Determining ownership positions in acquisitions: market and strategic influences on investments in European targets.

Francis, John D.

ABSTRACT

Ownership positions taken in international acquisitions are based on developing efficient organizational arrangements for the purpose of integrating and coordinating activities between the target and the acquirer. This process is influenced by factors within market contexts and by the strategic repertoires of the acquiring firm as they face the complexity of foreign markets.

Regression is used to model these factors influencing the ownership positions of U.S. firms in the acquisition of targets within European Union nations. Results indicate that strategic similarity and to lesser degree market uncertainty influence ownership and that these results differ depending on the cultural proximity.

INTRODUCTION

Merger and acquisition activity has risen dramatically as an internationalization strategy and as a means to establish an immediate foreign presence. Of particular importance in an acquisition is the ability to effectively combine resources and coordinate activities through the use of power and control, where power is one member's potential to influence the decision variables of its partner and align inter-firm resources (Griffith & Harvey, 2001). In recent years researchers have focused on the determinants of power and the control issues implied by various internationalization strategies (Davidson & McFetridge, 1984, 1985; Davis, Desai & Francis, 1999; Contractor, 1990; Erramilli, 1991; Argarwal & Ramaswami, 1992; Anderson & Gatignon, 1986). While this attention has been helpful in determining why various organizational arrangements have been used, its application to merger and acquisition activity has been somewhat simplistic. Much of the internationalization literature presents acquisitions as if targets are always fully acquired in order to classify this organizational arrangement as one that affords a high degree of control to the parent (Caves & Mehra, 1986; Kogut & Singh, 1989).

In reality, international mergers and acquisitions involve various organizational arrangements ranging from minority owned to wholly owned positions, each involving tradeoffs between the extent of control afforded, the amount of risk exposure, and the level of resource commitments required. Ownership choices in acquisitions are the first in a sequence of strategic steps aimed at effectively combining resources and coordinating activities in global relationships based on the power created from the investment position taken.

Transaction costs arguments suggest that ownership positions are predicated upon economic arrangements aimed at achieving competitive efficiencies across national boundaries. As each transaction involves an acquiring firm and target from different markets and firm orientations, aspects of each are expected to influence the ownership position taken as firms attempt to maximize efficiency and reduce transaction costs. For international acquisitions, ownership positions must also be examined in relationship to the specific context of crossing national boundaries. Economic efficiency is predicated on the strategic allocation of acquisition ownership based on effectively combining resources and coordinating the activities of international relationships. In international acquisitions, this process involves overcoming potentially difficult national differences that lead to greater transaction costs. These differences alter the strength of industry and firm influences as acquiring firms seek to enter markets very different from their own.

In order to understand this aspect of international acquisitions, the paper addresses these issues and examines the degree of ownership an acquiring firm purchases by juxtaposing elements at two levels of analysis: those at the market and firm. The research addresses four key, related issues:

What impact do industry characteristics have on the degree of ownership of an international target firm?

What impact do strategic pre-dispositions have on the degree of ownership of an international target?

Are these different sets of determinants complimentary in their impact on the degree of ownership in international acquisitions?

Do the effects of these determinants differ between national environments?

THEORY AND HYPOTHESES

Owning a large percentage of an international acquisition versus holding a smaller position is important as it involves distinct differences in the commitment of resources by the acquiring firm, as well as the level of control desired in global operations. The choice of ownership level is complicated further when the acquisition involves crossing national boundaries. In order to achieve and maintain control, multinational firms face several complexities not encountered by domestic firms such as communication barriers, difficulties in the evaluation of performance due to exchange rate shifts, and cultural differences between headquarters and subsidiaries (Mascarenhas, 1992). In the decision to acquire a target firm, a higher degree of ownership provides greater control and power for the parent firm as it organizes its activities. In this way, an acquiring firm increases its decision making authority and monitoring power.

From a transactions cost perspective, the decision regarding the degree of ownership in an international acquisition involves reducing inefficiencies taking place between firms in two markets. At its basis, transactions cost theory argues that the primary purpose of an organization is economizing, to make organizations "efficient" rather than wasteful (Williamson, 1985). Transaction costs focus on administrative issues like "make or buy" decisions, aspects of organization design and structure, and management of administrative and transaction costs. Therefore, it is particularly applicable merger and acquisition activity as it primarily focuses on the necessity of finding an optimal solution to achieve efficiency in the investment and administration of target firm assets within the network of a multinational firm.

