Bank Acquisitions Research Articles

Optimal lending under strategic acquisition and capital regulation: an option-based optimization

This paper explores the determinants of the acquirer bank's optimal loan rate based on a firm-theoretical option-pricing model under the maximum net gain from strategic acquisition. The model demonstrates how the nature of the loan (substitutes/complements), loan rate strategies (strategic substitutes/strategic complements) and regulation conditions jointly determine the acquirer bank's optimal loan rate. We find that the acquirer bank's loan rate are negatively related to the proportion of the combined banks owned by the acquirer bank's shareholders and also negatively related to the capital regulation under the nature of the loan complements and the loan-rate-setting complement strategy. Our findings provide an alternative explanation for the acquirer bank's strategies for operating and competing in the lending market concerning bank acquisition behavior.

Comparative cost study of foreign and Thai domestic banks in 1990–2002: Its policy implications for a desirable banking industry structure

This paper investigates the changing production technologies of foreign and domestic banks in Thailand in relation to increased foreign bank penetration by estimating their cost functions using panel data from 28 banks during 1990–2002. Our analysis suggests that foreign and domestic banks have the different advantages in their information production and processing. After the Asian crisis, more stringent prudential regulations improved the comparative cost performance of foreign banks. Foreign acquisition of domestic banks reduced costs associated with fee-based businesses and improved their operational efficiency. The analysis provides some evidence that consolidating domestic banks, allowing greater foreign bank penetration and enhancing information sharing system are needed to build a desirable banking industry structure.

Effect of Liberalization of Foreign Investment Limits: Evidence from the Indian Banking Sector

On February 16, 2002, the Reserve Bank of India issued a circular that signaled a policy liberalization facilitating acquisition of private sector banks in India by foreign entities. Portfolios of private sector and nationalized banks posted significant value gains in the days surrounding the announcement. The gains by private sector banks were almost double those of nationalized banks. We further analyze the firm specific abnormal returns using cross-sectional regressions and find a significant relation between firm-specific abnormal returns and factors typically associated with a bank's potential for takeover. These results provide the first empirical support for Stulz's hypothesis that one cause of the valuation gains associated with liberalization is the expected gain from a reduction of agency costs.

Efficiency vs. Agency Motivations for Bank Takeovers: Some Empirical Evidence

Bank takeovers result on average in little improvements in performance. This may be due to conflicting driving forces behind them; however these have seldom been studied. We study directly the motivations for bank acquisitions by analyzing the prices paid for them, under the assumption that bankers are willing to pay for what they want. We find that there is no evidence that bankers are ready to pay for possible economies of scale and scope; on the other hand buyers expect to transfer their superior managerial skills to targets. Market power seems to hold little value while entry (or diversification) commands a premium. Agency issues at the buyer are also an important motivation for takeovers: other things being equal acquirers with more free capital are willing to pay more.

Asset Restructuring Strategies in Bank Acquisitions: Evidence from the Italian Banking Industry

One of the most lively debated effects of banking acquisitions is the change in lending and asset allocation of the target bank in favour of transactional activities, at the expense of small and informational opaque borrowers. These changes may be the result of two distinct restructuring strategies of the asset portfolio of the bidder bank. An asset cleaning strategy (ACS), in which the acquiring bank makes a clean sweep of all the negative net present value activities in the portfolio of the acquired bank, and an asset portfolio strategy (APS), in which the acquiring bank permanently changes the portfolio allocation of the acquired bank. In this paper we focus on Italian bank acquisitions and test which asset restructuring strategy was predominantly pursued over the period 1997-2003. Moreover, we estimate both a model for the whole Italian banking industry and a model for the acquired banks located in economic backward Southern regions. At the national level we find evidence of a primacy of ACSs over APSs. When we concentrate on bank acquisitions that occurred in the Mezzogiorno (Italy's Southern regions), evidence seems to reverse, i.e. APSs dominate over ACSs.

Commercial Banks as Equity Underwriters

We examine the in-roads commercial banks have made into equity underwriting over 1990-2002. While banks end the period handling upwards of 25% of equity underwriting, most of this increase results from acquisitions of investment banks with an already established market share of equity underwriting. These acquisitions provide an opportunity to gauge the potential advantages of bank affiliation to equity underwriting. We find a significant decline on average in the market share of equity underwriting that banks acquired in the post-merger period. This decline in market share is larger than that experienced by investment banks of comparable reputation. Among the reasons why banks lose market share is that post-merger they originate fewer IPOs and their IPOs have a lower incidence of follow-on SEOs compared to independent investment banks. Following the merger, banks experience a large fall-off in their ability to retain follow-on SEOs and are less successful in winning SEO mandates when an issuer switches from its IPO underwriter. Taken together, the findings indicate that banks have not been able to achieve scope economies in equity underwriting.

