Mergers, Acquisitions and Joint Ventures between U.S.-Mexican Firms 1993-1994

Abstract

This paper analyzes abnormal returns, wealth effects and transfers generated in Mexican Joint Ventures and Merges with U.S. partners. Following NAFTA (the North American Free Trade Agreement) Mexican and U.S. firms have increased their deals both in numbers as well as in size of the deal. We conduct an Event Study to measure the stock price response associated with the announcement of a Merger or a Joint Venture. In addition, we analyze the aggregate wealth effects and transfer between the pairs of firms involved. Finally we make a cross-sectional analysis in order to examine the existence of investment opportunities, differences in abnormal returns due to the type of deal, size of the firms or country of origin. We find that the Mexican firms involved in Joint Ventures have larger abnormal returns even more than previous studies. In addition, Mexican firm acquirers have positive and significant abnormal returns. Moreover divestitures of U.S. companies generate a notable dollar wealth transfer to the Mexican acquirers. Another important result is that in the Mexican case, the data shows a diagonal response to news generated, and much stronger for the event study period. This may be a signal of less efficient markets. We detect an average of $130 million dollars of wealth created in each pair of our sample. The more remarkable happened when a U.S. mega firm is involved. We attribute the abnormal returns with reference to NAFTA. The Mexican investors have a favorable perception of the possible outcomes, i.e., investors' perception that operating synergies and strategic realignment of firms will generate positive net present value. On the other hand, U.S. investors seem quite skeptical of Mexican prospects. Their attitude may be qualified as one of caution.

Keywords: Mergers, acquisitions, event study, NAFTA, economic integra