WHY DO FOREIGN ACQUIRERS PAY MORE?

WHY DO FOREIGN ACQUIRERS PAY MORE? Evidence from European Cross-Border Acquisition Premiums Marc Rustige Frankfurt School of Finance & Management, Sonnemannstraße 9-11, 60314 Frankfurt am Main, Germany E-mail: m.rustige@fs.de, Phone: +49 69 154008 389 Michael H. Grote Frankfurt School of Finance & Management, Sonnemannstraße 9-11, 60314 Frankfurt am Main, Germany E-mail: m.grote@fs.de, Phone: +49 069 154008 326 Abstract: Premiums offered by foreign acquirers in Europe are on average 10.4 percentage points higher than those of domestic bidders. This cross-border effect remains robust in a multivariate setting. Investigating a sample 1,931 European deals from 1985 to 2009, we additionally find that only public acquirers offer higher premiums in cross-border acquisitions while premiums offered by private acquirers do not differ significantly between domestic and cross-border transactions. Further more, public acquirers with a high degree of managerial discretion offer the highest premiums in cross-border transactions. We conclude that private benefits for the management are a driver of higher premiums in international acquisitions. JEL-Classification: G34, F21 Key Words: corporate control, cross-border premium, corporate governance

1 1. Introduction The market for corporate control is becoming more and more integrated across countries with cross-border transactions accounting for more than 42 percent of all mergers and acquisitions worldwide (Rossi and Volpin (2004)). In such an international context, target shareholders should be indifferent towards being acquired by domestic or foreign firms. However, we find considerable differences in premiums paid by domestic and foreign firms in acquisitions. Indeed, foreigners pay the most is a well established saying among mergers and acquisitions professionals. This phenomenon has not received much attention in the academic literature; there exists only limited empirical evidence on the differences of premiums in domestic versus cross-border deals. Likewise, theoretical reasoning on why such differences may be justified is scarce. Practitioners usually name higher synergies such as market access the main reason for higher premiums paid by foreign bidders. However, previous academic studies document negative wealth effects associated with internationalization (Moeller and Schlingemann (2005); Denis et al. (2002)) a finding that challenges the notion that market access constitutes a positive value for the shareholders. In this paper we provide evidence that premiums offered by foreign bidders are significantly higher and that synergies can only partially explain the difference. Instead, we find that especially firms with a high managerial discretion tend to pay more in cross-border acquisitions. Europe with its multiple countries and borders serves well as a research setting. We use the Thomson One Banker database to compile a sample of European target acquisitions announced between 1985 and 2009 with a transaction value of more than 10 million Euros. We require information about the bid price to be available on a per share basis and the consideration to be either all cash, all share or a combination of both. This results in a final sample of 1,931 deals. The bid premiums measured relative to the target s share price between -30 and -10 days prior to the announcement date are on average 10.41 percentage points higher (median 7.95 percentage points) if the acquirer is foreign a statistically significant and economically highly relevant difference. While the mean premium in domestic deals equals 24.42 percent (median 21.29 percent) the average cross-border bid premium runs up to 34.83 percent (median 29.24 percent). A straightforward explanation would be that companies acquired in domestic transactions differ systematically from firms acquired in international transactions. However, although the cross-border premium reduces to an average of 8.97 percentage points in our multiple regression model, it remains highly significant when we control for deal and target

2 characteristics as well as industry, country and time fixed effects. Likewise, the results are neither driven by financial investors nor by differences in target share run-ups before the announcement date and the results remain robust if we restrict the sample to cash offers. We investigate two hypotheses to explain the cross-border premium. On the one hand, an expansion beyond the current geographic scope may generate synergies that are idiosyncratic to foreign bidders. Access to foreign markets can, among others, lead to higher sales growth by leveraging the target s sales network to distribute the acquirer s products and vice versa. Likewise, synergies such as tax advantages or natural hedges against currency fluctuations constitute a value for foreign acquirers. Because target shareholders are aware of their firm s value to the foreign bidder they demand a higher premium and due to the free-rider effect (Grossman and Hart (1980)) the acquirer has to offer higher bid premiums accordingly. On the other hand, Seth et al. (2002) argue that international diversification may be associated with private benefits for the acquiring firm s management: Building a large international empire is accompanied with higher salary, more prestige and, due to diversification of the firm s operations into different markets, higher job security for the management (Jensen and Murphy (1990); Amihud and Lev (1981)). Hence, in cross-border acquisitions the management has an incentive to offer bid premiums beyond reasonable levels justified by synergies in order to consummate the deal. While the synergistic motives for paying higher premiums in cross-border transactions should be equally distributed across acquirers, the pursuance of private benefits by management should be more pronounced for public acquirers due to the higher degree of managerial discretion (see, e.g., Jensen (1989)). We discriminate between both motives and test for the existence of the cross-border effect in the subsamples of private and public acquirers. This is in the spirit of Bargeron et al. (2008) who find that private acquirers pay a significantly smaller premium in US domestic transactions as compared to their public peers. Private acquirers are typically characterized by a highly powered incentive system with a strong family and/or managerial ownership and monitoring such that agency problems can be expected to be less prevailing as compared to public peers. Indeed, for our sample of European acquisitions, we find that private acquirers do not pay any significant cross-border premium. Public acquirers in contrast pay significantly more. This represents a strong support for our hypothesis of agency problems driving high cross-border premiums. We test the robustness of the results with respect to systematic differences in targets acquired by private and public companies. Specifically, it is conceivable that private acquirers tend to buy target firms with a likewise concentrated ownership structure, i.e., firms with a similar corporate governance structure and culture. Holmström and Nalebuff (1992) show that the existence of large shareholders reduces the

3 required offer price since the relevance of the free-rider problem becomes less relevant with the existence of a pivotal shareholder. We use the acquisition process as a proxy for the relevance of the free-rider problem and differentiate between tender and non-tender offers. In tender offers private as well as public acquirers are facing the free-rider problem and have to incorporate the expected synergies in the bid premium in order to consummate the deal. Hence, in tender offers the premium represents a proxy for the synergies. In nontender offers (e.g. privately negotiated deals) on the contrary, we expect a better bargaining position for the acquirer such that less of the synergy gains have to be paid to target shareholders. Indeed, we find that private acquirers do pay a 5.3 percentage points higher bid premium in cross-border deals if acquiring through a tender offer. In non-tender deals on the contrary, private acquirers pay equally high premiums in cross-border and domestic acquisitions. Strikingly however, tender offers by public acquirers are 13.3 percentage points higher when buying abroad rather than domestic, and still 8.58 percentage points higher in non-tender deals. We conclude that market access is paid for by private as well as public acquirers in tender offers. Still, the fact that public acquirers pay significantly more in all setting lends strong support to our agency hypothesis. To further challenge the hypothesis that the high premiums in cross-border acquisitions reflect higher synergies, we investigate the abnormal returns of public acquirers upon the announcement of cross-border and domestic acquisitions. Our event study findings are in line with previous studies (Eckbo and Thorburn (2000); Moeller and Schlingemann (2005); Martynova and Renneboog (2006)). Transactions involving foreign targets yield approximately one percentage point lower short term wealth effects. These results are in line with the notion that the higher premiums in cross-border acquisitions are not entirely justified by higher synergies. The significant relationship between proxies for managerial discretion and the premium paid in cross-border transactions further confirms the notion that agency problems are a driver for high prices offered in foreign target acquisitions: The difference between domestic and cross-border premiums is highest for acquirer s with a low percentage of closely held shares. The more concentrated the acquirer s shareholder structure, i.e., the better the monitoring, the lower the difference. Likewise, the higher the ratio of total liabilities to total assets, a frequently used measure of management discretion, the lower the premium offered. Also, cash rich acquirers tend to pay higher premiums in cross-border acquisitions. We conclude that corporate governance issues, i.e. private benefits for the bidders management, are partly responsible for the higher premiums paid in cross-border transactions by public acquirers.

