Influences of Firm- and Macro-Level Determinants on the Probability of Cross-Border Mergers and Acquisitions

Contents

1. Introduction

2. Literature Review
2.1. Macro-Level Determinants of Cross-border M&A and General FDI
2.1.1. Exchange Rates
2.1.2. Institutions
2.1.3. Taxation
2.2. Firm-Level Determinants
2.2.1. General FDI determinants
2.2.1.1. Asset Intangibility
2.2.1.2. Firm Size
2.2.2. Domestic M&A Determinants
2.2.2.1. Relatedness
2.2.2.2. Economic Growth
2.2.2.3. Stock Market Growth
2.2.2.4. Excess Cash
2.3. Summary of Determinants

3. Conceptual Framework

4. Methodology
4.1. The Model
4.2. Data Retrieval and Methodology
4.3. Firm-Level Variables
4.4. Macro-Level Variables
4.5. Data Overview and Descriptive Statistics
4.5.1. Descriptive Statistics

5. Results and Discussion
5.1. Fit of the Models
5.2. Robustness Checks

6. Conclusion
6.1. Limitations

7. Bibliography

8. Appendix

1. Introduction

As companies are generally striving for profit maximisation, they constantly have to search for growth opportunities that increase revenue and earnings (Shleifer & Vishny, 1988). A way for firms to increase revenue is by expanding their businesses and there exist several different means for a firm to do just that (Penrose, 1959). The first option is to grow organically by investing internally into the existing operations. Another one is to use the firm’s funds in order to acquire or merge (M&A) with another company. Managers using the latter strategy hope to generate valuable synergies by combining the resources and capabilities of the two firms (Chatterjee, 1986; Damodaran, 2005) or by attaining more favourable financial economies (Hill & Hoskisson, 1987). Nowadays, as the world becomes ever more globalised and integrated, company transactions are becoming more international. From the mid-1990s onwards, the fraction of M&A transactions involving a US firm acquiring a foreign entity was over 15% (Faktorovich, 2008). Brakman et al. (2006) show that the number as well as the value of deals has also increased substantially on a global scale during the period of 1985 to 2005. These so- called cross-border mergers and acquisitions (CBA) represent a subcategory of foreign direct investments (FDI). The other subcategory of FDI is greenfield FDI. The difference between the two is that in CBAs existing foreign companies are targeted, while greenfield FDI is about building a new entity in a foreign country from scratch. Comparing the two means of entry shows that CBAs represent the majority of FDI operations. CBAs make up 78% of the FDI category and 97% of those transactions are acquisitions, while 3% are mergers (Brakman, Garretsen, & Van Marrewijk, 2006). This is also one reason for the focus on CBAs in this study.

A great body of research exists in the field of general and domestic M&A and on the FDI category, but relatively little attention has been devoted to the topic of the (firm-level) determinants of cross-border M&A. Harford (1999), for example, investigates if the level of excess cash on a firm’s balance sheet will increase the probability of a domestic acquisiton in the US and was able to verify this claim. Nocke and Yeaple (2007), Hennart and Park (1994), Pradhan (2004), and Raff and Ryan (2008) research the influence of asset intangibility and firm size on general FDI activity and finds a positive relationship. Research that analyses CBAs is more focused on the influence of macro-level determinants on a transaction. Rossi and Volpin (2004) focus their research on differences in laws and regulations across countries and found that better institutional quality and economic growth lead to an increase in cross-border M&A activity. As Blonigen (2005) assumes, the focus on macro-determinants stems from the limited data availability in the past. More recent studies should be able to employ firm-level data in order to proof firm-level theories. While the research on the macro-level is truly adding value to our understanding of cross-border transactions, firm-level determinants are also important aspects that deserve to be investigated. This study will include firm-level determinants in order to investigate CBAs, because the industrial organization theory by Hymer (1976) and the transaction cost theory by Hennart (1982) both argue that firm-specific characteristics lead to FDI. Moreover, industry-level determinants imply that all companies in an industry are homogeneous, which is an assumption that according to Hennart and Park (1994) cannot be verified. Furthermore, it seems reasonable to assume that one of the beginning steps in the decision-making process to acquire a company in a foreign country is based on the characteristics of the firm itself before characteristics on the country-level are being taken into account. This dominance of firm-level determinants is part of the resource-based view (RBV) used in strategic management. The RBV proposes that the process of entering a market is based on a firm’s heterogeneous resources, which at first have to be analysed for their uniqueness. After this step, the firm can search for a market in which those resources can earn the highest rents (Teece, Pisano, & Shuen, 1997).

