DP6102 Globalization and Profitability of Cross-border Mergers & Acquisitions

Author(s): Pehr-Johan Norbäck, Lars Persson
Publication Date: February 2007
Keyword(s): FDI, greenfield investments, investment liberalization., mergers and acquisitions
JEL(s): F23, G34, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6102

This paper studies how the surplus generated by the globalization process is divided between MNEs and owners of domestic assets. We construct an oligopoly model where the equilibrium acquisition pattern, the acquisition price and firms' greenfield investments are endogenously determined. Acquisition entry is shown to be more likely when the complementarity between domestic and foreign assets is high. However, we show that such acquisitions might have a low profitability, since the bidding competition over the domestic assets is then so fierce that the firms involved would be better off not starting a bidding war. Risks associated with different entry modes are also examined.