Facilitate faster entry into foreign market

As compared to internally generated product developments and new business, acquisitions allow the firm to enter a new market more rapidly. It is argued that in general it is expensive, difficult and time-consuming to build up a global organisation and a competitive presence due to issues such as differences in culture, liability of foreignness, different business practices and institutional constraints. Cross-border M&As offer significant time saving in this respect. For example, cross-border M&As allow immediate access to a local network of suppliers, marketing channels, clients and other skills.

Martin et al. (1998) have suggested that CBM&As can be used to access new markets as well as expand the market for a firm’s current goods. Similar conclusions have been drawn by Datta and Puia (1995) who state that CBM&A activity provides the opportunity for instant access to a market with established sales volume. UNCTAD (2000) also indicates that cross-border mergers provide the fastest means for international expansion compared to greenfield investment or joint ventures.

Research on entry mode choice also suggests that acquisition is more appropriate for a faster entry into a new market compared to greenfield investment (Shimizu et al., 2004). If the investor has a short amount of time to penetrate the foreign market, the only available choice will be acquiring an existing firm. In fact, greenfield entries require a much slower and more moderated approach. Hennart and Park (1993) found that the timing of the investment influenced the mode of entry choice. Specifically, if the target market has a high growth rate, the choice of an acquisition allows the investor to penetrate it more quickly.

Uddin and Boateng (2011) examined the growth of CBM&As over recent decades and highlighted that prior studies referring to cross-border M&A activities as an entry mode of FDI have focused on industry and firm level-related factors. Therefore, Uddin and Boateng investigated the role of macroeconomic influences on CBM&A activities in the UK over the 1987–2006 period and found that GDP, exchange rate, interest rate and share price have all had significant impact on the level of outward UK CBM&As, thus contributing to our understanding of the effects of macroeconomic variables.

Increase market power

Market power exists when the firm can sell its products above the existing competitive market prices or when its manufacturing, distribution and service costs are lower than those of competitors. Market power is a product of the firm’s size, the degree of sustainability of its current competitive advantage, and its ability to make decisions today that will yield new competitive advantages tomorrow (Hitt et al., 2001).

Cross-border acquisitions are used to increase market power when the firm acquires: (a) a company competing in the same industry and often in the same segments of the primary industry; (b) a supplier or distributor; or (c) a business in a highly related industry (Hitt et al., 2001). If a company operates within a concentrated market where there are fewer competitors, merging via horizontal integration could provide the company with even more market power. Having more market power also means having the ability to impact and/or control prices. Through vertical acquisitions, firms seek to control additional parts of the value-added chain. Acquiring either a supplier or a distributor or an organisation that already controls more parts of the value chain than the acquiring firm can result in additional market power. Market power can also be gained when the firm acquires a company competing in an industry that is highly related.

Cui et al. (2014), using a sample of 154 Chinese firms, found that firms’ strategic assets seeking managerial intent to catch up with world-leading economies by acquiring strategic assets abroad has been influenced by their exposure to foreign competition, their governance structure and relevant financial and managerial capabilities. Nicholson and Salaber (2013), for their part, explored the value creation of cross-border acquisitions in emerging markets and its impact on shareholder wealth creation, and concluded that Chinese investors gain from the cross-border expansion of manufacturing companies, and that location also affects the performance of cross-border acquisitions, with acquisitions into developed countries generating higher returns for shareholders.

Access to and acquisition of new resources and technology

A number of studies have examined the motivation for cross-border M&As from the resource-based and organisational learning perspectives (Barkema and Vermeulen, 1998; Madhok, 1997; Vermeulen and Barkema, 2001). These studies suggest that cross-border M&As are motivated by an opportunity to acquire new capabilities and learn new knowledge. Today’s products rely on so many different critical technologies that most companies can no longer maintain cutting-edge sophistication in all of them (Ohmae, 1989).

Tapping external sources of know-how becomes imperative. Acquisition of an existing foreign business allows the acquirer to obtain resources such as patent-protected technology, superior managerial and marketing skills, and special government regulation that creates barriers to entry for other firms. Shimizu et al. (2004) endorse this by suggesting that firms may engage in M&As to exploit intangible assets. This line of reasoning is consistent with Caves (1990), who argues that acquisition of a foreign competitor enables the acquirer to bring under its control a more diverse stock of specific assets, which enables it to seize more opportunities.

