Are cross-border Mergers and Acquisitions more successful between culturally similar countries in the EU?

An empirical study on the shareholder wealth effects of European acquirers

Master's Thesis, 2017

75 Pages, Grade: 7.00


Table of Contents





2.1.1 Introduction to Mergers and Acquisitions 9
2.1.2 Cross-border Mergers & Acquisitions 11
2.1.3 Motives for cross-border M&A 14
2.2.1 Legal and regulatory barriers 15
2.2.2 Cultural and political barriers 16
2.2.3 Corporate governance barrier 17
2.2.4 Other barriers 18
2.3.1 Cultural distance 18
2.3.2 Legal origin measures 19
2.3.3 Trust measures 19
2.3.4 Hofstede measures 19
2.3.5 Corporate Governance 21

3.3.1 Abnormal returns 29
3.3.2 Cumulative abnormal returns 30
3.3.3 Test Statistic 30
3.4.1 Dependent Variable 30
3.4.2 Independent variables 31
3.4.3 Control Variables 32
3.6.1 Short-term analysis 37
3.6.2 CARs in event studies 38
3.7.1 The effect of cultural distance on announcement returns 38
3.7.2 The effect of legal origin on announcement returns 39
3.7.3 The effect of trust on announcement returns 40
3.7.4 The effect of Hofstede ’ s dimensions on announcement returns 40
3.7.5 The effect of corporate governance on announcement returns 41
3.7.6 Robustness tests 42

4.1.1 Cultural distance 45
4.1.2 Legal origin 50
4.1.3 Trust 52
4.1.4 Hofstede ’ s dimensions 52
4.1.5 Corporate governance 54
4.2.1 Hofstede ’ s four versus 6 cultural dimensions 57
4.2.2 Additional event windows 58





Cross-border mergers and acquisitions have increased significantly over the last two decades and have substantially changed the European industry, since it has become one of the leading approaches for firms to gain access to global markets. However, there has been little progress in the research literature investigating the role of culture in explaining the success of these cross-border transactions. This paper analyzes if cross-border M&As are more valuable for acquirers between culturally similar countries by investigating the countries’ cultural distance, legal origin, trust, Hofstede’s dimensions, and corporate governance measures. The results indicate that cultural distance has a positive and negative effect on bidder announcement returns. Legal origin has a negative effect on acquirer gains in cross-border M&A whereas trust has a positive but insignificant effect. Hofstede’s dimensions have no particular effect on the data set and corporate governance measures have a strong negative effect on bidder announcement returns. The robustness checks do not alter the results.


After 5 years of studying at Maastricht, and having almost completed the program with great pleasure, now is the time to finish my academic career by the writing and presentation of this dissertation. My choice of thesis topic “Are cross-border M&As more successful between culturally similar countries in the EU?” became clear after various courses and guest lectures related to Corporate Finance at Maastricht University where my initial interest started regarding M&A. My preferred career path will involve M&A advisory and this thesis is a worthy personal accomplishment to show my interest in Corporate Finance. Another personal motivation is the intention to contribute to the rise and fall of mergers in the European Union. This thesis will investigate how the wealth of the shareholders of the acquiring firm is affected by the relationship between cultural differences and cross-border M&A.

This thesis has helped me better understand the importance of cultural differences that impact international transactions in the EU. This research process was a pleasant, yet extensive experience due to the interest of the subject that I choose. I would however not be able to write this thesis without additional help. First of all, I would like to thank my supervisor, Professor Kleimeier, who provided me with a total guidance of every aspect of my research. Furthermore, my special thanks go to my brother, Kevin Wijnant, who provided me with his knowledge and experience that benefitted to my results.

1 Introduction

1.1 Background and Problem Statement

The Franco-Dutch airline Air France-KLM is the result of a cross-border merger that occurred in 2004 between Air France and KLM, which became a large player in the global airline business. The incentives for this merger were the economic recession, the increase of low-cost carriers (e.g. Ryanair), and the worldwide overcapacity in terms of airlines and flights offered. The results of this merger are opportunities for cost saving, rescheduling of routes, and an improved use of the airline fleet. In order to make the merger work, a strategic plan was created that both parties needed to follow and execute. Due to the merger, synergies were achieved by integrating business areas where possible and experiences from both sides were used as a learning tool to integrate in other areas. In order to bridge the cultural differences between the Dutch and the French side, cultural bridging session programs were set up to share thoughts and to monitor constantly. The cultural program eventually resulted in a complete working manual written by managers from both the French and the Dutch side. This is an example of a successful cross-border merger between two European countries that overcame the cultural, economic, and political differences between the two countries. Therefore, this thesis will focus on the success of cross-border mergers and acquisitions between countries with different cultures.

