In our increasingly global economy, you might imagine that when looking for companies to buy, no stone will be left unturned, and scouts will scour the world looking for the best fit. Alas, new research from UConn School of Business suggests that isn’t really the case, and a disproportionate number of acquisitions occur much closer to home. Indeed, the research suggests that companies are around 2.5 more likely to buy firms that have a headquarters in the state where the CEO of the acquiring firm grew up than firms based elsewhere.
“We imagine this is because most people, including CEOs, have an emotional attachment to the place where they grew up,” the researchers say. “They may want to help their hometown or even become a hometown hero. They may also have a hometown advantage because they know the people and the place.”
The findings emerged from an analysis of over 5,500 mergers and acquisitions between 1992 and 2014. The mergers involved around 2,200 companies and 4,200 CEOs. The researchers used social security data to identify the home state of each executive.
Looking locally
The researchers found that companies were around 83% more likely to buy a firm when it was based in their CEO’s home state. What’s more, this phenomenon was even stronger when the CEO had lived in that state for a long time, or had attended college there.
Interestingly, when the researchers divided public and private deals, it emerged that such hometown deals were more likely to occur when it is for corporate gain, and therefore under greater scrutiny from investors, the press and so on. Indeed, such deals are also typically 10 times larger than deals that occur behind closed doors.
The researchers believe that the benefit of such an approach often revolves around the level of scrutiny the deal receives, both from the board and the outside world.
“The most interesting aspect of our research is that if the deal is subject to a great deal of scrutiny and attention, the hometown acquisition turns out to be a better business decision,” they explain. “But, if it is a small, private acquisition, it is typically a worse deal that other private acquisitions.”
Strong performance
Whilst deals driven by home comforts don’t create an impression of good corporate governance, the data suggests they do actually outperform similar deals by around 2%, which represents around $100 million in shareholder value. This is because the local knowledge of the CEO often translates into higher performance gains.
Scrutiny appears to be the key to such success however, as private deals conducted in the home town of the CEO typically underperformed the average by 1.5%, stripping some $22 million from shareholder value.
“Corporate monitors should be leery of small, private hometown deals, but should also recognize that a hometown advantage could benefit a company—if it has strong corporate governance in place, “ the researchers conclude.