Organizing investments in foreign markets have a high degree complexity and uncertainty for an internationalizing firm. Acquiring firms face unclear cultural expectations regarding marketing and human resource practices, inexperience in business negotiations, information about local partners, and the need to integrate the target firm into its current organizational structure and culture. Human actors make decisions in this process with limited knowledge and bounded rationality. They are also mindful of opportunism that can take place within the exchange between parties when there is no structured, organizing arrangement. Therefore, as acquisitive firms seek targets, they make adaptive, and sequential decisions regarding the structure of the acquisition relationship in order to shield the organization from opportunistic behavior while creating the most efficient, economizing arrangement. Each ownership choice is predicated on the attempt to eliminate or reduce the perceived transactions cost that arise from the risk and uncertainty involved in acquiring and integrating an international target.

Transaction costs have long been acknowledged as influenced by the market contexts that exchanges take place in. Market based assets and structures have been demonstrated to impact organizational arrangements that develop global integration and maximize efficiencies (Kale, 1986; Inkpen & Beamish, 1997), particularly the environmental characteristics that create excess costs related to overcoming risk and uncertainty. Dynamic market contexts are sources of ambiguity and complexity as attributes multiply and change. This dynamism is related to technological development, unclear customer demands, changing infrastructure requirements and standards, and most uncertain of all the competitive nature of the industry environment. Markets differ in terms of their levels of instability and complexity and therefore, require organizational arrangements that are particularly suited for them. For cross border actions, firms seek to reduce the costs associated with dynamic environments while integrating the resources of international operations.

An important aspect of industry dynamism is the extent of technological development occurring within a given market. New technologies alter industries structures by making existing products outdated or manufacturing processes obsolete. Technological development within industry, due to its transitory and destructive nature, is cited as a primary driver of a firm's strategy and structure (Chan, Martin, & Kensinger, 1990; Child, 1972).

Acquisitions are a preferred method for firms to modify or update their technology, as evidenced by the large amount of merger and acquisition activity in high-tech markets. However, competing considerations are involved in determining the initial ownership position taken by an acquiring firm. Typically, members participating in high-tech industries create competitive advantage through technological competencies. These firms invest time and resources into developing these technologies and want to fully realize their rent producing returns. It is likely that they are reluctant to share knowledge with rival firms (Anderson & Gatignon, 1986) or expose themselves to the opportunism that might arise through partnerships.

However, firms in high technology industries also need to collaborate in order to benefit from exposure to other knowledge resources and to offset the large initial costs of new product and technology development. As Kogut and Singh (1989) argue, foreign expansion in high technology industries most likely requires investment in research and development and product adaptation, creating an incentive for firms to pool competencies and overcome risk and cost.

Therefore, firms must decide upon organizational arrangements that reduce the opportunism that may arise through collaboration, while at the same time lowering the expense involved in research and development. Acquisitions with lower levels of ownership appear to be an effective means of lowering both transactions costs that might arise through opportunism while at the same time lowering the costs of research and development. Supporting studies indicate that sharing ownership when it comes to joint ventures is highly preferred in high tech environments (Gomes-Casseres, 1989; Hennart, 1991; Kogut & Singh, 1988, 1989; Yip, 1982). As such, we expect that acquiring firms would invest as minority owners in high technology industries without making extensive resource commitments that comes with purchasing high degrees of ownership. Based on this discussion the following hypothesis is offered:

Hypothesis 1: The level of ownership of international acquisitions will be negatively associated with the level of technological development of an industry.

Another market attribute impacting uncertainty that can lead to transaction costs concerns the rate of growth of the target markets. Increased customer demand, changing industry strategies and standards, and increased competitive rivalry are all conditions of these markets. Rapid growth in international markets reduces entry barriers by creating disequilibrium conditions that encourage diversification and market entry. These types of markets are primary locations for acquisition activity. However, they generate, at any point in time, inconsistencies concerning competitive requirements, institutions and customers, as well as uncertainty over future changes. For international firms, these inconsistencies are further complicated as they apply to cross-border activities. Businesses operating in these markets typically face high transactions costs as they lack knowledge and information that can reduce uncertainty, while accepting their potential accessibility and attractiveness.

Firms taking advantage of growth opportunities in these markets through acquisitions seek to efficiently allocate investments. They want to add value to the firm, while improving their operations and resources. To most efficiently optimize their investments into growing, transitory markets, we expect acquiring firms to purchase larger degrees of ownership. This enables an acquiring firm to not only tap into the investment returns in these attractive markets, but also take control of the target in regards to future strategies and opportunities and achieve synergies with existing operations. Given rapid market growth, higher ownership and control reduce future uncertainty for the acquiring firm. Based on this argument the following argument is offered:

Hypothesis 2: The level of ownership of international acquisitions will be positively associated with the degree of industry growth rates.

