Cross-border bank mergers: What lures the rare animal?

Although domestic mergers and acquisitions (M&As) in the financial services industry have increased steadily over the past two decades, international M&As were until recently relatively rare. Moreover, the share of cross-border mergers in the banking industry is low compared with other industries. This paper uses a novel dataset of over 3000 mergers that took place between 1985 and 2001 to analyze the determinants of international bank mergers. We test the extent to which information costs and regulations hold back merger activity. Our results suggest that information costs significantly impede cross-border bank mergers. Regulations also influence cross-border bank merger activity. Hence, policy makers can create environments that encourage cross-border activity, but information cost barriers must be overcome even in (legally) integrated markets.     

Corporate Governance and Mergers and Acquisitions Performance in Banks: Evidence under the Special Regulatory Environment in Taiwan

In this study, we focus on the relation between bank governance and bank merger results under Taiwan’s special regulatory environment in 2000. Adopting governance variables (executive remuneration, managerial ownership, and board diversity), we find that managerial ownership is positively related to bank merger results and that board size is negatively correlated with bank mergers’ performance. This study supports sound governance mechanisms to prevent banks from pursuing a value-loss merger and acquisition (M&A). Our results offer the insight that internal bank governance structures have a bigger impact on the value effects from bank mergers. Thus, regulators may elevate the performance of bank M&As by enhancing corporate governance codes.     

The value of access to finance: Evidence from M&As

We examine synergies in mergers and acquisitions (M&As) generated by firms’ comparative advantages in access to bank finance. We find robust evidence that greater access to bank finance increases firms’ attractiveness as acquisition targets. Targets’ comparative advantage in bank finance improves bank credit supply and reduces financing costs for the merged firms. These effects are more pronounced for acquirers with greater frictions in accessing bank loans and acquirers with greater growth opportunities. Overall, this paper reveals that targets, not just acquirers, contribute to financial synergies in M&As.     

Does Financial Restructuring Change the Relationship Between Corporate Governance and the Static and Dynamic Efficiency of Bank Mergers in Taiwan?

Taiwan's Financial Restructuring Fund Statute was enacted in 2001. This study is unique in simultaneously considering Taiwan's corporate governance, bank mergers, and the financial restructuring scheme. Unlike other literature that investigates only the characteristics of corporate governance that affect the concurrent static efficiency of bank mergers, we further use the dynamic slacks-based measure to examine the persistent and intertemporal effects on the dynamic efficiency of bank mergers. The results of this study show that major shareholders of acquiring banks have greater controlling power to decide whether to merge during the financial restructuring period. A bank merger using the financial restructuring scheme has less static and dynamic efficiency in the short run but gradually increased static and dynamic efficiency in the long run. Such an observation is consistent with the hypothesis that controlling shareholders pursue long-term efficiency in a bank merger.     

Merger and acquisitions in South African banking: A network DEA model

Banking in South Africa is known for its small number of companies that operate as an oligopoly. This paper presents a strategic fit assessment of mergers and acquisitions (M&A) in South African banks. A network DEA (Data Envelopment Analysis) approach is adopted to compute the impact of contextual variables on several types of efficiency scores of the resulting virtual merged banks: global (merger), technical (learning), harmony (scope), and scale (size) efficiencies. The impact of contextual variables related to the origin of the bank and its type is tested by means of a set of several robust regressions to handle dependent variables bounded in 0 and 1: Tobit, Simplex, and Beta. The results reveal that bank type and origin impact virtual efficiency levels. However, the findings also show that harmony and scale effects are negligible due to the oligopolistic structure of banking in South Africa.     

The impact of bank merger growth on CEO compensation

We examine the impact of bank mergers on chief executive officer (CEO) compensation during the period 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non‐merger internal growth, with the former relationship being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post‐financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.     

How Do Stock Markets in the US and Europe Price Efficiency Gains from Bank M&As?