Mergers and Acquisitions (henceforth M&As) within the European financial market have changed the European sector significantly in the last decades. Cross-border M&As have not been a major feature of the EU sector, implying that domestic mergers dominated the merger process for a long time (Walkner & Raes, 2005). However, since mid-1990s, cross- border M&A gained momentum and played a significant role in the European banking consolidation process (Walkner & Raes, 2005). Therefore, in recent years the number of cross-border M&As has increased substantially (Martynova & Renneboog, 2006). The total volume of international M&A deals has risen more than four times over the past 20 years. Several reasons for this are the integration of capital markets, technological developments, and globalization. As a result, companies in developed markets could play a more prominent role in cross-border M&A activities.

Cross-border M&A deals have been motivated by a variety of factors that differentiates them with domestic M&A deals. These factors include entering new markets, growth through market expansion, utilization of lower raw material and labor costs, newer technologies, combined tax liability, and benefits of geographic diversification (Goergen & Renneboog, 2004). However, despite these factors, cross-border M&As are categorized by more complexity as there is additional risk involved due to differences in the cultural, political, and economic environment, law and tax rules, accounting, corporate culture, and organization that arise between the country of the acquiring and acquired firms (Bruner, 2004). Due to these additional risks involved in cross-border M&A it is suitable to posit the following problem statement:

“Are cross-border M&As more successful between culturally similar countries in the EU?”

Specifically, this research attempts to find the value effects of cross-border M&As on acquiring firms’ shareholders in the European Union. This research will indicate when it is valuable for a firm to merge with another firm from a different country based on the cultural differences. Various variables are included in this research in order to attempt to correctly answer the given problem statement, such as cultural distance, common border, legal origin, common language, corporate governance, trust, and Hofstede’s measures.

1.2 Aim of this research

The aim of this research is to investigate how cultural differences between countries affects the acquirers gains during the announcement period in cross-border M&As. Prior studies signify the importance of cultural distance, legal origin, trust, Hofstede’s dimensions and corporate governance. The study further aims to provide an overall comparison with previous studies, since most evidence has shown that the results of cultural differences on bidder CARs have been mixed. By using similar control variables as used by previous studies, this research can provide an overall conclusion if, based on a different sample and variables, if the results hold in comparison with other papers. As most evidence is based on countries outside of the EU, another aim of this paper is to provide similar results on sample of countries that are located within the European Union.

1.3 Contribution to previous studies

Cross-border mergers and acquisitions have increased significantly over the last two decades and have become one of the most prominent approaches for firms to gain access to global markets (Denison, Adkins, & Guidroz, 2011). Yet, there has been little progress in the research literature investigating the role of culture in explaining the success of these cross- border transactions (Denison, Adkins, & Guidroz, 2011). Previous research states that poor culture-fit has often been cited as the reason for unproductive cross-border M&A deals (Stahl & Voigt, 2008). In addition, cross-border M&A includes the challenge of dealing with both national and corporate cultural differences (Denison, Adkins, & Guidroz, 2011). Hence, this paper will analyze if cross-border M&As are more valuable between culturally similar countries by investigating the countries’ cultural distance, border, legal origin, language, corporate governance, trust, and Hofstede’s dimensions.

1.4 Structure

This research has been introduced in Section 1. The remainder of this paper is organized as follows: Section 2 provides the reader with the theoretical framework of the topic of this research. Section 3 illustrates the research design that incorporates the hypothesis formulation and the sample. Section 4 posits the empirical results. Section 5 provides the conclusions and limitations of this paper, which also incorporate the links to future research. References and the appendix can be found in section 6 and 7.

2 Theoretical Framework

2.1 Cross-border Mergers & Acquisitions

2.1.1 Introduction to Mergers and Acquisitions

M&A is a general term that refers to the consolidation of companies or assets, which is a commonly used business strategy for company expansion and to increase internal growth (Martynova & Renneboog, 2006). M&As are also a valuable strategy that firms can use to gain market power, to obtain quality staff or additional skills, to access funds or valuable assets for new development, or to diversify products or services (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). Although the U.S. domestic M&A market is the main market for the majority of investors, there has been a growth in M&A activities internationally along with the rising number of firms worldwide and the integration of financial and product markets (Grave, Vardisbasis, & Yavas, 2012). M&As supports the process of channeling corporate assets towards their best possible use help this process by reallocating control over companies (Rossi & Volpin, 2004). Moeller et al. (2011) state that there are two major difficulties exist when firms engage in M&A activity. First of all, several frictions such as transaction costs, information asymmetries, and agency conflicts can prevent efficient transfers of control (Rossi & Volpin, 2004). Secondly, and more importantly, cultural differences between countries does affect companies when international M&A is considered (Ahern, Daminelli, & Fracassi, 2015). Section 2.1.2 will follow up with the latter. Corporate governance is an important factor for firms when engaging in M&As (Rossi & Volpin, 2004). Rossi and Volpin (2004) state that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. In addition, better investor protection is associated with a greater use of stock as a method of payment, and with higher takeover premiums (Rossi & Volpin, 2004). This indicates that domestic investor protection is an important determinant of the competitiveness and effectiveness of the market for mergers and acquisitions within a country (Rossi & Volpin, 2004).