A third industry factor influencing ownership positions in acquisitions concerns the level of concentration of market power by industry rivals. Industries low in concentration are fragmented by a large number of firms, many privately held and none with a substantial share of total industry sales (Porter, 1985). The primary attribute of a fragmented industry is the absence of market leaders mainly due to a lack of economies of scale, low entry and exit barriers, changing value chain technologies, diverse market demands, and the presence of new products or participants. These industries are typified by changing products, technologies, and customer demands leading to a highly uncertain market environment.

Alternatively, highly concentrated industries contain a small number of firms and are characterized by economies of scale and market power while displaying conditions of oligopolistic interdependence. Typically, due to the size and strength of industry participants, these industries are global in nature with firms coordinating and controlling extensive operations across multiple foreign markets. These firms have built large hierarchies over time to eliminate or reduce transaction costs by internalizing transactions. For participating firms in these industries, it likely that acquisitions will be integrated as fully as possible into the organizational hierarchy through increased ownership positions. Small firms in fragmented industries have not developed the global infrastructure to internalize transaction costs. They do not rely on global coordination and scale to achieve organizational efficiency and will therefore, not be as likely to purchase large degrees of ownership as they expand abroad. Based on this discussion the following hypothesis is offered:

Hypothesis 3: The level of ownership of international acquisitions will be positively associated with the degree of industry concentration.

While environmental factors do affect strategic choices, a richer perspective views acquisitions as strategic actions that allow firms to modify their competencies and enhance their value as they keep pace with change in the environment (Bowman & Singh, 1990, 1993; Kogut & Zander, 1996; Oliver, 1997). International acquisitions are the result of corporate strategies aimed at applying a successful corporate theme (Porter, 1987). From an economic standpoint, a strategic action is more likely to be efficient and create value when it deploys assets utilizing similar key success factors and value-creating opportunities (Capron, Mitchell, & Swaminathan, 2001). Employing similar or consistent strategies throughout a network of international operations is more efficient and leads to synergies throughout the organization.

Strategic similarity at the corporate level can be found in the pre-existing repertoires of the acquiring firm in its pattern of diversification and allocation of resources throughout its business units. Firms invoking strategic similarity develop related competencies and resources in an attempt to exploit or realize the potential economies and synergies that large size and related diversification can offer.

A type of strategic similarity employed by organizations involves how resources are deployed, namely, investments in research and development (R&D) and marketing across the firm's different businesses. Corporate resources are distributed either evenly or unevenly across different business units based on what yields higher returns or to develop and enhance a common set of competencies. To measure strategic similarity, the emphasis is not on why a certain allocation is made or the intensity of the allocation, but on how similar or dissimilar the allocations are across the corporation.

Similar resource allocations across multiple business units signal involvement in industries that require competitive advantages based on common tactics or they signal an attempt on the part of top management to manage multiple lines of business based on a singular dominant logic (Harrison, Hall, & Nargundkar, 1993). The similarity of resource allocations is evidence that the corporation is emphasizing organizational processes that require a firm to maintain similar strategies throughout its network of business units. This consistency signals the presence of high control processes at work throughout the corporation and results in a tendency to replicate existing organizational features or strategies, especially as firms invest abroad (Rosenzweig & Singh, 1991).

R&D and advertising allocations are of particular importance as they determine a firm's emphasis on innovation or marketing for its competitive advantage. Outlays in these areas are expected to affect a firm's cash flow from both its existing assets and its future investments. If business units do not share a corporate emphasis on innovation or marketing with their siblings, then there is no consistent corporate strategic emphasis in these areas, indicating the use of different strategic approaches for each business unit.

Business units with similar resource patterns indicate high levels of internal consistency and control which in turn increase the ability of the corporation to implement strategies and coordinate activities (Anderson & Gatignon, 1986). Firms with a corporate strategy of allocations of similar intensity across their business units and their resulting benefits will want to continue this pattern in international acquisitions. Only high ownership positions allow the control necessary for these types of resources. Alternatively, when low levels of ownership are purchased, target firms continue to possess the autonomy necessary to adopt resource deployment patterns unaffected by the norms of other organizational units within the acquiring firm. Based on these arguments the following hypotheses are offered:

Hypothesis 4: The level of ownership of international acquisitions will be positively associated with the similarity of R&D allocations across acquiring firms' business units.

Hypothesis 5: The level of ownership of international acquisitions will be positively associated with the similarity of advertising allocations across acquiring firms' business units.

