Large Mergers Research Articles

The Echoes of Forgotten Footfalls: Telecommunications Mergers at the Dawn of the Digital Millennium

The Telecommunications Act of 1996 promised to promote competition and reduce regulation, secure lower prices and higher quality services . . . and encourage the rapid deployment of new telecommunications technologies. One decade later, the Act has drawn sharp criticism for having prompted a wave of mergers among incumbent carriers without having generated a corresponding increase in consumer welfare. For instance, the very sort of merger that was once considered unthinkable - a reunification of AT&T with two former Bell operating companies - is on the verge of completion.The legal fate of these mergers is at once a historical mirror and a harbinger of American telecommunications law beyond the first decade under the 1996 Act. Mergers such as the unions of SBC and AT&T, Verizon and MCI, and Sprint and Nextel have not encountered significant legal obstacles. Since the Bell breakup, no significant telecommunications merger has failed to receive regulatory approval in the United States. The 1996 Act and its implementation have signaled that federal authorities will remain content to extract concessions in exchange for their approval of even the largest mergers within the telecommunications industry. A decade after comprehensive legislative reform of telecommunications, all segments of the industry are highly concentrated. Miniature versions of the old Bell system have emerged on each coast. The cable industry is only slightly less concentrated, and nothing stands between further consolidation and integration in that industry except provisions of the 1996 Act that had been designed to protect competition within media rather than telecommunications markets. If Voice over Internet Protocol (VOIP) overcomes every other form of terrestrial telecommunications technology, control of telecommunications will be divided between providers of broadband Internet access and wireless network operators. Firms that are most facile in integrating wireless and wireline services, for residential and business customers alike, will dominate the industry.This article reviews the mergers that have reshaped the telecommunications industry since the Bell breakup decree and in particular since the passage of the 1996 Act. It analyzes the legal framework that has developed in response to the 1996 Act and its implementation. Much of the FCC's merger policy has grown out of its response to horizontal mergers involving incumbent telecommunications carriers. The Telecommunications Act's cable provisions and certain legal tools independent of the 1996 legislative reform have facilitated an alternative approach to merger policy. That alternative path has assumed ever greater importance as the Internet and access to it via cable-based platforms have achieved greater prominence within the market for telecommunications services.This article also explores why the Act has accelerated rather than retarded the trend toward consolidation and concentration in telecommunications. Having devoted most of its energy toward legal issues whose technological and economic roots lay deep in the Bell breakup decree, the Act failed altogether to deal with the Internet. This oversight was merely one of several profoundly mistaken technological assumptions underlying the Telecommunications Act. It also contemplates explores possible avenues for reform that remain open under the 1996 Act should the federal government ever conclude that the anticompetitive potential of telecommunications mergers outweighs their salutary effects.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2005

The profitability of the U.S. commercial banking industry remained strong again in 2005, although it was a bit below the levels of recent years. Asset quality was still sound, but pressure on net interest margins lowered the return on assets, and an increase in equity relative to assets—owing to an accumulation of goodwill from recent large mergers—pushed down the return on equity more substantially (figure 1). Growth in industry assets remained solid. These bank profit and balance sheet developments were in large part attributable to the generally favorable financial and economic conditions of the U.S. economy in 2005. On the financial front, shortand intermediate-term interest rates increased as monetary policy tightening lifted the target federal funds rate 2 percentage points during the year (figure 2). Longer-term interest rates remained quite low, however, and thus the Treasury yield curve flattened considerably. Interest rates on fixed-rate homemortgage loans were relatively low over most of 2005, although they rose somewhat late in the year. Corporate risk spreads stayed quite narrow by historical standards. The U.S. economy continued to expand at a solid pace in 2005. In the household sector, consumer spending remained vigorous despite higher energy prices; it was supported by an improving labor market and gains in household wealth that reflected further substantial increases in house prices. The low level of residential mortgage interest rates last year spurred sales of both new and existing homes to record levels, although sales cooled somewhat late in the year. Mortgage refinancing rose for a time during the first half of the year but dropped back in the second half. In the corporate sector, investment spending expanded at a solid pace, buoyed by robust growth in final sales. Corporate profits posted strong gains, and firms maintained ample stocks of liquid assets. As a result, businesses financed much of their capital expenditures out of internal funds. Nonetheless, elevated merger and acquisition activity and a considerable rise in share buybacks contributed to a pickup in business borrowing, particularly in the form of commercial and industrial (CI large banks, $7.3 billion to $85.7 billion; medium-sized banks, $457 million to $7.2 billion; and small banks, less than $457 million. Data shown in this article may not match data published in earlier years because of revisions and corrections. In the tables, components may not sum to totals because of rounding. Appendix table A.1, A–E, reports portfolio composition, income, and expense items, all as a percentage of overall average net consolidated assets, for all banks and for each of the four size categories. Appendix table A.2 reports income statement data for all banks. 1. Bank profitability, 1990–2005

