Value creation in international acquisitions : evidence from U.S. firms buying into Canada

This study attempts to investigate two main issues: (1) Whether international acquisitions, in contrast to their domestic counterparts, create value for the shareholders of acquiring firms, and (2) What explains the variation in the abnormal returns generated by international takeover announcements. Using a dummy-variable approach and a sample of 187 transactions between Canada and the U.S., we examine the stock behavior of American companies that have purchased Canadian firms in the period 1982-1995, in order to determine whether the market reacts differently to domestic and foreign takeover announcements, and more specifically, to transactions between these two countries. Characteristics of the bidding firm and its industry, as well as of the acquisition and the economical environment were examined to identify the variables enhancing wealth creation. Consistent with prior research, significant positive abnormal returns to American firms announcing the acquisition of Canadian companies are reported. Moreover, evidence shows that the wealth created by international acquisitions is a function of the bidding firm's prior level of international exposure, the degree of the firms' relatedness, the foreign exchange rate, and the Tax Reform Act of 1986. Furthermore, the method of payment, the ownership status of the target firm, whether the firm was purchased by a Canadian subsidiary, and the bidder's stock exchange seem to also play a role in explaining the abnormal returns generated by diversification to the acquiring firm