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CROSS-BORDER MERGERS AND ACQUISITIONS:
PATTERNS IN THE EU AND EFFECTS
by: Grazia Ietto-Gillies (South Bank University, London)
Meloria Meschi (formerly South Bank University and currently LECG, London)
Roberto Simonetti, Open University, Milton Keynes
This paper has been prepared as part of the project ‘Technology, Economic Integration and
Social Cohesion’, sponsored by the European Commission under the TSER programme
This paper can be obtained at http://meritbbs.unimaas.nl/tser/tser.html
1. Introduction
As highlighted in chapter one of this book, in recent years mergers and acquisitions
(M&As) have accounted for the majority of foreign direct investment (FDI), with the share
of M&As in FDI even reaching 87% in the industrialized countries. It is reasonable to
argue, therefore, that the recent growth in FDI is mainly due to the increase in
international M&A activity. The rise in international M&As has been one of the most
important factors behind the emergence of new global oligopolies in many industries.
Cross-border M&As are one of the strategies that companies follow for market
penetration in foreign countries. Other well known strategies include exports, franchising,
and direct investment via greenfield. The official data on FDI does not distinguish
between greenfield and M&As type of investment. It therefore does not distinguish
2
between capacity that is new and additional to both the host country and the acquiring
company, and capacity that is already in existence in the host country though additional
to the acquiring company. In one case we have increase in productive capacity for both
the host country and the acquiring TNC - a situation which is similar to domestic capital
formation - in the other we have simply a change in ownership of existing capacity.
Conceptually, therefore, the data on FDI take a micro point of view - the point of view of
the investing TNC - in assessing the level of additional capacity. For the TNC both
greenfield and M&As FDI represent new capacity; however, only the first one - greenfield
- is additional capacity for the host country1.
The market strategies of companies have various aspects of which the entry mode is one.
Another important aspect in the context of this book is the wider issue of world-wide
locational targeting. Are companies targeting regional or global markets in their various
entry strategies? Specifically, in the context of our study, are TNCs from European
countries targeting the EU market and locations or are they aiming at world wide markets
and locations? Are they following an integrated production strategy within Europe or at
the global level in their pattern of M&As?
An analysis of the dynamics of globalisation and European integration must take into
account the role of M&As. An in-depth analysis of the role of M&As in globalisation and
European integration, however, would require at least a book of its own. This chapter only
aims to identify the main patterns of M&As that involve European companies, and to
1 While the analysis of FDI as a whole, is beyond the scope of this chapter, the interested reader canconsult Cantwell (1991) and Ietto-Gillies (1992) for a survey of theories on FDI, and Clegg (1992) for asurvey of the applied literature. Interesting applied papers are also Graham1(992); Cantwell and Sanna-Randaccio (1992); and Barrell and Pain (1997).
3
explore some issues that relate to the economic performance of M&As. Throughout this
chapter the emphasis will be on international M&As rather than on domestic ones.
Many explanations have been supplied as to why mergers occur; there is no agreement
either on theoretical explanations or reliability of the results of applied investigations.
Companies may join forces in order to improve their productive, distributive, or financing
capacity by achieving economies of scale and/or scope. A merger may take place to
enhance the market power of the merging partners and, in some cases, cut down excess
capacity in the industry; or to exploit the cost efficiencies and synergies deriving from the
acquisition of technology or intangible assets, such as the knowledge of the markets.
Firms in oligopolistic industries may decide to merge simply to counteract similar moves
by other companies in the industry (Cantwell, 1992). Finally, when two companies
operating in different countries merge they may do so in order to establish a presence in
a foreign market; or to counteract various forms of trade barriers in the foreign country; or
to exploit tax and other financial advantages (Harris and Ravenscraft, 1991); or to exploit
information synergies. An acquisition will give the acquiring company access to valuable
information on the target market as well as on local production conditions. Thus the
acquisition will overcome one of the barriers to entry into foreign markets. Whatever the
specific companies’ motivations and objectives for M&As ex-ante, ex-post some of the
consequences highlighted above as well as other effects not part of companies’
objectives may apply cumulatively.
While there have been many theoretical and empirical studies on the causes and
consequences of domestic mergers, less is known about cross-border mergers,
especially those involving EU partners. Empirical work by Davis, Thompson and Shore
4
(1993) shows that domestic mergers are motivated by different reasons to cross-border
mergers. The authors find that domestic mergers are undertaken mainly to pursue
expansion, diversification and economies of scale. In contrast, cross-border mergers are
motivated mainly by the need to enter new markets, and to grow. Other motivations
mentioned above - including the enhancement of market power - may apply to both
domestic and cross-border M&As.
With the completion of the Single European Market (SEM) at the end of 1992 and the
consequent removal of all barriers to trade, EU domestic firms faced increased
competition in their product markets. In the run-up to the establishment of the SEM,
companies across Europe as well as in the rest of the world prepared themselves to the
challenges posed by operating in a more competitive environment. To this end, some
companies concentrated their operations by divesting or selling off non-core lines of
business; while other companies rationalised their production, and tried to achieve cost
synergies and efficiencies by merger (European Commission, 1994). Moreover, many
companies strengthened their market position by undertaking cross-border acquisitions:
between 1983 and 1987 the increase in merger activity involving EU companies as both
buyers or targets was enormous (Geroski and Vlassopoulos, 1993), despite the fact that
cross-border as compared to domestic merger activity was small.
