Skip to main content
SpringerLink
Log in

Mitigating risk in international mergers and acquisitions: the role of contingent payouts

  • Article
  • Published:
Journal of International Business Studies Aims and scope Submit manuscript

Abstract

Previous internationalization studies have focused on the entry modes employed by multinational firms but have not considered the contractual heterogeneity that underlies each mode. It is important to examine these contractual details, as the firm may be able to obtain some of the benefits typically associated with one entry mode while selecting another. In the case of international mergers and acquisitions (M&As), a key contractual variable is whether the parties agree to a performance-contingent payout structure, which can mitigate the risk of adverse selection. In this paper, we examine the antecedents of contingent payouts in the form of earnouts and stock payments. The results indicate that firms lacking international and domestic acquisition experience turn to contingent payouts when purchasing targets in high-tech and service industries. Firms tend to avoid contingent payouts in host countries with problems with investor protection and legal enforceability.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Akerlof, G.A. (1970) ‘The market for ‘lemons’: qualitative uncertainty and the market mechanism’, Quarterly Journal of Economics 84: 488–500.

    Article  Google Scholar 

  • Amihud, Y., Lev, B. and Travlos, N.G. (1990) ‘Corporate control and the choice of investment financing: the case of corporate acquisitions’, Journal of Finance 45: 603–616.

    Article  Google Scholar 

  • Anand, B.N. and Khanna, T. (2000) ‘Do firms learn to create value? The case of alliances’, Strategic Management Journal 21: 295–316.

    Article  Google Scholar 

  • Anand, J. and Kogut, B. (1997) ‘Technological capabilities of countries, firm rivalry and foreign direct investment’, Journal of International Business Studies 28: 445–465.

    Article  Google Scholar 

  • Balakrishnan, S. and Koza, M.P. (1993) ‘Information asymmetry, adverse selection, and joint ventures’, Journal of Economic Behavior and Organization 20: 99–117.

    Article  Google Scholar 

  • Barkema, H., Shenkar, O., Vermeulen, F. and Bell, J.J. (1997) ‘Working abroad, working with others: how firms learn to operate international joint ventures’, Academy of Management Journal 40: 426–442.

    Article  Google Scholar 

  • Bayless, M. (1994) ‘The influence of predictability on differences in the market reaction to debt and equity issue announcements’, Journal of Financial Research 17: 117–131.

    Article  Google Scholar 

  • Brouthers, K.D. and Brouthers, L.E. (2000) ‘Acquisition or greenfield startup? Institutional, cultural, and transaction cost influences’, Strategic Management Journal 21: 89–98.

    Article  Google Scholar 

  • Brouthers, K.D. and Brouthers, L.E. (2001) ‘Explaining the national culture distance paradox’, Journal of International Business Studies 32: 177–190.

    Article  Google Scholar 

  • Cakici, N., Hessel, C. and Tandon, K. (1996) ‘Foreign acquisitions in the United States: effect on shareholder wealth of foreign acquiring firms’, Journal of Banking and Finance 20: 307–329.

    Article  Google Scholar 

  • Cannella Jr, A.A. and Hambrick, D.C. (1993) ‘Effects of executive departures on the performance of acquired firms’, Strategic Management Journal 14: 137–152.

    Article  Google Scholar 

  • Chang, S. (1998) ‘Takeovers of privately held targets, methods of payment, and bidder returns’, Journal of Finance 53: 773–784.

    Article  Google Scholar 

  • Cho, K.R. and Padmanabhan, P. (1995) ‘Acquisition versus new venture: the choice of foreign establishment mode by Japanese firms’, Journal of International Management 1: 255–285.

    Google Scholar 

  • Coff, R.W. (1999 ‘How buyers cope with uncertainty when acquiring firms in knowledge-intensive industries: caveat emptor’, Organization Science 10: 144–161.

    Article  Google Scholar 

  • Datta, D.K. and Puia, G. (1995) ‘Cross-border acquisitions: an examination of the influence of relatedness and cultural fit on shareholder value creation in US acquiring firms’, Management International Review 35: 327–359.

    Google Scholar 

  • Datta, S. and Iskandar-Datta, M.E. (1995) ‘Corporate partial acquisitions, total firm valuation and the effect of financing method’, Journal of Banking and Finance 19: 97–115.

    Article  Google Scholar 

  • Dewenter, K.L. (1995) ‘Does the market react differently to domestic and foreign takeover announcements? Evidence from the US chemical and retail industries’, Journal of Financial Economics 37: 421–441.

    Article  Google Scholar 

  • Doukas, J. and Travlos, N.G. (1988) ‘The effect of corporate multinationalism on shareholders' wealth: evidence from international acquisitions’, Journal of Finance 43: 1161–1175.

    Article  Google Scholar 

  • Dyer, J.H. and Singh, H. (1998) ‘The relational view: cooperative strategy and sources of interorganizational competitive advantage’, Academy of Management Review 23: 660–679.