Deng (2009), drawing on a multiple-case study of three leading Chinese firms – TCL, BOE and Lenovo – stressed the strategic assets resource-driven motivation behind Chinese cross-border M&A in order to retain their competitive advantages. In the same vein Rui and Yip (2008) utilised a strategic intent perspective (SIP) in order to analyse the foreign acquisitions pursued by Chinese firms, and suggested that acquiring firms from China strategically use cross-border acquisitions to obtain strategic capabilities that help them to to offset their competitive disadvantages and leverage their unique ownership advantages, while making use of institutional incentives and minimising institutional constraints. Extending this logic, Buckley et al. (2014) developed and tested a framework of the resource- and context-specificity of prior experience in acquisitions conducted by multinational companies from emerging countries (EMNCs) that acquire companies in developed countries. They found that acquisitions made by EMNCs often enhance the performance of target firms in the developed economies, and the role of EMNCs’ idiosyncratic resources (such as access to new markets and cheap production facilities) and investment experience in enhancing the performance of target firms differs across acquisition contexts. Specifically, they indicated that while certain types of resources and investment experience might be beneficial, due to facilitating resource redeployment and the exploitation of complementarities, some other types of experience may have a detrimental impact on the performance of the incumbent target companies.

Kohli and Mann (2012) assessed the acquiring company announcement gains, and determinants thereof, in both domestic and cross-border acquisitions pursued in India. Specifically, their sample consisted of 268 acquisitions comprising of 202 cross-border and 66 domestic deals. Interestingly, this study found that cross-border acquisitions have created significantly higher wealth gains than the domestic deals. Furthermore, Kohli and Mann concluded that cross-border acquisitions involving both an acquiring company and a target company in the technology intensive sector provide opportunities for the acquiring company to combine and judiciously utilise intangible resources of both companies on a broader scale across new geographies and as a result create superior wealth gains.

Zheng et al. (2016), drawing on multiple cases of cross-border mergers and acquisitions by Chinese multinational enterprises (CMNEs), investigate their search for strategic assets in developed economies. Their study reveals that CMNEs possess firm-specific assets that give them competitive advantages at home and seek complementary strategic assets in similar domains, but at a more advanced level. Moreover, the focal CMNEs utilised the partnering approach that facilitated the securing of the aforementioned strategic assets through no or limited integration, namely granting autonomy to the target firm’s management team and retaining talents.

Park and Ghauri (2011) investigated whether foreign acquiring firms contribute towards enhancing technological capabilities of local firms in foreign markets, and found that mere exposure to favourable learning environments is insufficient to develop an effective absorptive capacity, and that intensity of effort is a critical component functioning as a facilitator towards the extent of learning. In addition, their findings indicate that existing knowledge can be improved when the combining entities share similar business backgrounds, and finally that collaborative support from knowledge transferers serves as a significant catalyst leveraging a specific learning capability.

Almor et al. (2014), based on an empirical study of Israeli knowledge-intensive companies between 2000 and 2009, found that maturing, technology-based, born-global companies can increase their chances of survival by acquiring other firms. Although such acquisitions do not increase profits, they allow born-global firms to continue increasing their sales and to expand and upgrade their product lines, which in turn increases their chances of remaining independent. It is worth highlighting that although the majority of aforementioned born-global companies can continue operations if they survive the first decade, they are not highly successful in terms of growth or enhancing shareholder wealth. Therefore, Almor et al. recommend that maturing, technology-based, born-global companies should be more aggressive in pursuing their M&A strategies if they wish to be successful.

Diversification

Diversification is a well-documented strategy for firm expansion and has been suggested as one of the dominant reasons for cross-border M&As. Sudarsanam (1995) notes that diversification is generally defined as enabling the company to sell new products in new markets. This implies that the target company in an acquisition operates in a business that is unrelated to that of the buyer firm.

It is argued that international acquisitions not only provide access to important resources but also allow firms an opportunity to reduce the costs and risks of entering into new foreign markets. Seth (1990) reported that geographical market diversification is a source of value in cross-border acquisitions. This is because the sources of value, such as those associated with exchange rate differences, market power conferred by international scope and ability to arbitrage tax regimes, are unique to international mergers. Moreover, as economic activities in different countries are less than perfectly correlated, portfolio diversification across boundaries should reduce earnings volatility and improve investors’ risk–return opportunities.