This chapter is thus structured. Following a section on the data, section three looks at the
possible tensions between European integration and globalisation. Are EU firms creating
Europe-wide networks through M&As in order to better exploit the opportunities offered by
the single market, or are they more interested in going global? Has 1992 had an impact
on the M&A activity in the EU? Section four focuses on the pattern of M&As at the level
5
of individual countries. It looks in particular at the UK, which is responsible for the largest
share of European M&As. It deals specifically with the dynamics of European integration
within each EU country and it investigates whether integration is occurring evenly or
whether different patterns are emerging due to the influence of geographical or cultural
factors. We shall then briefly consider the effects of M&As on economic performance by
drawing on existing literature (section five) and on a case study of the UK (section six) to
illustrate some of the issues. Section seven concludes.
2. The dataset
The empirical analysis presented in the next sections is based on a dataset created from
the SDC International Mergers & Acquisitions database provided by Securities Data
Company. The data is available for the period 1986-97, and it is broken down by country
and by industry for both bidder and target firms. Information for both the number and
values of deals is available, although the values are disclosed only for a subset of the
deals. For this reason, the results have been presented mainly using the number of deals
while information based on the value of deals has been used when different patterns
have emerged.
As it happens with the statistics on FDI, also for our data on M&As the nationality of
bidders and targets is defined as the nationality of the firm involved in the deal, i.e. it
does not reflect the nationality of the parent companies. So if, say, the Irish subsidiary of
a US corporation acquires a French subsidiary of a German corporation, the country of
the bidder is Ireland and the country of the target is France in our data set. On one hand,
6
this might lead to some over-estimation of the M&A activities of EU countries within the
EU as it is possible that some European subsidiaries of American and Japanese TNCs
have acquired European companies; the deal would appear as "intra-EU" and the
increase in foreign- owned capital stock in Europe would be neglected. On the other
hand, some subsidiaries of EU TNCs could buy other firms outside the EU, and this would
not be reflected in the data.
The dataset includes all the deals for which a European company was either the bidder or
the target, and it only refers to bids that have been completed - the date of each deal is
the completion date.
The deals have been classified into three main groups, according to the nationality of
bidders and targets:
- Intra-EU: If both bidder and target are companies of EU countries. We are not analysing
the pattern of domestic M&As and therefore they are not included in this definition.
- EU Global Bids: If the bidder is a company from the EU and the target is from a country
outside the EU
- EU Global Targets: If the bidder is a company from outside the EU and the target is from
a country of the EU
The analysis will be conducted by considering trends in the geographical patterns of
deals and targets as well as by the use of some indices designed to assess the
7
propensity to regionalisation and the clustering within the EU region. The indices will be
introduced in the relevant sections. We shall use the data at the aggregate level for the
whole EU countries and for each EU country separately.
3. Main aggregate patterns of integration and globalisation
A visual analysis of the number of deals that involve EU companies, as reported in figure
1, shows that M&A activity has grown very fast since the mid-1980s. While some of the
reason for the dramatic growth might be a better coverage of the existing deals, there is
little doubt that the actual EU M&A activity has grown at a fast pace in the period
considered. Figure 1 also shows that the years around 1992 saw firms concentrating on
gaining a good position in the Single European Market through M&As. Both the number of
Intra-EU deals and the number of EU Global Targets peak in 1991. Moreover, the number
of EU Global Bids falls in the run up to 1992 - which confirms that the attention of EU
firms was mainly directed towards the EU itself.
This trend is even clearer from figure 2, which shows the number of Intra-EU deals as a
percentage of all deals where the bidder was from the EU (Intra-EU plus EU Global Bids).
The ratio clearly peaks in 1992 and decreases steadily until 1996.
Insert Figures 1 and 2 here
So 1992 had a clear effect on M&A activity in the EU. In the run up to the SEM, EU firms
tried to become increasingly pan-European by buying companies in other EU countries.
8
In addition, the growth of EU Global Targets in figure 1 suggests that firms from outside
the EU rushed to buy EU firms in order to gain a foothold and/or strengthen their position
in the huge EU market. The situation seems to have changed in the most recent years,
which have witnessed an explosion in the number of EU Global Bids (figure 1) which
contrasts with a (mild) decline in intra-EU M&As2.
A breakdown by main sector is presented in figures 3 and 4 and shows the increasing
contribution to M&As made by service companies for both targets and bids. Nonetheless,
the majority of target companies were in manufacturing throughout most of the period in
our analysis. There has been a change in 1995 and 1996 with a reversal back to previous
position in 1997. As regards bids, the upward trend in services met the downward trend in
manufacturing in 1992; there have been oscillations since then. The M&As activity in the
primary sector has been very low and steady throughout.
