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The Search for Value: Cross-border Bank M&A in Emerging Markets

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Abstract

Between 1998 and 2005, we identify 73 cross-border bank mergers and acquisitions (M&A) transactions in which international banks acquired ownership stakes in 46 listed banks in emerging market economies (EME). A total of $797.5 billion of bank assets was acquired for $37.5 billion in Latin America, Central and Eastern Europe, and Asia. Using event study methods, we establish (1) whether the announcement of cross-border M&A transactions generates value for bank shareholders; and (2) whether M&A characteristics and/or economic and institutional features explain returns to bank shareholders in EME from cross-border investments. Consistent with US and European evidence, cross-border M&A creates value or significant abnormal returns for target bank shareholders. Yet, returns to shareholders at acquiring banks often exhibit value destruction; cross-border M&A activity in banking is not found to facilitate wealth redistribution from EME to industrialised countries. A regression analysis confirms the importance of the institutional and economic environment, as well as target bank profitability and the method through which international banks acquire ownership stakes, as significant determinants of abnormal returns.

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Notes

  1. To calculate the acquired total assets of target banks, we count the assets of each bank only once even though there are instances of multiple acquisitions of ownership rights for a single institution. For the total value of deals, we sum across all transactions. The assets of target banks, the value of deals, and cost per unit of asset for each region are: LatAm ($187.4 billion, $26.9 billion, $0.1435); CEE ($86.6 billion, $5.0 billion, $0.0583); and Asia ($523.5 billion, $5.5 billion, $0.0106). Source: own calculations from Thomson and BankScope data.

  2. Purchasing an established branch network is one mode through which acquiring banks access underdeveloped, but potentially large, retail banking markets that exist in EME. Other investment options include taking a minority stake in a target bank and increasing it over time, or entering into a joint venture agreement. We note that hostile takeovers in banking are very rare and foreign bank takeovers are subject to regulations that vary between countries.

  3. Barth et al. (2001) provide an exhaustive source for the proportion of banking system assets held by foreigners in nearly 100 countries.

  4. This type of evaluation is a complex task owing to informational asymmetries and data availability.

  5. Operational diseconomies associated with distance are heightened by barriers relating to the following: culture, language, currency, the host regulatory and supervisory structure, and explicit and/or implicit rules against foreign banks (Berger et al., 2000).

  6. We did estimate our preferred model using abnormal returns both to acquiring banks and joint banks as the dependent variable. Generally speaking, the models lacked explanatory power. Further details on the regression models and also on the initial vector of covariates are available from the authors on request.

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Williams, J., Liao, A. The Search for Value: Cross-border Bank M&A in Emerging Markets. Comp Econ Stud 50, 274–296 (2008). https://doi.org/10.1057/ces.2008.2

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