Strategic similarity also facilitates the integration of the target to the acquirer from both a technical and organizational perspective (Ahuja & Katila, 1998; Haspeslagh & Jemison, 1991; Singh & Zollo, 1997). The absorptive capacity argument maintains that the ability to use resources of acquired firms increases when the target firm is related to the firm's existing resources (Cohen & Levinthal, 1990). Acquisitions of firms with similar strategic characteristics such as competition or similar products result in higher scale efficiencies and lower transaction costs than acquisitions involving strategically dissimilar firms (Ramaswamy, 1997).

Therefore, the relatedness of the acquiring firm to the target firm is an extension of existing capabilities in order for the firm to achieve the tangible and intangible benefits of product similarities. In this case, higher degrees of ownership would be more appropriate for firms acquiring related target firms by reducing transaction costs and creating an optimal organizational arrangement. However, if the target firm is not related, then less ownership will be preferred due to the lack of synergies to be exploited and an increased level of uncertainty due to entering a new market. Therefore, the following hypothesis is offered:

Hypothesis 6: The level of ownership of international acquisitions will be positively associated with the relatedness of the acquiring firm to the target firm.

Strategic similarity creates a shared understanding that facilitates acquisition resource deployment between the target and the acquirer, while dissimilarity reduces the party's contextual knowledge (Capron et al., 2001). Shared understanding arises from common knowledge and industry experiences (Huff, 1982), common repertoires of strategies (Spender, 1987), and common collective cognitive models and beliefs (Porac, Thomas, Wilson, Paton, & Kanfer, 1995). To this point, the study has argued that these variables are specifically germane to firms crossing national boundaries due to the high level of uncertainty in these environments and the desire for investing firms to reduce transaction costs that arise.

However, international markets differ in the amount of uncertainty and complexity they create for the investing firm. These differences can be found in the distance culturally and economically from an entering firm's home market. In acquisitions, as these differences increase, the dissimilarities between the target and the acquiring firm become greater. In predicting the control an organization is likely to maintain over foreign operations, theorists associate higher distance with higher transaction costs due to information costs and the difficulty of transferring resources (Buckley & Casson, 1976; Vachani, 1991). Dess, Gupta, Hennart, & Hill (1995) suggest that high degrees of geographic diversification create unwanted transactions cost due to the degree of differences between cultures and nations.

A key component of transaction costs theory is that human agents involved in decision-making are characterized by bounded rationality. The implication of the assumption of bounded rationality is that individuals are limited in knowledge, foresight, skill, and time, exchanges will be characterized by adaptive, and sequential decision-making, and trading requires the support of safeguards to shield organizations from opportunistic behavior (Williamson, 1985). Therefore, as the uncertainty associated with greater market distance rises, factors influencing higher levels of control become more important as firms look to create economically efficient organizational arrangements. A reduced understanding of the target's home country by the acquiring firm increases the reliance on common market expectations and strategic repertoires as firms look to make sense of the complexities and intricacies of foreign environments. Therefore, it is expected that the hypothesized relationships described earlier would intensify as market distance increases. In the context of this study, market distance is lower for target countries closer to the United States. Based on this discussion the following hypotheses are offered:

Hypothesis 8: The association between industry factors and higher degrees of ownership will be stronger in markets with higher distance proximity.

Hypothesis 9: The association between firm factors and higher degrees of ownership will be stronger in markets with higher distance proximity.

METHODOLOGY

The source of the sample for this study is the Mergers and Acquisitions roster. Acquisitions included in the sample met the following restrictions:

1. U.S. firms acquiring target firms headquartered in the European Union.

2. Acquisitions between January 1,1993 and December 31, 1997.

3. Acquisitions involving the purchase of a target firm as opposed to purchases of assets such as property plant and equipment.

4. Transactions reporting the degree of ownership exceeding ten percent.

5. New transactions of acquisitions as opposed to additional share purchases.

6. Acquisitions by publicly traded U.S. firms.

Measurement of Variables

Degree of ownership is measured using the percentage of ownership purchased reported in Mergers and Acquisitions roster. The measurement of an industry's technological development follows Chan et. al. (1990) by utilizing Business Week's annual R&D scorecard for the year prior to the acquisition. Industries are classified as high, medium or low in technological development and treated as an interval variable. Industry growth rate is measured within the target firm's international industry located in its home country. The data for this variable is obtained from the Eurostat database. The measure captures the percentage change in industry revenues three years prior to the acquisition.

