The impact of cross-border M&As in
services
Policy issues
Pehr-Johan Norbäck, Institutet för Näringslivsforskning
Lars Persson, Institutet för Näringslivsforskning
Background
• Strong increase in FDI during the last decades
 Welcoming attitude towards inward FDI in general
 Development of new technologies (IT)
Increasing FDI in the world economy
Percentage
of GDP
Stock of inward FDI (world)
Sweden
60
50
40
Developed
countries
30
20
10
0
1980
1985
Source: WIR (1997, 2005)
1990
1995
2000
2004
Background, cont
• The composition of FDI has shifted towards
services
• Mergers and Acquisitions is a major driving force in
the increase of FDI in services
M&As in services increasingly important
Cross-border M&A's: 1987-2004
1400000
Millions of USD
1200000
1000000
800000
Services
600000
Manufacturing
Primary
400000
200000
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
0
Source: UNCTAD. Current values. By purchaser.
Policy issues
Concern 1: Cross-border M&As, in contrast to
greenfield FDI, are driven by market power
motives hurting consumers
Concern 2: Strong foreign entrants will be able to
acquire domestic firms at “too low” a price
Concern 3: Obstacles for FDI in the service sector
(EU)
Purpose
•
Develop a theoretical framework to analyze:
 Driving forces of cross-border M&As and greenfield investments
(new ventures) in service markets
 The welfare impact of cross-border M&As and greenfield
investments in service markets
•
Examine:
 Cross-border merger policy
 Privatization policy
Theoretical framework
• Stylized Fact 1: Service markets have high trade and entry
barriers
 → Oligopoly interaction
• Stylized Fact 2: M&As are the dominating entry mode of
FDI in services
 → M&As can increase the risk of abuse of market power
• Stylized Fact 3: MNEs are typically the most efficient firms
in their industries
 → Potential synergies from M&As
Theoretical framework, cont
Theoretical framework capturing these stylized facts:
1. MNEs bid for the domestic firm
2. MNEs can invest in new assets
3. Firms interact in an oligopolistic service market
Cross-border M&A policy
•
We compare:
– A discriminatory policy which allows for greenfield
investments (new ventures) but not cross-border M&As
– A non-discriminatory policy which allows both greenfield
investments and cross-border M&As
Cross-border M&A policy
Result 1: Restrictions on foreign acquisitions can increase
welfare when synergies are low
• A market power driven foreign acquisition can be an
alternative to a more pro-competitive greenfield entry
– Domestic owners break-even from selling
– Higher consumer prices due to a more concentrated market and
lower efficiency
• However, for a foreign acquisition to take place, the MNE
must be sufficiently efficient
Cross-border M&A policy, cont
•
Result 2: Foreign acquisitions can increase the
welfare if synergies are sufficiently large
a) Increased productivity in the merged firm tends to lead to
lower consumer prices
b) Bidding competition among MNEs leads to the selling
domestic firm getting a large share of the surplus
Example preemptive acquisition
• In November 2000, Banco Santander Central
Hispanio (BSCH) won a controlling minority stake
in Banespa, in competition with its Spanish rival
Banco Bilbao Vizcaya Argentaria (BBVA)
• According to Business Week (April 23, 2001): "It
cost an astronomical $3.55 billion, but it put BSCH
back on top"
Acquistions
allowed
Producer
Surplus
PS ND
v mm
P
T
vd
0
0
PS D
Takeover
acquisition
No acquisition
Acquistions
not allowed
T
1
Preemptive acquisition:
P
Synergies, 
Inefficient
acquisition
Acquistions
allowed
Consumer
Surplus
CS ND
C
T
CS D
CS
d
No acquisition
Takeover
acquisition
Acquistions
not allowed
Preemptive acquisition:
0
0
T
1 P
Synergies, 
Domestic Competition Policy
•
EU has documented severe obstacles for greenfield
investments in the service sector.
•
Can cross-border acquisitions mitigate this problem?
•
Result 3: For sufficiently concentrated service
markets: Preemptive domestic acquisitions will take
place and may preempt efficient foreign acquisitions.
Privatization policy
• Problem with lack of efficiency improvements in privatized
firms
• Focus on competition effects
• Set-up:
– Government liberalize by:
• (i) selling of state firm
• (ii) allowing for new investments
– One efficient MNE and one inefficient domestic firm competing to
enter the market
Privatization policy, cont
• Result 4: Risk that the inefficient owner obtains
the state assets without updating the technology
 Selling procedure is used to limit competition:
• The domestic (inefficient) firm buys at a low price
• The MNE (efficient) obtains a strong market position
 → Both firms gain from inefficient ownership
Privatization policy, cont…
• How to avoid inefficient ownership?
• Introduce several MNEs
• Result 5: Increased competition for the market
decrease the risk that owners strategically using
the selling process to limit competition
– Foreign (efficient) firms then risk to not be able to enter the
market if not acquiring state assets
Conclusions
• Allowing cross-border M&As can increase host countries
welfare due to:
– increased productivity
– bidding competition among MNEs over target firms.
• Market power driven cross-border M&As occur, but for
cross-border M&As to take place, MNEs must be sufficiently
efficient
• For sufficiently concentrated markets preemptive
acquisitions can take place and thus competition authorities
should monitor such behaviors
Conclusions, cont
• In privatizations one owner can induce another to
take on the role of the weak owner
• Authorities should not only ensure competition
over the privatized firm, but also competition for
de-novo entry
• Merger and privatization policies, but not
discriminatory policies towards foreigners, can play
an important role in the development of service
markets