The strategic reasons to conduct a cross-border M&A or to conduct greenfield FDI can be fundamentally different. Due to this, it is necessary to make a distinction between them. A firm’s capabilities play an important role in that point (Nocke & Yeaple, 2007). Nocke and Yeaple argue that if a company is more R&D driven, it possesses capabilities that are relatively mobile across borders, hence, CBAs are more attractive. A company with higher advertising-intensity on the other hand, has more immobile capabilities, which leads to the company rather conducting greenfield FDI.

Besides their failure to distinguish between cross-border M&A and greenfield FDI, there exists another limitation in many existing studies. Their samples are limited to specific countries. Instead of using an international sample, there are studies that, for example, focus on Indian (Pradhan, 2004) or Japanese (Raff and Ryan, 2008; Hennart and Park, 1994) firms conducting

FDI. This limits the ability to derive implications for cross-border M&A transactions even further.

Another point that is only rarely being considered in the FDI and CBA literature is the relatedness between the acquiring and the target company. There exist three strategies for conducting M&A. A company can acquire either a horizontally, vertically or unrelated target (Herger & McCorriston, 2014). Each of the strategies follows different goals. While horizontal transactions are about acquiring a closely related company in order to generate synergistic effects (Chatterjee, 1986), vertical transactions are focused on placing parts of the supply chain in their most favourable locations (Herger & McCorriston, 2014). In unrelated or conglomerate transactions the focus of the acquirer lies on diversifying the operations across several unrelated business areas in order to reduce risk (Amihud & Lev, 1981). It is expected that the firm- as well as the macro-level determinants will have different influences on the probability of a CBA when taking relatedness into account. To my knowledge, only Herger and McCorriston (2014) differentiated between the three entry strategies in their study on CBAs using macro-level determinants only.

After having reviewed the existing literature, there seems to be a gap, which is worth to be investigated and hopefully be (partly) closed. In this research I would like to elaborate on the following question:

How do firm-level and macro-level determinants affect the probability of conducting a horizontal, vertical or conglomerate cross-border M&A transaction?

By focusing on CBAs and including firm-level characteristics, two threads of research will be combined in one study. The one thread of research represents studies that only use macro-level determinants when analysing CBAs and do not include firm-level characteristics. The other thread of research is a group of studies that use firm-level determinants to study domestic M&A transactions or FDI. The studies on FDI do not distinguish between CBA and greenfield FDI.

It will be elaborated upon which firms are more inclined, e.g. which are more likely, to acquire what kind of foreign company. The resulting insights on CBAs hopefully provide an extension of the existing literature. As pointed out above, the separation between CBA and greenfield FDI seems to be necessary and valuable, since the strategic objectives differ fundamentally. The sample used in my research will not be restricted to any countries or industries; therefore it will potentially result in an increased generalizability and applicability of the results. Moreover, applying variables that previously have been employed in research on domestic M&A or general FDI on CBA data is expected to further add to the existing literature. Lastly, taking the different degrees of relatedness between the two parties into account should provide deeper insights into the different objectives when conducting CBAs.