Industry concentration is obtained using the four-firm concentration ratio, a common method for operationalizing the variable (Caves & Mehra, 1986; Chatterjee, 1992). Data is taken for the year of the acquisition from the Census of Manufacturers. The arithmetic average of the concentration ratio is used for acquiring firms active in multiple industries following the method used by Hennart (1991).

The relatedness of the acquiring firm to the target firm is obtained using similarities between 3 digit SIC industries of the target firm and the acquiring firm. If the target belongs to a similar three-digit SIC then it is treated as related; targets belonging to different SIC industry groups are defined as unrelated. This independent variable is tested using a dummy variable. In order to measure the similarity or dispersions in resource allocations across businesses, the study follows Harrison and colleagues (1993) by examining the variance of the intensity of R&D and advertising across each business unit segment of the corporation. Data for these variables are collected from the COMPUSTAT database and annual reports. Acquiring firm size in terms of revenues and prior internationalization are controlled for in the analytical tests.

DATA ANALYSIS AND RESULTS

As the model includes a set of both market and firm strategy variables, hierarchical set regression is used to ascertain the increment in the proportion of variance accounted for by each set and to support the individual hypotheses (Pedhazur, 1982). The Mergers and Acquisition roster reveals in excess of 3,000 mergers and acquisitions of EU targets by U.S. firms during the sample time period. Of these, 948 include some description of the degree of ownership. Upon application of the study requirements, the final sample includes 311 acquisitions. Comparisons on average acquisition price, target firm location, and target firm industry membership indicate that the sample of 311 acquisitions is representative of the larger sample.

Table 1 presents the correlation matrix of the variables in the research model and indicates the strength and significance of the bi-variate associations between each of them. The table reveals several expected or likely associations

The correlation matrix indicates that several variables (AFINTL, TFREL, INTINDGR, and INDCONC) have significant bi-variate associations with degree of ownership (OWN%).

Hierarchical set regression is used to test the research model and the results are indicated in Table 2. Model 1 in Table 2 includes only the control variables and indicates that the extent of prior internationalization (AFINTL) of the acquiring firm shows a negative significant relationship to degree of ownership.

The second model in Table 2 regresses both the control variables and market variables on the degree of ownership. Hypotheses one, two, and three develop the relationships concerning the influence of market characteristics (level of technological development, international industry growth rates and level of concentration) on the degree of ownership in acquisitions. As this model indicates, support is found for Hypotheses 2 and 3. Both the growth rate of the international target's industry and industry concentration have significant positive relationships with the dependent variable. Higher growth in the target firm's market and higher industry concentration lead to a higher degree of ownership being purchased. The overall adjusted R2 is significant, explaining 8.6% of the variance of the dependent variable.

The third model is calculated with control variables and firm strategy variables entered respectively. The model indicates that the relatedness of the target firm to the acquiring firm is significant (Hypothesis 6). Other firm variables are not significant, therefore providing no support for hypotheses 4 and 5. Model 3 has a strongly significant adjusted R2 of .26.

Lastly, Model 4 is estimated. This regression model includes the control, industry, and firm strategy variables entered simultaneously. In this last model, only the relatedness of the target firm to the acquiring firm indicates a significant t-ratio. However, the model does not have a significant adjusted R2, indicating that this model does not explain any additional variance beyond Models 1, 2 or 3.

Cultural distance

The initial sample included acquisition targets from a large homogenous political/legal environment in order to control for extraneous national or legal effects on the degree of ownership. Large numbers of acquisitions within the sample are clustered in the United Kingdom, France, and Germany. The sample included 101 acquisitions of U.K. targets, with 74 and 46 in Germany and France respectively. Even though these countries have common tariffs and international trading standards, they are of course very different socially and culturally. Of the three, the U.K. is most culturally similar to the U.S. and is its leading international trading partner. As such, this nation is considered having the least market distance between U.S. markets and business practices.

To investigate the hypothesized relationships in the context of cultural differences between U.S. firms and the individual nations within the European Union, the research model was again tested using these subsets of the overall acquisition sample per nation. The results of the tests run on the three nations are indicated below in Table 3. This test illuminates the strength of the proposed hypotheses (H7 & H8) per each of these three countries.

As the results indicate, all three models had significant adjusted R2's, however they differed somewhat on the predictor variables. For the French and German sample of firms, the common significant predictor was similarity of advertising allocations across business units. This variable indicated a strong negative relationship with degree of ownership. Therefore, when advertising intensity is similar across businesses within the acquisitive firm the degree of ownership purchased would be less. Another finding for the French sample is the importance of industry growth in the French market. The model shows a significant influence on the dependent variable suggesting that higher industry growth in the target market meant higher degrees of ownership by the acquiring American firms.

