Does Corporate International Diversification Destroy Value? Evidence from Cross-Border Mergers and Acquisitions

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of U.S. acquirers over the period 1990-1999. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. Consistent with the industrial diversification discount literature, unrelated cross-border acquisitions result in a significant diversification discount of about 24 percent after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target.