Insert Figures 3 and 4 here
A caution on data must be made here. As with many companies’ data with a sectoral
breakdown, services activities may be underrecorded because companies are classified
according to their main line of activity. Many manufacturing companies have gradually
moved into services; however, they are recorded under their original/main activity that is
under manufacturing. This bias against service industries, however, is mitigated by the
2 It would be interesting to investigate these trends in greater detail to see whether the aggregate patternsare mostly generated by the same firms that first acquired an EU base around 1992 in order to expand lateror whether some newcomers are going directly for global market skipping the EU stage.
9
fact that the industry classification of the deal refer to the unit whose ownership has been
transferred rather than to the whole industrial group (the parent company).
4. Country-level analysis
The previous two chapters have shown that EU countries differ substantially in their FDI
activity. Not surprisingly, this is also true in the case of M&As. A number of factors
influence the volume of M&As in each country, from the structure of the financial market
to the level of industrial concentration. In this section we analyse three aspects of
differences between EU countries: (a) the special position of the UK; (b) the possible
divergencies in patterns of integration versus globalisation for each EU country; and (c)
the possible clustering within countries of the EU.
The role of the UK in the EU patterns of M&As
We already noted in the introduction that the UK exhibits a different pattern of FDI
compared to other EU countries. A priori, one would therefore expect a different pattern of
M&As for the UK compared to other EU countries. Various reasons account for this. The
UK is more heavily involved in FDI in general and has a long history of such involvement
(see chapters two and four in this volume). It has also a tradition of more liberal attitude
towards FDI both on the inward and outward sides. This means that the UK has provided
a welcoming and strategic location for TNCs from the US and Japan wishing to avoid the
EU trade barriers in reaching European markets.
10
As regards the M&As component of FDI there are also additional reasons to expect a
different pattern for the UK compared to other EU countries: the structure of its capital
markets. The UK capital market is highly sophisticated and plays a dominant role in the
whole economy, as it happens in the US. Thus one would expect M&A activities to have a
stronger role in the UK compared to other EU countries particularly those where families
holdings or regulation make corporate acquisitions more difficult (Tylecote, 1998).
We have used our data to analyse whether the UK does indeed exhibit a different pattern
from other EU countries. Figure 5 shows the weight of the UK in the EU bids. The UK
accounted for around 60% of EU Global Bids and 40% of Intra-EU bids in the late 1980s.
Although these shares have fallen substantially, the UK still accounts for nearly 40% of
EU Global Bids and more than 20% of Intra-EU M&As. Figure 6 also suggests that UK
firms prepared earlier for EU integration than the rest of EU firms: the peak for the UK
bids in the rest of the EU countries (EU14) is in the 1980s while that for the EU as a
whole is in the early 1990s, as it appears from figure 1 above. Figure 5 concentrates on
the EU Global Bids broken down by UK and EU14. It shows a strong level of involvement
by the UK in Global Bids, much stronger than for the other 14 countries, although the
trend is stationary for the UK and rapidly growing for the EU14 in the 1990s.
Insert Figures 5 and 6 here
11
Integration versus globalisation
To what extent have the various countries of the EU tended to gravitate within the region
in terms of their M&As’ activity? And to what extent have they spread their wings globally?
In order to help us answer these questions we use an intensity index of M&As3. The
index has been calculated for both bids (B) and targets (T). The following formula is used
for bids:
I B i E U = B i E U / B i W ( B W E U - B i E U ) / ( B W W - B i W - B W i )
where BiEU is the number of bids from country i in the rest of the EU (we ignore domestic
deals), BiW is the number of bids from country i in the rest of the world (including the EU -
the subscript W therefore includes the EU), BWEU is the number of bids from the rest of
the world in the EU, BWW is the total number of international deals in the world and BWi
is the number of bids from the rest of the world in country i4. In words, the index
compares the share of EU bids on the total international bids of the country i (in the
numerator) with the share of EU bids on the total international bids of the rest of the world
(in the numerator). In the denominator the country whose index is calculated has been
excluded from the data.
The index IBiEU is designed to measure the propensity to regionality (the EU) versus
globality for each country i with reference to the bids. For targets the index is:
3 Petri (1994) applies the formula to trade and FDI of various world regions4 Note that the denominator can also be expressed in terms of targets. Conceptually, the bids from the restof the world to the EU can be seen as EU targets from the rest of the world – that is, BWEU=TEUW. Note, in
12
I T i E U = T i E U / T i W ( T W E U - T i E U ) / ( T W W - T i W - T W i )
Values for the index above one indicate strong gravitation towards the region; values
below one indicate a propensity towards globality more than regionality in the activity
used in the measurements, which in our case is M&As. Given that the overall total of
international M&As in the world (BWW or TWW) used to calculate the index is slightly
underrepresented,5 the values of the indices for all countries are underestimated. This,
however, should have a very limited impact on the value of the indices given the
difference in the orders of magnitude between each country's total and the world total
number of M&As.
