Cross-border mergers and acquisitions as a market entry strategy and initial equitiy ownership dilemma

written by Associate Professor Dr. Ahmad Arslan, Prof. Dr. Shlomo Y. Tarba 27. May 2019
Acquisition StrategiesFinance Strategies

Brief Commentary:

Cross-border mergers and acquisitions (CB M&As) are one of the two options for firms when they internationalize to foreign markets using foreign direct investment (FDI) mode (e.g. Arslan and Dikova, 2015). The other alternative to CB M&As for market entry is referred as greenfield investment in literature, where everything including manufacturing facilities need to be built from scratch (e.g. Arslan and Dikova, 2015). Extant international business (IB) and strategy literature has addressed use of CB M&As for market entry using a range of theoretical lenses and empirical methodologies (e.g. Ahammad et al., 2017). Moreover, researchers have tried to analyze dynamics of equity ownership in M&As for market entry, by focusing on both macro (country and industry level variables) as well as micro (firm and individual managers level variables) angles (e.g. Boateng et al., 2017). It should be noted that despite significant work on this area, prior research on this specific topic has revealed varying and, in some cases, conflicting results. Therefore, for firm managers engaging in CB M&As for market entry two key questions still remain. Firstly, what is the optimum equity share for a foreign firm undertaking CB M&A for market entry? and secondly, are CB M&As, where acquiring firms have full ownership always beneficial?

Based on our understanding of this topic, we argue that for managers interested to use to M&As for market entry purposes, a key word in our view is “context”. Appropriate share of equity in acquired subsidiary is dependent on specific context of CB M&A being undertaken as well relevant institutional and industrial factors. Managers need to realize that there is no single strategy or success formula concerning equity ownership while using CB M&As for market entry. Even though, significant prior research has highlighted usefulness of fully acquired subsidiaries (i.e. 100% equity ownership) due to relative ease of post-acquisition integration in such cases; it is not necessary that from a market entry perspective, such an approach is always useful. Partial CB M&As are rather under-researched and less understood modes of entry (e.g. Arslan and Larimo, 2015) as majority of prior empirical research focused on either choice between M&A and greenfield investment. However, partially acquired subsidiaries can be very useful especially when foreign firm needs to get a foothold in local market, get acquainted to the networks, and operate under local brand in order to avoid liabilities of newness and foreignness (e.g. Arslan and Dikova, 2015). Moreover, in many emerging and developing markets, foreign firms especially from developed western countries encounter a major problem concerning information asymmetry. This means that valuation of local firm for CB M&A purposes is hard due to lack of established accounting standards and practices. As, a result, there is a risk of over-payment for the target firm as well as over-evaluating the potential benefits from synergy due to lack of specific relevant information (e.g. Arslan and Dikova, 2015). In such circumstances, partial CB M&A offer a reasonable buffer against these risks, as the owners of acquired local firm will be more inclined to collaborate with foreign firm undertaking M&A when they also still own equity share due to self-interest. Moreover, partial CB M&As have also been found to be useful in transition and emerging economies in order to prevent local stakeholders from hijacking M&A deal (Jakobsen and Meyer, 2008). Managers of foreign firms undertaking CB M&A can later decide to increase its equity share once they have familiarized themselves with local context as well as potential opportunities and threats related to the M&A being undertaken. Hence, managers are strongly recommended not to ignore usefulness of partial CB M&As in such situations by solely focusing on fully acquiring local firm, while evaluating possibility of market entry in such markets using CB M&A mode.

It has been mentioned earlier that there is no single appropriate strategy concerning appropriate equity ownership share for foreign firms entering new markets using CB M&As. However, one strategy which has been highly recommended in academic research including prior work done on M&As is mimicking (e.g. James, 2002; Malhotra and Zhu, 2013). Firm managers should try to find benchmark M&A deals which are successful in industries similar to their own and should consider mimicking those strategies especially in cases when target country contexts are either same or similar. Mimicking has been referred as a useful tool to reduce uncertainty as well as offer practical guidance to managers facing strategic questions like equity share in M&As. Therefore, we also recommend appropriate usage of mimicking strategy albeit with caution concerning context, to the managers considering entering foreign markets using CB M&As.


Ahammad, M. F., Leone, V., Tarba, S. Y., Glaister, K. W., & Arslan, A. (2017). Equity ownership in cross‐border mergers and acquisitions by British firms: An analysis of real options and transaction cost factors. British Journal of Management, 28(2), 180-196.

Arslan, A., & Larimo, J. (2015). “Partial Acquisition or Greenfield Joint Venture: Determinants of collaborative entry strategies of Finnish Multinational Enterprises”. In J. Larimo, N. Nummela, and T. Mainela (Eds), Handbook on International Alliance and Network Research. Edward Elgar Publishing, UK. pp. 320-355.

Arslan, A., & Dikova, D. (2015). Influences of Institutional Distance and MNEs’ Host Country Experience on the Ownership Strategy in Cross-border M&As in Emerging Economies, Journal of Transnational Management, 20(4), 231-256.

Boateng, A., Du, M., Wang, Y., Wang, C., & Ahammad, M. F. (2017). Explaining the surge in M&A as an entry mode: home country and cultural influences. International Marketing Review, 34(1), 87-108.

Jakobsen, K. and K.E. Meyer (2008), ‘Partial acquisitions: the overlooked entry mode’, in
J.H. Dunning and P. Gugler (eds), Process in International Business Research, vol. 2, New
York: Oxford University Press, pp. 2013–226.

James, A. D. (2002). The strategic management of mergers and acquisitions in the pharmaceutical industry: Developing a resource-based perspective. Technology Analysis & Strategic Management, 14(3), 299-313.

Malhotra, S., & Zhu, P. (2013). Paying for cross-border acquisitions: The impact of prior acquirers’ decisions. Journal of World Business, 48(2), 271-281.

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