Bank Consolidation and Small Business Lending: The Role of Community Banks

This paper examines how bank merger and acquisition activity affected small business lending in local U.S. banking markets between 1994 and 2000, focusing particularly on the role that community banks played in determining the ultimate effects of consolidation. During the 1994-1997 period, we find evidence that consolidation activity involving big banks was associated with lower loan growth, whereas community bank consolidations and a greater presence of community banks in the market were associated with higher loan growth. During the 1997-2000 period, consolidation activity was either unrelated to small business loan growth or associated with higher loan growth, suggesting that the dynamics of consolidation activity had changed. In both periods, we find evidence that consolidation presented an opportunity for community banks. Once adjustments are made for reclassifications in the size category of organizations due to consolidation or asset growth, we find that the share of small business lending funded by community banks rose during both study periods - particularly in markets undergoing consolidation.

Multi-channel banking in Romania: a comparative study of the strategic approach adopted by domestic and foreign banks

Driven by increased competition and more demanding customers, in the last five years a large number of banks have diversified their offer, offering multi-channel banking services. The situation is similar in transition economies where domestic and foreign banks are attempting to develop the market and attract a larger share of customers. This study presents a comparative analysis of the multi-channel banking strategies implemented by foreign and domestic banks in Romania, discussing the competitive conditions of the Romanian banking environment and the main reasons for the development of multi-channel services: in the market penetration stage, the foreign banks enter the Romanian market either by initiating electronic banking services, or through the acquisition of domestic banks; then, in the expansion stage, the foreign banks continue to develop through organic growth or through further local acquisitions, while domestic banks attempt to diversify their offer by introducing electronic banking services.

Competition and Strategic Information Acquisition in Credit Markets

We investigate the interaction between banks’ use of information acquisition as a strategic tool and their role in promoting the efficiency of credit markets when a bank’s ability to gather information varies with its distance to the borrower. We show that banks acquire proprietary information both to soften lending competition and to extend their market share. As competition increases, investments in information acquisition fall, leading to lower interest rates but also to less efficient lending decisions. Consistent with the recent wave of bank acquisitions, we also find that merging for informational reasons with a competitor is an optimal response to industry consolidation.

Hibernia National Bank and the Texarkana Acquisition

After a string of successful Louisiana bank acquisitions that accompanied a dramatic turnaround, New Orleans-based Hibernia Bank moved into Texas with the acquisition of Texarkana National Bank (TNB). The mismatch of markets, products, and strategies between parent and target, exacerbated by geographic distance, caused major market-share losses and internal upheaval at TNB. John Ulmer, sent to manage the turnaround, is informed by top managers the day he arrives that he does not have their support. This case helps students (1) understand the role of consolidation in the changing financial-services sector, (2) learn how one company manages the post-merger-integration (PMI) process, and (3) plan their own PMI process under turnaround conditions.

Role of Foreign Banking Institutions in the European Union’s New Financial Markets

The aim of this paper is to analyze the influence of foreign capital on the commercial banking sector of the emerging markets. The entry of foreign banks into the markets of Central and Eastern European countries (CEECs) has been rapid, remarkable and massive. This paper presents some empirical results of foreign banks’ entry, activities, operation and strategies in four CEECs (Estonia, Lithuania, Poland, and Romania); the first three of them have already joined the European Union integrated financial market in May 2004. The paper is based on a special survey results obtained by the authors from domestic and foreign-owned banks in these countries. Meanwhile mergers and acquisitions of the domestic banks are rather technical details of a foreign capital influx. According to our results, the main incentives motivating foreign entry have been to exploit new business opportunities and/or market expansion strategies. The host country market specifics, advantages and disadvantages of foreign banks, main target groups, and fields of activities, as well as foreign banks’ motives for strategic long-term stay in the host country market some more important characteristics of banks’ governance and management are also discussed. Interesting are the questions who are the key decision-makers in the majority of foreign-owned banks, how banks have adopted knowhow and risk management systems from the mother bank, how the mother bank helps its daughter in the host country, etc. The issues of the competitive pressure by foreign banks and the domestic banks’ survival prospects are also addressed in the paper.

IBBEA Implementation and the Relative Profitability of Small Banks

The enactment of Riegle‐Neal IBBEA in 1994 encouraged bank mergers and acquisitions. Empirical evidence indicates that large banks benefited from IBBEA enactment. However, there is little, if any, evidence of the impact of the act on small banks’ profitability relative to large banks. This study examines the impact of IBBEA on the performance of small banks in the period preceding and following IBBEA implementation. Evidence is presented that indicates the return on assets of small banks was significantly less than that of larger banks in the post‐IBBEA period. This is contrary to the results of the pre‐IBBEA period when small banks’ profitability was competitive with and in some cases even better than large banks’ profitability. It is concluded that the enactment of IBBEA has placed small banks at a competitive disadvantage which could eventually lead to their demise.

Does Foreign Bank Entry Reduce Small Firms' Access to Credit? Evidence from European Transition Economies

On the basis of focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States, the development of small-business lending by foreign banks is analysed. Our approach allows us to complement the standard empirical literature, which has difficulty in analysing qualitative issues such as the role of changing lending technologies. It is found that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply towards large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail makets.

