Cherries for Sale: Export Networks and the Incidence of Cross-Border M&A

This paper develops a dynamic model of cross-border M&A activity. We show that foreign firms will be relatively more attracted to targets in the domestic country that had high productivity levels several years prior to acquisition, but then suffered a negative productivity shock (i.e., cherries for sale). With high ex ante productivity levels, target firms are able to invest in large export networks that are valuable to foreign multinationals because of locational differences and trade costs. Subsequently, domestic firms that experience reductions in productivity no longer find their established network as valuable to serve independently, increasing the surplus generated by a foreign acquisition. From the theory we derive a dynamic panel binary choice empirical model that uses predetermined export activity and the evolution of target firm productivity over time to predict cross-border M&A activity. Administrative data from French firms across 1999-2006 provide strong evidence that both the established export networks and productivity losses among target firms promote takeover by foreign multinationals.