How do Mergers Create Value? A Comparison of Taxes, Market Power and Efficiency Improvements as Explanations for Synergies

There is little evidence in the literature on the relative importance of the underlying sources of merger gains. Prior literature suggests that synergies could arise due to taxes, market power, or efficiency improvements. Based on Value Line forecasts, we estimate the average synergy gains in a broad sample of 264 large mergers to be 10.03% of the combined equity value of the merging firms. The detailed data in Value Line projections allows for the decomposition of these gains into underlying operating and financial synergies. We estimate that tax savings contribute only 1.64% in additional value, while operating synergies account for the remaining 8.38%. Operating synergies are higher in focused mergers, while tax savings constitute a large fraction of the gains in diversifying mergers. The operating synergies are generated primarily by cutbacks in investment expenditures rather than increased operating profits. Overall, the evidence suggests that mergers generate gains by improving resource allocation rather than by reducing tax payments or increasing the market power of the combined firm.

PFPC: Building an IT Risk Management Competency

IT Risk management is becoming increasingly important for CIOs and their executive counterparts. Educators and managers have materials they can use to discuss specific IT risks in project management, security and other risk-related topics, but they have few resources they can use to have a holistic discussion of enterprise-level IT risk management. This case is intended to address the gap. It describes the IT risks facing a large financial services firm, PFPC, as a result of rapid growth, a large merger and distributed management of the IT function. The firm's first enterprise-wide CIO, Martin Deere used risk management as a key pillar in a major revamp of the firm's applications and IT capabilities. The case is rich in detail on the firm's IT risks, the new risk management process, including examples of the firm's risk management tools. It also describes early lessons and outcomes in the implementation of risk management capabilities. The case has enough richness and potential controversy to engage students from the undergraduate through executive levels in an informative and interesting discussion of IT risk management.

Left at the Altar? A Relational View of Merger and Acquistion Announcements in the 1990s

In this paper, we analyze data on the world's largest merger and acquisition (M&A) announcements in the 1990s to explore the relational factors that determine their completion or withdrawal. Existing research on this little understood phenomenon in the M&A process typically focuses on the characteristics and actions of acquirer firms to understand financial and strategic M&A elements. We offer a new perspective by focusing on the dyadic relationship between acquirer and target firms. Controlling for strategic and financial factors, we find that the completion of an announced M&A is more likely to the extent that the relational capabilities stemming from country-level, industry-level and organizational-level factors generate a cooperative and trustworthy relationship. We conclude by discussing theoretical and managerial implications of our multi-level relational model.

Mergers involving academic medical institutions: Impact on academic radiology departments

During the past 10 years, there have been a number of large health care mergers in which at least one partner has been an academic medical center. This review summarizes the definitions, attributes needed for success, and reasons for failure of mergers. It then describes the various mergers and their outcomes and discusses the impact of the mergers on the involved radiology departments.

