Cross-Border Mergers and Acquisitions: The Undervaluation Hypothesis
Quarterly Review of Economics and Finance, Vol. 38 No. 1, Spring 1998
Posted: 29 Jan 1998
Abstract
The growing interdependency of the global economy has developed new relationships between economic agents of different countries. In the last decade, a very interesting phenomenon has surfaced in the international market for corporate control. In a reversal of previous patterns, the number of foreign firms acquiring U.S. firms has been larger than the number of U.S. firms taking over foreign companies. The exact motivations for this switch in the role of U.S. firms from bidder to target are many. We focus our attention on the quest for undervalued assets. Under our undervaluation hypothesis, we postulate that the existence of market imperfections that cause frictions in the product and service markets also contributes to favor the acquisition of a company already operating. Thus, in order to minimize the costs penetrating into foreign markets, firms will search across national boundaries for undervalued companies as targets for their acquisitions. The results of this study offer support for this viewpoint.
JEL Classification: G34
Suggested Citation: Suggested Citation