The research question stated above implies that a logit/probit model is the most suitable methodology to be employed in my study. Due to the binary setup of the dependent variable, using an ordinary least square (OLS) or linear probability model (LPM) approach to estimate the relationship between the dependent variable and the independent variables is not recommended. A binary dependent variable allows for the estimation of the probability of a certain state of the dependent variable taking place. This probability has a range between zero and one and is of non-linear nature (Brooks, 2014). A LPM is not able to capture this non-linear relationship, since it will try to estimate the coefficients of the independent variable in a linear way. The model assumes that influence of the independent variable is unconstrained. So for example, a one unit change in the independent variable would have the same influence on the dependent variable, no matter if it was a change from two to three or from 100 to 101. In other words, arbitrarily large or small probabilities would be predicted for arbitrarily large or small values of the independent variable (Nagler, 1994). Logit/probit models, on the other hand, do not expect a linear relationship between the dependent variable and the independent variable. Instead, they analyse the data constraining the coefficients of the independent variables to an s-shaped curve between zero and one. Doing this, one is able to estimate how much each independent variable increases the chance of the dependent variable having a value of one.

Since my study includes firm-level determinants, there is a need to analyse balance sheet and income statement items of a sufficiently large amount of companies. In order to get access to this data, the Compustat Global database is used. Data on M&A deals are sourced from the Thomson One Banker and Zephyr databases. Since I am making use of macro-level determinants as well, I retrieve data on economic growth and exchange rate movements from the Worldbank database. Data on stock market growth come from the Bloomberg database. The data on the quality of the institutional environment in the different countries is retrieved from the Worldwide Governance Indicators Project.

The results of this research will show that firm-level determinants have a substantial influence on a firm’s decision to conduct a CBA. When taking the relatedness between the acquirer and the target into account, the results provide more insight into the importance of firm- and macro-level determinants on the different transaction strategies. In related transactions, the amount of excess cash, the existence of R&D expenses and the firm’s size are more highly influential on the CBA probability than macro-economic determinants. Firms conducting unrelated transactions seem to act more opportunistically, because for them the CBA decision mostly depends on the relative value of their currency and the stock market valuations in the target country.

After this introduction, I will first continue with a literature review. After that, I will elaborate on the methodology, the data employed and the construction of the variables. Thirdly, I will present my results and will conduct a discussion thereof. Finally, I will conclude my study and elaborate on its limitations.

2. Literature Review

A vast amount of literature has dealt with the determinants of FDI. Researchers have tried to analyse transactions with determinants from various levels. In order to introduce the different kinds of determinants, the following literature review is organized across two dimensions. One dimension presents the firm-level versus the macro-level determinants. The second dimension differentiates between the firm-level determinants of general FDI and domestic M&A.

2.1. Macro-Level Determinants of Cross-border M&A and General FDI

The review of determinants will start with an overview of macro-level determinants that have been employed in studies on CBA and general FDI. Although the focus of this research are firm- level determinants of CBAs, including macro-level determinants of FDI will add valuable insights as well. The macro-level determinants will account for influences of the economic environment on the transaction probability. Secondly, using FDI determinants in a research on cross-border M&A is supposed to be a valuable addition to the existing academic body.

2.1.1. Exchange Rates

The relation between exchange rates and FDI has been studied taking different approaches. One direction is the influence of exchange rate movements on the level of FDI. Froot and Stein (1991) found that when a currency appreciates compared to another, a firm that conducts business in the country with appreciated currency has relatively more valuable funds than a firm conducting business with the depreciated currency. Hence, the former firm can cheaply invest in the latter country. This theory is proven empirically (Froot & Stein, 1991). The same directional influence of currency movements on FDI is also proven by Klein and Rosengreen (1994) and Blonigen (1997). Blonigen manages to link this macro-level factor to an industry determinant and finds that firms coming from high-technology industries mostly drive the effect. The reasoning behind this is that high-technology companies are more likely to acquire transferable firm-specific assets. An exchange rate movement will lower the price of those assets in the foreign currency but will not decrease their nominal return, which makes it reasonable for high- technology firms to use the opportunity to buy those assets cheaply (Blonigen, 1997). On the basis of this finding, it makes sense to include currency movements as a macroeconomic variable in the model in order to see if this effect also holds for CBAs. Due to the differentiation based on the relatedness between the parties, it will also be interesting to see if there are differences in significance or direction across the transaction strategies.

