Accounting Not to Blame for Foreign Merger Woes.
The research was conducted by two University of Arkansas professors -- Tommy Carnes, assistant professor of accounting, and Tomas Jandik, assistant professor of finance -- along with Ervin Black of Brigham Young University.
The researchers initially set out to see if differences in generally accepted foreign accounting principles were to blame for the widespread failure of cross-border mergers.
The conclusion? The opposite was true. U.S. companies that bought foreign companies with similar accounting systems to our own had more problems than acquisitions that involved more exotic accounting systems.
"In the majority of instances, expansion of U.S. firms through acquisition of foreign targets is a value-destroying activity," the study concluded.
The researchers said the problem may be due to the higher cost of capital in foreign countries.
The researchers analyzed 361 cases in which U.S. companies acquired companies in 17 foreign countries between 1985 and 1995. Most of the research concerned the United Kingdom (24 percent), Canada (20 percent), France (15 percent) and Germany (11 percent).
Carnes said the average decrease in stock values of the 361 acquisitions studied was 2 percent one year after the merger, 13 percent after three years and 23 percent after five years.