Improved management

Sirower (1997) notes that managers try to maximise shareholder value either by replacing inefficient management in the target firm or by seeking synergies through the combination of the two firms. Gaughan (1991) claims that some M&As are motivated by a belief that the acquiring firm’s management can better manage the target’s resources. The acquirer may feel that its management skills are such that the value of the target would rise under its control.

The improved management argument may have particular validity in the case of large companies making offers for smaller companies. The smaller companies, often led by entrepreneurs, may offer a unique product or service that has sold well and facilitated the rapid growth of the target. As the target grows, however, it requires a very different set of management skills than were necessary when it was a smaller business. The growing enterprise may find that it needs to oversee a much larger distribution network and may have to adopt a very different marketing philosophy. Many of the decisions that a larger firm has to make require a vastly different set of managerial skills than those that resulted in the dramatic growth of the smaller company. The lack of managerial expertise may be a stumbling block in the growing company and may limit its ability to compete in the broader market place. These managerial resources are an asset which the larger firm can offer the target (Gaughan, 1991).

Synergy

Bradley et al. (1988) and Trautwein (1990) argue that firms engage in M&As in order to achieve synergies. Synergies stem from combining operations and activities such as marketing, research and development, procurement and other cost components, which were hitherto performed by the separate firms. It is argued that by combining operations and activities, M&As can increase a firm’s capacity and opportunity to reduce costs through economies of large-scale production, pooling resources to produce a superior product and generate long-run profitability. Interestingly, in the particular context of declining industries, Anand and Singh (1997) found that assets in the aforementioned industries are redeployed more effectively through market mechanisms than within the firm through the acquisition of complementary assets, and consolidation-oriented acquisitions outperform diversification-oriented acquisitions in the decline phase of their industries in terms of both ex ante (stock-market- based) and ex post (operating) performance measures.

In the specific context of cross-border M&As, the literature on corporate foreign investment describes various means by which cross-border M&As may create value. Acquiring an existing foreign facility provides a means for the rapid exploitation of the potential for synergistic gain compared with de novo entry. Porter (1987) suggests that one source of operating synergy comes from the potential to transfer valuable intangible assets, such as skills, between the combining firms. If a firm has know-how that can be used in markets where the sale or lease of such knowledge is inherently “inefficient,” then the firm will tend to exploit it through its own organisation. Although different versions are developed by various scholars (e.g. Williamson, 1975; Rugman, 1982), all assume that transacting in the international market entails substantial costs which will reduce the value of proprietary information. Faced with this cost, a firm will be likely to internalise the transaction and use the proprietary information within its expanded organisation. Gains may also be realised form “reverse internalisation”: firms acquire skills and resources from cross-border M&As that are expected to be valuable in their home markets. A related source of synergistic gains in cross-border acquisitions focuses on market development opportunities. In order to utilise their “excess” resources for long-run profitability efficiently, firms will invest abroad when growth at home is limited or restricted and in the presence of trade barriers which restrict exports. In addition, devising and implementing the tailor-made post-acquisition integration approach was found to be critical for potential synergy realisation in cross-border M&As (Almor et al., 2009; Weber and Tarba, 2011; Weber, Tarba and Reichel, 2009, 2011; Weber, Tarba and Rozen Bachar, 2011, 2012).

Managerial motive

The managerialism hypothesis suggests that managers embark on M&As in order to maximise their own utility at the expense of their firm’s shareholders (Seth et al., 2000). Managers can have private or personal reasons for their behaviour and make investments which from an economic point of view may seem irrational, but for the individual can be of high value. The empire-building theory maintains that management want firm growth for personal reasons, and acquisitions provide this growth. An important aspect of this is the wage explanation, whereby the salary paid to managers is a function of the size of the company (Mueller, 1969). Motives like power and prestige are also stressed (Ravenscraft and Scherer, 1987): for instance, managers in large companies have an easier route to senior positions in committees and on boards of directors (Pfeffer and Salancik, 1978).

While managerialism has been proposed as a motive for domestic M&As, it may also be relevant for cross-border M&As if managers have the incentive and the discretion to engage in M&As aimed at empire building (Seth et al., 2000). In an integrated capital market, firm-level diversification activities to reduce risk are generally considered non-value maximising as individual shareholders may duplicate the benefit from such activities at lower cost. However, managers may still seek to stabilise the firm’s earnings stream by acquiring foreign (rather than domestic) firms, given low correlations between earnings in different countries. Foreign acquisitions may be more satisfactory vehicles for risk reduction than domestic acquisitions; and, in the absence of strong governance mechanisms to control managerial discretion, managers may overpay for these acquisitions.