2.1.2. Institutions

Under the term “institutions” the quality of the political and legal landscape in a country is summarised. It represents the degree to which investors in a country are sheltered from expropriation and the quality of the accounting standards that exist in a country (Rossi & Volpin, 2004). The general hypothesis is that poor protection of assets and low quality institutions in a country will lead to less FDI activity into this country (Blonigen, 2005). Rossi and Volpin (2004) use a large international dataset and find that better investor protection is associated with more mergers and acquisitions, domestic as well as cross-border. In Feito-Ruiz and Menendez- Requejo’s (2009) study on acquisitions conducted by European firms outside of their home countries, they find mixed results for the institutional quality difference variable. This variable represents the difference in institutional quality between the target and the acquiring country in a year. Depending on the model specification the variable loses its significance. In their basic model though, the institutional quality difference has a significant positive influence on their dependent variable (Feito-Ruiz & Menendez-Requejo, 2009). So far, the academic community was not able to agree on the magnitude of the impact of this determinant on the M&A activity. Due to this, a positive direction of the effect can be assumed, provided that the variable is significant.

Rossi and Volpin (2004) also develop a relationship between the quality of institutions and CBA. They find that in cross-border transactions the acquirers on average come from countries with higher investor protection in comparison to targets. According to the authors, this leads to a convergence of corporate governance practices internationally. Pablo (2009) supports this claim in his study on Latin American M&A transactions.

2.1.3. Taxation

Another determinant that has often been investigated is taxation. A substantial amount of data is required to implement all dimensions of taxation into this study. Since this study is conducted on a large international sample, this data would need to be of substantial international breadth as well as national depth. This represents a threshold, which places this determinant outside of the scope of this study. Due to this, it was decided to not include an individual taxation determinant in the model. This could represent a limitation to the results of my study, which I will discuss further in a later part of the paper.

2.2. Firm-Level Determinants

As already indicated, the discussion of firm-level determinants will be grouped into determinants that have so far only been employed in studies on FDI or domestic M&A.

2.2.1. General FDI Determinants

In the following section I will introduce two determinants that have frequently been used in the literature investigating the occurrence of FDI in general. The authors in this section either missed to distinguish between the different kinds of FDI or deliberately decided to use the broader FDI category.

2.2.1.1. Asset Intangibility

Asset intangibility, measured as the ratio of research and development expenditures (R&D) to assets or sales (Blonigen, 2005), is also called R&D intensity by other authors (Nocke & Yeaple, 2007; Hennart & Park, 1994; Pradhan, 2004; Raff & Ryan, 2008). The theory behind the importance of asset intangibility is that it is hardly possible to extract the full value potential of intangible assets through exporting or licensing agreements. The reason for this lies in the intangibility of the asset, which makes a fair valuation of assets difficult, especially in an international context. This phenomenon can be related to Akerlof’s (1970) lemons problem where markets eventually collapse due to uncertainty about the fair value of the goods traded on the markets. With reference to asset intangibility, the market failure can also stem from the difficulties of protecting knowledge with patents. In certain countries, it can be difficult and costly to codify knowledge into a patent and enforcing patent rights (Hennart & Park, 1994). Even in the case where patent protection exits, the efficient and effective enforcement of those rights can be very difficult. These market conditions make it difficult to operate profitable licensing or exporting agreements (Hennart & Park, 1994). It is theorised that this is a market failure that will force a company to stop exporting and licensing and to become a multinational enterprise (MNE) through FDI activity (Navaretti & Venables, 2004). Knowledge intensive firms will use this way of internationalisation to exploit the full value of their knowledge capital (Hennart & Park, 1994). Moreover, Pradhan (2004) argues that asset intangibility is a necessary prerequisite for a firm to successfully conduct FDI, because only when there exists firm-specific technology, product differentiation, management knowhow, marketing and selling skills can firms exploit monopolistic rents in foreign markets.

