February 22, 2010
Cross-Border M&A and National Pride
This morning I opened my email to see news on two multi-billion dollar deals by Indian conglomerates. Bloomberg reported that Reliance Industries Ltd., one of India’s largest companies and owner of the world’s largest oil-refining complex, raised its offer for bankrupt LyondellBasell Industries AF to about $14.5 billion. In addition, India’s Bharti Airtel has been able to line up almost $9 billion in loans for its $10.5 billion bid for Zain’s African assets. These types of large-scale deals generally receive a lot of positive popular press attention in India, some of it with nationalistic sentiments touting the rise of India Inc. Whenever I read these stories they make me wonder about a recent paper by Ole-Kristian Hope, Wayne Thomas and Dushyantkumar Vyas, entitled “The Cost of Pride: Why do Firms from Developing Countries Bid Higher?” which examines whether companies from developing countries bid higher (relative to companies from developed countries) in their quest for international expansion and national glory.
Abstract: Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries (versus those from developed countries) bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications (including alternative measures of national pride) and control variables, are both statistically and economically significant and highlight a source of pride beyond personal hubris which potentially influences corporate decision makers.
In my opinion, the next stage of this research is to see whether deals with national exuberance create positive wealth effects for the shareholders of the bidding companies.
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