Target Banks Research Articles

Corporate Governance Structure and Mergers

Few transactions have the potential to generate revelations about the market value of corporate assets and liabilities as mergers and acquisitions (M&A). Corporate governance and control mechanisms such as independent directors, independent blockholders, and managerial share ownership are usually important predictors of the size and distribution of the incremental wealth generated by M&A transactions. The authors add to this literature by investigating these relationships using a sample of banking organization M&A transactions over the period 1990-2004. Unlike research on nonfinancial firms, the impact of independent directors, share ownership of the top five managers, and independent block holders on bank merger purchase premiums in this environment is likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. The authors model controls for risk characteristics of the target banks, the deal characteristics, and the economic environment. Their results are robust. They support the hypothesis that independent directors may provide an important internal governance mechanism for protecting shareholders' interests, especially in large-scale transactions such as mergers and takeovers. The authors also find the results to be consistent with the hypothesis that independent blockholders play an important role in the market for corporate control as does managerial share ownership. But these effects dampen the impact of independent directors on target shareholders' merger prices. Their overall findings would support policies that promote independent outside directors on the board of banking firms in order to provide protection for shareholders and investors at large.

Re-Engineering of Banking Sector Through Merger & Acquisition (with Reference to Selected New Private Sector Banks in Chennai)

Merger and acquisition of Indian banking has occupied an important place amongst the personnel and policy-makers of banking system in recent years, as a sequel to economic reforms to bring in equilibrium and stability in the banking industry. Whether it is merger and acquisition in the free markets or consolidation in the international markets, the underlying objective is similar. Mergers have been considered as a possible avenue for improving the structure and efficiency of the banking industry. Merger is that the value of the combined entities is expected to be greater than the sum of the independent values of the merging entities to reap the following benefits, cost benefits economies of scale, organizational efficiency, funding, costs and risks diversification, revenue benefits - economies of scale, enhancing monopoly rents, and economic conditions - mergers after business crisis or after the upswing of the business cycle to initiate strategies. Other consideration private managerial benefits, defense against takeover. Further, there is variety of reasons to induce merger proposals. Some of them are synergy, tax considerations, economies of scale in operations, diversification. Merger taking place in India are in line with the trend of consolidation that has characterized the financial services industry and, in particular, the banking industry. The world over, banks have been merging at a furious pace, driven by the urge to gain synergies in their operation, derive economies of scale and offer one-stop facilities to a more demanding clientele.The financial and strategic management aspect of merger is to be analyzed from several angles and the study evaluated financial implications before and after mergers in the banking industry. Further, the reaction of security prices to announcement of M & A decisions are also studied. Survival is the ultimate objective of any organization and Mergers and Acquisitions is one form of survival strategy the predominant factors which create target and source banks for the M&A, were also not discussed in the literature works.

Trade Credits and Bank Loans for SMEs in the Textile Sector

We investigate the relationship between trade credits and bank loans for on average 493 Turkish SMEs in the textile sector. Our study period extends from the year 1997 to 2005, totaling 1973 observations. The results indicate, interestingly, a non-linear relationship between trade credits and bank loans. Specifically, at low levels of trade credits, bank loans increase with the rise in trade credits, confirming the complementing argument. Whereas at higher levels of trade credits, by corroborating the substitution argument, banks become reluctant to grant external finance to firms. Moreover, we do not detect that outside and domestic financial crises alter the pattern of the non-monotonic relationship. Furthermore, while firm size, firm age and foreign sales have a positive impact on bank loans, profitability has a fairly adverse influence. Finally, we find a modest speed of adjustment to target bank loans for the firms.

How to Identify the Best Target in the M&A Banking Operations? Case of Cross-Border Strategies in Europe by Line of Activity

During the last decades, the European banking system has known some deep changes. They have led to mergers and acquisitions (M&As). The available studies show that the failure rate of theses M&As is relatively high. Cross-border operations are more exposed to this risk. The high failure rate is due to the cultural and contextual differences between the M&A participants, differences which make the process of integration particularly difficult. Thus, the success of M&As depends on the choice of adequate M&A targets. This choice constitutes the main challenge for company leadership. The aim of this paper is therefore to determine the factors which permit to identify the best M&A targets. Our contribution compared to that of previous research is that we study M&As and the identification of targets by line of bank activities. On the basis of a sample made up of 1071 European banks, between 2000 and 2006, we use a Logit Multinomial Model. Our main results show that the target banks tend to be specialized in investment and market activities while the acquiring banks tend to approach themselves to the universal bank model.

M&A and Post Merger Integration in Banking Industry: The Missing Link of Corporate Culture

The intense concentration process taking place in the financial systems of the major countries has attracted substantial attention from stakeholders and academics. The impact of M&A on value creation and efficiency / effectiveness improvements of banks involved appears, on the whole, disappointing and still hard to create benefits for customers. The reason seems to lie in the difficulty of governing a post-merger integration process, which generally requires good governance and management practices, significant experience and attention to cultural profiles and individuals’ behavior. More in detail, management literature recognizes the importance of corporate culture, considered as the set of values and decisions that drive individuals’ behaviors within organizations, for explaining alliance success in M&A operations. In fact cultural clashes could determine conflicts and negative effects, on one hand, on the timing and the effectiveness of the post-merger integration process and, on the other hand, on motivation and turnover of individuals. Set in Italian banking industry, this paper proposes a framework, applied to a representative sample of cases (about 78,2% of market share, based on total assets), for assessing cultural similarity of actors involved in M&A operations. Corporate culture is measured using an ethnographic approach focusing on language as its special artifact. The assessment is based on the definition of some key concepts that are relevant for the banking industry (e.g., competencies, competition, customer, disclosure, human resources, innovation, risk) and on a text-analysis model applied to a corpus of reference texts produced by the surveyed banks three years before M&A. The elaboration of data uses Wordsmith 4, a text analysis software developed by Oxford University. The paper is organized as follows: at first, we analyze and explain how low levels of cultural compatibility before M&A could limit the success of post-merger integration processes of banks. After, we propose and describe the measurement procedure of the cultural fit among bidder and target banks, based on text analysis. Lastly, we conclude with the discussion of the results obtained for each couple of banks involved in M&A and with suggestions for future applications of our framework.