Regional origin of the target firm

There is no prior literature that provides an extensive examination of the strategic motives of international acquisition according to the choice of nationality of the foreign firm. Foreign firm choice will presumably hinge on the tasks to be accomplished by the acquisition and the particular characteristics required from a target. To the extent that UK firms believe that targets in particular foreign nations can provide certain requirements of the acquisition – for example, access to specific markets or types of technology – these targets will be chosen in preference to potential targets in different places when the acquisition is made. The fundamental motive for the acquisition may then be expected to vary according to the nationality of the foreign target. This leads to Hypothesis 1:

The relative importance of strategic motives for CBM&As will vary with the regional origin of the target firm.

Industry of operation

The motives for carrying out M&As from the acquiring firm’s perspective tend to be different across various industries (see Walter and Barney, 1990; Brouthers et al., 1998). Kreitl and Oberndorfer (2004) argued that motives vary across industry and time, and found that more emphasis was placed on certain motives in engineering consulting firms than in other manufacturing sectors. Several of the strategic motives appear to lend themselves more readily to acquisitions in the manufacturing sector – for example, product rationalisation and economies of scale, and transfer of complementary technology/exchange of patents – than they do to acquisitions in the service sector, where risk sharing, shaping competition and the use of acquisition to facilitate international expansion appear to be more relevant. To the extent that this is the case, it would be expected that strategic motivation would vary with the industry sector of the acquisition, which is reflected in Hypothesis 2:

Pre-acquisition performance of the target firm

An acquiring company can correct an efficiency problem in the target firm, which will increase the target’s value and create synergistic gains. To detect a situation in which the target’s inefficiencies can be improved, the target’s performance prior to the acquisition is examined for inefficient management. According to Servaes (1991) the largest synergistic gains are possible when an efficient firm acquires an inefficient firm. Therefore, an acquirer may be motivated to acquire a poorly performing foreign firm with a view to turning it around, for example by replacing inefficient management. On the other hand, an acquirer may be motivated to acquire a profitable foreign firm in order to realise synergic benefits, such as economies of scale or cost reduction. The fundamental motive for the international acquisition may then be expected to vary according to the pre-acquisition performance of the target firm, which leads to Hypothesis 3:

Relative importance of the strategic motives

The rank order of the twenty strategic motives for international acquisition by UK companies, based on the mean measure of importance, is shown in Table 3.1. The median measure is exceeded by nine acquisition motives, of which “to enable presence in new market” (3.55), “to enable faster entry to market” (3.54), “to facilitate international expansion” (3.52), “gain new capabilities” (3.42), “gain strategic assets” (3.26) and “increase market power” (3.09) constitute the six with the highest degrees of importance. It is clear from the table that the managers perceived their motives for international expansion to be strongly influenced by growth-oriented factors. The highest-ranked strategic motives are concerned with relative competitive positions in new markets.

Considering the motives in terms of their underlying theoretical explanations, it is apparent that, for this sample, the main strategic motives are underpinned by the theories of strategic positioning and the resource-based view (RBV). The first three ranked motives are concerned with improving the firm’s competitive position through the use of acquisitions that may be characterised as most importantly allowing the UK firms to enter new foreign markets at speed and/or consolidating existing market positions.

The leading set of motives also lends support to the RBV of acquisitions, particularly when it is recognised that the acquisition takes place because the acquirer lacks the necessary capabilities or assets required for remaining competitive in the foreign market. Where one firm wishes to acquire a capability that it does not have but is possessed by a target firm (such as tangible resources – for example, capital, machinery and land – and intangible resources – for example, capabilities, organisational culture and know-how), then an acquisition may facilitate obtaining these capabilities.

The most important acquisition motive for the surveyed firms was to enable presence in new markets. Thus, expanding the acquiring firm’s market portfolio to reach new markets was obviously a top priority for the surveyed firms. The importance of presence in new markets supports Ingham et al.’s (1992) study of British firms where the penetration of new geographic markets ranked second.