The indices for the each EU country for four sub-periods are presented in table 1 for bids
and in table 2 for targets. Table 1 shows that for most countries and most sub-periods the
indices are well above one indicating a tendency to gravitate towards the region. Values
below unity occur sporadically and only relate to small countries, in which the activity of
few large firms can influence the overall result. It is interesting, however, that most of the
values below unity occur in the last period: in 1995-7 there are three out of a total of five
for all the sub-periods. This finding is in line with the observed trend
addition, that the total number of bids in the world is the same as the total number of targets in the worldbecause every deal has one and only one bid and one and only one target by definition – that is, BWW=TWW.5 The main dataset used for this chapter only includes all international M&As in which EU companies areinvolved. The totals for the world also include all international deals that refer to the US, Japan, other NorthAmerican countries, and Eastern European countries. The overwhelming majority of deals in the databaseinvolves a country of the triad, so the bias is not significant.
13
towards a greater orientation towards acquisitions outside the EU after 1992 (see figure 2
above), which also explains the decreasing values of the index observed over time in
various countries, such as France, Austria, Finland, Sweden, Spain and Portugal. Indeed,
Spain and Portugal, together with Greece, are responsible for the three values below
unity, which suggest that some small countries might be privileging global links to EU
integration. The other countries show stable values over time, with Germany and the UK
even experiencing modest increases (although from a lower initial level) while the
remaining countries show the highest values of the index.
Insert Table 1 here
The results of our indices for targets are in table 2. The most noticeable result is the
extremely low and decreasing value of the index for the UK. It is apparent from the value
of the index that the UK has progressively become the favourite target of global (more
than regional) FDI in the form of M&As. Various reasons can account for this, from the
ease of acquiring UK companies, given the M&A culture and supporting institutions that
exist in the UK, to the high level of deregulation of the British economy of which the opt-
out clause in the Social Chapter is an example. Moreover, from the bidder’s point of view,
a foothold in the UK provides an easy entry into the EU markets and production locations
as already pointed out.
No significant trends appear from the data relative to all the other countries. The other
pattern that it is possible to identify is the general tendency for the index to be higher for
small economies - i.e., small countries are mainly targeted by EU firms while global non-
EU TNCs prefer to locate in larger economies such as France and Germany. Relatively
14
low values of the index are also found for Ireland and, not surprisingly, the Scandinavian
countries.
Insert Table 2 here
Geographical clusters of Intra-EU M&As
Figure 2 above shows that Intra-EU international M&As peaked before 1992 and then
decreased, but only rather slightly. This indicates that there was a rush towards
integration through M&As just before 1992, and after that date the process of integration
has continued at a slightly lower pace. Although EU companies are acquiring relatively
more outside the EU, integration through merger is still a significant phenomenon
possibly because EU firms want to establish a solid base in the EU upon which they can
build with global acquisitions.
As we have just seen, however, the EU is a highly heterogeneous region and it is
therefore important to investigate whether the process of integration is taking place
evenly across countries, or whether some blocks are emerging within the EU. In order to
investigate the pattern of Intra-EU M&As, a matrix has been created to examine the flows
of M&As (number of deals) between every pair of countries. The matrix (not presented
here) does not indicate clearly whether some flows are particularly significant because
the values in the cells are influenced by the overall M&A activity of the two countries to
which the cell refers (the row and column totals). Thus an indicator of 'abnormal' M&A
15
activity (either more or less than expected), based on the chi-square statistic, has been
developed using the following methodology.
The two-way matrix has been compared with another matrix which contains the
theoretical frequencies that would appear in absence of any particularly strong link
between two countries6. The theoretical matrix represent the M&A flows that would occur
in absence of any factors that favour particular relationships (i.e., particularly high or low
flows) between countries7. The two matrices have been compared using an indicator
based on the chi square statistic. Such indicator, Aij, is the square value of the difference
between the observed flow, Oij, and the theoretical flow, Tij, divided by the theoretical
flow. The formula used is the following:
A i j = O i j - T i j
T i j
2
Particularly high values of the indicator associated with positive differences - that is,
observed flows greater than theoretical flows – are represented with a plus sign (+); very
high values of the indicator are indicated with two plus signs (++); particularly weak flows
between two countries - which are associated with a high value of the indicator coupled
with a negative difference between observed flows and theoretical flows - are indicated
with a minus sign (-).
6As in the case of the chi-square statistic the theoretical frequency for each cell is calculated by multiplyingthe row and column totals relative to the cell and then dividing the product by the overall total.7As in all our calculations, domestic M&As have been excluded. The cells on the diagonal of the theoreticalmatrix have been replaced by their theoretical values in order to calculate the theoretical values of theother cells.
16
The results are reported in table 3, which refers to the number of deals8. The figure
shows that geographical and historical factors, both in terms of physical distance and
cultural links (e.g., common language), are important. The table also reveals the
existence of regional processes of integration that are occurring between nearby
countries. The links between Germany and Austria, Ireland and the UK, Belgium and
France or Belgium and the Netherlands, Spain and Portugal and the Scandinavian
countries are not surprising. The geographical factor also emerges in the case of the UK,
which has stronger links with nearby countries (Ireland, France and the Netherlands). The
three Scandinavian countries also have tight links between themselves.