This paper examines whether the stock markets price changes in operating efficiency as a result of bank mergers and if the premiums paid by the acquiring banks also reflect these changes. The sample covers mergers and acquisitions consummated in the US and Europe during the period of 1997 to 2003. Changes in cost and profit efficiency are calculated using the non-parametric Data Envelopment Analysis (DEA) method 1 year prior and 3 years following the merger announcement. Evidence suggests a significant relation between the announcement-period abnormal returns and the post-merger profit efficiency changes. Results also indicate that bank managers are likely to pay a higher premium for those M&A transactions that can bring about greater efficiency gains, particularly on the profit side. Further, although acquirer shareholders in the US and Europe appear to react differently to the announcement of a bank merger, our results for target shareholders suggest that regional differences might be less important than the degree of capital market development in explaining wealth effects.     

Estimating the degree of operating efficiency gains from a potential bank merger and acquisition: A DEA bootstrapped approach

We propose a bootstrapped Data Envelopment Analysis (DEA)-based procedure to pre-calculate and pre-evaluate the short-run operating efficiency gains of a potential bank merger or acquisition (M&A). As an illustrative example, we apply our proposed procedure to investigate the degree of operating efficiency gains of 45 possible bank M&As in the Greek banking industry over the period from 2007 to 2011. The results reveal that a year before and a year after the initiation of the Greek fiscal crisis, the majority of the potential bank M&As under examination were unable to generate short-run operating efficiency gains. In addition, our results for 2011 indicate that the majority of bank M&As can lead to short-run operating efficiency gains. Finally, the empirical findings support the view that a merger or acquisition between efficient banks does not ensure an efficient bank M&A.     

Top-tier financial advisors,expropriation and Chinese mergers & acquisitions

The empirical literature contains mixed evidence regarding the relationship between advisor reputation and returns in mergers and acquisitions (M&As). However, very few studies consider the detrimental effect of expropriation by controlling shareholders and value creation role of top-tier financial advisors. We revisit the role of financial advisors in M&As by examining whether and why top-tier advisors affect acquisition quality in the Chinese market, finding that they generate substantial value for acquiring shareholders, though value creation is lower for high expropriation-possibility acquirers. We also show that top-tier financial advisors help improve operating performance and reduce bid premiums. The results contribute to the takeover literature by shedding new light on the role of financial advisor in acquisitions.     

Mergers,acquisitions, and bank efficiency: Cross-country evidence from emerging markets

In emerging countries, bank mergers and acquisitions (M&A) are frequently motivated by the objective of promoting stability in the banking industry. However, the evidence that M&A can lead to better performing banks is tenuous at best. In this article, we investigate if this tenuous relationship could be due to the treatment of target and acquiring banks as the same type in empirical analysis, which overlooks the possibility that M&A may affect these banks differently. Using panel data on six emerging countries, our results confirm that the effect of M&A is generally weak except when our regressions are implemented separately for target and acquiring banks. For the latter, we find that target banks tend to be more efficient after an M&A but no efficiency improvements are found for acquiring banks. These results suggest that in emerging countries, bank M&A can lead to efficiency improvements for the combined entity, although target banks are mainly the ones to benefit from it. They also highlight the importance of distinguishing between target and acquiring banks so as to obtain sharper estimates of how M&A might affect bank performance.     

Liquidity creation through efficient M&As: A viable solution for vulnerable banking systems? Evidence from a stress test under a panel VAR methodology

According to the “cost efficiency - liquidity creation” hypothesis (CELCH), introduced in this paper, a rise in a bank’s cost efficiency level increases its liquidity creation. By employing a novel stress test scenario under a panel VAR methodology, the CELCH and the direction of causality between liquidity creation and cost efficiency are tested. Moreover, using new measures of liquidity creation (Berger and Bouwman, 2009), the question of whether potential bank mergers and acquisitions (M&As) can enhance liquidity creation and generate additional credit channels in the economy is addressed. The robustness of potential consolidation scenarios are evaluated and compared through the use of new “half-life” measures (Chortareas and Kapetanios, 2013). In line with CELCH, the positive impact of cost efficiency on liquidity creation is shown. The empirical evidence further suggests that potential consolidation activity can enhance the flow of credit in the economy. Bank shocks seem to have the most persistent effect on both liquidity creation and cost efficiency. Finally, doubts are cast on the strategies followed by policy authorities regarding the recent wave of M&As in the banking sector.     