4 The remainder of the paper is organized as follows. In section 2, we describe our sample of acquisitions and the methodology. In section 3, we compare the bid premiums offered in domestic and cross-border deals in univariate and multivariate settings. In Section 4 we develop our hypotheses, discriminate between synergistic and agency related motives for higher premiums and run an event study on public acquirers acquisition announcements. In section 5, we analyze the marginal effect of cross-border premiums for the sample of public companies along a set of corporate governance indicators. Section 6 concludes. 2. Sample composition and methodology We use the Deal Analysis module of Thomson One Banker to compile a set of all completed and uncompleted acquisitions between 1985 and 2009 in which the target is publicly listed and located in Europe. Most contemporary empirical studies in financial economics focus on the US-market. Rossi and Volpin (2004) however find that the proportion of cross-border deals in the US accounts for only 9.07 percent of all deals. Hence, the European market with its many different countries and higher proportion of cross country transactions provides a more suitable research setting to investigate the dynamics of cross-border transactions. We only consider deals in which the acquirer holds less than 50 percent prior to the announcement and seeks to own more than 50 percent after completion. Additionally, we require information about the deal value excluding assumed liabilities to be available in Thomson One Banker. This yields a total of 6,510 deals. We exclude all deals with missing Datastream codes (1,295), all announcements flagged as Acquisition (which denotes spin-offs in the database), Exchange Offer, Recapitalization or Buyback (88) and all transactions with a deal value below 10 million Euros (622). With few exceptions, the previous academic literature examining premiums paid in acquisitions has routinely either used the information on bid premiums provided by Thomson (e.g. Rossi and Volpin (2004)) or calculated target announcement returns as a proxy for the price offered by the acquirer (e.g., Bargeron et al. (2008)). We decide not to use the information provided by Thomson for two reasons. First, the bid premium in the database is calculated relative to the target s share price on the trading day four weeks prior to the announcement. This may be problematic as fluctuations in the daily share price may skew our analysis. Second, we find that Thomson assigns an erroneous time series for nearly 5.5 percent of the observations in our sample.

5 We as well do not use target announcement returns, since, as Betton et al. (2008) put it, target abnormal stock returns present noisy estimates of offer premiums because they incorporate the probability of bid failure and competition at the initial offer date, and they must be estimated over a long event window to capture the final premium. Thus, it is difficult to properly sort out how bidders determine offer premiums unless one employs offer price data directly. Hence, for the remaining 4,505 deals, we screen the information on the consideration structure provided by Thomson One Banker in the CONSID text-field and individually extract the initial per share price offered by the acquirer. We include only deals that involve all-cash, all-share or a combination of both and exclude transactions that involve a choice between cash and share payments. Furthermore, we exclude deals in which the consideration is not available on a per share basis and deals in which the acquiring entity is flagged as government, joint venture or individual. For the remaining 3,185 deals, we calculate the bid premiums following the methodology applied by Jindra and Walkling (2004) as the percent difference between the first per share offer announced and the target s average share price in the period of -30 to -10 days prior to the announcement date. In case of share offers, the acquirers shares are valued at the closing stock price on the day prior to the initial announcement. Likewise, any currency translations are based on the exchange rate one day before the announcement. All price time series are taken from Thomson Datastream. Bid contests, i.e., multiple bidders bidding for one target, are likely to have a distorting effect as the target s share price will jump upon the announcement of the first bid. Any subsequent offer by a second bidder will typically trigger smaller price increases in the target s stock. Hence, the bid premium for this second bid may not be calculated in relation to the already appraised share price. To avoid this bias, we group bid announcements for a specific target within a time span of 60 days into one contest and relate all offers related to one contest to the announcement date of the first bid. This results in an adjustment of the announcement date for 149 transactions. We check the announcement dates and time series identifiers provided by Thomson for all transactions with implausible bid premiums and adjust the data of 162 observations. To avoid any bias due to thinly traded stocks in which case the share price may not adequately reflect the firm s value, we exclude all transactions in which the target does not show any share price movement within the time span of -30 to -10 days prior to announcement. To eliminate any distorting effects of outliers, we truncate the sample at the top and bottom percentile. The target firms are matched to Worldscope data which provides information on the year end market capitalization, total assets, return on assets and total liabilities. We again truncate these accounting data to eliminate outliers.

6 Deals are categorized as domestic if the target s nation matches the relevant nation of the acquirer. The relevant nation of the acquirer is defined as the acquirer s nation if the acquirer is flagged as a public or private entity. In the 668 cases, in which the acquiring entity is a subsidiary we refer to the acquirers immediate parents status and nation. This is to avoid misclassifying those acquisitions in which foreign acquirers execute the transaction through a local subsidiary, which would incorrectly be classified as domestic transactions although in fact being cross-border. In 175 cases the immediate parent itself is a subsidiary as well and the deal cannot be correctly classified. These selection criteria yield our final sample of 1,931 deals of which 1,110 are domestic transactions and 821 are cross-border deals. Table 1 shows the distribution of the deals by announcement year and target country. Table 1: Sample distribution by announcement year and target country The table lists the distribution of observations by year and by target country in our sample of 1,931 acquisitions. Deals are classified as domestic if the acquirer s or acquirer s immediate parent s nation respectively equals the target s nation and as cross-border otherwise. Information on the nation and the announcement year stem from Thomson One Banker. Panel A: Distribution by year Panel B: Dicstribution by target country Year Domestic Cross border Total Target Country Domestic Cross border Total 1985 1 1 2 United Kingdom 543 345 888 1986 3 0 3 France 122 70 192 1987 9 3 12 Italy 68 17 85 1988 7 6 13 Norway 61 58 119 1989 5 5 10 Sweden 54 57 111 1990 8 4 12 Germany 51 58 109 1991 8 7 15 Spain 48 18 66 1992 8 11 19 Netherlands 40 47 87 1993 5 9 14 Denmark 25 22 47 1994 14 9 23 Portugal 16 3 19 1995 31 12 43 Greece 15 10 25 1996 29 13 42 Switzerland 15 24 39 1997 47 36 83 Ireland-Rep 14 17 31 1998 70 51 121 Austria 6 11 17 1999 130 92 222 Finland 11 16 27 2000 125 77 202 Belgium 10 25 35 2001 56 35 91 Czech Republic 4 4 8 2002 48 35 83 Poland 3 8 11 2003 75 48 123 Hungary 2 3 5 2004 52 42 94 Isle of Man 1 2 3 2005 91 51 142 Liechtenstein 1 0 1 2006 103 63 166 Guernsey 0 2 2 2007 83 94 177 Jersey 0 3 3 2008 55 75 130 Monaco 0 1 1 2009 47 42 89 Total 1,110 821 1,931 Total 1,110 821 1,931 The distribution of the annual deal volume reflects the increase in M&A activity during the millennium change as well as the up-rise during the period prior to the recent financial crisis. The active market for corporate control in the United Kingdom is reflected in the sample distribution as well. Around 45 percent of the deals involve UK targets. Strong

7 dominance of the UK in European acquisition samples has been documented in studies using similar data sets before (Rossi and Volpin (2004); Martynova and Renneboog (2006)). 3. Bid premiums in domestic and cross-border acquisitions The dynamics of bid premiums with respect to the differences between cross-border and domestic acquisitions have received little attention in the academic literature. To our knowledge only Danbolt (2004) explicitly addresses the topic for a non-us market. In his sample of UK target acquisitions he documents that any difference between the premiums disappears once controlled for bid characteristics. Still, the common view among M&A practitioners as well as academics prevails that foreign bidders pay more than domestic firms. In a first step we compare the premiums offered in domestic and cross-border transactions. 3.1. Univariate results Table 2 displays the comparison of the average and median bid premiums in domestic and cross-border deals. Our univariate analysis confirms the existence of a statistically and economically significant cross-border premium for our sample. On average, bid premiums are 10.44 percentage points higher in cross-border acquisitions than in domestic transactions. The difference is highly significant with an error probability of below one percent. The comparison of the median shows the same pattern. Although the medians are lower than the means for both domestic and cross-border acquisitions, the difference of the medians is highly significant as well.