Cosmological Growth History of Supermassive Black Holes and Demographics in High-zUniverse

We study the demographics of supermassive black holes (SMBHs) in the local and high-z universe with hard X-ray luminosity functions (HXLFs) of AGNs. First, we compare the mass accretion history at z > 0 with optical luminosity functions (OLFs) and that with HXLFs. We consider the constraints on parameters of mass accretion (energy conversion efficiency and Eddington ratio) and conclude that the constraints based on HXLFs are more adequate rather than that based on OLFs. The sub-Eddington case is allowed only when we use HXLFs. Next, we estimate the upper limit of the cumulative mass density of SMBHs at any redshifts. For an application, we examine if Lyman-Break galaxies (LBGs) at z = 3 already have SMBHs in their centers which are suggested by recent observations. We show that the special conditions should be met in order that a large part of LBGs have SMBHs (for example, large energy conversion efficiency and frequent mergers and/or direct formations at z > 3). The possibility that nearly all LBGs have SMBHs with large mass ratio, such as MBH/M s t e l l a r > 0.005, is reliably ruled out.

Mergers Among Debt Underwriters

This paper examines the impact of two large mergers of underwriters of corporate debt on their distribution and certification capacities. Compared to non-merging firms, the pure investment bank merger (Morgan Stanley and Dean Witter) and the hybrid merger (Citicorp and Salomon) both enhance distribution ability. Neither merger improves certification ability. Furthermore, mergers do not enhance these underwriters' prestige. In co-led syndicates, the listing of merging firms' names tend to follow those of non-merging investment banks, which implies that followers resort to more cumbersome mergers while leaders improve internally to stay competitive. Finally, all other commercial banks that underwrite corporate debt enhance their distribution ability similarly to the hybrid merger.

Really Large Mergers

Really Large Mergers

Measuring large UK accounting firm profit margins, mergers and concentration

This paper examines the relationship between UK accounting firm mergers and increases in profit margins enjoyed by large UK accounting firms. Cowling’s monopoly capitalism model provides the theoretical framework. The empirical parts of this paper draw on a number of quantitative sources, including the fees and staff numbers disclosed by UK accounting firms, official salary data and salary survey data. Correlation is used to show that the accounting firm data is a reliable source of evidence. The data are then used to construct an indicator of concentration, merger impact on concentration, and an indicator of big firm profit margins. Regression is used to estimate the close positive relationship between concentration and profit margins. The results confirm Cowling’s hypothesis that mergers lead to increases in profits. This paper complements Hanlon’s “commercialisation of accounting” thesis by providing an alternative theoretical framework for examining accounting firms and by bringing quantitative sources of evidence to bear.

Bank Mergers, Competition and Liquidity

We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the interbank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statics suggest that a more competitive environment moderates this effect.

Cross-Border Bank Mergers and Acquisitions in the EU

Beginning at the end of the 1990s the banking industry entered into a new phase of consolidation. The US market is experiencing an increasing number of inter-state bank mergers and acquisitions, whereas cross-border mergers between banks in different countries are becoming ever more common in the EU. This paper examines the motives and gains from large cross-border bank mergers by using what has been called a 'balanced scorecard approach'. It assesses firm performance by using both financial and non-financial (strategic) variables. The paper is explorative and covers a select literature review of bank mergers and acquisitions in general and an analysis of the Nordbanken-Merita merger based on the balanced scorecards approach in particular. It is shown that the balanced scorecard may be a very useful technique to analyse the complexity of large cross-border bank mergers and thereby it adds to our over-all understanding of bank mergers across borders. Furthermore, we demonstrate how the growth strategy behind the merger of the two banks may be organised within the framework of a balanced scorecard highlighting the strategic fit between them. Our findings imply that the strategic fit was of a complementary nature. The banks were completing each other rather well in the different perspectives of the model. The success of the merger will therefore very much depend on the capability of cross-utilising the different characteristics and strengths of the merging banks.