Insert Table 3 here
5. Effects of M&As
The consolidation of the European production structure via the process of merger has,
allegedly, resulted in the creation of companies that; (a) can exploit economies of scale
or scope better; (b) have spread production technologies beyond the borders of the
home country and are therefore producing knowledge spillovers; and (c) are better able
to exploit information synergies.
8Another matrix based on the value of deals has also been calculated though it is not reported here. Thetwo matrices offer substantially the same picture, although the one based on values captures the influenceof few large deals. When the values of deals are taken into account, the picture alters slightly as new linksappear, such as the strong link between Germany and the UK or a link between Italy and Luxembourg.
17
There are, however, wider effects of M&As on the companies, industry and the
macroeconomy. What do we know and can infer on such effects of M&As? Let us start by
considering who and what may be affected by companies’ strategies on M&As.
There are four groups of subjects that are affected by a merger or acquisition. These are:
the shareholders and employees of the merging partners; the other firms in the industry;
and consumers.
The effects of mergers on shareholders have been analysed in many empirical studies.9
If the shareholders of the acquired and acquiring firms gain positive abnormal returns
post merger, then the merger can be said to have had positive effects on shareholders.
There is, however, plenty of evidence that this can hardly be considered the case. The
existing empirical work for the UK and USA shows that mergers actually result in negative
or, at best, neutral returns for the shareholders of the acquiring company; and that only
the shareholders of the acquired company gain as a result of the merger. The overall
impact of UK and US mergers on shareholders’ welfare has been at best neutral and at
worst negative (Hughes, 1993). This is because the management of acquiring firms
usually pays a premium in order to secure the merger (Alberts and Varaiya, 1989), and,
ironically, this to the detriment of those shareholders whose interests the management is
supposed to look after. When the ownership of a company is spread across many
shareholders, managerial actions are difficult to monitor and control. It is therefore very
difficult to stop the management of a company from embarking in an acquisition that will
ultimately
9 See Meschi (1997) for a survey of the existing empirical literature.
18
damage the interests of the owners of that company (the shareholders). In view of these
issues some authors call for intervention by the authorities in order to: (a) secure more
information to the shareholders (Caves, 1989); and (b) encourage the return profits to
shareholders in the form of dividends rather than their use for acquisitions.
It is sometimes maintained that one outcome of mergers is the displacement of inefficient
management; Thus merger activity is seen by some authors as a form of disciplinary
device operated by the market for corporate control (Manne, 1965). In this perspective,
the low M&A activities in some countries including some EU countries and Japan, is seen
as leading to long term negative outcomes as inefficient management cannot be punished
(Franks and Mayer, 1993).
While the issue of the effects of mergers on shareholders has been widely analysed,
surprisingly little is known on the exact effect of mergers on employment. Whenever two
companies merge, job losses usually follow whether the rationalization process involves
only the elimination of duplicating departments or also the reduction of total production
capacity. It is sometimes argued that in terms of overall welfare the negative effects of job
losses are counter balanced by efficiency gains. However, even if this is the case, the
fact is that the groups who bear the consequences of job losses – the workers and the
governments – are not the same as those who benefit from efficiency gains – mainly the
relevant firms, its management and shareholders.
The effects on the industry’s competitive environment - and through it on the consumers -
tend to be top of the agenda on any discussion on concerns over M&As. Traditional anti-
trust laws, including European law is, indeed, centered on the assessment of the effects
19
of a merger on consumers and on the industry structure. It is considered to be a main aim
of the antitrust authorities to assess whether a proposed merger can result in a
substantial increase of market power on the behalf of the merged entity. Mergers that are
likely to result in much increased market power - with all the consequent negative effects
for the industry and the consumers – may not be allowed. There are, of course, many
theoretical as well as empirical problems in trying to assess the effects ranging from
definition of the product to the geographical scope of the market.
The European merger policy is centered around the issue of the creation or abuse of a
dominant position by the merging partners; cost-efficiency arguments cannot be invoked
(Bensaid et al., 1994). This contrasts with the US policy, where the cost efficiencies
arising from a merger can be used by the merging partners in the case they present to the
Department of Justice. There have been several criticisms of the structural approach to
M&As particularly if the impact of cost efficiencies is ignored. Farrell and Shapiro (1990)
point out that if firms are not equally efficient and/or if there are economies of scale,
welfare increases whenever large or more efficient firms take over smaller or less efficient
ones, even if the acquisitions increase concentration.
Another critique to the structural approach is that forbidding mergers on market power
grounds could have negative long run effects on welfare by discouraging investment in
R&D. Large expenditure on R&D is undertaken in the hope of gaining market power
(Groenewegen and Beije, 1992). It is claimed that if a merger might create a rich enough
firm to invest in R&D, then this efficiency consideration should be taken into account and
weighed against market power considerations, especially in industries with short-lived
technology (Ordover and Baumol, 1988). On the other hand it could be argued that
20
excessive marker power may discourage innovation. Considerations of efficiency versus
market power have also been analysed in respect of mergers between firms with different
capital vintages in a market dominated by excess capacity and declining demand (Dutz
1987).