8 Table 2: Bid premiums in domestic and cross-border deals The table shows the average and medium bid premiums offered for European targets between 1985 and 2009. The bid premiums are calculated as the first per share price offered relative to the target s average share price between -30 to -10 days prior to the announcement. Deals are classified as domestic if the acquirer s or acquirer s immediate parent s nation respectively equals the target s nation and as cross-border otherwise. The information on the nation is taken from Thomson One Banker. Tests for differences are based on an ordinary t-test (mean) and the Wilcoxon rank-sum test (median). Domestic acquisition Crossborder acquisition Difference P-Value of Difference Mean 24.40% 34.84% 10.44% *** 0.000 Median 21.18% 29.22% 8.05% *** 0.000 N 1,110 821 *** significant at 99%, ** significant at 95%, * significant at 90% Still, it is well conceivable that domestic and cross-border deals differ along other dimensions than only the location of the target relative to the acquirer. For each deal we collect information on target and deal characteristics and test for a significant difference between the group of cross-border acquisitions and the group of domestic deals. The results are displayed in table 3. In Panel A of table 3 we compare the mean and the median of target and deal characteristics. The target s pre announcement stock return is calculated as the buy and hold return over the timespan from -150 days to -30 days prior to the announcement. We find the returns in cross-border deals not to be significantly different from those in domestic acquisition, neither with respect to the mean nor to the median. Likewise, we compare the target s profitability as measured by its return on assets in the fiscal year preceding the acquisition announcement. Again we do not observe any significant difference. We as well approximate the target s growth opportunities by Tobin s Q, which calculates as the ratio of total assets less total common equity plus the year end market capitalization divided by total assets. Targets acquired in cross-border deals have significantly higher growth opportunities. Additionally we compare deal characteristics and find deals in-cross border acquisitions to be significantly larger as measured by the deal value excluding assumed liabilities. The percent sought by the acquirer does not differ however we find evidence, that toeholds as measured by the percent held before the acquisition are significantly higher in domestic deals.

9 Table 3: Summary statistics on domestic and cross border deals The table reports the summary statistics for our sample of 1,931 acquisitions announced between 1985 and 2009. Deals are classified as domestic if the acquirer s or acquirer s immediate parent s nation respectively equals the target s nation and as cross border otherwise. Stock return is the buy and hold return within the time span from -150 days to -30 days prior to the deal announcement. Accounting data of the target companies is extracted from Thomson Worldscope. Tobin s Q calculates as total assets less total common equity plus the year end market capitalization divided by total assets. Information on the deal characteristics and the indicators stems from Thomson One Banker. Percent sought and Percent held at announcement represent the percentage the acquirer is seeking to acquire or holding before the announcement respectively. Challenged Deal is a dummy variable that equals 1 if more than one bidder is reported by Thomson One Banker. Diversifying Deal is a dummy that equals 1 if the first two digits of the target s and acquirer s primary SIC code do not match. Amended offer is a dummy variable with the value 1 if the initial offer is increased. Tender Offer is a dummy with value 1 if the acquirer launches a tender offer for the target and Cash consideration is a dummy that equals 1 if the consideration consists exclusively of cash. `Hostile acquisitions equals 1 if the transaction s attitude is describes as hostile in Thomson One Banker. Completed Deal is a dummy that equals 1 if the deal is flagged as completed. Test-statistics are based on the ordinary t-test (means), the Wilcoxon rank-sum test (median) and the Fisher exact test (proportions). Panel A: Deal and target characteristics Mean Median DO CB Diff. P-Value DO CB Diff P-Value Target characteristics Stock return [-150;-30] 8.01% 6.47% -1.53% 0.335 6.69% 4.55% -2.14% 0.128 Return on Assets 4.37% 3.71% -0.66% 0.152 5.16% 5.63% 0.47% 0.183 Tobin's Q 1.42 1.58 0.17 *** 0.000 1.17 1.31 0.14 *** 0.000 Deal characteristics Deal Value [ m] 533.93 831.90 297.96 *** 0.000 123.95 189.81 65.86 *** 0.000 Percent sought [%] 87.12 87.64 0.51 0.576 100.00 100.00 0.00 0.486 Percent held before [%] 7.59 6.38-1.21 * 0.053 0.00 0.00 0.00 0.118 Panel B: Indicators Proportion DO CB Diff P-Value Challended Deal 0.14 0.17 0.03 ** 0.049 Diversifying 0.63 0.55-0.09 *** 0.000 Amended Offer 0.15 0.15 0.01 0.699 Tender Offer 0.68 0.71 0.02 0.250 Cash consideration 0.76 0.91 0.15 *** 0.000 Hostile acquisition 0.07 0.08 0.01 0.341 Completed Deal 0.72 0.76 0.04 * 0.077 Furthermore, panel B shows that when buying abroad, deals are significantly more often challenged and less often of diversifying nature. We cannot confirm any differences between both groups with respect to the frequency of bid amendments, the usage of tender offers or the occurrence of hostile bids. Cross-border deals however are more often settled in cash and the proportion of completed deals is marginally higher.

10 3.2. Regression results The systematic differences between cross-border and domestic acquisitions documented in table 3 may explain the difference in bid premiums. To check for the influence of these differences we estimate a multiple regression model and control for the deal characteristics shown above. We additionally control for whether the acquirer and the target are both located in Euro countries to capture any influences of the common currency. All models include dummies for the announcement year, target country and target industry (1 digit SIC code). The results are shown in model (1) of table 4. The cross-border dummy remains highly significant. Even after controlling for target and deal characteristics, acquirers pay on average almost nine percentage points higher premiums when buying abroad. The control variables indicate that the bid premiums decrease significantly with the targets pre-announcement stock return, the return on assets and the target s growth opportunities. Consistent with the theory that toeholds reduce offer premiums, we find the bid premiums to be lower the more the acquirer owns at the announcement. Additionally, significantly higher prices are offered if the deal is challenged, if the acquirer launches a tender offer, if acquirer and target share a common currency and for completed deals. Deals that are subsequently amended, diversifying deals and hostile offers experience lower bid premiums. We check the robustness of these results and test three additional hypotheses that may explain the cross-border effect. Previous research has documented a significance price runup in the target s stock prior to the announcement of an acquisition. Schwert (1996) documents that targets show a stock price movement as early as 42 days prior to the announcement. If domestic transactions are anticipated by the market more frequently than cross-border deals, the target share price would start to rise earlier and the bid premium would be calculated relative to an already appraised share price. We re-calculate the bid premiums based on the average target share price in the period from -60 to -40 days and re-run the multivariate model. We as well recalculate our control variable for the stock return over the time span from 180 days to -60 days to avoid an overlap with the calculation period of the bid premiums. The results are shown in model (2) of table 4. While some of the control coefficients change slightly, the significant cross-border effect even increases to a value of above ten percentage points.

