Communicational and demographic influences on M&A abandonments: Informal institutional perspective and evidences from US cross-border M&A deals

Abstract

This study analyses the impact of bilateral differences in institutions on M&A abandonments. Cross-border M&As involve firms headquartered in two different countries, and the institutions of both countries impact the negotiations. The study uses an institutional framework focusing upon informal institutions (communicational and demographic) and analyzing their impact on country-level M&A abandonment rates. Counterintuitively, the results reveal a proportional decrease in M&A abandonments for greater communicational distance. Cultural differences and social openness should cause difficulties in communicating during negotiations. The results suggest otherwise, higher cultural and connectedness distances lead to lower abandonment ratio. Acquirers may accept greater autonomy of the target in case of higher communication differences making the negotiations more friendly and acceptable to the target firms. The results remain robust when the analysis is done for inbound M&As. Concerns regarding misuse and theft of innovations contribute to increased M&A inbound abandonments, with countries having weaker knowledge institutions. Demographic institutions affect the strategic decision regarding labor and markets, and larger age demographic distances cause increased abandonments of outbound M&As. Informal institutions play a vital role in M&A outcomes and may have different impacts on pre-completion negotiation and post-completion integration phases. The study draws attention to the role of familiarity between acquirer and target country and the tussle during negotiations. The findings imply that potential issues of conflict may go unnoticed in the presence of large communication distances and may lead to future problems. Communication differences may lead to deal completion of potential bad deals. The study suggests greater involvement of internal negotiators along with advisors during the negotiation period.

JEL Classification: F21, G34, O43