Cross-Border Acquisitions and Target Firms' Performance: Evidence From Japanese Firm-Level Data

Abstract

Using Japanese firm-level data for the period from 1994-2002, this paper examines whether a firm is chosen as an acquisition target based on its productivity level, profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector, we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However, it may argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem, in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects, we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms' productivity and profitability significantly more and quicker than acquisitions by domestic firms.Moreover, we find that there is no positive impact on target firms' profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact, in the manufacturing sector, the return on assets even deteriorated one year and two years after within-group in-in acquisition, while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions, parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability.

The effect of investor origin on firm performance: Domestic and foreign direct investment in the United States

“…A burgeoning literature in international economics has conducted causal analyses on foreign ownership and firm performance (Djankov and Hoekman, 2000;Conyon et al, 2001Conyon et al, , 2002Harris and Robinson, 2003;Bertrand and Zitouna, 2005;Girma, 2005;Benfratello and Sembenelli, 2006;Fukao et al, 2006;Girma and Görg, 2007a,b;Heymann et al, 2007;Arnold and Javorcik, 2009, just to name a few). These papers focus on ex-post performance changes in the target firm after foreign takeover.…”

Privatization, Foreign Acquisition and the Motives for FDI in Eastern Europe

“…That is there is an expectation of post-acquisition inward transfer of inputs, perhaps including technology, organizational skills and brand names, which would raise the volume and/or value of output. It might suggest that multinational acquirers look for similar performance gains from targets in transition economies to those they generate from targets in developed western economies such Japan (Fukao et al 2006) and the United States (Conyon et al 2002).…”

“…In countries as diverse as Japan (Fukao et al 2006), Italy (Piscitello and Rabbiosi 2005) and the United Kingdom (Conyon et al 2002) foreign acquisition has been found to raise firm productivity performance, consistent with the internal transfer of technological or managerial skills or brand name advantages. Work by Girma has suggested the caveat that target firms may differ in their absorptive capacity according to both industry sector (Girma and Görg 2007) and competitive circumstances (Girma et al 2006).…”

Adoption and policy implications of Japan’s new corporate governance practices after the reform

“…However, the fact that higher returns are available to group-based friendly mergers is consistent with our Proposition 3. Similarly Fukao, Ito, Kwon, and Takizawa (2006) estimated effects of mergers on the target firms for the period 1994-2002 and found that there was no improvement in their profitability after the merger but there was some improvement in total factor productivity for mergers between firms from the same corporate group (but not for mergers between unrelated firms). This is also consistent with Proposition 3 that friendly mergers are generally preferred in Japan.…”