Mitigating risk in international mergers and acquisitions: the role of contingent payouts
- PDF / 150,046 Bytes
- 14 Pages / 595 x 794 pts Page_size
- 57 Downloads / 153 Views
& 2004 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $25.00 www.jibs.net
Mitigating risk in international mergers and acquisitions: the role of contingent payouts Jeffrey J Reuer1, Oded Shenkar2 and Roberto Ragozzino2 1
Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA; 2Fisher College of Business, The Ohio State University, Columbus, OH, USA Correspondence: Dr JJ Reuer, Kenan-Flagler Business School, University of North Carolina, McColl Building, Chapel Hill, NC 27599, USA. Tel: þ 1 919 962 4514; Fax: þ 1 919 962 4266; E-mail: [email protected]
Abstract Previous internationalization studies have focused on the entry modes employed by multinational firms but have not considered the contractual heterogeneity that underlies each mode. It is important to examine these contractual details, as the firm may be able to obtain some of the benefits typically associated with one entry mode while selecting another. In the case of international mergers and acquisitions (M&As), a key contractual variable is whether the parties agree to a performance-contingent payout structure, which can mitigate the risk of adverse selection. In this paper, we examine the antecedents of contingent payouts in the form of earnouts and stock payments. The results indicate that firms lacking international and domestic acquisition experience turn to contingent payouts when purchasing targets in high-tech and service industries. Firms tend to avoid contingent payouts in host countries with problems with investor protection and legal enforceability. Journal of International Business Studies (2004) 35, 19–32. doi:10.1057/palgrave. jibs.8400053 Keywords: contingent earnouts; international mergers and acquisitions; adverse selection
Received: 5 March 2002 Revised: 27 June 2003 Accepted: 22 August 2003 Online publication date: 13 November 2003
Introduction International mergers and acquisitions (M&As) have become a primary mode of internationalization in recent years (UNCTAD, 2000). As is the case for other internationalization modes, however, foreign acquisitions often suffer from the acquirer’s ‘liability of foreignness’ in the form of unfamiliarity with the target country, its culture, and its institutions (Zaheer, 1995), and this is especially true when the firm has little or no prior experience in international markets (e.g., Johanson and Vahlne, 1977). Multinational firms conducting acquisitions may also be unfamiliar with potential targets, and may find it difficult to assess the value of the resources that a target firm brings to the transaction. Significant inefficiencies can therefore pervade international M&A markets. For instance, extension of Akerlof’s (1970) ‘market for lemons’ model from product markets to the M&A market suggests that when bidders cannot efficiently value targets, and targets for their part cannot credibly convey the value of their resources, then otherwise attractive deals may not go forward just as other, less attractive acquisitions proceed. In the latter instance, if suitable cont
Data Loading...
