The International Diversification of Banks and the Value of their Cross-Border M&A Advice

Abstract

This paper investigates the effects of international diversification of banks on the value of their M&A advice. We study bidder returns to 1,253 cross-border M&A announcements. We find that acquirers engaging a more internationally diversified financial advisor generate lower excess returns. Acquirers benefit most from advisors with a greater focus on their home country. These results suggest that the benefits of advisors' international diversification related to greater economies of scale and scope and the flexibility of allocating deals to the most skilled employee do not outweigh the costs emanating from a lack of country-specific knowledge and greater conflicts of interest.

Investment Bank Expertise in Cross‐border Mergers and Acquisitions

“…Dollar measures, though not reported, yield similar results with raw total deal dollar and percentage of total past five years' worth of M&A in target country activity. de Jong, Ongena, and van der Poel () find that international diversification has no effect on deal success rate but their measure is vastly different and measures the emphasis of a particular market for the investment bank rather than accumulated experience as ours does.…”

“…Huang et al () find that board directors with investment banking experience positively affect the outcome of acquisitions. de Jong, Ongena, and van der Poel () suggest that conflicts of interests might arise when the investment bank is geographically diverse and might not exert its best effort in a region that bears little weight in its advising portfolio. In contrast, as suggested by Sibilkov and McConnell's (2014) results, an investment bank has a higher incentive to do well in these instances as a successful deal will increase the firm's expertise and improve its chance of being selected for future deals in the target country.…”

J. P. Morgan in London and New York before 1914

“…78 Even today internationally diversifi ed investment bankers still struggle to convert their more impressive overseas market shares into value for their shareholders or customers, compared to more focused players. 79…”

Expert Advice: Industry Expertise of M&A Advisors and Acquirer Shareholder Returns

“…1 Overall, our article provides a comprehensive set of evidence suggesting that investment banks with more expertise in the target industry can help acquirers generate higher shareholder returns. As such, we contribute to the literature on M&A advisors (see, e.g., Bowers and Miller (1990), McLaughlin (1990McLaughlin ( ), (1992, Allen, Jagtiani, Peristiani, and Saunders (2004), Servaes and Zenner (1996), Rau (2000), Kale, Kini, and Ryan (2003), Bao andEdmans (2011), Golubov, Petmezas, andTravlos (2012), Sibilkov and McConnell (2014), Rajamani, Van der Poel, De Jong, andOngena (2017), andChemmanur, Ertugrul, andKrishnan (2019)). Differing from prior articles that focus on investment banks' market share, prior client performance, international diversification, and employee human capital, we highlight the value of their industry expertise as an organization.…”