The Dynamics of International Mergers and Acquisitions

Abstract:     
Over the past two decades, cross-border M&As have totaled over eight trillion dollars and have fluctuated widely from year to year. In this paper, I study the dynamic patterns of cross-border mergers and make two distinct contributions:

First, I present key facts about international mergers: (1) Cross-border mergers come in waves that are highly correlated with business cycles. (2) Most mergers occur when both the acquirer and the target economies are booming. (3) Merger booms have both an industry-level component (productivity shocks) and a country-level component (financial shocks). (4) Across over one million observations, acquirers tend to be more productive and targets tend to be less productive, compared to their industry peers. These facts are consistent with the neoclassical theory of mergers in which productive firms expand overseas to seize new investment opportunities, but not with the widely held views that most cross-border mergers occur when the target economies are in a recession or face a financial crisis.

Second, I construct a dynamic structural model of cross-border mergers and integrate the important facts above into the model. This dynamic structural approach allows me to quantify the effects of productivity and financial shocks on M&A decisions. In addition, this approach provides a proper analytical framework for conducting policy experiments. As an example of such analyses, I investigate the impact of President Obama's proposal on multinational corporation taxation. My simulation results suggest that the foreign operation tax has economically significant effects on productive firms and can be very distortionary for cross-border mergers.

Number of Pages in PDF File: 70

Keywords: Cross-border Mergers, Merger Waves, Capital Flows, Multinational Taxation

JEL Classification: F23, G34, G38

working papers series