In this study, we examine the differentiating characteristics of acquiring firms and focus on the M&A (Mergers and Acquisitions) motives from the perspective of agency theory. We use an out-of-sample dataset that involves all completed Canadian M&A deals between 1997 and 2002. With respect to firm-specific financial and technical variables, we found that firms with higher cash reserves, better past performances, and a higher R&D (Research and Development) focus (high-tech firms) are more likely to be the acquirers. With respect to the firm-specific governance variables, we found that acquiring firms have higher pay ratios (option pay plus option value dividend by cash pay), lower inside director ratios, higher board sizes, and lower blockholder ownerships. However, these results are not supported in multivariate analysis. The results from differentiating characteristics analyses have highlighted at least two motives behind an acquisition decision. First, we found strong support for an `empire building' motive behind M&A. Our results indicate that firms with higher levels of cash reserves are more likely to be acquirers. In other words, firms with more CEO discretion and excess resources tend to grow in size through acquisition. Second, we found support for a strategic motive for high-tech firms behind M&A. High-tech firms were more likely to make an acquisition in order to stay innovative and preempt competition.

Over the last two decades, issues related to Mergers and Acquisitions (M&A) have attracted considerable interest from practitioners and academicians. As a result, numerous empirical studies have documented various aspects of M&A activity including trends in M&A activity, characteristics of the transactions and corresponding gains or losses to shareholders. A majority of the existing empirical evidence focuses on the stock returns surrounding the announcement dates and the long-run post-acquisition stock returns and operating performance. A smaller body of research focuses on the characteristics of acquiring firms and motives behind an acquisition decision.

First, although there have been a few studies that have investigated the characteristics of a target firm, there is virtually no comprehensive study that examines the characteristics of an acquiring firm. Second, the characteristics of bidder firms may have implications for the short-term and long-term stock return performance of their shareholders. Consequently, knowing the characteristics of a bidding firm would give some valuable information to the stockholders in terms of their expected stock return following an acquisition announcement (Bae et al., 2002). Third, a revelation of the differing governance characteristics (if any) between the bidding and non-bidding firms would tell us about the role of governance mechanisms (such as board independence and ownership structure) in making an acquisition decision. Fourth, as discussed above, an identification of the bidding firms' characteristics would also shed some light on the motives underlying the acquisition activities (Powell, 1997).

In this study, we focus on the Canadian M&A activities that will bring some fresh evidence to the literature. Most of the prior studies have focused on acquisitions in the US and UK, where most of the M&A deals occur. The Canadian M&A market is also large and vibrant. As reported by Crosbie & Co., a Toronto-based merchant bank, the total transaction value of the announced deals during 2006 was $257 bn with 1,968 deals. Despite such substantial M&A activities in a Canadian context, no published study to date has examined the differentiating characteristics of Canadian acquiring firms. In addition, it will not be prudent to extend the US (M&A) results to Canadian market conditions, although the geographical market locations are close. Important differences exist between the US and Canadian markets with respect to ownership structure, regulatory environment, and preferences for certain deal characteristics (such as payment method) that may influence the performance outcome. For example, in Canada, firms have more concentrated ownership than do the US firms and the use of multiple voting shares and pyramidal structures is more prevalent (King and Santor, 2007).

Business Strategy Journal, Mergers and Acquisitions, Multivariate Analysis, Canadian Markets, Cash-rich Companies, Corporate Investment, Psychological Literature, Technological Sectors, Monitoring Management, Management Process, Binary Logistic Regression, Logistic Regression Models, Corporate Acquisitions.