M&A activity does not occur randomly. It is a well-known fact nowadays that M&As come in waves, which was first observed by Golbe and White (1993, as cited in Martynova & Renneboog, 2006). Until now, five waves have been examined: those of the early 1900s, the 1920s, the 1960s, the 1980s, and the 1990s (Martynova & Renneboog, 2006). The popularity of M&As increased due to technological development and globalization in the fifth merger wave (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). Furthermore, the most recent merger wave was also particularly remarkable in terms of size and geographical dispersion (Martynova & Renneboog, 2008). Additionally, the rapid rate of international trade and the consolidations of industries and regions have also contributed to an increase of overall M&A activity worldwide (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). The increase in M&As in the US and UK spilled over to European firms in the 1990s and they hit similar levels to those experienced in the US (Martynova & Renneboog, 2008). As of mid-2003, M&A activity has been on the rise again since its abrupt decline in 2001, which could indicate that we are rolling into a new takeover wave, unless the global financial crisis triggered by the US property bubble shows otherwise (Martynova & Renneboog, 2008). A graphical overview of the historical merger waves is shown in Appendix A.

The decision for a firm to buy another company (or assets) is driven by numerous factors, including the desire to improve its current business, to grow, and/or to expand an existing business platform (Rosenbaum & Pearl, 2013). Moreover, M&As also occur for several other factors, such as economics of scale and scope, vertical integration, expertise, monopoly gains, efficiency gains, tax savings from operating losses, diversification, earnings growth, and managerial motives to merge (Berk, DeMarzo, & Harford, 2012). Building a company from scratch is often a longer process than growth through acquisition, which is faster, cheaper, and less risky (Rosenbaum & Pearl, 2013). The primary motivation for acquisitions is the ability to deliver growth and enhanced profitability by building on a company’s core business strengths that will optimistically result in higher shareholder returns (Rosenbaum & Pearl, 2013). Furthermore, acquisitions result in value creation since the combined entity can enjoy reduced costs, charge higher prices for its products, or both (Chatterjee, 1986). Buyer motivations in M&A consist of synergies, cost synergies, and revenue synergies. In general, Rosenbaum and Pearl (2013) refer synergies to “expected cost savings, growth opportunities, and other financial benefits that occur as a result of the combination of two companies.” Synergies are one of the main value enhancers for M&A transactions, especially when a firm targets a company in related or core businesses (Rosenbaum & Pearl, 2013). Following the combination of two companies, there is a need for solely one accounting department, one marketing department, or one information technology platform, and therefore cost synergies include consolidation, headcount reduction, and increased purchasing power (Rosenbaum & Pearl, 2013). Cost synergies can result in economies of scale, since the increased size due to synergies result in the ability of companies to leverage their fixed cost base, and they can obtain better supplier terms due to an increase of the quantity of order (purchasing synergies) (Rosenbaum & Pearl, 2013). Furthermore, cost synergies increase economies of scope as the increased size of companies also allows for the allocation of resources across multiple products and geographies (Rosenbaum & Pearl, 2013). Another motivation for the acquisition of another firm is revenue synergies, which refer to the enhanced sales growth opportunities created by the combination of related business (Rosenbaum & Pearl, 2013). According to Bruner (2004), the returns to acquirers will be higher in M&As if the motivation of bidders are strategic rather than opportunistic, if the acquirers target underperforming value acquirers instead of glamour acquirers, and if they target focused or relating acquiring firms. Moreover, hostile takeovers, cash deals, cold M&A markets, high managerial stake, active investors, and a shareholder-oriented management are also more interesting from the acquiring firm perspective (Bruner, 2004).

