Assortative matching in cross-border mergers and acquisitions

A standard assumption in models of cross-border mergers and acquisitions (M&As) is that highly productive acquirers transfer their productivity level to that of the less productive target. However, our stylized evidence suggests that this is not the case and that the post-merger firm productivity is lower than that of the most productive firm in the M&A. It is an average of the pre-merger productivity levels of both firms. Furthermore, the data also show that M&As also take place among firms that are not the most productive in the market. These observations raise the question under what circumstances M&As become profitable. Based on the Melitz (Econometrica 71(6):1695–1725, 2003) approach, we develop a model of cross-border M&As that permits imperfect productivity transfers between merging firms. With imperfect transfers, (weak) assortative matching in productivity arises for firms in cross-border M&As, without strict productivity ordering. The model rationalizes that M&As occur both in the high- and low-productivity ranges of the market. M&As raise the overall average productivity and welfare. However, the welfare benefits are small(er) if productivity transfers are less than perfect.