Measuring Takeover Premiums in Cross-Border Mergers and Acquisitions: Insights from Turkey

We investigate whether the merger announcement dates provided in a popular mergers and acquisitions (M&A) database, SDC, serve as accurate event dates for estimating the wealth effects of mergers on target firms located in Turkey. We find that 74 percent of SDC’s merger announcement dates are preceded by merger-related events such as merger rumors, target firms’ search for potential acquirers, and early-stage merger negotiation announcements. Target cumulative abnormal return (CAR) estimates around these early dates are almost twice as large as the CAR estimates around SDC’s merger announcement dates. We argue that our findings have implications for the recently flourishing cross-border M&A literature.     

The Disciplinary Role of Financial Statements: Evidence from Mergers and Acquisitions of Privately Held Targets

This study examines whether requiring the disclosure of audited financial statements disciplines managers’ mergers and acquisitions (M&As) decisions. When an M&A transaction meets certain disclosure thresholds, the Securities and Exchange Commission (SEC) requires the public acquirer to disclose the target's audited financial statements after the merger is completed. Using hand‐collected data, I find that the disclosure of private targets’ financial statements is associated with better acquisition decisions. Furthermore, I find that this disciplining effect of disclosure is more pronounced when monitoring by outside capital providers is more difficult and costly, and when other disciplining mechanisms are weaker. Finally, these findings are robust to several alternative explanations, such as monitoring from blockholders and voluntary disclosures. In sum, the evidence suggests that the ex post mandatory disclosure of private targets’ accounting information disciplines managers’ acquisition decisions and improves acquisition efficiency.     

U.S. Airways merger: A strategic variance analysis of changes in post-merger performance

This case provides students the opportunity to apply strategic variance analysis (SVA) methodology in analyzing the performance changes realized in an airline merger. The U.S. Airways–America West merger provides an example of a complex, strategic action that simultaneously impacts firm size, unit pricing and costs, efficiency, and capacity for the combining airlines. This merger provides a rich example for the analysis since it combines U.S. Airways, a higher cost network airline that is geographically focused on the Eastern U.S., with America West, a low cost airline operating primarily along the Western U.S. The case includes merger and acquisition (M&A) theory discussing market power vs. efficiency motives for mergers and discusses the role of the U.S. Department of Justice and Federal Trade Commission in evaluating M&As and their impact on markets. The case asks students to serve as consultants applying the SVA methodology to the past U.S. Airways–America West merger and provide conclusions.     

Cross‐Border Bank M&As and Risk: Evidence from the Bond Market

The impact of cross‐border bank M&As on bank risk remains an open question. Though geographically diversifying bank M&As have the potential to reduce the risk of bank insolvency, they also have the potential to increase that risk due to the increase in risk‐taking incentives by bank managers and stockholders following these transactions. This paper empirically investigates whether cross‐border bank M&As increase or decrease the risk of acquiring banks as captured by changes in acquirers' yield spreads. This paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following M&A announcements. The study finds that bondholders, in general, perceive cross‐border bank M&As as risk‐increasing activities, unlike domestic bank mergers. Specifically, on average, yield spreads increase by 4.13 basis points following the announcement of cross‐border M&As. This study also finds that these yield spreads are significantly affected by the differences in investor‐protection and deposit insurance environments between the transacting countries. However, the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads. The overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks' reserve positions.     