Pradhan (2004), who limits his analysis of firm-level determinants to outward FDI conducted by Indian manufacturing companies, finds a statistically significant positive relationship between R&D intensity and FDI. Moreover, he shows that R&D intensity is one of the most dominant determinants in his model. Raff and Ryan (2008) find a similar relationship in their study on Japanese manufacturing firms. Hennart and Park (1994) use a sample of Japanese manufacturing firms as well, but their sample differs in the countries of investment and the timeframe. While Raff and Ryan use investments into Europe between 1970 and 1994, Hennart and Park use a sample of all listed Japanese companies in 1986. The methodology of the two studies differs as well. Hennart and Park use a binary dependent variable, which indicates if a Japanese firm had manufactured a product in the US at the end of 1986, while Raff and Ryan use a binary dependent variable, which indicates if a firm conducted FDI in a year during the observation time. The results of the two studies are congruent; R&D intensity has a significant impact on the probability of FDI into the US manufacturing industry. It is reasoned that through this Japanese firms want to take advantage of their technological knowhow by investing in the US.

What has to be taken into account in the aforementioned results is that the studies were conducted on FDI samples without differentiating between CBAs and greenfield FDI. Moreover, it is not distinguished between related and diversifying investments. The relatedness between the acquirer and the target has to be taken into account because it can have a significant influence on the results (Hill & Hoskisson, 1987). In cases where divisions of different companies are vertically related by technological assets, a disruption in the technological environment can cause the synergistic advantages of related companies to deteriorate. It is argued that more loosely related companies, which put more focus on financial economies when pursuing CBAs, will be better able to cope with uncertainty and disruption due to their diversified business portfolios. This is one reason for taking the relatedness between the acquirer and the target into account in this study.

The R&D intensity determinant has, to my knowledge, only been employed in two studies that explicitly make a difference between greenfield FDI and CBA, namely Nocke and Yeaple (2007) and Brouthers and Brouthers (2000). However, Nocke and Yeaple do not conduct an empirical study, but rather develop a theoretical model on asset intangibility and its implication on the decision between cross-border M&A and greenfield FDI. They find that firms with high R&D intensity will be more likely to conduct cross-border M&A compared to firms with high marketing intensity. They argue that this is due to R&D capabilities being internationally more mobile than marketing capabilities. Brouthers and Brouthers conduct an empirical study, but it investigates the likelihood of either conducting CBA or greenfield FDI, rather than the influence of asset intangibility on the probability of conducting CBA itself. Moreover their sample is limited to Japanese firms conducting transactions, similar to the samples of Hennart and Park (1994) and Raff and Ryan (2008). This restricts the applicability of their results on a more general, international population of firms, which will be used in this study here. Still, it will be expected that R&D intensity in general has a positive influence on CBAs and especially in CBAs conducted by manufacturing firms.

