Accounting Not to Blame for Foreign Merger Woes

When U.S. companies buy foreign companies, the result is usually a decrease in stock value, but the problem isn’t because of different accounting methods, according to a recent study presented at the American Accounting Association Globalization Conference in Berlin.

The research was conducted by two University of Arkansas professors — Tommy Carnes, assistant professor of accounting, and Tomas Jandik, assistant professor of finance — along with Ervin Black of Brigham Young University.

The researchers initially set out to see if differences in generally accepted foreign accounting principles were to blame for the widespread failure of cross-border mergers.

The result? The opposite was true. U.S. companies that bought foreign companies with similar accounting systems to our own had more problems than acquisitions involving more exotic accounting systems.

“In the majority of instances, expansion of U.S. firms through acquisition of foreign targets is a value-destroying activity,” the study concluded.

The researchers said the problem may be due to the higher cost of capital in foreign countries.

The researchers analyzed 361 cases in which U.S. companies acquired foreign companies in 17 different countries between 1985 and 1995. Most of the research concerned the United Kingdom (24 percent), Canada (20 percent), France (15 percent) and Germany (11 percent).

Jandik said the companies in the study underperformed the stock market by 2 percent one year after the merger, 13 percent after three years and 23 percent after five years.