2.1.2 Cross-border Mergers & Acquisitions

A domestic acquisition posits that the target and acquirer company originate from the same country. A cross-border acquisition implies that the target and acquirer company do not originate from the same country. Cross-border M&A can be defined as “a process where the control of assets and operations is transferred from a local to a foreign company, the former becoming an affiliate of the latter” (Danbolt & Maciver, 2012). Harris and Ravenscraft (1991) state concerning cross-border M&A that if international capital and takeover markets are perfectly integrated, there are expected to be no systematic differences in the abnormal returns to either targets or bidders in cross-border as compared to domestic acquisitions. However, such an assumption of perfectly integrated markets is unrealistic as argued by theoretical frameworks and prior empirical evidence that suggest that the level of abnormal returns may differ substantially between cross-border and domestic M&A deals (Danbolt & Maciver, 2012). Moreover, foreign direct investment (FDI) theory posits that deficiencies exist that give multinational firms a competitive advantage over domestic firms (Goergen & Renneboog, 2004). Therefore, cross-border acquisitions are expected to generate higher shareholder wealth than domestic acquisitions (Kang, 1993, as cited in Goergen & Renneboog, 2004).

Cross-border M&A, as a response to domestic M&A, has shown a significant growth in the last two decades due to the global phenomenon of industry consolidation and privatization, and the liberalization of economies (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). In addition, deregulation and an increase in globalization have further resulted in significant increases in the level of cross-border acquisitions (Danbolt & Maciver, 2012). This increase can also be reasoned due to the fact that firms have, since then, moved away from traditional Greenfield investments and because of the growth in international financial markets which has allowed firms to pursue investment opportunities both domestically and internationally (Francis, Hasan, & Sun, 2008). The value of cross-border acquisitions has increased from 0.5% in the mid-1980s to over 2% in 2000 (Goergen & Renneboog, 2004). The total merger volume of cross-border acquisitions has been growing worldwide from 23% in 1998 to 45% in 2007 (Erel, Liao, & Weisbach, 2012). Within Europe alone, the value of cross-border acquisitions reached $498 billion in 1999, a 75% increase from the year before (Bjorvatn, 2004). In addition, cross-border M&As account now for over 80% of all FDI by industrialized countries (Conn C. , Cosh, Guest, & Hughes, 2002).

The characteristics of cross-border M&As are similar to those of domestic M&As (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). Cross-border mergers occur for similar reasons as domestic ones: two firms will merge when their combination increases value (utility) from the perception of the acquiring firm’s managers (Erel, Liao, & Weisbach, 2012). However, while cross-border M&As have several characteristics in common with domestic M&As, they also show unique and significant differences (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). First, cross-border M&As have a range of investment options available, which include ‘greenfield’ investments, merging with or acquiring an existing host country firm, partnering with a host country firm in a joint venture or alliance, partnering with foreign firms, or a combination of these approaches (Collins, Holcomb, Certo, Hitt, & Lester, 2009). Second, firms are more likely to choose investing abroad instead of domestic M&As as trade and exporting costs increase, which is one of the reasons for the heavy increase in cross-border M&As (Hijzen, Gorg, & Manchin, 2008). Finally, national borders lower the preference for domestic mergers because they are associated with an additional set of frictions that can impede or facilitate mergers (Erel, Liao, & Weisbach, 2012). For example, cultural or geographic differences can increase costs of combining two firms (Erel, Liao, & Weisbach, 2012). The challenge in order for cross-border M&As to work is to deal with those different economic, regulatory, and cultural structures (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). Those different structures are for example related to governance-related differences across countries, which increase the implementation of a merger if the combined firm has better protection for the target firm’s shareholders due to a higher governance standard in the host country (Erel, Liao, & Weisbach, 2012). More importantly, another reason for differences in economic, regulatory, and cultural structures in cross-border M&As is a result of an imperfect integration of capital markets across countries that can lead to a merger in which a relatively low-cost target is acquired by a higher-valued firm (Erel, Liao, & Weisbach, 2012). This results from changes in exchange rates or stock market valuations that are valued in their local currency (Erel, Liao, & Weisbach, 2012). Motivation for changes in regulatory structures is particularly important for countries situated in the European Union due to an increase in economic and institutional integration within EU (Bjorvatn, 2004). From a theoretical perspective, the increase in international mergers in more integrated economies is a relatively puzzling effect (Bjorvatn, 2004). Due to the “business stealing effect”, M&AS in integrated markets are an unlikely motivation to engage in cross-border M&A deals in Europe (Bjorvatn, 2004). However, firms are able to deal with these frictions, since economic integration may trigger cross-border acquisitions by reducing the business stealing effect and the price paid to the target firm (Bjorvatn, 2004).