Enabling faster entry to market was highly ranked. International mergers and acquisitions are the fastest means for firms to expand their production and markets internationally (Chen and Findlay, 2003). When time is crucial, acquiring an existing firm in a new market with an established distribution system is far preferable to developing a new local distribution and marketing network. For a latecomer to a market or a new field of technology, international M&As can provide a way to catch up rapidly. With the acceleration of globalisation, and enhanced competition, there are increasing pressures for UK firms to respond quickly to opportunities in the fast-changing global economic environment. Thus, for UK companies seeking to compete in nations outside their home base, acquiring a firm is a much faster way to reach this objective when compared with the time required to establish a new facility and new relationships with stakeholders in a different country.

The third-ranked motive was to facilitate international expansion. The desire to expand from the national domestic market is not surprising as the search for new markets and market power is a constant concern for firms in an increasingly competitive environment. In conditions of rapid change and high innovation costs, expansion through external means has become an absolute necessity (Child et al., 2001). A company can expand through greenfield or through mergers and acquisitions. When expanding abroad via direct investment, firms face greater risks than local firms due to their lack of familiarity with the host market. Thus, the firm often prefers the lower risk of acquisition once a foreign firm is thought suitable for the purpose of international expansion (Caves, 1996).

Another important motive for cross-border M&As for UK acquiring firms is to acquire strategic assets and capabilities, which encompass technology, R&D and management know-how. This finding is consistent with Granstrand and Sjolander (1990), who suggest that firms with low skills may enter foreign markets via M&As that allow the firms to obtain new technological resources and other strategic assets. Caves (1990) endorses this by suggesting that foreign acquisitions may be motivated by the quest to bring a more diverse collection of specific assets under the acquirer’s control and to enable more opportunities to be seized. This explanation is also in line with the views of Hill et al. (1990), who point out that foreign acquisition by MNCs may be motivated by strategic objectives. Bresman et al. (1999) also suggest that cross-border M&A is an effective way to expand the knowledge base of a firm.

The ranking of the motives revealed that British CBM&As are not driven by diversification motives (rank 10 and 13) or by the desire to reduce costs (rank 11 and 14). Firms usually pursue diversification in order reduce earnings volatility and improve investors’ risk–return opportunities. However, one of the disadvantages of acquisitions that are motivated by diversification is the tendency to stretch the acquiring company’s management (Gaughan, 1991). The ability to manage a firm successfully in one industry does not necessarily translate to other businesses. Moreover, the acquiring company is providing a service (i.e. diversification) to stockholders that they can accomplish better themselves (Levy and Sarnat, 1970). For instance, a steel company that has a typical pattern of cyclical sales may consider acquiring a pharmaceutical company that exhibits a recession-resistant sales pattern. Financial theory states that the managers of the steel company are doing their stockholders a disservice through acquisition of the pharmaceutical company. If stockholders in the steel company wanted to be stockholders in a pharmaceutical firm, they could easily adjust their portfolios to add shares of such a firm. Stockholders can accomplish such a transaction in a far less costly manner than through a corporate acquisition.

The lowest-ranked international acquisition motives (rank 15 to 20) include “enable overcoming of regulatory restrictions” (1.63), “turn around failing acquired firm” (1.62), “redeploy assets to the acquisition” (1.54), “replace inefficient management” (1.54) and “tax reasons” (1.32). Overcoming regulatory restrictions appears not to be an important motivation for British international acquisitions. This is not surprising as most of the regulatory restrictions were removed before 2000 (all of the acquisitions in the sample were completed in the 2000 to 2004 period). Regulatory reform and deregulation in the 1990s in industries such as telecommunications (the WTO agreement on basic telecommunications services came into effect in 1998), electricity and finance played a significant role in the remarkable increases in M&As in both developed and developing countries (UNCTAD, 2000). The promotion of regional integration in the 1990s, as in Europe and North America, provided opportunities for expansion through cross-border M&As. Thus, regulatory restrictions are now less important factors for making an acquisition overseas. “Tax reasons (savings)” is ranked lowest, indicating that British CBM&As are rarely driven by this motive. Weston et al. (2001) suggest that the synergies resulting from tax savings are insufficient to motivate an acquisition, which seems to be supported by this study.

Strategic motives and origin of the target firm

The rank order of strategic motivation according to the geographical region of the acquisition, North America or Europe, is shown in Table 3.3. Some of the motives have a similar rank; however, there are several differences in rank order according to the location of the acquisition. The joint highest-ranked motive for North American acquisitions is to gain new capabilities, while for European acquisitions this motive is ranked only sixth. UK firms appear to believe that North American firms provide access to specific capabilities more readily than do European firms. Acquisition of new capabilities appears to be an essential step, because today’s products rely on so many different critical technologies that most companies can no longer maintain cutting-edge sophistication in all of them (Ohmae, 1989). In this respect it appears that North American firms have developed these capabilities more than European firms.

