cross-border acquisitions
I was quite dumbstruck when a McKinsey partner said that he advised his clients to engage in cross-border M&A due to the relatively higher historical returns associated with such transactions.
True, acquisitions abroad may have higher yields. However these extra returns often come with additional risks. For example, the acquirer needs to cope with cultural differences in business practices, difficulties involved in monitoring a physically far-away entity, exchange rate risks created by a cost structure denominated in a different currency, and socio-political risks associated with investing in another country. In other words, on a risk-adjusted basis, returns on domestic acquisitions may still be more favorable.
True, acquisitions abroad may have higher yields. However these extra returns often come with additional risks. For example, the acquirer needs to cope with cultural differences in business practices, difficulties involved in monitoring a physically far-away entity, exchange rate risks created by a cost structure denominated in a different currency, and socio-political risks associated with investing in another country. In other words, on a risk-adjusted basis, returns on domestic acquisitions may still be more favorable.
