Dr. Mike Peng, O.P. Jindal Distinguished Chair and a professor in the Jindal School’s Organizations, Strategy and International Management Area; Dr. Joyce C. Wang, PhD’19, an assistant professor of management at Texas State University; Dr. Sergey Lebedev, PhD’16, an associate professor of strategic management at Kennesaw State University; and Dr. En Xie, a professor at Tongji University, Shanghai, China, won the award for their paper “Theorizing About Emerging Multinationals’ Cross-Border Acquisitions.”
The study investigates the acquisition strategies of multinational enterprises from emerging economies (EMNEs) — specifically, why these large companies are paying more to acquire targets from developed economies while also allowing those acquired targets to operate independently after the purchase.
“The project started more than 10 years ago,” Peng said. “What attracted our research attention was the rising number of cross-border acquisitions of EMNEs and their unique approaches that could not be easily explained by received theory.”
Peng explained that EMNEs think acquisition targets in developed economies can offer better value-creation potential; however, the EMNEs often face legitimacy deficits.
“Therefore, to show ‘sincerity,’ EMNEs are willing to pay higher premiums,” Peng said. “EMNEs know they are internationally inexperienced, so they understand they have to pay high ‘tuition’ in the form of higher premiums.”
The “legitimacy deficit” ENMEs face is a lack of credibility in the eyes of many people from developed economies.
“Relative to developed economies, emerging economies tend to have lower per-capita income, and historically lack world-class firms, brands, technologies, and talents,” Peng said. “Until recently, in the eyes of customers, suppliers, and stakeholders in developed economies, EMNEs have inspired little confidence in terms of management capabilities, brand prestige, product quality, and sometimes business ethics. Other scholars reported that American, French, and German managers are more likely to resign if their company is acquired by an EMNE (from either China or India) than by an acquirer from their home country or another developed economy. EMNEs are aware that they are embarking on an uphill battle when engaging in acquisitions in developed economies.”
By taking the high road in granting a high level of autonomy to the acquisition target, the EMNE may gain long-term benefits. But there are also risks to taking this approach.
“The primary benefits are better rapport between acquirers and targets, which become new subsidiaries,” Peng said. “This can lead to better morale, more collaboration, and certainly less resistance, which can contribute to long-term performance. The primary risks may end up having numerous silos with little standardization or sharing of knowledge and resources, resulting in higher costs and noncompetitive products and services.”
The reason they offer the newly acquired companies a high level of autonomy, Peng said, is because they want to extract value from those acquired companies.
“Property rights theory suggests that firms with higher value-creation potential when leveraging an asset should own the asset,” Peng said. “That explains the high bids. This is especially the case when targets have a good deal of complementarity with acquirers, and when targets are in knowledge-intensive, high-technology industries. Having won the bid, it becomes imperative that acquirers offer a high level of autonomy to such targets, if they want to extract value. Otherwise, knowledge assets may dissipate, and knowledge workers may quit, undermining the original valuation model.”
Managers and employees from newly acquired companies are naturally concerned, no matter who buys the company, because they have just lost their independence and their jobs may be on the chopping board, Peng said.
“Property rights theory suggests that this concern is not avoidable, but can be minimized,” he said. “One way to minimize such resistance is to offer autonomy in the post-acquisition phase.”
Peng warned that, given the winds of deglobalization, in the future, emerging-market acquirers will probably pay even higher premiums and offer higher levels of autonomy to targets in developed economies.
“Think of EMNEs from China,” he said. “Given the worsening geopolitical relationship, Chinese EMNEs are likely to confront even more legitimacy deficits in the United States and other developed economies. To the extent that such acquisitions are approved by U.S. authorities, we can expect higher premiums and more autonomy. But at some point, a more sober decision will need to be made to prevent the price paid to be greater than the value that the targets can potentially bring to the acquirers. This is known as a walk-away price that acquirers will not exceed. Given the poor economic performance at home, EMNEs from companies such as China may simply be less able or willing to generously fund such acquisitions as before. In general, the scale and scope of EMNEs’ cross-border acquisitions are likely to shrink in the next couple of years.”
Considering that the paper was 10 years in the making, Peng feels gratified that it finally won the award and got accepted for publication.
“It had been rejected by several journals earlier,” he said. “Relative to other submissions, it is likely that this paper was better crafted, as it had been presented in several earlier conferences before we presented it at the Academy of Management conference in Chicago in August.”
Particularly gratifying to Peng was the transition of two of his former students to colleagues during the research process — their backgrounds played a key role in their research contributions.
“Joyce came from China and Sergey came from Russia,” Peng said. “Their backgrounds in emerging economies added rich nuances to this paper. This paper extended an earlier paper first authored by Sergey on ‘Mergers and Acquisitions in and out of Emerging Economies’ published in the Journal of World Business.”
Peng advises current and future PhD students to have active minds.
“Look for management phenomenon that cannot be easily explained by received theory,” he said. “Don’t be discouraged by the rejections. Managing the review process really means ‘managing the rejection process.’ Don’t count on a single project. Having like-minded colleagues with multiple projects can help you cope with such stress and reach success.”
As of September 25, 2024, according to Google Scholar, Peng is ranked No. 1 in global strategy, No. 3 in international business, and No. 8 in strategic management in the world in the number of citations of his research articles.