For most of the firms that employ a cross-border M&A strategy, it is usually the only reasonable choice to guarantee a rapid entry into foreign markets (Erel, Liao, & Weisbach, 2012). If the M&A process is successful and the barriers to entry are overcome, then economies of scale and scope can result as well as an increase in market power (Erel, Liao, & Weisbach, 2012). Furthermore, firms that focus on R&D, new capabilities, and acquiring new talent may also expand their industry with cross-border M&A (Erel, Liao, & Weisbach, 2012). Additionally, if those challenges have been overcome, then cross-border M&As can be implemented to access new and lucrative markets and to expand the firm’s current market (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). Cross-border M&A is particularly useful from a cost perspective, since it facilitates marketing, R&D and procurement in order to achieve economies of scale and efficiency. Furthermore, firms that engage in cross-border M&A deals may, due to portfolio diversification across borders, reduce both operational and financial risk.

However, cross-border mergers are expected to be more complex, and could therefore be more costly and risky to execute (Danbolt & Maciver, 2012). The differences in valuation are important, which can vary substantially over time for any combination of countries through fluctuations in stock market movements, exchange rates, and macroeconomic changes (Erel, Liao, & Weisbach, 2012). However, of particular interest are the differences in culture between two countries. Prior evidence has shown that cultural distance significantly effects the bidder announcement returns in cross-border M&As (Ahern, Daminelli, & Fracassi, 2015). Moreover, several other cultural differences, such as legal origin and trust are shown to affect the reason for firms to merge (Chakrabarti, Y-Ting, & Chang, 2013). The focus on corporate governance is also important for firms engaging in cross-border M&A activity (Rossi & Volpin, 2004). Rossi and Volpin (2004) posit that in cross-border deals, acquirers on average have higher investor protection than targets as firms step aside of a weak governance management via cross-border deals. Therefore, the international market for corporate control helps generate convergence in corporate governance management across countries (Rossi & Volpin, 2004). Furthermore, Hofstede (1980) provides several measures to estimate the effect of national cultural differences, which do have an effect on trade. Section

2.3 will focus on these cultural differences in detail.

2.1.3 Motives for cross-border M&A

Managers pursue cross-border M&As due to the value it can add for the firm, which is also the reason why shareholders agree to allow the acquisitions (Danbolt & Maciver, 2012). Increasing the scope in searching for potential M&A targets, cross-border M&As could identify undervalued targets (Danbolt & Maciver, 2012). If corporate governance policies in a country are weak, foreign acquiring firms could increase value through improvement in target company management (Bris & Cabolis, The value of investor protection: Firm evidence from cross-border mergers, 2008). Other factors that potentially affect the likelihood of cross- border mergers are the lower combined tax liability of the combined firms, the level of market development, and agency considerations that can lead managers to make value-decreasing acquisitions that increase managers’ individual utilities (Erel, Liao, & Weisbach, 2012). In addition, when a firm is acquired that has its headquarters in another country, it can benefit from knew knowledge and capabilities of the foreign market (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). After completing an acquisition, firms generally require to integrate the target firm into their operations to generate the total value for their investment where cross-border M&As can be identified a mode of entry or diversification in a foreign market, as a dynamic learning process, or as a value-creating strategy (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). A firm's prior acquisition experience that is used as a learning tool, can increase the motivation of the firm to engage in subsequent international acquisitions (Collins, Holcomb, Certo, Hitt, & Lester, 2009). Collins et al. (2009) discuss in their study that both prior domestic acquisitions and international acquisitions influence the likelihood of acquisitions in foreign markets (Collins, Holcomb, Certo, Hitt, & Lester, 2009)

2.2 Barriers for European Transactions

Despite the increase in cross-border M&As within the European Union along with the incentives to stimulate deals, there are several barriers that negatively influence the success of a cross-border deal. Firms need to consider various country-, industry-, and firm-level factors when engaging in cross-border M&A deals that relate to both the acquiring and target firm (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). Factors such as labor, capital, and natural resource endowments are highly significant (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). In addition, Harzing (2003) states that different languages, national cultural differences, and institutional differences as well as economic, legal and political differences are barriers for successful cross-border M&A deals. The following section will therefore explicitly state how the different barriers reduce the profitability and success of a merger or acquisition.

2.2.1 Legal and regulatory barriers

In the European Union, there is a considerate number of regulatory rules in and between member states that have an influence on the M&A activity (Campa & Hernando, 2004). There are different takeover rules among the member states which differ significantly (Campa & Hernando, 2004). In addition, corporate takeover pills and similar provisions are established as to protect the existing management of a firm (Campa & Hernando, 2004). After the M&A deal, the government keeps maintaining considerable final control over large firms by using golden shares and numerous regulatory and antitrust provisions prior to the approval of large M&A deals (Campa & Hernando, 2004).