6. A case study on the performance of M&As: business establishments in Britain 10
A study based on data from the 1990 Workplace Industrial Relations Survey (WIRS)
reveals interesting results on the performance of mergers. The WIRS is an establishment-
level survey of public and private establishments located in Britain and employing more
than 25 workers. The survey sample contains 2061 observations and is representative of
the population of British establishments. There are hundreds of questions - some
expressing the managers’ perceptions - from which relevant variables can be derived.
The data available allowed the authors to discriminate between merged and non-merged
establishments according to various measures of performance as well as several other
features whose results are not reported here. We just mention that some of these results
show that merger activity is higher in manufacturing compared to services. This result is,
indeed, consistent with the pattern on intra-EU M&As presented in figure 3 above.
Moreover, the probability that an establishment is merged is higher for foreign-owned
establishments than for UK-owned ones. The large majority of merged establishments is
of small to medium size.
10The results presented here are part of a larger study (Ietto-Gillies and Meschi, 1998) which wasundertaken as part of the same EC TSER project which funded the research leading to this book.
21
The WIRS gives us information on a variety of elements of performance and in particular
on productivity, employment, capacity utilization changes in demand and financial
performance. The relevant variables and statistical results are presented in table 4.
The share of establishments recording higher, lower, or the same level of productivity as
compared to three years ago is statistically not different between merged and non-
merged establishments (variable 1 table 4). Some 83.1 percent of merged and 78.2
percent of non-merged establishments show productivity growth. The corresponding
percentage for single establishments is 54.4.
Fewer independent establishments, compared to those belonging to wider organizations,
reduced their workforce during the past calendar year (variable 2). Moreover,
considerably more merged than non-merged establishments reduced employment (44.1
versus 31.1 percent); thus mergers are associated with job losses.
The reduction in employment appears to be due, to some extent, to the adoption of
changes in capital endowement on the part of the companies whose establishments have
been included in the sample. Variable 3 shows that negative effects of capital investment
on employment are declared in 64.4 per cent of merged versus 52.7 of non-merged
establishments. The worst hit by job cuts were recently acquired establishments in the
manufacturing sector, which experienced the largest productivity gains, particularly in
merged establishments.
In the sample as a whole (variable 4) a significantly larger proportion of merged than non-
merged establishments (10.9 versus 6 percent) is operating considerably below full
22
capacity. Moreover, the proportion of merged establishments experiencing a fall in
demand (variable 5) is 22.2 percent, almost three times as large as that of non-merged
establishments (8 percent).
The latter results are consistent with the answers to questions on financial performance
(variable 6). The percentages of managers in non-merged multi-establishment that report
performances a lot better and a little worse than in similar establishments are 29.5 and 4
percent respectively. In contrast the figures for merged establishments are 19.5 and 10
percent respectively. Overall, fewer merged than non-merged multi-establishments report
a better than average financial performance (50 versus 56.9 percent). While merged
establishments appear to be under-performing compared to merged ones in multi-plant
organizations, they perform better than single establishments; only 40 percent of the
latter ones have a declared above-average performance.
Insert Table 4 here
These overall results could be a sign of internal organizational difficulties and
inefficiencies linked to the mergers; they could also point towards the hypothesis that
underperforming establishments are more likely to be the target of mergers in the ex-ante
expectation of a turn around which does not materialize ex-post or not within the three
years period considered in the survey. It may also be that improvements in performance
can only be realised over a longer period than the three years considered in the survey.
23
These results corroborate those usually found in the literature, where industry-adjusted
estimates of accounting profitability show very disappointing results11. We must,
however, take account of the fact that the WIRS results express the manager's perception
of what the financial performance of similar establishments is, and managers may after all
deceive themselves and/or the interviewers12.
Given their UK and domestic focus, these results from WIRS should not be extrapolated
readily and fully to the EU international M&As. However, the fact that poor results are
found on all aspects of performance and that this is in accordance with the results in the
wider literature should not be ignored.
7. Conclusions and policy implications
This chapter has analysed the pattern of M&As in the EU, looking at both bids and
targets. We have particularly looked at the following: (a) the possible tension between EU
integration and globalization in the mergers activity with regard to the EU as a whole and
to single EU countries; (b) the patterns of different EU countries with respect to their intra-
11See Meschi, 1997 for a survey of results.12However, it appears that managers perceptions and expectations are a good predictor of actual results(see Anderson and Narus, 1990).
24
EU activity: to what extent can clusters be observed? We have also considered briefly the
possible effects of M&As.
The results show that M&As patterns were greatly affected by the run up to the SEM.
Moreover, for intra-EU M&As the share of deals involving services has increased steadily
through the last twelve years. As regards integration versus globalization patterns, we
have observed differences between the 15 EU countries. In particular the UK exhibits a
strong propensity to globalisation.