11 Table 4: Cross border effect in a multiple regression model The table reports the result of the cross sectional model regressing target and deal characteristics on bid premiums. Cross Border is a dummy variable that equals 0 if the acquirer s or acquirer s immediate parent s nation equals the target s nation and 1 otherwise. Stock return is the buy and hold return within the time span from -150 days to -30 days prior to the deal announcement except for Model (2) where the stock return is calculated from -180 days to -30 days prior to avoid overlaps with the premium calculation period. Target RoA is the target s return on assets as reported by Thomson Worldscope. LN Target Q represents the target s Tobin s Q and is calculated as total assets less total common equity plus year end market capitalization divided by total assets. LN Deal Value is the logarithm of the deal value excluding assumed liabilities as reported by Thomson One Banker. Percent sought and Percent held at announcement represent the percentage the acquirer is seeking to acquire or holding before the announcement, respectively. Challenged Deal is a dummy variable that equals 1 if more than one bidder is reported by Thomson One Banker. Diversifying Deal is a dummy that equals 1 if the first two digits of the target s and acquirer s primary SIC code do not match. Subsequently amended is a dummy variable with the value 1 if the initial offer is increased. Tender Offer is a dummy with value 1 if the acquirer launches a tender offer for the target and Hostile acquisition is a dummy that equals 1 if the deal is flagged as hostile by Thomson. Completed Deal is a dummy that equals 1 if the deal is flagged as completed. Euro deal is a dummy that equals 1 if the acquirer and the target are both located in countries that have introduced the Euro. Cash payment is a dummy that equals 1 if the consideration exclusively consists of cash. All models include dummies for the announcement year, the target s industry classified by the primary SIC code s first digit and the target s country, t-values are reported in brackets based on Huber/White/sandwich estimator for standard errors. (1) (2) (3) (4) Premium calculation period [-30;-10] [-60;-40] [-30;-10] [-30;-10] Cross Border 8.748 *** 10.495 *** 7.878 *** 8.613 *** [6.98] [5.25] [5.93] [6.24] Stock return [-150;-30] -14.204 *** -15.274 *** -17.524 *** -13.103 *** [-7.15] [-5.34] [-7.41] [-6.33] Target RoA -0.235 *** -0.296 *** -0.295 *** -0.249 *** [-2.91] [-2.66] [-3.34] [-2.87] LN Target Q -3.948 ** -6.244 *** -3.873 ** -4.005 ** [-2.3] [-2.74] [-2.14] [-2.17] LN Deal Value 0.353 0.606 0.24 0.543 [0.9] [1.04] [0.56] [1.29] Percent sought 0.073-0.015 0.053 0.062 [1.41] [-0.17] [0.94] [1.09] Percent Held at announcement -0.167 *** -0.237 * -0.192 *** -0.215 *** [-2.66] [-1.78] [-2.86] [-3.17] Challenged Deal 7.741 *** 7.23 *** 8.828 *** 8.228 *** [4.36] [3.27] [4.52] [4.29] Diversifying Deal -3.117 *** -1.757-4.367 *** -1.774 [-2.63] [-1.06] [-3.33] [-1.41] Subsequently Amended -4.249 *** 0.445-4.773 *** -5.559 *** [-2.58] [0.11] [-2.7] [-2.92] Tender Offer 4.147 *** 5.762 *** 4.517 *** 4.036 ** [2.88] [2.96] [2.84] [2.5] Hostile acquisition -4.681 ** -8.037 *** -5.401 ** -4.651 ** [-2.24] [-2.88] [-2.4] [-2.06] Completed Deal 3.518 ** 6.202 *** 3.948 ** 4.14 *** [2.39] [3.38] [2.47] [2.58] Euro deal 4.908 ** 4.533 4.547 ** 5.545 ** [2.38] [1.51] [2.03] [2.4] Cash payment 2.175-0.104 3.261 [0.88] [-0.03] [1.24] N 1,931 1,929 1,596 1,665 R² 22.7% 16.7% 25.4% 23.0% R² adjusted 20.1% 13.9% 22.5% 20.0% F 0.23 *** 0.17 *** 0.25 *** 0.23 *** *** significant at 99%, ** significant at 95%, * significant at 90%

12 It might be possible that the cross-border effect is driven by systematic differences in the payment structure. To test the impact on our results, we follow the argument of Kohers and Kohers (2001) and exclude all deals that are partially or fully financed by equity. As can be seen in model (3) of table 4, the coefficient of the cross-border variable decreases to 7.9 but remains significant. The results do not change qualitatively. Last, financial investors could be causing the cross-border effect. If we assume the synergistic gains incurring to the acquirer to be lowest for financial investors (Bargeron et al. (2008)) and if we further assume most of the acquisitions made by financial investors to be domestic deals, then this systematic bias could be driving the observed cross-border effect. We test this hypothesis by excluding all acquirers flagged by Thomson One Banker as financial sponsor. 1 This reduces the testable sample size to 1,665 observations. The multivariate results are shown in model (4) of table 4. Again, the cross-border effect remains unaffected. Our robustness checks confirm that in cross-border acquisitions acquirers pay a statistically and economically higher price. This remains robust if the dependent variable is measured over different base periods, the result is irrespective of the payment method and robust to the exclusion of financial buyers. 4. Drivers of the cross-border premium: synergy vs. private benefits Higher premiums in cross-border acquisitions can be explained by two hypotheses that are not mutually exclusive: On the one hand, higher synergies may result in higher prices offered by foreign acquirers. On the other hand, agency problems may lead to management overpaying in acquisitions in order to extract private benefits from an international expansion. Synergistic gains that are idiosyncratic to foreign acquirers may have several sources. First, operational synergies can stem from market access. The option to operate locally represents a comparative benefit to the foreign bidder, either for reasons of efficiency if production costs differ across countries or for reasons of revenue generation, if a local presence increases the marketability of the products. Additional operational synergies can be extracted by going abroad if the acquirer s home market is consolidated and offers limited growth opportunities. In this case cross-border expansions help to fuel growth and extend economies of scale. Second, financial synergies such as natural hedges against exchange rate fluctuations or tax benefits add towards the synergistic gains. Following the 1 Thomson one banker defines a financial sponsor as a company that engages in private equity or venture capital non-strategic acquisitions using capital raised by investors.

13 free-rider argument of Grossman and Hart (1980), the existence of these synergies will increase the offer price even up to the point where the entire synergy value has to be paid as a premium to the target shareholders in order to consummate the deal. Agency related reasons may also play a major role in explaining the cross-border effect. International expansions may entail private benefits for the acquirer s management from two sources (Seth et al. (2002)). On the one hand, buying abroad increases the firm s degree of global diversification. The agency related costs associated with an international diversification are similar to the drawbacks of an industrial diversification and discussed extensively in literature (Lang and Stulz (1994); Berger and Ofek (1995)). Amihud and Lev (1981) argue that the lower volatility resulting from a diversification is in the first place beneficial for the management whose personal portfolio is undiversified with a disproportionally high stake in the company they work for. Hence, any diversification that reduces the firm s risk of distress in fact reduces the management s personal risk at the same time. This is not necessarily in the best interest of the shareholders as it gives management an incentive to pursue even those investments that reduce shareholder value. On the other hand the management profits from the increase in firm complexity that is associated with an international expansion. Managers of complex and large corporations have more power and prestige (Jensen (1986); Stulz (1990)), earn more (Jensen and Murphy (1990); Bebchuk and Grinstein (2007)) and are at the same time less likely to be replaced by the board (Shleifer and Vishny (1989)) since their knowledge and skills have become indispensable for the company. Separating managerial discretion: public vs. private acquirers Both, synergistic and agency motives for offering higher premiums when buying abroad, are plausible explanations that are not mutually exclusive. In order to test whether agency motives play a role we split our sample in firms that have arguably the lowest level of agency problems, i.e., private firms, and such with weaker ownership control, i.e., public firms. The fact that public companies typically have a larger, less concentrated shareholder structure as compared to private acquirers fuels the agency problem for two reasons. First, the individual shareholders stakes in the company are too small to exercise control on the management, and second, the incentives to monitor the management are too little. This separation of ownership and control leads to a higher degree of managerial discretion over the company s funds which increases the management s opportunity to pursue projects that generate private benefits. All else equal, public and private acquirers should be able to extract the same synergies from an acquisition. Hence, if synergistic gains are the dominating motive for paying higher premiums, we expect private and public acquirers to pay equally higher