Value Creation at the Ongoing Consolidation of the European Banking Markets

The European banking landscape has experienced a profound restructuring since the mid 1980ties and still is substantially changing. In the last three years, prior to the formal start of the European Monetary Union, we counted more completed large mergers and acquisitions (M&A) than in the period between 1985 and 1997. We examine the value implications of 98 large national and international mergers and acquisitions of exchange listed European acquiring banks. Mergers and acquisitions with associated sectors, such as insurance and securities are considered as well. Effects are analyzed for the shareholders of the targets, the bidders and the combined entity of targets and bidders. We find, consistent with prior research, that the shareholders of the targets receive a considerable and significant positive revaluation of their shares. Effects for bidders are mostly insignificant. But, on an aggregate basis mergers and acquisitions of European banks do still create value. However, we detect a shift in results over time. European acquiring banks in large deals have experienced significant negative cumulated abnormal returns since 1998. Moreover, we find that in particular cross-border transactions of European banks seem to be value destroying.

Prior Strategy Processes as a Key to Understanding Mega-mergers:: The Novartis Case

Given that the majority of large mergers does not meet expected results, it is imperative to assess ex ante to what extent a merger concept can be realised in the market environment. The merger concept is usually the result of a not immediately transparent process of negotiation between the management bodies of the merging firms. It remains difficult for researchers to study these negotiation processes with first-hand information. The Novartis case study shows that the merger concept is closely aligned to previous strategy processes of the merging firms. Conducting a longitudinal multilevel analysis focused on resource allocations the authors introduce a new way to explore intra-organisational strategy processes using publicly available information.

Network effects and merger analysis: instant messaging and the AOL–Time Warner case

The AOL–Time Warner merger, announced in January 2000, was and still is the largest merger ever consummated. The merger plan was submitted to the FTC for antitrust review and to the FCC for license transfer review. The FTC approved the merger with conditions relating to open access. The FCC approved the merger subject to a condition (among others) that mandated interoperability for future (but not present) generations of AOL's popular instant messaging (IM) service, based on the potential leveraging of merger assets together with current IM network effects into market power in next-generation IM services. This condition was controversial and represents a new departure in antitrust analysis for industries imbued with network effects. This paper analyzes AOL's IM service and the ability to leverage merger assets into future market power in the context of the FCC condition; counter-arguments are considered and larger lessons for “new economy” antitrust are drawn from this experience and analysis.

Market reaction to large bank merger announcements in oligopolies

This paper evaluates the individual and rival stock price reactions to large bank merger announcements and subsequent regulatory rejection in an oligopoly. The results show that the announcements produce significant positive abnormal returns for the merger candidates. Regulatory obstacles and denial of the proposed mergers produce significant negative returns. Analysis of the rivals’ reactions doesn’t produce consistent significant results. This suggests that the market reactions for the merging banks results are driven by expected increases in efficiencies. The rivals’ reaction is explained by the fact that the market would remain contestable after the mergers since the offered products are homogeneous.(JEL G14, G34)