Mergers and acquisitions flows between the EU and the US are boosted by the historical
links between the two countries. The highly international character of the two Anglo-
Saxon economies and the level of development of their stock markets account for the
high M&A activity in those two countries. Because of its high level of internationalisation
at the beginning of the period considered, the UK does not show the same strong positive
trend in global acquisitions that the rest of the EU experience as EU companies gradually
acquire a global dimension. The data show that after a rush towards the acquisition of a
European dimension, EU companies are recently concentrating relatively more on the
global dimension. Intra-EU M&As, however, continue to be a significant phenomenon,
and they have almost reached the peak of 1991 again.
The specificity of the UK position within the EU is corroborated by our results on each EU
country (tables 1 and 2) which shows that the UK has low values of the intensity index for
both bids and (especially) targets. The indices confirm the picture of the UK as an
outward looking economy although the index for bids shows a stationary trend, while the
rest of the EU countries have shown a great increase in Global Bids especially after
25
1992. The relatively global character of the British economy, however, is dramatically
confirmed by the analysis of the targets of non-EU TNCs: the UK is the favourite (and
increasingly so) target by a long way.
Another interesting pattern that emerges from the analysis of the intensity indices is that
firms in small peripheral countries such as Greece, Spain and Portugal are becoming
increasingly inclined towards global markets while their countries are the targets mainly of
EU firms.
The process of corporate integration through M&As within Europe, however, is not evenly
distributed. Firms tend to merge with other firms of nearby countries, especially when
strong cultural ties, such as a common language, are present, as in the case of the UK
and Ireland, the Scandinavian countries, Belgium and Holland and Germany and Austria.
Moreover, when the flows take into account the value of the deals, the data for the last
twelve years reveal significant links between the larger economies, such as in the case of
Germany and the UK, as large firms seek presence in all the main EU economies.
We report results of various studies on performance. All together they reveal a rather
bleak picture on the company and industry performance of M&As. We have included
some details of the results of the performance of M&As in business establishments in
Britain as from the WIRS 1990 (Ietto-Gillies and Meschi, 1998). Poor performance of
merged establishments compared to the non-merged ones, comes out from all the
variables on which there was information and particularly from capacity utilisation, growth
in demand and financial performance. Moreover, merged establishments appear to
experience more reduction in employment.
26
There are policy implications from the overall results. The poor performance of mergers at
the micro and industry level is worrying. This is particularly so when seen in the context of
increased M&As activity in countries with a traditional strong propensity towards it (such
as the UK or US) as well as the increased propensity in countries relatively new to merger
activity (such as Italy).
In this perspective stronger tests on the short and long term effects of mergers should be
carried out before mergers are allowed. Schenk (1999) shows that there are far-reaching
consequences of competition policies and argues that the authorities should start with a
general policy presumption against merger unless the case for wide-ranging efficiency
gains can be made.
27
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33
Figure 1M&As involving European companiesNumber of deals
Source: Securities Data Company, 1998
Figure 2European Bids: Integration versus globalisationCross-border Intra-EU bids as a % of total international Bids
Source: Securities Data Company, 1998
0
100
200
300
400
500
600
700
800
900
1,000
1986
1988
1990
1992
1994
1996
Year
Num
ber
of d
eals EU global targets
EU global bids
Cross-borderIntra-EU
0%
10%
20%
30%
40%
50%
60%
70%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
34
Figure 3Industry trends: Bidder industryPercentage of deals in the sector
Source: Securities Data Company, 1998
Figure 4Industry trends: Target industryPercentage of deals in the sector
Source: Securities Data Company, 1998
0%
10%
