Equity Ownership in Cross-Border Mergers and Acquisitions by British Firms: An Analysis of Real Options and Transaction Cost Factors

We investigate the factors influencing the share of equity ownership sought in cross border mergers and acquisitions (CB M&As). Drawing on real options theory and transaction cost economics (TCE), we address and hypothesize key factors linked to commitment under exogenous uncertainty and the separation of desired and non-desired assets’ influence on share of equity sought by acquiring firms in CB M&As. Empirical analysis based on 1872 CB M&As undertaken by British firms in both developed and emerging economies show that British MNEs are more likely to pursue a partial acquisition in a target foreign firm when those foreign firms are from culturally distant countries. Further, findings support the view that the high cost of separating desired assets from non-desired assets motivates firms to make a partial acquisition rather than acquire the target completely. This is one of the first studies to use real options theory to address the cost of commitment under exogenous uncertainty, as well as TCE logic to address the separation of desired and non-desired assets in the target firm, while analysing equity ownership sought in CBM&As. Empirically, our paper contributes by examining CBM&As by British firms in both developed and emerging markets.