Cross-Border Mergers and Acquisitions and Country Risk Ratings: Evidence from U.S. Financials

ABSTRACTThis study reports how country risk and macroeconomic conditions influence the wealth gains of U.S. financial firms involved in international mergers and takeovers. The findings suggest that U.S. financials experience weakly significant wealth gains around announcement date. The wealth gains are significant for takeovers in Latin America. There are also differences in wealth gains of subsector affiliations of financial firms. While banks experiencing wealth loss, both insurance and investment services firms having significant wealth gains. The country risk, including economic, political, and financial risk ratings, help to explain the wealth gains to financial bidders.JEL: G14, G15, G20, G34KEYWORDS: Financial Takeovers, Country Risk, Wealth Effects(ProQuest: ... denotes formulae omitted.)INTRODUCTIONInternational mergers and takeovers continue to get attention of both academicians and practitioners. The financial services industry also has experienced an extensive period of reorganization and consolidation with increased trend toward cross-border takeovers. The motivations for these include existence of economic reasons for restructuring, an increase in the general economic integration and volume of trade across national borders, changes in laws, and presence of an easy financing environment. The international involvements of firms both provide new opportunities for the firms and expose them variety of risks, including economic, political, and financial risks, among others. The argument for in favor of cross-border takeovers includes firm's ability to realize benefits that can't be obtained cross-country portfolio diversification. Therefore, cross-border takeovers may add value to shareholders wealth.Majority of the studies report positive wealth gains for U.S. firms in international takeovers (Cakici, Hessel, and Tandon, 1996; Kiymaz and Mukherjee, 2000; Kiymaz, 2005). There are also studies reporting negative wealth gains to U.S. acquiring firms. For example, Moeller and Schlingemann (2005) find that firms involving cross-border takeovers experience lower wealth gains than domestic takeovers. Doukas and Kan (2006) report that foreign involvement decreases shareholder value while increasing bondholder value.This study researches the impact of country risk (political, economic, and financial risks) on the stock price reactions of US financial firms announcing foreign takeovers. The study first examines the wealth effects that result from takeover announcements for US financiais involved in cross-border takeovers during the period of 1989-2003. It then explores the impact of geographical location of target and the industry affiliation of bidder on wealth gains. The study further examines the determinants of wealth gains to U.S. bidder by analyzing country risk and macroeconomic factors while controlling for other variables.Overall, findings show the stock prices of U.S. financiais increase slightly following takeover announcements. These results are contrary to those of domestic studies of financial mergers that report declining stock prices following takeovers announcements. The extent of stock price change also varies depending on location of target and sub-sector of financial bidders.Cross-sectional regression results show that country risk play a role in explaining the stock price reaction. The wealth gains (increase in stock prices) relate positively with economic risk rating and inversely with financial and political risk rating. This implies that takeovers in more stable economic environment lead higher wealth gains to U.S. financiais. On the other hand, the inverse relation between wealth gains and financial and political risk ratings suggest that takeover in countries with lower financial and political risk rating (higher risk) result in higher wealth gains to bidders. This may be a result of bidding firms negotiating a better deal as less favorable financial or political conditions present opportunity for U. …