A Global Market for Corporate Control

"A market for corporate control emerges when bidders have incentives to monitor the corporate world for companies that are undervalued due to inattentive or inept managers. Bidders have such incentives in a market for corporate control that is unfettered by regulation because they can profit from such monitoring by buying a controlling interest in the shares of undervalued companies and displacing those managers." (Macey, 2008)

The market for corporate control is a fundamental feature of modern financial markets and essentially refers to the role of equity markets in facilitating Mergers & Acquisitions (M&A) for enhanced control over a company's shares. It acts as a mechanism to instill greater management efficiency since poor company performance will increase the susceptibility of the company to active M&A. In this way, the market for corporate control could magnify the efficacy of corporate governance rules, and facilitate greater accountability of management to their investors.

While this paper acknowledges that there is a global market for corporate control due to the increasing integration and greater deregulation in the global economy, the scope of cross-border M&A activity has been limited to only a few countries and the level of cross-border deals has not been optimized due to government protectionism and lobbying pressures by business groups.

Over the past two decades, cross-border M&A has skyrocketed from US$ 75 billion in 1987 to US$ 526 billion in 2011 and accounted for 40% of total M&A. In contrast to traditional M&A growth patterns, emerging markets are taking a greater initiative in driving cross-border M&As with developed countries. For example, almost 20% of cross-border M&As in 2007 were started by developing countries and this growth is expected to continue at a rate of 26% annually. (A.T.Kearney, 2008)

The growth in cross-border M&A has been stimulated by a myriad of factors. Firstly, there is a larger degree of financial and stock market liberalization in countries where free capital movements facilitates cross-border loans and credits (Eizaguirre et al, 2002). While this trend is more salient in the developed countries, regulations in developing countries are generally moving away from regimes of "financial repression" (Lambert, 2008). Developing and emerging economies are slowly adopting a more liberal stance to foreign investors by removing public policies and restrictions on foreign bank entry and foreign ownership of domestic firms, as well as phasing-out controls on capital outflows. For example, following the 1997 Asian financial crisis, countries in South-East Asia such as Thailand, Indonesia and Korea no longer had restrictions imposed on foreign ownership of domestic banks (Williams and Nguyen, 2005).

The increased integration in global financial markets has been accompanied by a marked increase in global capital flows. In particular, di Giovanni (2005) found a positive relation between domestic financial market depth and outward M&A activity where with every 1% increase in the stock market capitalization to GDP ratio in the acquiring country, the corresponding cross-border M&A activity increases by 0.955%. The emergence of global financial advisers and transnational banks has also extended the reach and facilitated the ease of financial access for firms in international capital markets via syndicated bank loans, cross-border stock listings and bond issuances (World Bank, 2012).

Moreover, with the breakdown of Bretton Woods and adoption of the currency non-system, capital market imperfections and exchange-rate fluctuations has lowered the cost of capital for firms investing abroad. Using the examples of Japan and US, Froot and Stein (1991) argues that the more net wealth the Japanese firm is able to invest and the depreciation of the US dollar has increased the returns to Japanese firms and the cross-border M&A activity to the US (Kang, 1993).

Secondly, the market for corporate control arises primarily as an Anglo-Saxon phenomenon and more countries (especially former British colonies) are now adopting features of this style of corporate governance. The United States and the United Kingdom remain strongholds of the Anglo-Saxon economic system and are also countries in which the most M&A activity can be observed: in 2011 they were the first and third-ranked countries in terms of value of cross-border M&A (UNCTD, 2012).

A reason for this is that there is a "breakdown of the old antitakeover coalition" according to Black (2000a, p. 10) cited by Evenett (2004). Black (2000a) argues that the main opponents of M&A have largely been eliminated in the Anglo-Saxon economic system, such as the disassembling of worker unions that have left M&A decisions largely in the hands of shareholders and managers. The bargaining powers of unions have weakened and have a limited influence on board-level decisions. This has facilitated both the speed and the ease at which M&A can occur.

There is also an emphasis on dismantling institutional and political barriers. For instance, bank-firm relations and cross-shareholding arrangements in traditional coordinated market economies such as Germany have slowly been removed in favour of share-swaps, spin-offs and holding firms (Jackson and Miyajima, 2007), creating favourable conditions for cross-border M&A.

Thirdly, the European Union (EU) is a landmark regional integration that has arguably facilitated cross-border M&A within member countries. Adopting the free-market principles of the Anglo-Saxon economies, the EU has aimed to deregulate its economies and allow for the free trade between members. Between 1985-2004, the manufacturing sector in the EU has almost doubled the M&A activity incoming from non-EU countries, with a 50% increase within European Monetary Union (EMU) countries (Coeurdacier et al, 2009).

Sectorally, the global market for corporate control is focused on a few primary sectors for cross-border M&A. In 2011 ranked by value; these are financial services (US$149.2 billion); chemicals & chemical products (US$87.7 billion) and mining, quarrying & petroleum (US$63 billion) (UNCTAD, 2012).

Financial services recorded spectacular values of M&A in 2011, mainly attributed to the insurance industry. For instance, AXA Asia-Pacific was acquired by AMP of Australia for $11.7 billion. (UNCTAD, 2012). Additionally, renewed interest of well-capitalized investors as well as motivation to put capital to work due to bond markets coming to life contributed to this (Stearns, 2012).

In the chemicals industry, cross-border M&A is driven largely in pharmaceuticals