Toward a complete definition of relatedness in merger and acquisition transactions

The interrelation between different sources of relatedness in M&A transactions has been largely overlooked in extant literature. This paper offers theoretical and empirical investigation and introduces a few new measures of relatedness. We find that single-dimensional measures of relatedness are complements, not substitutes, of each other, and their impacts on the market’s reaction are additive and interdependent. Specifically, each measure contains unique relatedness information and the market’s perception of, and reaction to, the presence of relatedness in M&A deals is more sophisticated than the extant literature prescribes. The market seems to reward operational and marketing relatedness in small-vicinity mergers and out-of-state mergers. In contrast, related in-state mergers seem to be associated with a significantly negative market reaction. Similarly, technology affiliation induces an additional positive market reaction that is separate from simple industry matching, and the market seems to reward the acquisition of high-technology targets by high-technology acquirers and to penalize the acquisition of high-technology targets by non-high-technology acquirers. Furthermore, we find that horizontally and vertically related mergers are relatively more likely to be completed, while in-state and large-vicinity mergers are less likely to be completed. We also find that when the target is incorporated in a target-friendly state, the merger is less likely to be completed, though state-specific merger laws do not contribute significantly to mergers’ valuation. Taken together, our results indicate that relatedness is a multidimensional metric composed of several interrelated components, and, thus, single-dimensional proxies are not sufficient to capture relatedness accurately and completely.

     

The evidence on efficiency gains: The role of mergers and the benefits to the public

Operating efficiencies, employee productivity, profit performance and average relative efficiency (using Data Envelopment Analysis) were measured for Australian trading banks from 1986 to 1995. Changes in a bank’s market share of deposits is explored as a means of determining the extent to which efficiency gains are passed on to the public. In general, efficiencies rose in the post-deregulation period. Evidence from the merger cases studied supports the reports of others that acquiring banks are more efficient than target banks. However, the acquiring bank does not always maintain its pre-merger efficiency. Decision-makers ought to be more cautious in promoting mergers as a means to enjoying efficiency gains. There is mixed evidence on the extent to which the benefits of efficiency gains are passed on to the public.     

Cross-border mergers and acquisitions: The importance of local credit and source country finance

We study host and source country finance and the interplay between the two in determining the incidence and intensity of cross-border mergers and acquisitions (M&As) into the U.S. We find that states adopting interstate banking deregulation attract a greater number and higher total volume of cross-border M&A deals. We also document a positive impact of source country financial depth on the incidence of cross-border M&As and uncover a substitution effect between local and source country bank finance. The effects are larger for deals where cash is used as the method of payment as well as for firms that are more dependent on external finance, and smaller for publicly traded firms.     

Aggressive CEOs and bank mergers and acquisitions

The U.S. banking industry has seen waves of mergers since the 1980s. Despite a significant body of research on the determinants of these waves, there are few studies of how CEOs influence banks’ mergers and acquisitions (M&As). This paper studies the effect of CEO aggressiveness on bank M&As. We construct a new measure of bank CEO aggressiveness based on CEOs’ ancestral countries of origin and data on inter-country wars. We find that aggressive CEOs are more likely to acquire other banks. Moreover, the impact of CEO aggressiveness on bank M&A decisions is more pronounced when the CEOs are from larger and more profitable banks, when CEOs have a longer tenure, and when CEOs’ ancestral country of origin has a more masculine culture. Moreover, we show that aggressive CEOs are more likely to make acquisitions when CEOs possess more cultural maintenance, which captures the extent to which CEOs retain their original cultural values and beliefs. Finally, we document positive short-term stock market reactions to bank M&As initiated by aggressive CEOs.     

The impact of gender diversity on shareholder wealth: Evidence from European bank M&A

We explore the association between board gender diversity and shareholder value creation. Specifically, we investigate the impact of gender diversity on the economic impact of bank mergers and acquisitions (M&A). We employ a multi-year sample of M&A announced by European listed banks and find that: (i) the presence of women on the board of directors has a positive and statistically significant effect on acquirer gains; and (ii) boards with three or more women, or where women represent more than 25% of the board, have a stronger impact on acquirer gains than in the opposite case, consistent with critical mass theory. Moreover, banks with a critical mass of female directors perform better in undertaking value-enhancing M&A after the global financial crisis. Policy makers and practitioners could benefit from the findings by exploiting the advantages of board heterogeneity in terms of gender.