Moreover, Campa and Hernando (2004) discovered that M&As in industries that are heavily regulated or formerly been under government control create lower shareholder value than M&A announcements in unregulated industries. This decrease in value creation is especially visible in M&As between firms of different countries where the target firm’ shareholders experience lower returns upon the announcement of the merger or acquisition (Campa & Hernando, 2004). Their evidence is consistent with the barriers of success when engaging in cross-border M&A, such as cultural, legal, or transaction barriers (Campa & Hernando, 2004). These barriers reduce the probability of the merger or acquisition being completed, which reduce the expected value of the M&A (Campa & Hernando, 2004).

The legal perspective does not only incorporate the different company and private laws that are inherent in the different European countries when engaging in cross-border M&A, but also the legal origin (French, British, Socialist, German, or Scandanavian) (Olie, 1994). It is therefore important to incorporate the legal aspect of the different countries within the EU when engaging in cross-border M&A (Olie, 1994).

2.2.2 Cultural and political barriers

Previous research on M&A deals has indicated that failures occur due to the different cultures and workforces of companies during the integration phase (Bjorkman, Stahl, & Vaara, 2007). These failures may be exacerbated when acquisitions take place between two companies that are located in different countries (Bjorkman, Stahl, & Vaara, 2007). Several problems result in cross-border M&A deals, such as foreign language problems, different legal systems and national cultural barriers, which may result in a lack of benefits for both firms (Olie, 1994). Moreover, Vaara (2003) states that greater cultural differences create more problems and, ultimately, lower profits and weaker market performance (Bjorkman, Stahl, & Vaara, 2007). Cross-border M&A are difficult to integrate as they require ‘double-layered’ acculturation, which can be defined as the combining and integration of different organizational cultures as well as different national cultural values and practices (Bjorkman, Stahl, & Vaara, 2007). As a result, this could pose additional problems to the successful integration of cross-border M&A (Bjorkman, Stahl, & Vaara, 2007).

Shimizu et al. (2004) state that high levels of cultural distance can prevent the successful integration of cross-border M&A. Therefore, cultural distance is a useful indicator for a firm’s country risk, which represents the difference between the acquirer and target firm’s degree of strategic advantage between different countries (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). As an example, Kogut and Singh (1988) indicated that cultural distance between the acquirer and target country affects the mode of entry choice, the perceived ability to manage foreign operations, organizational learning across cultural barriers, and the durability of global strategic alliances. In particular, the higher the distance between the acquirer and the target firm, the higher the probability that the acquirer prefers a joint-venture or greenfield investment over a merger or acquisition (Shimizu, Hitt, Vaidyanath, & Pisano, 2004). The major difficulty of such cultural differences is due to the high management costs curing the integration phase (Shimizu, Hitt, Vaidyanath, & Pisano, 2004).

In Europe, a high amount of literature and research is done on dealing with national cultural difference. One of these researchers is Hofstede who considers national culture as an important potential barrier for cross-border M&A. Hofstede’s research suggests that differences in national culture and their knowledge and beliefs can be explained by six dimensions: power distance, individualism versus collectivism, uncertainty avoidance, masculinity versus femininity, long-term orientation, and indulgence (Hofstede, National Culture, 2017). His research is very influential in understanding the national cultural differences and is still often used.

The political barriers in cross-border M&A deals are often the results of the target country’s government trying to prevent the merger to ensure their own national interests (Olie, 1994). Governments often hold stakes in the target company to exert influence on other shareholders (Olie, 1994). Besides this, Europe is characterized by powerful labor unions that are important to consider when approaching a target firm from a different country (Campa & Hernando, 2004). Moreover, companies engaging in cross-border M&A deals also face protectionist measures and political pressure as important risk factors, such as high-profile interference by politicians and regulators in the M&A deals (Olie, 1994). A recent example of this political barrier in cross-border M&A occurred in 2010 where the Canadian government rejected BHP Billiton’s $40 billion hostile takeover bid for Potash Corp., since BHP failed to meet the criteria of providing a net benefit to the country (Olie, 1994). Analysts concluded afterwards that the takeover bid would prevent any potential investors to approach the company in the future (Olie, 1994).

