Financial Strategy, Second Edition

CASE STUDY 4

Why Most Cross-Border Deals End in Tears

Simon London

Hardly a week goes by without news of a company abandoning plans for foreign expansion and retreating to its home market. The latest example of this sorry breed is Scottish Power, the UK utility, which is selling for $ 9.4bn (£5.1bn) the US business it acquired for $ 10bn in 1999. A $ 1.7bn write-off will result.

The tale is so familiar, it begs the question of why companies make overseas acquisitions at all. Yet they do – and in increasing numbers. Cross-border merger and acquisition activity increased fivefold in the 1990s and, following a brief lull, it is making a strong comeback.

Cross-border deals amounted to $ 75bn in the first quarter, a threefold increase from last year, according to Dealogic, the research firm. Eyecatchers include Pernod Ricard's proposed $ 13bn acquisition of drinks rival Allied Domecq and IBM's $ 1.75bn sale of its personal computer business to Lenovo, China's biggest personal computer maker.

Academic findings suggest three legitimate reasons for buying foreign companies. One: such deals can be a quicker, easier way to enter an overseas market than starting from scratch. The acquiring company buys not only an ongoing business but also a brand familiar to customers in the target country. If trade barriers are in place, an acquisition may be the only way to gain access to a new market.

Two: international diversification can stabilise cash flows and make the acquiring company appear less ...