Intra-Industry Signals Resulting from Insurance Company Mergers

ABSTRACT Given the increasing consolidation in the insurance industry, the authors' objective is to determine how the market revalues the acquirer, target, and rival insurance companies in response to merger announcements. The authors find that target and acquirer insurance companies experience favorable valuation effects at merger announcements. The authors also find positive and significant intra-industry effects in response to the announcements of insurance company mergers, which supports the signaling hypothesis. Furthermore, the authors find that the magnitude of the intra-industry effects is conditioned on the type, size, and location of the insurance companies. INTRODUCTION In recent years, the insurance industry has experienced substantial consolidation as mergers have been consummated to increase shareholder value. (1) The merger between two insurance companies may be value-enhancing for the following reasons. First, the merger may achieve economies of scale, as the combined company provides services at a lower average cost. The underlying factors that allow economies of scale include the application of technology to a larger customer base, a more efficient distribution system, and more efficient funding that reduces financing transaction costs. Second, the merging of two insurance companies may reduce redundant operations or branches, which would allow the remaining resources to work more efficiently. Third, the combination of two insurance companies that emphasize different services may allow for each entity to benefit from the expertise of the other entity. Fourth, to the extent that unsystematic risk is valued (see Harrington, 1983; Williams, 1983; and Venezian, 1984), the combination of two insurance companies may reduce the risk (see Cox and Griepentrog, 1988). Fifth, a merger may serve as a better alternative than potential insolvency for insurance companies that are experiencing financial problems (see BarNiv and Hathorn, 1997). Although there are valid value-enhancing motives for insurance company mergers, the ultimate test of the validity of mergers from a shareholder perspective is based on how shareholder wealth is affected. Many studies have measured the valuation effects of mergers. These studies have generally focused on industrial firms or commercial banks. Although virtually all related studies have found that the target firms experience positive significant valuation effects, the results for the acquiring firms are mixed. The authors' objective is to assess the valuation effects that result from large mergers between insurance companies. More specifically, the authors (1) measure the valuation effects of acquiring and target insurance companies whose stock was publicly traded, (2) measure the valuation effects of rival insurance companies (intra-industry effects) in response to announcements of mergers between insurance companies, and (3) attempt to explain the cross-sectional variation in intra-industry effects among rival insurance companies. The authors find positive and significant valuation effects for publicly traded acquirer and target insurance companies. Second, the authors find positive and significant intra-industry effects in response to the announcements of insurance company mergers, which supports the signaling hypothesis. Third, the authors find that the magnitude of the intra-industry effects is conditioned on the type of insurance company target. The authors also find that the intra-industry effects of insurance company mergers are more pronounced for insurance companies that have a similar size and are located in the same region as the target insurance company. The remainder of this article is organized as follows: the second section develops the hypotheses for intra-industry effects, the third section outlines the data and methodology, the fourth section presents the empirical results, and the final section provides conclusions and implications. …

Executive Commentary

The article discusses the preparation of global organizations in upcoming mergers and acquisitions. The author notes that the majority of corporations tend to crumble from within following a larger merger. Preventing this does not necessarily require a standardized corporate culture to be formed, but rather a concerned risk management view. The author advocates cosmopolitanism rather than xenophobia to help merging companies adjust. Merging partners are encouraged to engage in discussion regarding their outlooks and cultures.

How Different is the Long-Run Performance of Mergers in the Telecommunications Industry?

Using a sample of telecommunications mergers during the 1990-1994 period, we find that acquiring firms underperform relative to their size and industry matched control firms. The annual cumulative abnormal returns (CARs) to these firms are significantly negative for five years following the merger. Shareholders of the acquiring firm suffer a wealth loss of nearly 20% over the five-year post-merger period. We obtain similar results from three- and five-year holding period returns (HPRs). Our findings are consistent with those reported by earlier studies and indicates that regulated industries also experience post-merger underperformance. We do find however upon disaggregation of the sample that larger mergers exhibit positive long-run performance while the mid-size and smaller mergers underperform relative to their control firms. We further observe that conglomerate mergers demonstrate superior long-run performance while that for non-conglomerate mergers is consistent with the aggregate sample findings and suggests significant underperformance.

Bank Mergers in Europe: The Public Policy Issues

A very large merger wave in the banking industry has taken place in Europe over the last 15 years. Public policy‐makers need to assess how bank mergers – be they domestic intra‐industry, across‐industry, or cross‐border – affect their mission of protecting investors and ensuring financial stability, an appropriate level of competition, and the competitiveness of national firms. Moreover, as the banking world is becoming increasingly international, there is a need to reassess the structure of bank regulation and supervision which has been assumed historically by each nation‐state.