2.2.3 Corporate governance barrier

When a country’s overall corporate governance is weak, voluntary and market corporate governance mechanisms have more limited effectiveness and risk of expropriation can occur (Bauer, Guenster, & Otten, 2004). Furthermore, the most important factor of corporate governance of firms is the level of ownership and control where some firms have dispersed ownership, others have concentrated ownership or control (Bauer, Guenster, & Otten, 2004). Recent contributions on corporate governance show that there are large differences in the degree of investor protection across countries and that these differences are related to the development of capital markets and the ownership structure of firms (Bauer, Guenster, & Otten, 2004). However, M&A studies have found evidence that corporate governance has a negative effect on M&A activity (Rossi & Volpin, 2004). Additionally, Bris, Brisley and Cabolis (2008) concluded in their research that acquisitions of firms in countries with weaker corporate governance protection by firms in countries with stronger corporate governance protection increases the market value of the target firm. Cross-border M&As promote corporate governance spillovers in the host country (Martynova & Renneboog, 2008). However, targets acquired by firms from countries with weaker corporate governance protection do not lose market value (Bris, Brisley, & Cabolis, 2008). The corporate governance regulations of the firms’ country are considered important as well to increase the deal value in cross-border M&A (Bris, Brisley, & Cabolis, 2008). The target firm receives the nationality as well as the corporate governance regulation of the acquirer when the target firms is entirely taken over (Martynova & Renneboog, 2008). There is a similar spillover effect, since better corporate governance protection spills over to weaker corporate governance protection (Bris, Brisley, & Cabolis, 2008).

2.2.4 Other barriers

Besides the aforementioned barriers for successful cross-border M&As, other barriers may affect the deal value as well. The first barrier is former colonies, which will have a negative effect on the value of the M&A deal when the countries of the firms that merge have dissimilar former colonies (Head & Ries, 2008). The barrier is overcome and the cross-border M&A provides value when both countries have similar former colonies (Head & Ries, 2008). Former colonies are excluded in this study, since the sample only includes countries within the European Union, which almost none have a former colony. Next to this, religion and trust can also create barriers for successful cross-border M&A. Since the largest part of religion in the European Union is Christianity (72%) and due to the strong decline of religion in general in Europe, this research will discard the former and focus on the latter. Previous research indicated that organizational cultural differences have a negative influence on the value of the cross-border M&A deal while trust has a significant positive influence on knowledge transfer (Chakrabarti, Y-Ting, & Chang, 2013). Trust eases the process of M&A and creates a fair deal value for both parties (Chakrabarti, Y-Ting, & Chang, 2013).

2.3 Measures of cultural differences

There are several ways to measures cultural differences with the most common being cultural distance. Each measure will be able to indicate to what extent cross-border M&As will be valuable to the bidders as the previous section indicated that various barriers exist that are detrimental to the success of cross-border transactions. Therefore, this section will explain various measures that firms can use when engaging in cross-border M&A.

2.3.1 Cultural distance

Frankel and Rose (2002) use several proxies to estimate the effect of cultural distance between two countries. The study suggests three proxies to estimate cultural distance, namely the natural logarithm of the geographical distance between two countries capital city, a common border, and a common language (Frankel & Rose, 2002). Geographical istance is the most common proxy of the three variables, and the previous study includes different measures of bilateral distances (in kilometers) available for most countries across the world (Rose, 2000). The last two variables are used as dummy variables that equal 1 if the variables share a common border or common language, respectively, and otherwise takes the value of 0 (Frankel & Rose, 2002). As an example, the amount of trade that takes place between two countries that are 10,000 km apart is only 20% of the amount that would be predicted to take place if the same countries were 2,000 km apart (Rose, 2000). Cultural and administrative distance produce even larger effects (Rose, 2000).

2.3.2 Legal origin measures

La porta et al. (1998) state that common-law countries generally have the strongest shareholder protection whereas French-civil-law countries have the weakest. German- and Scandinavian-civil-law countries are located in the middle (La Porta, Lopez-de-Silanes, & Shleifer, 1998). La porta et al. (1998) state that the national legal origin strongly explains cross-country differences in financial development. Countries that contain the same legal origin have less cross-country differences and government intervention fades away (La Porta, Lopez-de-Silanes, & Shleifer, 1998).

2.3.3 Trust measures

Another barrier for cross-border M&As depends on the degree that members of a country trust other members. Previous literature states that organizational cultural differences have a negative influence on the value of the cross-border M&A deal while trust has a significant positive influence on knowledge transfer (Chakrabarti, Y-Ting, & Chang, 2013). Trust eases the process of M&A and creates a fair deal value for both parties (Chakrabarti, Y- Ting, & Chang, 2013). However, differences in trust values between two countries has a negative short-term wealth effect for the acquirer and target combined (Ahern, Daminelli, & Fracassi, 2015).