14 premiums in cross-border deals. In contrast, if deals are motivated by private benefits of the management we expect the cross-border effect to be more pronounced for public acquirers than for private buyers. Table 5 shows the univariate differences between the two groups. Table 5: Bid premiums by acquirer type The table shows the average bid premium offered by private and public acquirers differentiated along domestic and cross-border acquisitions. The bid premiums are measured relative to the target s average share price -30 to -10 days prior to the deal announcement. Deals are classified as domestic, if the acquirer s or acquirer s immediate parent s nation equals the target s nation and as cross-border otherwise. Information on the nation and the acquirer type stems from Thomson One Banker. The test for differences is based on an ordinary t-test. Acquirer type All Private Public Diff P-Value Domestic Mean 24.40% 22.59% 25.79% 3.20% 0.025 ** N 1,110 481 629 Cross Border Mean 34.84% 25.38% 38.32% 12.93% 0.000 *** N 821 221 600 Diff. 10.44% 2.80% 12.53% P-Value 0.000 *** 0.132 0.000 *** *** significant at 99%, ** significant at 95%, significant at 90% Private acquirers offer on average an insignificant 2.8 percentage points more in crossborder acquisitions than in domestic transactions (see second row in table 5). For public acquirers (third row) however, the difference between domestic and international transactions is economically and statistically significant: Compared to an average premium of 25.8 percent in domestic deals, public acquirers pay a premium of 38.3 percent in international transactions. This strong difference lends first support to the agency-related hypothesis of our cross-border effect. Similar to Bargeron et al. (2008) for the US we find that in Europe private firms pay less than public firms when acquiring other firms domestically and much more so in cross-border transactions. We again use a multiple regression analysis to test whether this difference is driven by firm or deal characteristics. The results are shown in table 6.

15 Table 6: Private vs. public acquirers The table shows the result regressing deal characteristics on bid premiums. Cross-border is a dummy variable that equals 0 if the acquirer s or acquirer s immediate parent s nation respectively equals the target s nation and 1 otherwise. Private Acquirer is a dummy equaling 1 if the acquirer is flagged as a private company in Thomson One Banker. Private Acquirer _x_ Cross-border is an interaction variable of Cross-border and Private Acquirer. Stock return is the buy and hold return within the time span from -150 days to -30 days prior to the deal announcement. Target RoA is the target s return on assets as reported by Thomson Worldscope. LN Target Q represents the target s Tobin s Q and is calculated as total assets less total common equity plus year end market capitalization divided by total assets. LN Deal Value is the logarithm of the deal value excluding assumed liabilities as reported by Thomson One Banker. Percent sought represents the percent of target the acquirer is initially seeking to own after completion and Percent held at announcement represents the proportion that the acquirer is already holding at the first announcement. Challenged Deal is a dummy variable that equals 1 if more than one bidder is reported by Thomson One Banker. Diversifying Deal is a dummy that equals 1 if the first two digits of the target s and acquirer s primary SIC code do not match. Subsequently amended is a dummy variable with the value 1 if the initial offer is increased. Tender Offer is a dummy with value 1 if the acquirer launches a tender offer for the target. Hostile equals 1 if the attitude is flagged as hostile by Thomson and Completed Deal is a dummy that equals 1 if the deal is flagged as completed. Euro deal is 1 if acquirer and target have the same currency. Cash payment is a dummy that equals 1 if the consideration exclusively consists of cash. All models include dummies for the announcement year, the target s industry (primary SIC code s first digit) and the target s country. T-values are reported in brackets based on Huber/White/sandwich estimator for standard errors. Cross Border 9.344 *** 2.346 8.99 *** [5.82] [1.19] [5.48] Private acquirer -5.982 *** [-3.73] Private Acquirer _x_ Cross Border -6.086 ** [-2.56] Stock return [-150;-30] -14.113 *** -15.413 *** -13.476 *** [-7.25] [-4.73] [-5.79] Target RoA -0.224 *** -0.292 ** -0.198 * [-2.77] [-2.26] [-1.91] LN Target Q -4.779 *** -1.522-6.847 *** [-2.81] [-0.56] [-3.24] LN Deal Value 0.125 0.94-0.225 [0.32] [1.42] [-0.46] Percent sought 0.082 0.088 0.1 [1.63] [1.09] [1.5] Percent Held at announcement -0.151 ** -0.09-0.193 ** [-2.45] [-0.89] [-2.38] Challenged Deal 7.486 *** 6.945 ** 7.386 *** [4.27] [2.36] [3.27] Diversifying Deal -1.704-3.791-0.516 [-1.41] [-1.62] [-0.35] Subsequently Amended -3.933 ** -4.054-3.859 * [-2.41] [-1.6] [-1.73] Tender Offer 3.592 ** 3.776 * 3.58 * [2.52] [1.72] [1.86] Hostile acquisition -5.506 *** -5.743-6.882 *** [-2.63] [-1.6] [-2.64] Completed Deal 2.937 ** 3.183 2.822 [2.02] [1.44] [1.4] Euro deal 4.426 ** 2.653 5.222 * [2.16] [0.77] [1.93] Cash payment 7.318 *** 7.867 *** [4.03] [4.12] N 1,931 702 1,229 R² 24.6% 19.1% 27.0% R² adjusted 22.0% 12.9% 23.3% F 8.422 *** 3.128 *** 6.793 *** *** significant at 99%, *** significant at 95%, * significant at 90% All Private Public (1) (2) (3)

16 Model (1) in table six tests the full sample. It includes a dummy variable Privat acquirer that is one if the acquirer is private and zero otherwise. We also include an interaction term of the private acquirer and the cross-border dummy (Private Aquirer_x_Cross-border) capturing the effects that the acquirer s status may have on the bid premium in cross-border transactions. If the acquirer is private, the marginal cross-border effect is equal to the sum of coefficients of the cross-border dummy and the interaction term. For public acquirers the marginal effect is measured only by the cross-border dummy. The results in Model (1) show that the cross-border effect for public companies is economically and statistically significant. Public acquirers pay about 9.3 percentage points more in cross-border transactions after controlling for the usual deal characteristics. The coefficient of the interaction term is -5.98 and significantly negative, i.e., the cross-border effect is considerably lower for public acquirers. We also check for the influence of the cross-border interaction variable in split samples. Model (2) and Model (3) separately replicate the multivariate model for private and public firms. The findings support the initial results: The cross-border coefficient of 8.99 is statistically and economically significant only for the subsample of public acquirers in model (3). Public firms pay 8.99 percentage points more in international transactions than in domestic ones, even after controlling for target and deal characteristics. The cross-border coefficient in the sample of private acquirers amounts to 2.346 only and is not significantly different from zero (t-value of 1.19). Private acquirers do not pay significantly more in cross-border acquisitions than in domestic ones. As a further robustness check, we test whether the effect is driven by the different sizes of public and private acquirers. Private firms are usually smaller in size than public firms. If smaller firms tend to pay lower premiums than our private dummy may capture this size effect and not solely reflect the acquirer s organizational status. Due to limited data available for private companies we cannot directly observe acquirer s size. We use deal value instead, based on the assumption that the deal value is highly correlated with acquirer size. We additionally interact the deal value with the cross border dummy to capture the marginal effect that cross-border may have depending on the deal size and include both in a multiple regression model (not reported). The documented cross-border effect remains unaffected by the inclusion of both variables. In fact the coefficient of the interacted deal value term is significantly negative indicating that especially small firms tend to pay more in cross- border acquisitions. This is contradicting to the hypothesis that our private dummy may serve as a proxy for the acquirer size. Hence,