Consolidation and Bank Performance: The Argentine Experience

We examine a large panel of more than 100 banks from Argentina to study the effects of bank consolidation on performance between December 1995 and December 2000, a period of heavy bank consolidation and relative calm. Overall, we find a positive and significant effect of bank consolidation on bank performance. Bank returns increase with consolidation, and insolvency risk is reduced. Additionally, the study suggests that mergers and privatizations have a beneficial effect on bank returns. The effects of a bank acquisition on return on equity is, however, negative. Acquisitions do not seem to have any effect on risk-adjusted returns. The study also finds that a bank's insolvency risk is reduced significantly through mergers and privatization and is unrelated to bank acquisitions.

Technical Efficiency of Large Bank Production in Asia and the Pacific

This study investigates the efficiency of large commercial banks in Asia and the Pacific region. In particular, the overall technical efficiency, pure technical efficiency and scale efficiency has been estimated, the factors (including, the environmental factors) that influence efficiency of banks in the region have been explained and the mean efficiency of large banks in different countries of the region has been compared. The study found that when the national frontier was expanded to regional frontier, the efficiency scores declined, the environmental variables had significant influence on efficiency scores and developed countries showed pure technical efficiency score significantly higher than the less developed countries. Hence, going by the global advantage hypothesis a surge in mergers and acquisitions of banks in this region is predicted

Corporate Governance Changes in the 20th Century: A View from Italy

In this paper, I consider four stages of Italian development in the 20th Century: liberalism, the mixed economy, the welfare state and the new economic constitution. In the first stage, liberalisation favoured economic and financial development. However, an important feature of Italian governance was the role played by the State. Initially this role was limited to supporting industrial growth; in the second stage of economic development, it involved the acquisition of banks and industrial companies by the State. Public ownership of large sectors of the economy and the equity markets' limited role in the financing of industry made company law modernisation less important from a policy perspective. In addition, the incumbent capitalists benefited from the State's occupation of large sectors of the economy. As a result, the rules on joint-stock companies, which were included in the Civil Code of 1942, were very mild in protecting minorities and largely ignored the joint-stock companies' role in the capital markets. More than thirty years elapsed before the introduction, in the third stage of Italian development, of disclosure rules for listed companies and of a securities regulator. Corporate governance reform was delayed until the end of the '90s, while a general reform of company law was enacted in 2003 reflecting a new stage of financial development started in the 90s as a consequence of trade liberalisation both in the EC and worldwide. However, astounding financial scandals showed that even the recent reforms are based on shaky foundations, to the extent that both public and private enforcement are weak, particularly with respect to listed companies. On balance, the Italian experience, despite offering examples of convergence towards global standards, does not support the 'strong convergence' theory and is better explained by the rival scholarly position which sees political forces and path dependency as shaping and constraining economic evolution.

What Motivates Bank Takeovers: An Insider's View

Bank takeovers result on average in little improvements in performance. This may be due to conflicting driving forces behind them; however these have seldom been studied. We study directly the motivations for bank acquisitions by analyzing the prices paid for them, under the assumption that bankers are willing to pay for what they want. We find that there is no evidence that bankers are ready to pay for possible economies of scale and scope; on the other hand buyers expect to transfer their superior managerial skills to targets. Market power seems to hold little value while entry (or diversification) commands a premium. Agency issues at the buyer are also an important motivation for takeovers: other things being equal more entrenched CEOs are willing to pay more; so are acquirers with more free capital.

Measuring Value Creation in Bank Mergers and Acquisitions

This paper performs an event study on mergers and acquisitions between publicly listed Italian banks. Our study shows that previous literature may have only partially captured the market reaction by choosing the announcement date as the event date. In less efficient markets that date is not sufficiently accurate to capture all the market reaction because of the leakage of information. Using the rumours date instead, we find that in our sample the overall market value creation can even become from negative to positive. Moreover, we also find evidence that in Italy private benefits are more likely to drive the bidders' decisions rather than value creation goals.

Learning by Observing: Information Spillovers in the Execution and Valuation of Commercial Bank M&As

We offer a new explanation for why academic studies typically fail to find value creation in bank mergers. Our conjectures are predicated on the idea that, until recently, large bank acquisitions were a new phenomenon, with no best practices history to inform bank managers or market investors. We hypothesize that merging banks, and investors pricing bank mergers, learn-by-observing information that spills over from previous bank mergers. We find evidence consistent with these conjectures for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. These findings are consistent with semi-strong stock market efficiency.

Bank acquisitions and performance: evidence from a panel of European credit entities

The aim of our research is to study the effect on European Union credit entities performance of financial acquisitions, overcoming three limitations found in previous studies: most studies have focused on the United States market (characterised by higher regulatory restrictions for banking expansion both geographically and in products); they have not considered acquisitions of other banks as distinct from acquisitions of other non-banking financial entities; and statistical limitations have been evidenced. Our study, therefore, is the first to analyse bank performance derived from both the acquisition of another bank and the acquisition of other non-banking financial entities, using panel data methodology, for the period 1993–2000, in a sample of 1629 banks, where 181 acquisitions are noted. The results show an increase in the acquirers’ long-term profitability. The increase in performance, however, is more significant for bank acquisitions than for non-bank acquisitions.