2.3.4 Hofstede measures

Hofstede defines national culture as “the collective programming of the mind distinguishing the members of one group or category of people from others” where national culture is a subculture of organizational culture (Hofstede, National Culture, 2017). The various cultural dimensions are power distance, masculinity, uncertainty avoidance, individuality, long-term orientation, and indulgence. The Hofstede measures can be used to determine the national cultural distance in cross-border M&A (Hofstede, National Culture, 2017). The power distance dimension measures the inequality in power between countries where the lower ranks in power consent and believe that power is unequally distributed (Hofstede, National Culture, 2017). The individualism versus collectivism dimension refers to the degree to which individuals are incorporated in groups or stay as an individual (Hofstede, National Culture, 2017). In individualism, individuals are expected to take care of their family and themselves where collectivism represents a preference for integration of groups with extended families and each individual looks after each other (Hofstede, National Culture, 2017). Masculinity versus feminism dimension measures the distribution of roles between two genders where the masculinity side prefers to achieve heroism, assertiveness, and success (Hofstede, National Culture, 2017). The feminist side, on the other hand, strives for cooperation, modesty, and quality of life (Hofstede, National Culture, 2017). The uncertainty avoidance dimension represents society’s tolerance for uncertainty and ambiguity (Hofstede, National Culture, 2017). Countries with strong uncertainty avoidance are intolerant for uncomfortable unstructured situations and try to minimize the uncertainty situation with strict rules and laws (Hofstede, National Culture, 2017). The long-term orientation dimension measures the degree of dealing with the challenges of the present and future (Hofstede, National Culture, 2017). Countries with strong long-term orientation encourage and stimulate society with education to prepare for the future (Hofstede, National Culture, 2017). Indulgence represents society’s allowing for free gratification of natural human drives to enjoy life and have fun (Hofstede, National Culture, 2017).

Companies are very influenced by culture as it involves mental programming and can be differentiated between organizational culture and corporate culture (Hofstede, National Culture, 2017). Firms often value the cultural distance factor by using the Kogut and Singh (1988) index, which is a composite measure of Hofstede’s dimensions of national culture to allow a comparison between countries. Researchers have shown their critique with Hofstede’s data and the index of Kogut and Singh as they are exhaustive, rely solely on one multinational company, and make assumptions of equivalence (Hofstede, National Culture, 2017). However, they are still one of the most used methods to identify the relationship between cultural distance and M&A performance due to the models’ advantages (Hofstede, National Culture, 2017). First, the data is derived from a large sample that makes the data more reliable (Hofstede, National Culture, 2017). Second, the cultural factors are codified into a numerical index, which makes them useful to quickly compare the culture between companies from different countries (Hofstede, National Culture, 2017). Finally, the dimensions have been extended with long-term orientation and indulgence, which provides a more detailed overview of the different national cultural distance factors between companies (Hofstede, National Culture, 2017). Therefore, Hofstede’s cultural dimensions have been recognized as an important indicator to measure cultural distance between countries (Hofstede, National Culture, 2017).

2.3.5 Corporate Governance

Corporate governance of the countries is measured by six indicators that stipulate if a country has good corporate governance within the country (Kaufmann, Kraay, & Mastruzzi, 2011). The first indicator is control of corruption, which captures perceptions of the extent to which public power is exercised for private gain, including both insignificant and large forms of corruption, as well as "capture" of the state by elites and private interests (Kaufmann, Kraay, & Mastruzzi, 2011).

The second indicator is government effectives that captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies (Kaufmann, Kraay, & Mastruzzi, 2011).

Next, political stability and absence of violence/terrorism is investigated (Kaufmann, Kraay, & Mastruzzi, 2011). This measures perception of the likelihood of political instability and/or politically-motivated violence, including terrorism (Kaufmann, Kraay, & Mastruzzi, 2011).

The fourth indicator is called rule of law that captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence (Kaufmann, Kraay, & Mastruzzi, 2011).

In addition, the fifth measure is regulatory quality that contains perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development (Kaufmann, Kraay, & Mastruzzi, 2011).

The last indicator of corporate governance is called voice and accountability (Kaufmann, Kraay, & Mastruzzi, 2011). This factor posits the perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as the freedom of expression, association, and media (Kaufmann, Kraay, & Mastruzzi, 2011).


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Are cross-border Mergers and Acquisitions more successful between culturally similar countries in the EU?
An empirical study on the shareholder wealth effects of European acquirers
Maastricht University  (Finance)
International Business
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mergers, acquisitions, european
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Cheyenne Wijnant (Author), 2017, Are cross-border Mergers and Acquisitions more successful between culturally similar countries in the EU?, Munich, GRIN Verlag,


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