20%
30%
40%
50%
60%
70%
1986
1988
1990
1992
1994
1996
Primary
Manufacturing
Services
0%
10%
20%
30%
40%
50%
60%
70%
1986
1988
1990
1992
1994
1996
Primary
Manufacturing
Services
35
Figure 5The role of the UK in EU bids
Source: Securities Data Company, 1998
Figure 6UK and EU14 global bidsNumber of deals
Source: Securities Data Company, 1998
0%
10%
20%
30%
40%
50%
60%
70%
80%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
a) UK Global Bids as a % of EU Global Bids
b) c+d: UK-EU14 M&As as a % of Intra-EU M&As
c) UK Bids in EU14 as a % of Intra-EU M&As
d) EU14 Bids in UK as a % of Intra-EU M&As
0
100
200
300
400
500
600
1986
1988
1990
1992
1994
1996
Year
Num
ber
of d
eals
UK global bids
EU14 global bids
36
Table 1: Intensity Index: Bids
Country 1986-88 1989-91 1992-94 1995-97
Austria 2.13 1.23 0.81 1.06
Belgium 1.17 1.46 1.51 1.44
Denmark 1.40 1.31 1.22 1.40
Finland 1.54 1.25 1.28 1.13
France 1.59 1.37 1.43 1.26
Germany 1.12 1.18 1.21 1.21
Greece n.a. 0.82 1.05 0.94
Ireland 1.95 1.53 1.34 1.57
Italy 1.54 1.25 1.11 1.42
Luxembourg 1.74 1.50 1.40 1.45
Netherlands 1.32 1.34 1.28 1.38
Portugal n.a. 1.93 1.47 0.76
Spain 1.25 1.20 1.13 0.62
Sweden 1.43 1.32 1.27 1.12
UK 1.09 1.09 1.01 1.11
Source: Elaborations on data by Securities Data Company˝
˝
37
Table 2: Intensity Index: Targets
˝
˝
Country˝
1986-88 1989-91 1992-94 1995-97
Austria 1.70 1.32 1.55 1.59
Belgium 1.78 1.57 1.63 1.55
Denmark 1.65 1.38 1.46 1.35
Finland 1.10 1.12 1.37 1.25
France 1.04 1.40 1.36 1.35
Germany 1.34 1.29 1.19 1.23
Greece 1.09 1.56 0.98 1.21
Ireland 1.37 1.35 1.43 1.30
Italy 1.37 1.42 1.27 1.40
Luxembourg 1.75 1.64 1.66 1.86
Netherlands 1.52 1.51 1.45 1.43
Portugal 1.87 1.52 1.46 1.69
Spain 1.71 1.64 1.47 1.64
Sweden 1.32 1.26 1.16 1.23
UK 1.01 0.81 0.68 0.66
Source: Elaborations on data by Securities Data Company˝
38
Table 3: Intra-EU M&A flows between countries: number of deals
˝
Targets
Bidders AUT BEL DEN FIN FRA GER GRE IRE ITA LUX NET POR SPA SWE UK
Austria n.a. ++
Belgium n.a. + +
Denmark n.a. + ++
Finland n.a. ++
France n.a. ++ + +
Germany ++ n.a.
Greece n.a.
Ireland - n.a. - ++
Italy ++ n.a.
Luxembourg
n.a.
Netherlands ++ + n.a.
Portugal n.a. ++
Spain ++ n.a.
Sweden ++ ++ n.a.
UK - ++ ++ ++ n.a.
Source: Elaborations on data by Securities Data Company˝
39
Table 4
The performance of merged versus non-merged business establishments in Britain
Variables Merged Unmerged Establishments
Establishm. Multi-Establish. Single Establish.
% (a) % (a) c21 (b) % (a) c21 (b)
[ 1] Changes in Productivity Over 3 Years
-Lot Higher 39.1 34.6 0.7 24.9 7.6 **
-Little Higher 44.0 43.6 0.0 29.5 7.2 **
-About the Same 14.2 20.4 1.9 39.7 21.6 **
-Little Lower 2.7 1.2 1.0 5.9 1.7
-Lot Lower 0.0 0.2 0.2 0.0 0.0
[ 2] Employment Reduced During Past Year
-Total 44.1 31.3 5.8 ** 25.4 12.7 **
-Due to Lack in Demand 16.1 11.8 1.3 14.2 0.2
-Due to Automation/New Equipment 3.6 5.2 0.4 4.0 0.0
-Due to New Working Methods/Integrat. 26.0 10.5 16.8 ** 5.3 36.6 **
-Due to Effic./Competitiv./Cost Red. 11.3 11.8 0.0 5.0 4.9 **
-Due to Cash Limits/Budget Reduction 2.4 3.9 0.5 2.3 0.0
[ 3] Changes Affecting Jobs
-Changes in Capital Endowments 64.4 52.7 3.9 ** 37.2 19.1 **
[4] Capacity Utilization
- Operates at Full Capacity 48.6 53.9 0.9 n.a. n.a.
- Operates Somewhat Below Full Cap. 40.5 40.1 0.0 n.a. n.a.
-Operates Considerably Below Full Cap. 10.9 6.0 2.9 * n.a. n.a.
[5] Change in Product Demand Over the Year
-Demand Has Been Rising 55.9 64.6 2.6 * n.a. n.a.
-Demand Has Been Falling 22.2 8.0 17.4 ** n.a. n.a.
[6] Financial Performance Compared to Similar Establishments
-Lot Better Than Average 19.5 29.5 3.7 * 15.3 0.9
-Little Better Than Average 30.5 27.4 0.4 23.8 1.7
-About the Same 31.4 31.2 0.0 34.7 0.3
-Little Worse Than Average 9.8 3.9 5.6 ** 3.9 5.0 **
-Lot Worse Than Average 0.1 1.0 0.7 1.0 0.7
Source: Ietto-Gillies and Meschi, 1998. Adapted from the Workplace Industrial Relations Survey 1990Notes: (a) Weighted Percentage of merged, unmerged and single establishments falling in the categorydefined in the Variables column; (b) Kruskal-Wallis non-parametric test of the alternative hypothesis that themean scores between the two samples differ. Under the null hypothesis the test is distributed as a c2 with onedegree of freedom. Column (4) lists test results for the hypothesis that the mean scores for merged andunmerged establishments differ. Column (6) lists test results for the hypothesis that the mean scores formerged and single establishments differ;* indicates 10% significance level; ** indicates 5% significance level