Cross-border Bank Acquisitions: Is there a Performance Effect? By Ricardo Correa Discussant: Elijah Brewer III, DePaul University and the Federal Reserve Bank of Chicago
Outline • Why I like the paper? • Summary of setup • Big picture questions • Results • Suggestions/clarifications – probit specification • Suggestions/clarifications – difference-in-difference tests • Assessment
Why I like this paper • The paper combines two strands of the banking literature: • It expands the literature on cross-border acquisitions by analyzing both the determinants of financial foreign direct investment at the country level and the target specific characteristics that motivate cross-border acquisitions. • It extends the operating performance analysis used to analyze performance effects post domestic M&A acquisitions to a sample of deals that include targets in developed and emerging economies.
Summary of setups • Probit specification to estimate the factors that distinguish banking organizations that have been targets of cross-border bids from those that have not using data from mid-1990s to the early 2000s. The dependent variable is equal to one, the year a firm is the target of a bid from a foreign financial institution, zero otherwise. • Univariate tests are conducted for several measures of performance • Comparing performance two-years before relative to two-years after merger. • An equation to estimate the effects of economic integration and information costs on a target’s performance post-cross-border acquisition
BIG questions • Which factors influence cross-border acquisitions? • Do cross-border acquisitions improve the target’s performance? • What factors can explain the change, if any, in performance?
Results • First question: • The discrete choice estimates show that banking organizations are more likely to get acquired in cross-border deals if they are relative large, poor performers, located in a small country, and when the banking sector is more concentrated. • Second question: • Post-acquisition performance for target banking organizations does not improve in the first two years relative to domestically-owned financial institutions. In fact, the multivariate regression shows that performance declines over the first several years after the acquisition by a foreign entity.
Suggestions, Clarificationsprobit specification (1) • Average performance measures over a longer horizon to smooth out short-run fluctuations in these measures that may not have anything to do with the long run performance of the firms. • A risk measure • Variability of ROA or ROE • RWA/TA • Cross-border deals might be motivated by the desire to gain access to a banking organization’s retail operations. Why not control for this possibility by including the ratio of retail deposits to total deposits in the specification? • Number of foreign banking organizations or banking organizations that are owned by foreign banks in the bank’s market area. Are you more likely to be a target if there are other banking organizations in your market that are foreign owned? • Is a banking organization more likely to be a target if it has a foreign operation?
Suggestions, Clarificationsprobit specification (2) • Are firms in a country more likely to be targets of cross-border deals if the currency of the country is relatively weak? A country-fixed effect? • Did you review the history of non-acquirers to identify firms whose objective function may include elements other than maximizing the value of the banking organizations’ to their shareholders? In particular, did you exclude organizations in any year in which they are government owned or owned as a part of a cooperative?
Suggestions, Clarifications probit specification (3) • To capture the importance of non-interest income, It might be useful to make use of: • The ratio of non-interest income to net interest income plus non-interest income • In addition, recent studies seem to suggest that banking organizations have been shifting within non-interest income between traditional and non-traditional sources of non-interest revenue. So, why not use the following decomposition of non-interest income: • Traditional fee-based revenue • is income from fiduciary activities plus service charges on deposit accounts. • Nontraditional sources of non-interest revenue • all other non-interest revenue (e.g., income from underwriting corporate debt and equity securities, selling and underwriting various forms of insurance, etc).
Suggestions, Clarificationsprobit specification (4) • What does the concentration measure actually tell us? • In four countries (France, Germany, Spain, and the United States) that account for 20 percent of the deals and 37 percent of the observations the cross-country average three-bank concentration ratio is likely to be very low and not quite representative of the actual concentration in the countries. According to one study using data for the period 1989 to 1996 the cross-country average three-bank concentration ratio was 0.26. For countries like the United States the three-bank concentration ratio does not reflect the extent of competition in a banking market in which a particular firm operates. The importance of this is likely to vary with size of country. • What does the Heritage Freedom measure and how is it expected to influence the probability that a firm will be target of a bid from a foreign entity? You need to discuss this and point out the limitation of this index.
Suggestions, Clarificationsprobit specification (5) • Room for greater interpretation of the coefficients. For example: • The Market CAP/GDP variable is included as a measure of the importance and market power of the banking system in the economy. • Correa claims that a more developed equity market competes with the banking sector in the allocation of resources, reducing market power and makes entry less attractive for MNBs. An alternative hypothesis is that more competition primarily from capital markets may make for greater efficiencies and higher profits, making entry more attractive. A discussion a long these lines would fill out the paper nicely.
Suggestions, Clarificationsprobit specification (6) • Econometric issues: • Do non-acquirers appear multiple times? If so, do you have panel data problems that Petersen (2007) discusses in “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” • Are the factors influencing cross-border mergers constant over time? The number of deals seem to peak in 2000, declining thereafter.
Suggestions, Clarifications difference-in-difference tests (1) • Control sample issues • Does the control sample include banking organizations that are undergoing some domestic restructuring that could make it a less than perfect control for overall changes in the banking activity at the country level? • If there is a problem with the control sample, this could not only influence the difference-in-difference tests but it could influence the performance and economic integration tests that are performed latter on in the paper. • I suggest that Correa try several other country-level indices: • One for those firms within the country that are involved in domestic mergers. • Another for those firms within the country that are not involved in any type of merger activities.
Suggestions, Clarifications difference-in-difference tests (2) • Compares performance of the standalone entity over the two year period before the merger with the entity that is a subsidiary of the acquirer over the two year period after the merger. Are we comparing apples and oranges here?
Assessment • Correa have considered two BIG picture questions: • Which factors influence cross-border acquisitions? • Do cross-border acquisitions improve the target’s performance? • Uses deals in both emerging markets and developed countries. Provides a nice addition to the literature. • Spending a little more time on the RHS variables in the probit regression seems worthwhile. • Developing appropriate benchmarks to compare banking organizations performance before and after cross-border acquisitions. • Correa has already found some very interesting correlations in the data and I have no doubt there is much to learn from considering these two BIG picture questions.