As for the U. K. sample, different predictor variables indicated significant explanatory power. The regression equation included the relatedness variable as significant to explaining the degree of ownership. Acquiring firms that were related to their targets acquired a greater degree of ownership than unrelated firms is similar to previous results.

DISCUSSION

The results of the data analyses reveal that, indeed, explaining the degree of target firm ownership is a combination of market and firm influences. The study suggests that acquisition ownership is driven in part by environmental influences and strategic similarity between the firms. The findings neither completely support the industry influences model nor the firm effects. Rather, they reveal that acquisitions and ownership are part of a process of capturing market opportunities and combining knowledge of existing market environments and internal capabilities.

The results concerning hypothesis 1, the level of technological development, suggest that this characteristic is not an important influence on firms concerning the degree of ownership they acquire. Overall, this finding is in contrast with much of the literature maintaining that an industry's technological development is one of the primary drivers of a firm's strategy and structure (Chan, Martin & Kensigner, 1990; Child, 1972). Perhaps the primary issue of acquiring firms investing in these markets is not the degree of the investment, but the fact that a purchase of any degree provides access to new technologies in international markets. Therefore, no ownership pattern emerges for these acquisitions.

In other aspects of the tests of market effects, it appears that industry growth rates are important for an acquiring firm's ownership preferences as indicated in hypothesis 2. U.S. firms purchase high levels of ownership in high growth markets regardless of any risk associated with volatility and change, in order to more capitalize on rapid market growth and reduce transaction costs. Acquisitions are one of the primary choices for corporate growth strategies that allow firms to move rapidly into new markets or areas and receive immediate benefits. With increased uncertainty and inconstancies inherent in these rapidly changing markets, firms utilize high degrees of ownership to structure their acquisitions.

Lastly, in the tests of market effects, the findings support hypothesis 3. The results suggest that U.S. firms belonging to highly concentrated industries purchase more of their targets than firms competing in fragmented industries. Typically, these concentrated industries are characterized by market maturity and stability. Alternatively, fragmented industries provide an environment for firms to undertake a diverse set of strategies. Investing abroad involves inherent uncertainty in determining how to compete in new industries or markets. In developing organizational responses for dealing with the uncertainties associated with international expansion, firms historically relying on market power in concentrated industries are likely to extend similar competencies into new subsidiaries. This meets their need for control required by large, powerful firms for resource allocation and for any post-acquisition realignment in the overall structure of the firm. Therefore, a conformance to pre-existing firm norms brought about by membership in highly concentrated environments may be particularly relevant for firms investing abroad through acquisitions. The overall result of this pattern is an effort by U.S. firms in concentrated markets to retain control through ownership over operations as they expand into newly acquired EU subsidiaries.

The tests of the firm effects model examine the importance of the acquiring firm's strategic similarity in terms of pre-existing relatedness patterns and resource allocations and the relatedness of the acquiring firm and target. The results for these effects are mixed with the variables relating pre-existing strategic patterns as having little importance for explaining the degree of ownership in acquisitions. The lack of support for these hypotheses has many plausible explanations. Perhaps when a highly related acquiring firm purchases targets in new areas or markets it does not have the existing competencies to warrant high degrees of ownership and control. As such, lower degrees of ownership would be warranted.

In interpreting the results focusing on corporate resource allocation patterns, the evidence suggests little influence of these strategic considerations on the degree of ownership. The findings do not allow us to extend Harrison et al. (1990), who argue that consistency of allocations provide clues as to the dominant logic of the firm and signal high control processes at work throughout the firm. It appears that for firms allocating resources similarly throughout their subsidiaries, the need for consistently applying this strategy does not carryover to its purchase of new subsidiaries by acquiring a high degree of ownership. Perhaps pre-existing patterns of allocating might be more important as influences later in the implementation process and could be an important factor in an acquiring firm increasing its ownership stake. Overall, hypothesis four and five are not supported.

The variable with the strongest significant explanatory power of any in the overall research model is the relatedness of the target firm to the acquiring firm. These results reveal that when acquiring firms are interested in expanding into related areas, then high degrees of ownership are warranted. Based on the theoretical framework, this is a continuation of capabilities developed in the acquiring firm and extended to the target. It is also an opportunity for the acquirer to adapt and change as new ideas and resources are brought into the firm. High degrees of ownership enable these processes within merging firms and provide an economically efficient means for growth. Lastly, purchasing related businesses offset the risk associated with an international acquisition.

