Please be noted that all changes in the document are highlighted yellow while newly-written sentences or paragraphs are highlighted green. Your comments are in italic texts while my answers are in normal texts.
The whole paper is well-constructed. The inner-logic is easly to follow. Unfortunately, the main disadvantage of this paper is the research period. Ending the research in 2010 indicates that this paper is "out of date" and might not be relevant to the current situation.
We appreciate your thoughtful comments on the research period. We are aware of this issue after SDC Platinum is removed from our database due to the substantial subscription cost of valuable M&A data. However, we were determined to compensate and expand our data by combining with arrays of data from WorldScope, thereby each acquiring firm is matched against the whole set of all available listed firms in the corresponding country. For example, to find wealth effect of a cross-border M&A for each Indian acquirer, the data on size, market – to – book and cash holding level along with Datastream’s return indices of all non-acquirer listed firms in India (More than 5,000 firms) in the following five years is collected from WorldScope to yield the optimal result. The total non-acquiring firms used for matching across the sample is 35,651, which makes our sample larger than most samples documented in the literature. We suppose that such a comprehensive expansion in tandem with 20 years of M&A data is, to a significant extent, representative for a merger wave observed from a new perspective.
We produce the entirety of section 3.1.1. for your benefits:
“The M&A events from emerging to developed countries are collected from Thomson One database, for 20 years, from 1990 to 2010, a period right before the dawn of Industry 4.0. The data include characteristics of the deal, country, and industry specifics. Initially, the total number of M&A deals reach nearly 140,000. However, the final sample drops to 281 after screening out all the missing data (as shown in table 1). To compensate for the lack of recent data on M&As, firm specifics and return data are extracted from World Scope, thereby each acquiring firm is matched against a whole set of all available listed firms in the corresponding country. For example, to examine the wealth effects of a cross-border M&A for each Indian acquirer, we collect from WorldScope the data on size, market – to – book and cash holding level along with Datastream’s return indices of all non-acquirer listed firms in India (more than 5,000 firms) in the following five years to yield the optimal result. The total non-acquiring firms used for matching across the sample is 35,651, which makes our sample larger than most samples documented in the literature. These steps are carried out together with 20 years of data on M&A to ensure the reliability and representativeness of the wave of M&As from emerging to developed markets explored in this paper.”
Moreover, another aspect that our study can contribute to the current literature is the use of the Propensity Score Matching framework together with difference-in-differences (DID) method, which addresses the well-known challenges of finding an accurate measure for the long-term wealth effects (Sudarsanam and Mahate, 2003, Girma et al. 2007 and Blundell and Costa Dias, 2000). We have added this original contribution to the abstract and explained it further from line 53-76 of the Introduction section, thanks to the suggestion of Reviewer 1.
Finally, in the Conclusions section, we have included this limitation and acknowledge it is necessary for future studies to expand the research period:
“Last but not least, the arrival of Industry 4.0 and the rapid change of globalization, the landscape of entrepreneurial finance has shifted remarkably, especially, for emerging markets (Block et al. 2018). This shifting business landscape can lead to new findings and possibly positive long-run performance for firms engaged in cross-border M&As. As such, future studies should extend the research period to cover more recent events, further scientific understanding in this area will be vital to preventing policy failure (Vuong 2018).”
The literature review is impressing.
Thank you very much for your comments.
I strongly recommend enlarging the research period and developing the section conclusions, which tell us nothing about the policy implications or practical dimensions of this research.
We have given our answers to the research period problem in the beginning of this letter. As for the policy implications or practical dimensions of this research, we have added the following paragraphs to create a better dialogue with the literature as well as highlighting the lessons for firms from emerging markets who might consider M&As in developed market in the future.
“This study sets out to examine the wealth effect of cross-border M&A from emerging to developed countries on the acquiring firm. Using a comprehensive sample in the 1990-2010 period, we find strong, statistically significant evidence for the negative wealth effects of M&A event. The negative wealth effects are consistently estimated in three, four, and five-year event window and reach approximately -69% after five years. This evidence highlights the difficulty to achieve synergies in cross-border M&As from emerging to advanced markets, in which, even a time window of five-year would not mitigate the negative effects. This result suggests conflicts that come from differences in culture, institution, market, business practice, etc. (Dunning et al. 2007, Gallo and Sveen 1991, Vuong 2016a, b) present considerable challenges for emerging market acquirers to benefit from M&As deals in mature markets.
More importantly, this study finds that the negative effects remain persistent even when we control for factors presumably have potentially positive impacts such as industry relatedness, method of payment (Mitchell and Stafford 2000, Sudarsanam and Mahate 2003) , acquisition for control (Cosh and Guest 2001, Franks and Harris 1989), prior experience (Aggarwal and Samwick 2003, Barkema et al. 1996), and structure break (Jarrell and Bradley 1980). We find that M&As with non-cash financing method shows a strong negative wealth effect after three and five years. This observation lends support to the signaling theory (Connelly et al. 2011) for no significant negative abnormal return is revealed in the cash-financing subsample. Further more, our study shows the power to control, especially to mitigate the negative impacts of incomplete contract or to control strategic assets are not enough to overcome the post-merger problems (Agrawal et al. 1992, Rau and Vermaelen 1998). As for the structure break and prior experience aspects, the analyses indicate similar trends: there is no statistical evidence for positive effects. This result sheds light on the predominance of post-acquisition issues over acquirer’s experience and the change in business environment during the second period of the merger.
Our strong evidence highlights the remarkable nature of value destruction of inter-country M&A investments from emerging to the developed world, which could serve to admonish companies in emerging countries to consider their future M&As deals in advanced markets more carefully.”
There is also no research question what should be added, because it increases the value added of the paper.
We have added the research questions to the Introduction section (Lines 72-76):
“As a result, this paper employs DIDs in tandem with PSM to answer the following research questions:
RQ1: What are the long-term wealth effects of CBMAs on shareholders’ return in emerging markets?
RQ2: How would the wealth effects change when controlling for factors such as industry related, payment method, acquisition for control, prior experience, and structure break, which are known to have positive impacts on the outcome of M&As?”
Once again, thank you very much for your time and consideration. Due to your comments, our paper can become more logical and coherent. Please accept my sincere thanks for your great contributions to the advancement of sciences in the world.
Yours sincerely,
Round 2
Reviewer 2 Report
none