2.2.1.2. Firm Size

A firm’s size also seems to be an important determinant of its international investments, but while the positive relation between size and foreign investment is not being questioned, authors differ on the point in time where size will affect the investment decision. Raff and Ryan (2008) say that larger firms would tend to have more investments abroad, but that this influence only exists at later stages after a firm has already conducted an initial FDI in this country. It is argued that domestic firm size does not have any influence on the initial decision to go abroad. On the other hand, there exists the threshold theory advocated by Caves (1982) and Blomström and Lipsey (1991). This theory uses the fixed transaction costs of operating abroad as its tool of argumentation. Those costs are the one-time costs that need to be incurred in order to learn how to conduct business abroad. They are independent of a firm’s size and only depend on the propensity or extent to which a firm wants to enter a foreign market (Blomström & Lipsey, 1991). This implies that for domestically larger companies, the size of these fixed costs is relatively small. Hence, once the domestic size of the firm has passed a certain threshold, it will conduct FDI. After those costs have been borne once, the firm size does not influence the fraction of resources assigned to foreign activities anymore (Blomström & Lipsey, 1991). Put differently, the authors argue that while a firm’s size influences the probability of conducting an FDI, it will not give any hint on the propensity of that FDI. Pradhan (2004) supports this theory with his findings on outflowing FDI by Indian manufacturing companies.

The reason for the difference between Raff and Ryan’s (2008) results and the results of other authors seems to lie in the treatment of the investment figures. Raff and Ryan, in contrast to other studies, do not pool a firm’s investments into a grand total. Instead, they analyse for each investment if this investment is an initial investment in a foreign market. Doing this they are able to distinguish between the likelihood of making a first investment and the likelihood of making a subsequent investment. They state that R&D intensity and the export ratio are strongly significant determinants of an initial investment, while size on the other hand only becomes a significant determinant at a second or third round of investing. Since Raff and Ryan restrict their sample to 286 Japanese manufacturing firms, it remains arguable if their results are able to falsify the findings of the other group aforementioned authors.

Although the academic literature on the relationship between size, relatedness and CBA likelihood is relatively small, it is expected that a firm’s size will always have a significantly positive influence on the CBA likelihood. Independently of the relatedness between the parties, it should generally be an advantage for the acquirer to be of bigger size, because then it should be easier for the firm to bear the substantial investment.

2.2.2. Domestic M&A Determinants

Now I will present the literature on domestic M&A transactions. Firstly, the research on organizational theory will be presented. After that I will present two macroeconomic determinants that have often been used to predict M&A activity. Lastly, I will introduce the excess cash determinant, which so far has only been used in one research by Harford (1999) on domestic M&A transaction.

2.2.2.1. Relatedness

When conducting a transaction, one can decide to conduct a horizontal, vertical or unrelated (conglomerate) acquisition. In a horizontal acquisition, the acquirer and the target both come from the same industry (Eckbo, 1981). Vertical acquisitions involve acquirers and targets that are not in the same industry but are connected through the same value chain in which the two companies are located at different steps (Goyal & Fan, 2006). In conglomerate transactions the two companies are not industrially related to each other (Amihud & Lev, 1981).

The objective of horizontal mergers lies in exploiting operational synergies between the two companies (Chatterjee, 1986). Synergies are the incremental value that arises when two companies are combined (Damodaran, 2005). Synergies can be grouped into financial synergies that arise from an increased debt capacity of the firm, benefits in taxation, risk reduction due to diversification and into business synergies that arise from efficiently sharing the same facilities and divisions between the merged companies (Hill & Hoskisson, 1987; Damodaran, 2005). Another reason for conducting a horizontal merger is the decrease of competition through integration of a direct competitor (Weir, 1993). Taking a global view, it has been shown that horizontal cross-border acquisitions represent the largest group of cross-border acquisitions with 49% on average (Brakman, Garretsen, & Van Marrewijk, 2006). Brakman et al. argue that the high fraction for this investment category proofs the theory of market-seeking FDI, meaning that companies buy foreign competitors in order to decrease competition and increase efficiency.

An argument for a vertical acquisition would be the integration of companies up- or downstream of the value chain, because it can be profitable to control a larger part of the value chain internally (Brakman, Garretsen, & Van Marrewijk, 2006). Perry (1989) mentions three broad determinants of vertical integration, namely technological economies, transactional economies, and market imperfections. Technological economies in vertical transactions arise when the resulting company requires less intermediate inputs in order to produce the same output downstream. An analogous concept applies to the transactional economies of vertical integration. A vertically integrated firm is assumed to face less costs in exchange for the intermediate inputs than when sourcing those inputs externally (Perry, 1989). Market imperfections can either lead to monopolistic behaviour in which a monopolist integrates up- and downstream in order to extract monopoly rents or they can lead to asymmetric information as a result of which a company wants to assure its supply through vertically integrating.