17 we can conclude that the documented cross-border effect for private acquirers is not caused by systematic differences in acquirer size. The results of the multiple regression analysis confirm the findings from the univariate examination: Our results do not convincingly support the hypothesis that private acquirers pay higher premiums in cross-border transactions than in domestic acquisitions. At the same time, we find that public acquirers pay a significant premium. We interpret this as support of the hypothesis that the cross-border premium is caused, at least in part, by systematic differences in the degree of managerial discretion between public and private companies. Target shareholder structure and cross-border premiums It is possible, however, that variations in bid premiums between private and public acquirers are driven by systematic differences in the targets acquired with respect to the target s shareholder structure. Private firms, which by definition are closely held and often family or owner controlled, may be prone to acquire firms with similar characteristics, i.e., firms that show a cultural proximity and are as well closely held. If that is the case then the offer price negotiations take place between a small number of shareholders. The assumption of non-pivotal, atomistic shareholders upon which the free-rider problem (Grossman and Hart (1980)) is founded, becomes invalid. If target shareholders cannot free-ride, lower bid premiums are resulting. In order to compare the bid premiums offered by private and public firms, we need to explicitly consider the degree to which the free-rider problem applies. We use the acquisition process as a proxy for the relevance of the freerider problem. If the acquisition is conducted through a tender offer, we can expect a nonpivotal shareholder structure. According to the free-rider hypothesis, target shareholders will not tender their shares until the entire expected synergies are included in the bid premium. In non-tender offers on the contrary, we can expect pivotal negotiation partners resulting in less synergies being paid out to the target shareholders (see Holmström and Nalebuff (1992)). Our sample includes 1,337 tender offers and 594 non-tender offers. For both groups we compare the average bid premiums for private and public acquirers in cross-border and domestic deals. If bidders offer higher premiums in cross-border acquisitions because of synergies and if the difference in the cross-border premiums of private and public bidders are due to a systematic difference in the relevance of the freerider problem, then we expect (a) private and public acquirers to pay equally more in crossborder tender offers and (b) public acquirers to offer cross-border premiums equal to private acquirers in non-tender offers. Table 7 displays the univariate results.

18 Table 7: Cross-border effect by method of acquisition The table shows the average bid premium offered by private and public acquirers differentiated along domestic (DO) and cross-border (CB) acquisitions as well as tender and non tender transactions. The bid premiums are measured relative to the target s average share price -30 to -10 days prior to the deal announcement. Deals are classified as domestic, if the acquirer s or acquirer s immediate parent s nation equals the target s nation and as cross-border otherwise. The test for differences is based on an ordinary t-test. Private acquirer Public acquirer DO CB Diff. P-Value DO CB Diff. P-Value Tender Mean 24.15% 29.49% 5.34% ** 0.020 28.15% 41.45% 13.30% *** 0.000 N 327 136 430 444 Non Tender Mean 19.27% 18.82% -0.45% 0.884 20.68% 29.40% 8.72% *** 0.002 N 154 85 199 156 Diff. 4.88% ** 10.67% *** 7.47% *** 12.05% *** P-Value 0.024 0.001 0.000 0.000 *** significant at 99%, ** significant at 95%, significant at 90% Indeed, private acquirers pay on average a significant 5.34 percentage points more in cross-border transactions if the deal is performed through a tender offer. Given that the bid premium may serve as a suitable proxy for synergies in tender offers, we interpret this as support of the argument that at least some synergistic gains exist in cross-border transactions. In line with our expectations, no significant cross-border effect can be observed in non-tender offers by private bidders in which case the target shareholders are pivotal. For public acquirers we document an even higher cross-border premium of 13.30 percentage points in tender offers. Strikingly, public acquirers even offer an average crossborder premium of 8.72 percentage points in non-tender offers where we expect at least some target shareholders to be pivotal and thus less free-riding behaviour. These findings hold also in a multivariate setting (not reported). The analysis shows that private acquirers do pay a cross-border premium in some cases, namely in transactions that involve a tender offer. This lends support to the synergy hypothesis: When non-pivotal shareholders have to be convinced to tender their shares, private acquirers pay a higher premium. Public firms, in contrast, pay significantly more for foreign firms no matter if the acquisition is done via tender offer or privately negotiated which in turn supports the agency hypothesis that management uses international acquisitions also as a vehicle to reap private benefits. Announcement returns of public acquirers An ideal check whether different cross-border premiums of private and public acquirers are justified by higher synergies in international transactions would be to analyse the abnormal returns triggered by acquisition announcements for both groups. Unfortunately,

19 no stock market reactions can be observed for private firms; also there is only very little information available about other firm characteristics such as governance, balance sheet information or income statements. Still, we can at least make use of the information available for public acquirers, a subgroup of our sample, and see whether the findings hold as well. We run an event study on the announcement of transactions for the subsample of public firms excluding the listed financial investors. If higher bid premiums paid in crossborder transactions are not exclusively motivated by synergies through market access, we should expect the capital market to anticipate these motives and the announcement returns of domestic and cross-border acquisitions to differ significantly. Prior empirical studies have investigated the short term stock returns of international expansions and indeed document a significant negative wealth impact of cross-border acquisitions. Moeller and Schlingemann (2005) for the US market find that transactions involving foreign targets experience significantly lower announcement returns of approximately one percentage point as compared to acquisitions of domestic targets. Likewise, Martynova and Renneboog (2006) document the effect for the European market and find lower announcement returns for cross-border acquisitions. We collect the public acquirers stock prices and calculate the abnormal returns around the acquisition announcement as the difference between the actual logarithmic return of the acquirer s stock R i,t and the an expected or normal return E(R i ). The expected return is estimated based on a market model approach over a 250 days estimation period starting 300 days prior to the announcement. We use the Datastream World Index as the relevant market index. The quotes are adjusted for dividend payments and stock splits. Some of the public acquirers are subject to infrequent trading, which may lead to biased market model parameters. Hence, we run the model estimation using trade-to-trade returns. Maynes and Rumsey (1993) for the Canadian market as well as Bartholdy et al. (2007) for the Danish market show that the trade-to-trade approach is most suited to cope with thinly traded stocks. In order to ensure an unbiased estimation of the trade-to-trade beta, a minimum of at least 100 observations of trade-to-trade returns during the estimation period is required. To remove heteroscedasticity, the trade-to-trade stock and market returns in the estimation are subsequently divided by the square root of the number of days n over which the trade-to-trade return is calculated to obtain unbiased and efficient estimates for the and parameters. We calculate cumulative abnormal returns in the common three day event window [-1;1] around the acquisition announcement. To eliminate any distorting influence of outliers we do not consider observations in which the three day abnormal returns are below the 1 st or above the 99 th percentile. We test for a significant difference in

20 announcement returns between cross-border and domestic deals in a multiple regression model in table (8). We control for the same deal and target characteristics as before. Some of these have previously been found to influence the announcement returns. Goergen and Renneboog (2004) document the negative announcement returns in hostile acquisitions and Travlos (1987) finds cash bids to yield higher stock returns. In Model (3) and Model (4) we additionally control for the acquirer s size as Moeller et al. (2004) show that announcements by large acquirers trigger lower returns. Fixed effects include dummies for the announcement year, the target industry as well as the target and acquirer country. Model (1) of table 8 shows that the cross-border indicator variable is negative but only marginally significant if we control solely for time, industry and country dummies. The coefficient and the significance increase substantially when we include further deal controls. Cross-border deals yield approximately 1.1 percentage point lower announcement returns (Model (2)) than domestic transactions. If we further control for the acquirer s size, our sample reduces to 955 observations (Model (3)). The cross-border coefficient decreases slightly in absolute size but still remains significantly negative. The inclusion of target characteristics ((4)) does not change the cross-border coefficient. These findings confirm previous empirical studies on announcement returns for cross-border transactions. The negative market reactions to non-domestic acquisition announcements are consistent with the hypothesis that higher premiums in cross-border transactions paid by public firms are not fully justified by a higher degree of synergies.