Lastly, the sample was split into subgroups consisting of acquisitions located in France, Germany and the U.K. The regression models were rerun to test what, if any differences, market distance had on the hypothesized relationships. Many international researchers have long argued that differences between nations necessitate the need for firms to be locally responsive to individual markets (Dunning, 1980; Kimura, 1989; Rosenzweig & Singh, 1991) even when legal or political considerations are similar. Theoretically, it was argued that as differences in national environments increased, the industry and firm factors driving ownership would have even stronger influences on degree of ownership.

The results are weak concerning hypotheses 7 and 8 as the factors do not appear stronger for the French and German subsets than they do for the U.K. The only factors that do differentiate themselves from the overall model concern advertising allocations and the extent of internal diversification of the acquiring firm. Consistent advertising allocations were not supported in the overall model. In the French and German samples they are not supported either, but are significant in the opposite direction of the hypothesized relationships. This evidence suggests that firms purchasing targets in nations with high market distance from the U.S. are expecting to adapt to their local environments in terms of marketing expenditures. The likelihood that the target will be integrated into the parent organization in this area appears to be, at least initially, offset for the need to be locally responsive in these strategic areas. In this situation, acquiring firms are not acting on extending similar strategic patterns, but are focusing on gaining market knowledge from other partners until time that shares of ownership will be increased or divested.

As for the U. K. sample, different predictor variables indicate significant explanatory power. The regression equation includes the relatedness variable as significant on the degree of ownership. Acquiring firms that were related to their targets acquired a greater degree of ownership than unrelated firms did. Interestingly, the strategic similarity theory as it applies to diversification relatedness appears stronger for targets located in the U.K. than for the French and German samples. Perhaps U.S. firms are more confident of extending their capabilities in U.K. firms with similar cultural proximity and therefore, purchase large degrees of ownership.

For an indication of the relative strength of the market and firm strategy effects, the results indicate that strategic considerations provide more explanatory power than industry influences. This difference is expressed in the percent of explained variance indicated in the adjusted R2 between the two main research models (2 and 3) in Table 2. Interestingly, more variables are significant in the industry effects model, but the model's overall predictive power is weaker. This result appears to be due to the importance of the relatedness of the target firm to the acquiring firm.

The two sets of market and strategy influences appear to lack any complementary or additive effects on the degree of ownership as expected in the research model. Instead, they appear to offset each other's explanatory power. For example, the explained variance of degree of ownership is not significant when the two sets are input simultaneously in regression Model 4. The significant industry variables, concentration and international growth, become inconsequential and even negative in their relationship with ownership, while the overall model is not significant in explaining any variance. Also, only the relatedness of the target firm to the acquiring firm is significant to the degree of ownership in Model 4.

Conclusions from these results indicate that the most predictable effects stem from the relatedness of the target firm to the acquirer, the growth rate of the target's international market and industry concentration level. Overall, the set of strategic choice variables is strongest in its explanatory power of degree of ownership. The complementary nature of these sets of predictors is not supported. The results do suggest that strategic similarity and environmental considerations are important for ownership choices.

As with any research, there are limitations to the study. While, efforts were made to minimize these limitations, some remain and must be stated. One issue concerns the inherent nature of cross-sectional designs. While this type of research design has the ability to describe features of large numbers of organizations, it is difficult to eliminate all factors that could possibly cause the observed correlation. The study attempted to control for these, but obviously many other factors could be suggested as important influences on the degree of ownership purchased of international acquisitions.

Another limitation of this research is the focus on acquisitions made in European Union nations. The findings of the study may not be generalizable to acquisitions made in other countries. Also, the study includes only acquisitions during the time frame of 1992-1997. The decade of the 1990's was an era of great change and discontinuity in the EU as new laws passed, Eastern European nations integrated into the West, and monetary and regulatory unification between the member nations continued. Obviously, with such change, one has to acknowledge that existing patterns and actions of firms during this period may not be the replicable in other time periods.

The results suggest that acquisitive U.S. firms investing in the E.U. tend to purchase higher levels of ownership if the firm is strategically similar to its current line of business, regardless of previous international experience, size of the firm, or industry characteristics. With high control via ownership, it may still be necessary to be locally responsive with corporate resource allocations. The evidence also suggests that U.S. firms in highly concentrated domestic industries purchase a higher degree of ownership of international acquisitions than firms participating in more fragmented industries. Overall, when making decisions about acquisitions, it appears that fitting the target to the acquiring firm may be of more importance to decision-makers than industry considerations.