Table 3.3 Strategic motives for international acquisitions: origin of the target firm

The highest-ranked motive for European acquisitions is to enable presence in new markets, whereas for North American acquisitions this motive is ranked only fourth. It appears that it is more of a priority for UK firms to gain a presence in Europe than in North America. The desire to access the European market tends to support the survey findings of Jansson et al. (1994), in which “nearness and potential of the single market” was identified as the main reason for cross-border M&As in Europe by UK manufacturing firms.

Similar variations exist in the case of other motives, such as increase market share, enable product diversification, and replace inefficient management of acquired firm. For acquisitions in Europe, the motive to increase market share is ranked fifth; in contrast, the same motive is ranked tenth for North American acquisitions. It appears that for UK firms it is relatively more important to increase market share in the European market than in North America. This finding supports a survey reported by KPMG Management Consulting (1998), where increasing market share was identified as one of the most important motives for M&As in Europe by UK firms.

For North American acquisition, the motive to enable product diversification is ranked fifth, whereas this motive is ranked tenth for European acquisition. It appears that it is more of a priority for UK firms to enable product diversification in North America than in Europe. To remain competitive in the North American market, UK firms may have acquired firms that enable product diversification.

The motive to replace inefficient management of the acquired firm is ranked twelveth for North American acquisitions and seventeenth for European acquisitions. It appears that for UK firms it is relatively more important to replace inefficient management in North American acquired firms than in European acquired firms. The management of UK firms may believe that they can better manage the North American firms’ resources.

Despite the variations in ranking, Table 3.3 indicates a lack of support for Hypothesis 1, in that the relative importance of the strategic motives does not vary significantly between the origins of the target firm. None of the factors has mean scores that are statistically different. With regard to individual motives, only the relative importance of two – obtain economies of large-scale production (p < 0.05) and replace inefficient management of acquired firm (p < 0.05) – are found to vary significantly between region of target firm. The mean score for the obtain economies of large-scale production motive is higher for acquisitions in Europe than those in North America. In the case of replace inefficient management of the acquired firm, the mean score is higher for North American than European Union acquisitions.

In general, then, similar motives are driving CBM&As in the EU and North America, with little significant variation in terms of the relative importance of the motives.

Strategic motives and sector of acquisition

To facilitate the statistical testing of the strategic motives, the industry of the acquisition was categorised in the conventional way by distinguishing between manufacturing and service sectors. The strategic motivation for international acquisitions by sector of operation is shown in Table 3.4.

The rank order of the strategic motives has a degree of similarity for the two sectors; however, there are some differences. For instance, the highest-ranked motive for acquisitions in the manufacturing sector is to gain strategic assets, while this motive is ranked only tenth in the service sector. It appears that it is more of a priority for UK firms to gain strategic assets in the manufacturing sector than in service sector. This suggests that UK firms lack the necessary strategic assets to

Table 3.4 Strategic motives for international acquisitions: sector of acquisition

operate and compete effectively in the foreign manufacturing sector. Thus, acquisition allows UK firms to obtain necessary and/or new technological resources and other strategic assets in order to seize opportunities in foreign markets (Caves, 1990).

The highest-ranked motive in the service sector is to enable faster entry into the market, while this motive is ranked only fourth in the manufacturing sector. It appears that it is more of a priority for UK firms to enable faster entry into the service sector than in the manufacturing sector. The importance of faster entry into the service sector supports Kang and Johansson’s (2000) study, where the growth of cross-border M&As in the service sector – that is, telecommunications, media and financial services – was seen in terms of the efforts of firms to capture new markets quickly and to offer more integrated global service.

The increase market power motive is ranked third for acquisitions in the service sector, whereas it is ranked ninth in the manufacturing sector. It appears that it is relatively more important for UK firms to increase market power in the service sector than in the manufacturing sector. If industry competition is higher in the service sector than in the manufacturing sector, a UK firm may choose to acquire an existing company in the service sector in order to increase industry concentration.

