Cross-border mergers and market concentration in a vertically related industry: theory and evidence

ABSTRACT

We present a tractable model of oligopoly to identify the linkages between local competition and cross-border mergers in a vertically related industry. We show that the incentives for cross-border mergers rise with vertical integration in an industry when the premerger concentration in that industry is sufficiently high relative to the concentration in the same industry in a foreign country. We also show that the incentives for a merger between a foreign firm and a vertically integrated home firm will be higher than that for a merger between a foreign firm and a disintegrated home firm, when the premerger concentration at home is low relative to the premerger concentration in the foreign country. We then analyze a firm-level panel of 90,614 M&A observations, between 1990 and 2012, from 86 countries. Logistic regressions confirm that market concentration is an important determinant of cross-border M&A. Our results support the conjectures of our theoretical model and are consistent with recent empirical findings and theoretical predictions.

JEL Classification Code:

• F10
• F12
• L13

KEYWORDS:

• Market concentration
• cross-border merger
• vertical integration
• oligopoly
• panel data

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Among notable contributions studies are Melicher, Ledolter, and D'Antonio (1983), Rose (2000), Jovanovic and Rousseau (2008), Alfaro and Charlton (2009), Chari, Ouimet and Tesar (2010), Bernile, Lyandres and Zhdanov (2012), Erel, Liao, and Weisbach (2012), and Weinberg and Hosken (2013).

2. Some landmark theoretical contributions include the works of Long and Vousden (1995), Head and Ries (1997), Falvey (1998), Reuer, Shenkar, and Ragozzino (2004), Neary (2007), and Beladi et al. (2013).

3. For example, Taiwan's Foxconn, a manufacturing firm that is a major Apple Inc. supplier, has offered 625 billion yen ($5.3 billion) to takeover Japanese electronics maker Sharp Corp recently. Sharp, once a leader in high-end displays for smartphones and TVs, has struggled with persistent pricing pressure from Asian rivals. Loss-making Sharp announced that it had agreed to be bought by Foxconn in 25 Feburary, 2016. Foxconn has made a US$9.9 billion takeover of Chi Mei Optoelectronics Corp in early 2010 to combine Foxconn's Innolux Display Corp with Taiwan's second-largest flat-panel maker. Foxconn sees ownership of Sharp as a way to better compete with Asian rivals such as Samsung Electronics Co. This example shows that the incentives for cross-border mergers rise with vertical integration within a country.

4. To further examine whether this increases is mainly driven by RelativeHHI, we perform a multinomial logit analysis. The dependent variable consists of four outcomes, i.e. interaction between cross-border mergers and home vertical, interaction between cross-border mergers and home horizontal, interaction between home-market mergers and home vertical, and interaction between home-market mergers and home horizontal. We treated the interaction between home-market mergers and home vertical as the base category in the regressions for the other three categories. Results show that the coefficients of RelativeHHI are only positively significant among interaction between cross-border mergers and home vertical, which are consistent with results in Table 4.