The Perfect Match: Assortative Matching in International Acquisitions
By Maria Guadalupe, Veronica Rappoport, Bernard Salanie, and Catherine Thomas
Among developed economies, which account for 64 percent of the (inward) stock of
multinational capital (UNCTAD, 2011), Foreign Direct Investment mostly takes in the form of
mergers or acquisitions (M&A): 89 percent of FDI flows in developed countries (Barba
Navaretti and Venables, 2004). Despite the importance of cross country M&A in FDI, little is
known about its patterns and motivations, and its effect on technology adoption and innovation.
In this project we analyze the synergies between the characteristics of firms participating in
cross-border M&A.
The matches between acquiring and target firms have imbedded information on the motives
guiding the choice of participating firms. We develop a methodology to learn, based on the
characteristics of the firms intervening in the deal, the sources of complementarities between
firms that the acquirer expects to exploit.
Our analysis is guided by a theoretical framework where firms are heterogeneous, within the
industry and country of origin, in two dimensions: productivity and market share. This modeling
choice is motivated directly by the data; larger firms are on average more productive, but there is
substantial heterogeneity of productivities for a given market share. Firms decide whether or not
to acquire an affiliate, and which firm to acquire. By a revealed preference argument, and the
assumption that the M&A market is efficient, an acquisition signals the existence of synergies
between the two merging firms. That is, the joint surplus function from the matching between the
target and the acquirer involves complementarities between at least some of the characteristics of
the involved firms, which make the value of the combined firm larger than the sum of the two
stand-alone firms. The theoretical framework used in the structural estimation is flexible enough
to incorporate both productivity-enhancing and monopoly power synergies (these two motives
were analyzed theoretically in Neary, 2007) and to admit the motives considered in Nocke and
Yeaple (2008) as a special case.
We analyze the characteristics of the matched firms based on domestic and cross-border M&As
for five large European countries, France, Germany, Italy, U.K., and Spain, collected by Zephyr
between 1997 and 2011. The dataset includes 8,600 deals, 30 percent of which are cross-borders,
and 46% are cross-sectors of production (2-digits SIC). These data allow us to characterize the
acquired and acquiring firms in terms of output per worker, size, total assets and main industry of
operations (at 4-digits SIC). Our empirical methodology is based on Galichon and Salanie
(2012). This approach recognizes that firms are heterogeneous not only in characteristics
observable to us but also other non-observable idiosyncratic dimensions that may enter in the
matching function, namely CEO’s preferences for empire building or unknown conglomerate
strategies. Under some assumptions on the distribution of unobservables, this approach
consistently estimates the parameters of the surplus function from the matching based on
observables only. Our results suggest that large firms tend to acquire other large (i.e., high
market share) but relatively unproductive firms. And this pattern is even more acute for crossborder acquisitions.