Timing Impacts Acquisition Value Creation in Emerging Markets
Acquiring and target firms experience different patterns and drivers of acquisition value creation in emerging markets.
ANN ARBOR, Mich.—A recent study at Michigan's Ross School of Business reveals that, on average, acquisitions made in emerging markets create value for both acquiring and target firms.
But this is not the case in developed markets where acquisitions normally seem to create value for the shareholders of the target companies but fail to create any substantive value for the shareholders of the acquirers.
Furthermore, the study shows two key factors—the acquiring firm's identity (local or foreign/global) and the relatedness of the acquisition—have significant impact on value creation in emerging markets, but the relationship of those factors depends upon the time period in which the acquisition takes place.
"In the period immediately following market liberalization, multinational corporation (MNC) acquirers create more value than local acquirers, and the relatedness of the acquisition seems to offer comparatively little benefit in terms of value creation," said Prashant Kale, assistant professor of corporate strategy and international business at the Ross School. "But as liberalization evolves in emerging markets, the relative advantage of MNC acquirers decreases substantially—although they continue to earn higher returns than local acquirers—and related acquisitions create much greater value than unrelated acquisitions."
Kale's findings are based on merger-and-acquisition activity in India between 1992 and 2002, following the liberalization of its business environment in 1991. He concludes that acquisition value creation is partly contingent upon the nature and pace of the liberalization process.
During the first five years after liberalization, MNC acquirers generate significantly higher returns in their acquisitions than local acquirers do. However, during years six through 10, local acquirers generate returns that are very close to those of the MNC acquirers.
Kale explains that when mergers-and-acquisition activity is in its early stage, multinationals have a greater chance of succeeding or creating value because they have substantial acquisition experience and well-developed acquisition capabilities.
Local companies, which are relatively new to the acquisitions game, are at a disadvantage, at least initially, he says. However, as time passes, local firms increase their acquisition experience and capability, which enables them to close the gap with MNC acquirers.
The passage of time also affects the relative impact of related and unrelated acquisitions on value creation. In developed markets, related acquisitions generally create more value and exhibit better performance than unrelated acquisitions because they provide a greater opportunity to exploit the operational synergies between the combining firms.
However, during the first five years of India's post-liberalization, the value-creation differential between these two types of acquisitions is not very large. Companies continue to engage in (and investors continue to reward) both related and unrelated acquisitions as firms seek to achieve growth and competitive advantage in any way possible while awaiting the development of the capital and labor markets.
But the differential increases in the second five-year period when related acquisitions create substantially more value than unrelated acquisitions.
"Immediately after liberalization, when the markets are not fully convergent with the practices and institutions in developed countries, unrelated acquisitions also may create some value," Kale said. "But over time, as business practices and norms in these markets become similar to those in developed markets (where the existence of business relatedness in acquisitions is preferred and rewarded), related acquisitions clearly become more favored and, therefore, more effective at creating value than unrelated acquisitions."
Written by Claudia Capos
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