21 Table 8: Cross sectional analysis of announcement returns The table shows the result of the cross sectional model regressing deal and firm characteristics on the cumulative announcement returns in the event window [-1;1]. The abnormal returns are calculated using a market model approach and trade to trade returns with an estimation period of up to 250 days starting 300 days prior to the announcement. Cross Border is a dummy variable that equals 0, if the acquirer s or acquirer s immediate parent s nation respectively equals the target s nation. LN Acquirer Market Cap is the logarithm of the acquirer s market capitalization at the end of the fiscal year preceding the acquisition. Target RoA is the target s return on asset and LN Target Q represents Tobin s Q of the target. Stock return is the buy and hold return within the time span from -150 days to -30 days prior to the deal announcement. LN Deal Value is the logarithm of the deal value excluding assumed liabilities as reported by Thomson One Banker. Percent sought represents the percent of target the acquirer is initially seeking to own after completion and Percent held at announcement represents the proportion that the acquirer is already holding at the first announcement. Challenged Deal is a dummy variable that equals 1 if more than one bidder is reported by Thomson One Banker. Diversifying Deal is a dummy that equals 1 if the first two digits of the target s and acquirer s primary SIC code do not match. Subsequently amended is a dummy variable with the value 1 if the initial offer is increased. Tender Offer is a dummy with value 1 if the acquirer launches a tender offer for the target. Hostile equals 1 if the attitude is flagged as hostile by Thomson and Completed Deal is a dummy that equals 1 if the deal is flagged as completed. Euro deal is 1 if acquirer and target have the same currency. Cash payment is a dummy that equals 1 if the consideration exclusively consists of cash. All models include dummies for the announcement year, the target s industry (primary SIC code s first digit) and the target s and acquirer s country. T-values are reported in brackets based on Huber/White/sandwich estimator for standard errors. (1) (2) (3) Cross Border -0.007 * -0.011 *** -0.009 ** -0.009 ** [-1.73] [-2.75] [-2.25] [-2.26] LN Acquirer Market Cap -0.002 * -0.002 * [-1.96] [-1.95] Target RoA 0.000 [0.28] LN Target Q 0.002 [0.48] Stock return [-150;-30] -0.001 [-0.27] LN Deal Value -0.001 0.001 0.001 [-0.62] [0.65] [0.54] Percent sought 0.000 0.000 0.000 [-1.38] [-1.51] [-1.49] Percent Held at announcement 0.000 0.000 0.000 [-0.75] [-0.95] [-0.93] Challenged Deal 0.001 0.001 0.001 [0.27] [0.26] [0.26] Diversifying Deal -0.001-0.001-0.001 [-0.26] [-0.31] [-0.33] Subsequently Amended 0.007 0.005 0.005 [1.33] [0.85] [0.89] Tender Offer 0.003 0.002 0.002 [0.69] [0.5] [0.47] Hostile acquisition -0.011 ** -0.012 ** -0.012 ** [-2.08] [-2.16] [-2.15] Completed Deal -0.003-0.003-0.003 [-0.9] [-0.77] [-0.78] Euro deal -0.007-0.005-0.005 [-1.11] [-0.71] [-0.76] Cash payment 0.014 *** 0.017 *** 0.018 *** [3.18] [3.62] [3.6] (4) N 1,028 1,028 955 955 R² 7.7% 10.1% 9.5% 9.5% R² adjusted 1.8% 3.3% 2.2% 1.9% F 1.80 *** 1.99 *** 1.62 *** 1.57 *** *** significant at 99%, *** significant at 95%, * significant at 90%

22 5. Public firms heterogeneity and the cross-border premium We finally make use of the heterogeneity within the subsample of public acquirers and test the relationship between the degree of managerial discretion and the observed crossborder effect. If private acquirers offer lower premiums in cross-border acquisitions because of better aligned incentive systems and close monitoring, we expect equally lower premiums to be offered by those public acquires that have a strong governance system and a low degree of managerial discretion. To our knowledge there is no governance rating available for European companies covering our sample period. Instead, we use indicators that have been applied in the literature before as proxy variables linked to governance and managerial discretion. We collect data on the percentage of acquirer s closely held shares, leverage and cashholdings from Worldscope. 2 The existence of large shareholders as a proxy for the degree of management discretion has been discussed by Shleifer and Vishny (1997), among others. The more concentrated the shareholder basis, the higher the monitoring incentives for the large shareholders. Likewise, the disciplining effect of debt has been argued by Jensen (1986). Liabilities reduce the amount of cash under the discretion of management and reduce the overinvestment problem. Lastly, Harford (1999) finds that the management of cash rich companies is more likely to undertake acquisitions and that those acquisitions are associated with a wealth decrease for the shareholders. We estimate multivariate models including interaction terms for each of our corporate governance proxies and again exclude financial buyers, as their accounting information may be misleading. Table nine displays the results. 2 The item acquirer closely held shares in Worldscope represents shares held by insiders and includes shares held by officers, directors and their immediate families, shares held in trust, shares held by any other corporation including pension plans and shares held by individuals who hold 5% or more of the outstanding shares.

23 Table 9: Multivariate model including corporate governance proxies The table shows the result of the cross sectional model regressing target and deal characteristics on bid premiums as measured to the target s average share price -30 to -10 days prior to the deal announcement. Crossborder is a dummy variable that equals 0 if the acquirer s or acquirer s immediate parent s nation respectively equals the target s nation and 1 otherwise. % Acquirer closely held shares is the percentage of closely held shares at year end as reported by Worldscope and % Acquirer closely held shares _x_ Cross-border is an interaction variable of the latter with the Cross-border dummy. % Liabilities is the percentage of total liabilities to total assets for the fiscal year preceding the acquisition as reported by Worldscope and % Liabilities _x_ Cross-border is an interaction variable with the Cross-border dummy. LN Cash to TA is the logarithm of cash to total assets and LN Cash to TA _x_ Cross-border is the interaction variable with the Cross-border dummy. Stock return is the buy and hold return within the time span from -150 days to -30 days prior to the deal announcement. LN Deal Value is the logarithm of the deal value excluding assumed liabilities as reported by Thomson One Banker. Percent sought represents the percent of target the acquirer is initially seeking to own after completion and Percent held at announcement represents the proportion that the acquirer is already holding at the first announcement. Challenged Deal is a dummy variable that equals 1 if more than one bidder is reported by Thomson One Banker. Diversifying Deal is a dummy that equals 1 if the first two digits of the target s and acquirer s primary SIC code do not match. Subsequently amended is a dummy variable with the value 1 if the initial offer is increased. Tender Offer is a dummy with value 1 if the acquirer launches a tender offer for the target. Hostile equals 1 if the attitude is flagged as hostile by Thomson and Completed Deal is a dummy that equals 1 if the deal is flagged as completed. Euro deal is 1 if acquirer and target have the same currency. Cash payment is a dummy that equals 1 if the consideration exclusively consists of cash. All models include dummies for the announcement year, the target s industry (primary SIC code s first digit) and the target s country. T-values are reported in brackets based on Huber/White/sandwich estimator for standard errors. All control variables used in model (3) of table 5 have been included but are omitted for reasons of brevity. All models include dummies for the announcement year and the target s industry classified by the primary SIC code s first digit. T-values are reported in brackets based on Huber/White/sandwich estimator for standard errors. (1) (2) (3) Cross Border 13.74 *** 23.573 *** 5.18 ** [5.05] [4.15] [2.1] % Acquirer closely held shares 0.06 [1.31] Acquirer closely held shares _x_ Cross -0.126 * [-1.83] % Liabilities 3.658 [0.73] % Liabilities _x_ Cross Border -23.456 *** [-2.77] LN Cash to TA -7.653 [-0.78] LN Cash to TA _x_ Cross Border 36.406 ** [2.17] Stock return [-150;-30] -15.66 *** -14.464 *** -15.11 *** [-5.6] [-5.54] [-5.53] Target RoA -0.195 * -0.141-0.206 * [-1.79] [-1.31] [-1.87] LN Target Q -6.39 *** -7.878 *** -7.465 *** [-2.85] [-3.42] [-3.09] LN Deal Value -0.302 0.184 0.018 [-0.54] [0.35] [0.03] Percent sought 0.162 ** 0.081 0.128 [2.05] [1.11] [1.61] Percent Held at announcement -0.111-0.202 ** -0.157 [-1.14] [-2.29] [-1.59] Challenged Deal 6.538 ** 7.533 *** 7.832 *** [2.54] [3.1] [2.98] Diversifying Deal -0.446-0.4 0.157 [-0.28] [-0.26] [0.1] Subsequently Amended -4.531 * -4.974 ** -5.396 ** [-1.88] [-2.2] [-2.2] T d Off 1046 3817 * 3051