It has been noticed that companies are starting to conduct vertical specialisation into specific steps of the value chain (Hummels, Ishii, & Yi, 2001). Vertical specialisation is defined as using imported intermediate inputs for producing goods that are eventually exported. Many goods cross at least two national borders from the start of production until they are sold to the final consumer. In their study of input-output tables of ten OECD and four emerging market countries Humels et al. find that vertical specialisation accounts for 21% of the exports from these countries and that this fraction has grown by 30% between 1970 and 1990.

When Meador et al. (1996) tried to predict US domestic horizontal and vertical mergers between 1981 and 1985, they received significant results for the claim that horizontal mergers are influenced by undervalued assets, while they are not able to find significant variables for vertical transactions. The reason for the lack of significance seems to lie in the fact that vertical mergers are more firm-specific and due to that, every vertical merger is characteristically more different than horizontal mergers. Due to this, the prediction of vertical mergers from historical data is more difficult and can in the end lead to insignificant results. This is a fact that also has to be taken into account in this study.

Economic reasons for conglomerate mergers are harder to justify. The often cited argument that the diversification of risk would be beneficial for the acquirer’s shareholders is frequently criticized, because a shareholder can on his own construct a portfolio with homemade diversification (Alberts, 1966; Levy & Sarnat, 1970). But there is another dimension of diversification that could be a valid explanation for conglomerate transactions. As managers are not able to diversify their human capital, they will try to decrease their risk of unemployment by diversifying their company across several industries (Amihud & Lev, 1981). In cross-border transactions this will eventually lead to the state of ‘double diversification’ (Faeth, 2009). As companies diversify their operations globally, they diversify their country-specific risk by trying to spread their operations across several countries (Rugman, 1975). This risk reduction through international diversification is what all cross-border acquisitions have in common, independently of the relatedness between acquirer and target. A company that diversifies simultaneously internationally and operationally, i.e. it acquirers unrelated companies, strives for ‘double diversification’. It tries to reduce country-specific as well as business-specific risks (Miller & Pras, 1980).

Another theory that sees the root cause for conglomerate transactions with the firm’s managers is the empire building theory. This theory argues that managers, if not monitored properly, will conduct an expansion into unrelated operations in order to maximize their own benefits, which is mostly not in the interest of a firm’s shareholders (Hope & Thomas, 2008). Harford (1999) relates US domestic M&A activity with the amount of corporate excess cash and finds that companies with higher levels of excess cash are more likely to conduct diversifying transactions.

A study by Herger and McCorriston (2014) conducted on a sample of 165,106 cross-border acquisitions between 1990 and 2011 shows that over 60% of the transactions were either of horizontal (8%) or vertical (55%) nature, while conglomerate mergers made up 20%. The residual value represents transactions that could not clearly be classified into one of those categories. Generally, Herger and McCorriston find that conglomerate mergers make up a substantial part of the overall group of cross-border M&As. Moreover, the amount of horizontal and vertical mergers was relatively stable over time, while the occurrence of conglomerate mergers seems to be related to so-called merger waves. During merger-waves the general M&A activity increases substantially and the number of conducted transactions is relatively high (Mitchell & Muhlerin, 1996).

Taking the relatedness of the target and the acquirer in the following study into account will hopefully add insight into the reasons for choosing a certain kind of target. Unlike the other variables, the relatedness variable will not be part of the actual regressions. Instead, the different kinds of relatedness will represent the basis on which different sub-samples will be constructed and analysed. This approach will hopefully extend Herger and McCorriston’s (2014) results, because firm-level variables will be included into the regressions.

[...]