    Google Scholar 

  • Eckbo, B.E., Giammarino, R.M. and Heinkel, R.L. (1990) ‘Asymmetric information and the medium of exchange in takeovers: theory and tests’, Review of Financial Studies 3: 651–675.

    Article  Google Scholar 

  • Erramilli, M.K. (1991) ‘The experience factor in foreign market entry behavior of service firms’, Journal of International Business Studies 22: 479–501.

    Article  Google Scholar 

  • Eun, C.S., Kolodny, R. and Scheraga, C. (1996) ‘Cross-border acquisitions and shareholder wealth: test of the synergy and internalization hypothesis’, Journal of Banking and Finance 20: 1559–1582.

    Article  Google Scholar 

  • Fishman, M. (1989) ‘Preemptive bidding and the role of the medium of exchange in acquisitions’, Journal of Finance 44: 41–57.

    Article  Google Scholar 

  • Fladmoe-Lindquist, K. and Jacque, L.L. (1995) ‘Control modes in international service operations: the propensity to franchise’, Management Science 41: 1238–1249.

    Article  Google Scholar 

  • Gatignon, H. and Anderson, E. (1988) ‘The multinational corporation degree of control over subsidiaries: an empirical test of a transaction cost explanation’, Journal of Law, Economics, and Organization 4: 305–336.

    Google Scholar 

  • Gordon, G.G. (1991) ‘Industry determinants of organizational culture’, Academy of Management Review 16: 396–415.

    Google Scholar 

  • Haleblian, J. and Finkelstein, S. (1999) ‘The influence of organization acquisition experience on acquisition performance: a behavioral learning theory perspective’, Administrative Science Quarterly 44: 29–56.

    Article  Google Scholar 

  • Hansen, R.G. (1987) ‘A theory for the choice of exchange medium in mergers and acquisitions’, Journal of Business 60: 75–95.

    Article  Google Scholar 

  • Harris, R.S. and Ravenscraft, D. (1991) ‘The role of acquisitions in foreign direct investment: evidence from the US stock market’, Journal of Finance 46: 825–844.

    Article  Google Scholar 

  • Hennart, J.-F. and Reddy, S. (1997) ‘The choice between mergers/acquisitions and joint ventures: the case of Japanese investors in the United States’, Strategic Management Journal 18: 1–12.

    Article  Google Scholar 

  • Hofstede, G. (1980) Culture's Consequences: International Differences in Work-related Values, Sage: Beverly Hills, CA.

    Google Scholar 

  • Johanson, J. and Vahlne, J.E. (1977) ‘The internationalization process of a firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies 9: 22–32.

    Google Scholar 

  • Keats, B.W. and Hitt, M.A. (1988) ‘A causal model of linkages among environmental dimensions, macro organizational characteristics, and performance’, Academy of Management Journal 31: 570–598.

    Article  Google Scholar 

  • Kogut, B. (1991) ‘Joint ventures and the option to acquire’, Management Science 37: 19–33.

    Article  Google Scholar 

  • Kogut, B. and Singh, H. (1988) ‘The effect of national culture on the choice of entry mode’, Journal of International Business Studies 19: 411–432.

    Article  Google Scholar 

  • Kogut, B. and Zander, U. (1992) ‘Knowledge of the firm, combinative capabilities, and the replication of technology’, Organization Science 3: 383–397.

    Article  Google Scholar 

  • Kohers, N. and Ang, J. (2000) ‘Earnouts in mergers: agreeing to disagree and agreeing to stay’, Journal of Business 73: 445–476.

    Article  Google Scholar 

  • Krishnan, H.A., Miller, A. and Judge, W.Q. (1997) ‘Diversification and top management team complementarity: is performance improved by merging similar or dissimilar teams?’, Strategic Management Journal 18: 361–374.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1997) ‘Legal determinants of external finance’, Journal of Finance 52: 1131–1150.

    Article  Google Scholar 

  • Lee, T.-J. and Caves, R.E. (1998) ‘Uncertain outcomes of foreign investment: determinants of the dispersion of profits after large acquisitions’, Journal of International Business Studies 29: 563–579.

    Article  Google Scholar 

  • Markides, C.C. and Ittner, C.D. (1994) ‘Shareholder benefits from corporate international diversification: evidence from US international acquisitions’, Journal of International Business Studies 25: 343–366.

    Article  Google Scholar 

  • Martin, K.J. (1996) ‘The method of payment in corporate acquisitions, investment opportunities, and management ownership’, Journal of Finance 51: 1227–1246.

    Article  Google Scholar 

  • Mayer, W. and Walker, M. (1996) ‘An empirical analysis of the choice of payment method in corporate acquisitions during 1980 to 1990’, Quarterly Journal of Business and Economics 35: 48–65.

    Google Scholar 

  • Morck, R. and Yeung, B. (1992) ‘Internalization: an event study test’, Journal of International Economics 33: 41–56.