From an investigation of this topic, questions emerge that generate areas for further research. One primary issue lies in determining the relationship of the degree of ownership with the performance of acquisitions. The performance--ownership linkage could be examined using market measures at the time of the purchase or the subsidiaries performance following the purchase. Lastly, an investigation of the different levels of ownership and control and their impact on the implementation of the acquisitions would be appropriate. Linking performance to the issue of degree of ownership would provide meaningful information in the areas of structure and implementation, providing data for firms on the most beneficial method for structuring acquisitions at their inception.

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Table 1 Correlation Matrix

 1 2 3 4 5

1. Acquiring 1.00
Firm Revenues

2. Acquiring Firms .12 * 1.00
Internationalization

3. Relatedness of .03 .05 1.00
Acquisition

4. Similarity of -.05 .05 .05 1.00
Acq Firm's R&D

5. Similarity of -.14 .21 .06 .02 1.00
Acq Firm's
Advertising

6. Industry Tech -.01 .16 ** -.04 .02 -.16
Development

7. Industry Growth -.05 .14 * .21 ** .04 .04

8. Industry .05 .07 -.08 -.16 * -.07
Concentration

9. Degree of -.05 .15 ** .31 ** .08 -.13
Ownership Purchased

 6 7 8 9

1. Acquiring
Firm Revenues

2. Acquiring Firms
Internationalization

3. Relatedness of
Acquisition

4. Similarity of
Acq Firm's R&D

5. Similarity of
Acq Firm's
Advertising

6. Industry Tech 1.00
Development

7. Industry Growth -.07 1.00

8. Industry .14 * -.13 1.00
Concentration

9. Degree of .01 .17 * .18 ** 1.00
Ownership Purchased

N = 311.

** Correlation is significant at the .01 level (1-tailed).

* .Correlation is significant at the .05 level(1-tailed).

Table 2: Regression Estimates For Degree of Ownership Total sample

 Model 1 Model 2

Variables [beta] t-ratio [beta] t-ratio

Constant 89.266 50.51 68.846 8.95

Control Variables

AF SALES -1.349E-5 -1.01 5.646E-5 -.38
AF INTL -15.307 * -2.76 -13.946 -1.90

Industry Variables

INDTCDV -- -- -.485 -.237
INTINDGR -- -- .173 * 2.41
INDCONC -- -- 26.079 *** 3.51

Firm Variables

TFREL -- -- -- --
AFR&DINT -- -- -- --
AFADVINT -- -- -- --

Adjusted [R.sup.2] * .022 ** .086
N 311 311

 Model 3 Model 4

Variables [beta] t-ratio [beta] t-ratio

Constant 111.954 18.42 116.821 5.06

Control Variables

AF SALES -6.770E-4 * -2.59 -3.674E-4 -.83
AF INTL -14.298 -1.44 -27.006 -1.78

Industry Variables

INDTCDV -- -- -3.434 -.80
INTINDGR -- -- -983 1E-3 -.05
INDCONC -- -- 13.161 .78

Firm Variables

TFREL 11.328 ** 2.81 14.824 * 2.42
AFR&DINT 17.540 .76 -24.279 .74
AFADVINT -54.190 -1.75 -36.098 -.89

Adjusted [R.sup.2] ** .260 .132
N 311 311

* p<.05, ** p<.01, *** p<.001

Table 3 Regression Estimates For Degree of Ownership France,
Germany, And U. K. Subsets

 France Germany

Variables B t-ratio B t-ratio

Constant 97.985 12.25 101.997 14.85

-Control Variables

AF SALES .251 .85 .025 .09
AF INTL .491 1.29 -.433 -1.66

-Industry Variables

INDTCDV .152 .48 -.187 -.70
INTINDGR .502 * 2.99 -.035 -.13
INDCONC -.031 -.06 .430 1.92

-Firm Variables

TFREL .103 .31 -.008 -.02
AFR&DINT .099 .32 -.295 -1.21
AFADVINT -265.
 631 * -3.18 -683.45 * -2.82

Adjusted [R.sup.2] *.646 *.411
N 47 74

 U. K.

Variables B t-ratio

Constant 66.700 8.57

-Control Variables

AF SALES .177 1.06
AF INTL -.105 -.43

-Industry Variables

INDTCDV -.203 -1.20
INTINDGR .194 .94
INDCONC .020 .09

-Firm Variables

TFREL 34.691 ** 5.54
AFR&DINT .013 .064
AFADVINT
 -.043 -.23

Adjusted [R.sup.2] *.792
N 101

* p<.05, ** p<.01, *** p<.001