24 Tender Offer 1,046 3,817 * 3,051 [0,51] [1,79] [1,35] Hostile acquisition -8,03 *** -6,779 ** -7,048 ** [-2,67] [-2,45] [-2,44] Completed Deal 4,067 * 2,967 1,313 [1,81] [1,36] [0,56] Euro deal 6,513 ** 6,307 ** 8,082 *** [2,09] [2,21] [2,64] Cash payment 7,731 *** 7,349 *** 7,378 *** [3,58] [3,61] [3,4] N 947 1.061 956 R² 30,2% 28,0% 28,9% R² adjusted 25,6% 23,7% 24,3% F 6,05 *** 6,20 *** 6,00 *** *** significant at 99%, ** significant at 95%, significant at 90% The results of model (1) show that the difference in bid premiums is negatively related to the percentage of the acquirer s closely held shares. Acquirer s with an atomistic shareholder structure pay a top-up of more than 13 percentage points in cross border acquisitions. This difference reduces by 1.26 percentage points for every ten percent closely held shares. Likewise, model (2) confirms a strong and significant influence of the acquirer s leverage on the bid premiums. Companies that are debt free and to a lesser extend subject to a disciplining effect of debt pay the higher bid premiums in cross-border deals. Again this difference reduces substantially. A ten percentage points increase in the ratio of debt to total assets reduces the cross-border effect by 2.3% Last, the results of model (3) show that the cash holding is positively related to the cross-border effect. Cash restrained companies pay on average only 5.18% more in crossborder effect. The difference however increases significantly if the acquirer is cash-rich. However, focussing only on the significance of the individual model parameters when interpreting interaction variable is misleading as Brambor et al. (2006) show. The standard error of the marginal effect of the cross-border variable, which is of interest here, is itself conditional upon the value of the interacted variable. We apply the methodology proposed by Brambor et al. (2006) and calculate the conditional standard errors for the different levels of the interacted variables % acquirer closely held shares, % liabilities and LN Cash to TA. As suggested by Brambor et al. (2006) we illustrate the results of table nine graphically in Figure (1) including the confidence interval of the marginal effect of cross border.

25 Figure 1: Marginal effects of cross-border on the bid premium The figures show the marginal effect of cross-border on the bid premium depending on the (a) acquirer s closely held shares, (b) % liabilities (c) LN Cash to total assets. The marginal effect is based on the estimations of the multivariate models in table 7. The confidence interval is based on the conditional standard errors using the Huber/White/sandwich estimator for standard errors. Plotted below is the histogram. (a) Marginal effect of cross-border depending on acquirer s closely held shares Marginal Effect of cross border in % -10-5 0 5 10 15 20 25 30 35 40 0 50 100 150 200 Frequency 0 20 40 60 80 100 Acquirer closely held shares (%) Marginal Effect 95% Confidence Interval (b) Marginal effect of cross-border depending on ratio of total liabilities to total assets Marginal Effect of cross border in % -10-5 0 5 10 15 20 25 30 35 40 0 50 100 Frequency 0.2.4.6.8 1 Total liabilities to total assets (%) Marginal Effect 95% Confidence Interval (c) Marginal effect of cross-border depending on the acquirer s level of cash holdings Marginal Effect of cross border in % -10-5 0 5 10 15 20 25 30 35 40 0 50 100 150 200 Frequency 0.1.2.3.4.5.6 LN Cash to total assets Marginal Effect 95% Confidence Interval Figure (1a) plots the marginal effect of the cross-border dummy conditional upon the acquirer s closely held shares. The higher the acquirer closely held shares, i.e., the better

26 the monitoring, the lower the premium paid in cross-border acquisitions. The difference in premiums offered in cross-border and domestic acquisitions is highest for public acquirers with a disperse shareholder structure and is decreasing with the percentage of closely held shares. Starting from about 60 percent closely held shares no significant cross-border effect can be confirmed. Similarly, Figure (1b) displays the negative relationship between the acquirer s ratio of total liabilities to total assets and the cross-border effect. The more liabilities, i.e., the lower the managerial discretion, the lower the difference in premiums offered in domestic and cross-border deals respectively. Again, at a level of approximately 80 percent liabilities to total assets, the cross-border effect looses significance. Last, Figure (1c) shows that the marginal effect of the cross-border dummy increases the higher the percentage of cash to total assets, i.e., the higher the funds at the discretion of the management. The documented relationships between the marginal effect of cross-border and the proxies for managerial discretion lend further support to the hypothesis that the observed higher bid premiums in non-domestic acquisitions are at least to some degree caused by agency conflicts. The subset of public acquirers that show similar characteristics than private firms, i.e., those that are closely held or those that can be assumed to act more prudent due to the need for external financing, are indeed subject to a lower cross-border effect. 6. Conclusion We find that the average takeover premium European cross-border acquisitions is 10.4 percentage points higher than domestic deals. This cross-border effect is economically and statistically significant and remains robust in multivariate settings with controls for firm and deal characteristics. This effect is not caused by differences in pre-announcement price run-ups and it is robust to the exclusion of share deals as well as financial buyers. We investigate whether this cross-border effect is due to higher operational or financial synergies that are idiosyncratic to foreign acquires and whether agency conflicts play a role. In support of the latter, we find that private acquirers, which we assume to be less exposed to agency conflicts, do not pay any cross-border premium at all. We check for the robustness of the results and test tender offers and non-tender offers separately to capture the relevance of the free-rider problem which may increase the bid premium. While in some cases also private acquirers pay a small average cross-border premium of 5.3 percent for foreign firms in line with the hypotheses that there are some synergies for foreign acquirers public bidders pay a significantly higher premium in cross-border acquisitions than private acquirers in all circumstances. We further analyse the abnormal returns for the

27 subsample of public acquirers and find evidence that cross-border deals are neither valueneutral nor value-enhancing for the acquirer s shareholders. The opposite is true: Crossborder acquisitions are yielding a significantly negative abnormal return of approximately one percent as compared to domestic deals. This is a strong opposition to the argument that only higher synergies in cross-border acquisitions are justifying higher premiums. We investigate the information available for the subsample of public firms with respect to proxies for managerial discretion such as the percentage of closely held acquirer share. Indeed, we find that the degree of managerial discretion influence the premium in crossborder deals significantly. Better governed firms pay lower premiums in cross-border transactions.

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