National Champion Versus Foreign Takeover

Governments in several countries have recently spent considerable effort to defend domestic firms against acquisition attempts from abroad and instead favoured mergers among national firms. In this paper we offer an explanation why globalization can reinforce the case for promoting national champions. We analyze an oligopolistic market where a domestic and a foreign firm are engaged in a takeover battle for a domestic competitor. Any merger or acquisition (M&A) must be approved by the national government whose objective function may include a bias against the foreign takeover. That bias endogenously results from lobbying efforts of the domestic firm that would become the outsider in the foreign acquisition scenario. In the case where the government is unbiased and only cares about welfare we find that falling trade barriers trigger the cross-border acquisition. However, when the domestic government cares sufficiently strongly about lobbying contributions, globalization has a qualitatively different effect. The foreign takeover would then only emerge in an intermediate range of trade costs. Once trade integration reaches a critical level the biased government starts to block the foreign takeover and instead opens the door for the national champion.