There is moderate support for Hypothesis 2, in that two of the six factors have mean scores that are significantly different – market power (p < 0.01) and product diversification (p <. 05) – with both mean higher in the service sector. Two of the three individual motives constituting the market power factor – increase market power (p < 0.01) and increase market share (p < 0.01) – show means that are significantly higher for international acquisition in the service sector compared to those in the manufacturing sector. The market power factor and the individual motives to increase market power, to increase market share and to eliminate or reduce competition may be viewed as a set of largely defensive motives designed to consolidate and protect the UK firms’ positions in foreign markets. Given that this set of motives is relatively more important for international acquisitions in the service sector than it is for motives in the manufacturing sector, it may be argued that international acquisitions in the service sector are more of a pro-reactive response to competitive pressure than is the case for international acquisitions in the manufacturing sector.

The finding that market power as a strategic motive is relatively more important for international acquisitions in the service sector than those in the manufacturing sector is consistent with McCann (1996) and Kreitl and Oberndorfer (2004). McCann found that the M&A motive of increasing the firm’s market share is very highly ranked in service sectors such as transportation and travel, financial services, professional service sectors and so on. Kreitl and Oberndorfer found market share was the third-highest-ranked motive in the consulting service sector. They argued that market share provides a consulting firm with name recognition and reputation for its expertise, a factor which reduces cost in marketing and sales.

The individual motive constituting the product diversification factor – enable product diversification (p < 0.05) – shows a mean significantly higher for international acquisition in the service sector compared to that in manufacturing sector. It appears that it is more of a priority for UK firms to enable product diversification in the service sector than in the manufacturing sector.

On the whole, there is moderate support for Hypothesis 2, indicating that motives for international acquisitions do vary according to the sector of acquisition, at least to some extent.

Strategic motives and pre-acquisition performance of foreign firms

The rank order of strategic motivation according to the pre-acquisition performance of target firms is shown in Table 3.5. Some of the motives have similar ranks between profitable target firm and not-profitable firm, although there are some differences in rank order according to the pre-acquisition performance of the target firm. The highest-ranked motive when acquiring a profitable firm is to facilitate international expansion, whereas this motive is ranked fourth in the case of an unprofitable firm. It appears that it is more of a priority for UK firms to acquire a profitable firm than to acquire an unprofitable firm for facilitating international expansion. This is not surprising, as acquiring a profitable firm can facilitate international expansion more easily than acquiring an unprofitable firm.

Similar variation exists in the rank order of other motives. The motive to increase market share is ranked sixth for acquiring a profitable firm. The same motive is ranked tenth for acquiring an unprofitable firm. It appears that it is relatively more important for UK firms to acquire a profitable firm than to acquire an unprofitable firm in order to increase market share. The market share of a profitable firm is expected to be higher than that of an unprofitable firm. Thus, acquiring a profitable firm can result in a relatively higher market share for the acquiring firm.

Despite some variation in ranking, Table 3.5 indicates weak support for Hypothesis 3, in that only one of the six factors – target improvement (p < 0.1) – has mean scores that are significantly different, with the mean unsurprisingly higher for acquisition of unprofitable firms. One of the three individual motives constituting the target improvement factor – turn around failing acquired firm (p < 0.01) – shows a mean significantly higher for international acquisitions of unprofitable firms compared with those of profitable firms. This is to be expected as an acquirer may be motivated to acquire a poorly performing foreign firm with a view to turning it around, for example by replacing inefficient management. This result is consistent with the improved management hypothesis, which holds that poorly managed firms have a greater likelihood of becoming takeover targets (Manne, 1965). Gaughan (1991) argues that some takeovers are motivated by a belief that the acquiring firm’s management can better manage the target’s resources. Thus, a UK acquirer may feel that its management skills are such that the value of the target will rise under its control.

Brealey and Myers (2003) suggest that cash is not the only asset that can be wasted by poor management. Firms with unexploited opportunities to cut costs and increase sales and earnings are natural candidates for acquisition by other firms with better managements. The authors also suggest that sometimes an acquisition is the

Table 3.5 Strategic motives for international acquisitions: performance of target firms

only simple and practical way to improve management, because the incumbent managers are naturally reluctant to fire or demote themselves, and stockholders of large public firms do not usually have much direct influence on how the firm is run or who runs it.

Overall, there is weak support for Hypothesis 3, suggesting that most of the motives for international acquisitions vary little according to pre-acquisition performance of the target firm. However, there are significant differences with respect to the motive of target improvement, as expected.