    Article  Google Scholar 

  • Morosini, P., Shane, S. and Singh, H. (1998) ‘National cultural distance and cross-border acquisition performance’, Journal of International Business Studies 29: 137–158.

    Article  Google Scholar 

  • Ouchi, W.G. (1979) ‘A conceptual framework for the design of organizational control mechanisms’, Management Science 25: 833–848.

    Article  Google Scholar 

  • Pennings, J.M., Barkema, H. and Douma, S. (1994) ‘Organization learning and diversification’, Academy of Management Journal 37: 608–640.

    Article  Google Scholar 

  • Reuer, J.J. and Koza, M.P. (2000) ‘Asymmetric information and joint venture performance: theory and evidence for domestic and international joint ventures’, Strategic Management Journal 21: 81–88.

    Article  Google Scholar 

  • Seth, A., Song, K.P. and Pettit, R. (2000) ‘Synergy, managerialism or hubris? An empirical examination of motives for foreign acquisitions of US firms’, Journal of International Business Studies 31: 387–405.

    Article  Google Scholar 

  • Seth, A., Song, K.P. and Pettit, R. (2002) ‘Value creation and destruction in cross-border acquisitions: an empirical analysis of foreign acquisitions of US firms’, Strategic Management Journal 23: 921–940.

    Article  Google Scholar 

  • Shaked, I., Michel, A. and McClain, D. (1991) ‘The foreign acquirer bonanza: myth or reality?’, Journal of Business Finance and Accounting 18: 431–447.

    Article  Google Scholar 

  • Shenkar, O. (2001) ‘Cultural distance revisited: towards a more rigorous conceptualization and measurement of cultural differences’, Journal of International Business Studies 32: 519–536.

    Article  Google Scholar 

  • Sherman, S.J. and Janatka, D.A. (1992) ‘Engineering earn-outs to get deals done and prevent discord’, Mergers and Acquisitions 26–31.

  • Simonin, B.L. (1997) ‘The importance of collaborative know-how: an empirical test of the learning organization’, Academy of Management Journal 40: 1150–1174.

    Article  Google Scholar 

  • Spence, A.M. (1974) Market Signaling: Informational Transfer in Hiring and Related Screening Processes, Harvard University Press: Cambridge, MA.

    Google Scholar 

  • Stulz, R.M. (1988) ‘Managerial control of voting rights: financing policies and the market for corporate control’, Journal of Financial Economics 20: 25–54.

    Article  Google Scholar 

  • Travlos, N. (1987) ‘Corporate takeover bids, methods of payment, and bidding firm's stock returns’, Journal of Finance 42: 943–964.

    Article  Google Scholar 

  • UNCTAD (2000) World Investment Report, Geneva, Switzerland.

  • Vermeulen, F. and Barkema, H. (2001) ‘Learning through acquisitions’, Academy of Management Journal 44: 457–476.

    Article  Google Scholar 

  • Walkling, R.A. and Long, M.S. (1984) ‘Agency theory, managerial welfare, and takeover bid resistance’, Rand Journal of Economics 15: 54–68.

    Article  Google Scholar 

  • Walsh, J.P. (1988) ‘Top management turnover following mergers and acquisitions’, Strategic Management Journal 9: 173–183.

    Article  Google Scholar 

  • Williamson, O.E. (1991) ‘Comparative economic organization: the analysis of discrete structural alternatives’, Administrative Science Quarterly 36: 269–296.

    Article  Google Scholar 

  • Zaheer, S. (1995) ‘Overcoming the liability of foreignness’, Academy of Management Journal 38: 341–363.

    Article  Google Scholar 

  • Zahra, S.A., Ireland, R.D. and Hitt, M.A. (2000) International expansion by new venture firms: International diversity, mode of market entry, technological learning, and performance. Academy of Management Journal 43: 925–950.

    Article  Google Scholar 

  • Zollo, M. (1998) ‘Knowledge codification, process routinization, and the creation of organizational capabilities’, Unpublished dissertation, University of Pennsylvania.

Download references

Acknowledgements

In developing this research, we received helpful comments from Jean Helwege, Mitchell Koza, Tony Tong, and two anonymous reviewers. Research assistance from Dina Tirtey is also gratefully acknowledged, as is research funding from Ohio State University's Center for International Business Education and Research (CIBER).

Author information

Authors and Affiliations

  1. Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA

    Jeffrey J Reuer

  2. Fisher College of Business, The Ohio State University, Columbus, OH, USA

    Oded Shenkar & Roberto Ragozzino

Authors
  1. Jeffrey J Reuer
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Oded Shenkar
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Roberto Ragozzino
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jeffrey J Reuer.

Additional information

Accepted by Arie Lewin, Editor in Chief, 22 August 2003.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Reuer, J., Shenkar, O. & Ragozzino, R. Mitigating risk in international mergers and acquisitions: the role of contingent payouts. J Int Bus Stud 35, 19–32 (2004). https://doi.org/10.1057/palgrave.jibs.8400053

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/palgrave.jibs.8400053

Keywords

Search

Navigation