General Introduction

“One needs two legs to walk. Globalization encourages us to search beyond our borders, but one also needs to strengthen one’s capacity at home, on one’s historical market sectors”.

Paul HERMELIN, Chief Executive Officer, Capgemini
(Les Echos, April 5, 2011)

“Acquisitions constitute an essential axis of the profitability growth plan of Rexel and we will keep investing in emerging markets as well as in mature markets”.

Rudy PROVOOST, Chairman of the Board of Rexel
(Activity Report, 2012, p. 16)

“Today, our ambition is to become a global leader, balancing emerging economies and mature economies, innovation potential and growth potential”.

Bruno LAFONT, Chief executive Officer of Lafarge
(Les Echos, May 7, 2014)

These quotes from economic and finance journals highlight how important it is for the performance of companies to develop internationally, especially via means of mergers and acquisitions.

Mergers and acquisitions activity is characterized, timewise, by waves of increased activity. The last of such waves peaked in 2007 to recede with the economic crisis of 2008. To date, 2007 is the year during which the largest number of operations occurred, for a total sum of 4,130 billion dollars [THO 14]. Although the economic context can explain the relative slowdown of external growth operations of companies, their activity remains high and the public announcements of 2014 suggest a new wave may be forming. French companies are particularly active as they account for 4% of the total number and value of operations completed globally. They, therefore, reach the third rank, just after the American and British companies (ranking established on the basis of the information available in the databases of Securities Data Company (SDC) Platinium on Line, from 1990 to June 2014). During the first 6 months of 2014, the French market displayed a strong growth, registering operations that sum up to a value of 107.7 billion euros. This sum is four times greater than that of the first semester of 2013 (an article in Thomson Reuters, published on July 1, 2014).

Moreover, the study of merger and acquisition dynamics shows an increase in the number of operations involving different nationalities. For example, such operations haves increased by 53% in 2011 [CNU 14]. Furthermore, companies from emerging countries account for an increasing part in merger and acquisition activity. The fraction of operations completed in these countries shows a clear growth in volume, contrary to these in mature countries: from only 6% in 1990, they rose to 24% in 2011 and even to 26% in 2013 [CUN 14].

This significant recourse to external growth strategies can be explained by the fact that such strategies enable a company to meet various objectives in a limited amount of time [SLA 08]. The literature, however, often highlights the risks carried by such operations. Since they have multiple characteristics and motivations, they are very complex in a financial, strategic, as well as a human perspective. Most studies about the relevance of such acquisitions report a lowering of the performance of company or, at best, a stagnation after the merger and acquisition operation [AGR 92, DEV 09]. In the same vein, authors estimate that the rate of failure of such acquisitions can reach above 50% [VAZ 12]. However, these works also showed that, although the profitability of abnormal acquisitions is effectively low, null or even negative for the buyer, they are strongly positive for the target when the acquisition is announced [MOE 05].

Globalization created new opportunities as well as new constraints regarding the expansion of companies, as their location can be a source of competitive advantage [GOE 10]. Indeed, companies must adjust their investments with regard to the operation and be especially careful about the location of their activity [COL 11]. This can be explained by the evolution of the law, which makes international trade easier, as well as by the growing importance of emerging countries in the global economy. These mutations of the international economical context offer new perspectives for external growth strategies. For example, gaining access to foreign markets seems to be the most commonly expressed cause for merger and acquisition operations [GRA 11]. They indeed constitute an efficient mode of entry into foreign markets.

This novel economic context raises many questions about the merger–acquisition activity: Which are the criteria according to which a company chooses to complete a merger–acquisition operation abroad and especially in emerging countries? How good is the performance of national and international mergers and acquisitions? How do we evaluate it? International management researchers have been interested primarily in the strategical choices of modes of entry into foreign markets and in the location of investments of companies. Finance researchers, for their part, have mainly been interested in the motivation and value creation of such operations.

In the context of a global environment undergoing multiple transformations, the study of the internationalization of companies has generated the development of several new concepts. A research field has thus been created, which investigates the modes of entry that companies use for their international development. Mergers and acquisitions are one of the means they can use to penetrate foreign markets. It is the most committing as it usually bears irreversible characteristics. International mergers and acquisitions, therefore, signal a long-term strategy of location in territories foreign to the company. This high level of commitment in a foreign country involves high risks, but these risks are compensated by privileged access to local resources. Therefore, the risks and performance of internationalization strategies depend on the chosen mode of entry. This is why such decisions are considered as some of the most crucial for the international development of a company.

Location strategies are, therefore, considered together with the choice of the mode of entry [DUN 08a]. Company location is one of the three pillars of the eclectic development paradigm developed by Dunning [DUN 98]. His theoretical framework explains the choices of modes of entry into foreign markets along three advantages, the OLI: advantages specific to the company (0 – ownership advantages), location (L – location advantages) and internalization (I – internalization advantages). It, therefore, draws attention to the elements that must be taken into account in the process of internationalization of a company. The eclectic paradigm therefore not only considers the specifics of companies; it also encompasses the local characteristics of countries. On this basis, the mergers and acquisitions should combine the three advantages. Furthermore, in the revised version of the eclectic paradigm, Dunning and Lundan [DUN 08a] also integrate local institutions because they inevitably influence the activities of companies.

These developments led researchers to investigate the consequences of the variations between the country of the acquirer and that of the target, along all their dimensions: geographic distance, economic growth, quality of institutions and cultural differences [GOE 10, MAL 14].

The appetite of companies for international markets and especially for emerging countries seems to indicate that there are strong incentives for companies to take long-term positions in foreign countries by means of mergers and acquisitions. There is ample literature about the choices of modes of entries and internationalization of companies. But, as far as we know, little research has investigated internationalization while simultaneously considering the effects of the various dimensions of opportunities and constraints opened by foreign markets on the decision to accomplish a merger or acquisition in a mature or emerging country. This is the reason why this work first studies how the specifics of the target country influence the decision to conduct a merger and acquisition in a mature country or in an emerging one.

Since the question of the performance of mergers and acquisitions plays an essential role in the choice of an internationalization strategy, we chose to develop our research by studying this theme [AKD 11, MOE 05]. There is a review of the literature of works concerning mergers and acquisitions in the finance domain that highlights two main general issues: the internal as well as external reasons that lead the company to develop such operations, on the one hand, and the performance of such operations, on the other hand. Of course, these two issues are mutually dependent, as research works have shown that the performance of an operation depends on the intentions of the acquirer [HAS 91, HOB 10].

In order to explain these motivations, some research works start from the industrial economy [BAI 56, MAN 39]. They study the financial and economic environment to more precisely understand the determining factors of the decisions regarding the strategies of external growth. Mergers and acquisitions would, in that theory, develop more significantly when changes occur in the international environment. Companies would be encouraged to conduct mergers and acquisitions by technological innovations, the stock exchange context or regulatory changes [SUD 10]. The main motivations for mergers and acquisitions thus seem to arise from the will to increase market power or to build synergies [HOB 10]. Such strategies indeed base their rationale on the idea that the...