Assessing the impact of mergers and acquisitions on bank profit efficiency: empirical evidence from Malaysia

The present paper examines the impact of forced mergers and acquisitions on the profit efficiency of the Malaysian banking sector. The analysis consists of three stages. Firstly, by using the data envelopment analysis (DEA) approach, we calculate the profit, profit pure technical efficiency, and profit scale efficiency of individual banks during the period 1997-2003. Secondly, we examine the changes in the efficiency of the Malaysian banking sector during the pre- and post-merger periods by using a series of parametric and non-parametric univariate tests. Finally, we perform a panel regression analysis to investigate the relationship between the efficiency of the Malaysian banks while controlling for the potential effects of the contextual variables. We find that the target banks have been relatively more profit efficient in six out of the seven merger cases analysed. The empirical findings suggest that the profit efficiency of the acquiring banks improves (deteriorates) from the merger with a more (less) efficient bank in six out of the seven merger cases analysed.

Determinants of Domestic and Cross-Border Bank Acquisitions in the European Union

This paper analyzes the determinants of bank acquisitions both within and across countries in the EU-25 over the period 1997-2004. The findings of this paper are broadly in line with those of the academic literature on the subject, which are mainly based on the US experience. Our results suggest poorly managed EU-25 banks (high cost to income) are more likely to be acquired by other EU-25 banks, in the same country. Nevertheless, this underperformance of target banks does hold for cross border bank acquisitions only if compared to the median of the market. Larger banks are more likely to be acquired by other banks in the same country. The probability of being acquired by another bank in the same market is larger for banks that are quoted in the stock market, which is consistent with the disciplinary character of listing in the stock markets. Finally, banks operating in more concentrated markets are less likely to be acquired by other banks operating within the same country but are more likely to be acquired by banks in other EU-25 countries.

Cross-Border Bank Acquisitions: Is there a Performance Effect?

This paper uses a unique database that includes deal and bank balance sheet information for 220 cross-border acquisitions between 1996 and 2003 to analyze the characteristics and performance effects of international takeovers on target banks. A discrete choice estimation shows that banks are more likely to get acquired in a cross-border deal if they are large, bad performers, in a small country, and when the banking sector is concentrated. Post-acquisition performance for target banks does not improve in the first 2 years relative to domestically-owned financial institutions. This result is explained by a decrease in the banks’ net interest margin in developed countries and an increase in overhead costs in emerging economies.

The Search for Value: Cross-border Bank M&A in Emerging Markets

Between 1998 and 2005, we identify 73 cross-border bank mergers and acquisitions (M&A) transactions in which international banks acquired ownership stakes in 46 listed banks in emerging market economies (EME). A total of $797.5 billion of bank assets was acquired for $37.5 billion in Latin America, Central and Eastern Europe, and Asia. Using event study methods, we establish (1) whether the announcement of cross-border M&A transactions generates value for bank shareholders; and (2) whether M&A characteristics and/or economic and institutional features explain returns to bank shareholders in EME from cross-border investments. Consistent with US and European evidence, cross-border M&A creates value or significant abnormal returns for target bank shareholders. Yet, returns to shareholders at acquiring banks often exhibit value destruction; cross-border M&A activity in banking is not found to facilitate wealth redistribution from EME to industrialised countries. A regression analysis confirms the importance of the institutional and economic environment, as well as target bank profitability and the method through which international banks acquire ownership stakes, as significant determinants of abnormal returns.

Bank Mergers and Small Firm Finance: Evidence from Lender Liability

As a merger approaches, the value of repeat business for the target bank can drop sharply, so loan relationships between this bank and small businesses are often disrupted. Small firms sometimes experience serious value destruction as a consequence of this sudden lack of credit. This paper shows that lender liability may result from bank mergers and bankers involved in mergers often engage in aggressive, scorched‐earth defense tactics to discourage further litigation. I summarize six lender liability cases to illustrate these points. Bank mergers have been shown to reduce credit availability in a number of studies. Since small firms depend on credit for their daily existence, owners of small firms do have a reason to fear a merger of their bank with a larger institution. Analyzing merger effects with survey data of firms obtained after a bank merger, an empirical strategy used in a number of studies, raises problems since the only firms considered are the ones that survived the bank merger. Suggesting that the problem will cure itself in the long run, an argument advanced in other studies, ignores small firms' daily dependence on credit. In the long run we are all dead. Bank examiners need to evaluate an institution's litigation experience and measure a bank's organizational architecture – its ethical climate. Banks which are repeatedly involved in lender liability lawsuits should be denied future mergers until there is a change in organizational architecture. To assist in evaluating organizational architecture, banks should be required to report their litigation expense on their call reports. Furthermore, regulators should seriously consider the recent suggestion of Carow, Kane and Narayanan (2006) that they take steps to ensure that participants in bank mergers preserve target bank relationships. Otherwise negative effects on small business lending and economic growth will continue as bank consolidation proceeds.

The Second Financial Reform and the Development of Financial Industry in Taiwan

All 11 cases of listed banks in Taiwan involved in merger and acquisition during 2000–2006 are examined. In this paper, the cumulative abnormal returns of acquiring banks two days after merger announcement are found to be negative, although target banks' shareholders enjoy higher abnormal returns. For acquiring banks, the post-merger cost efficiencies are not improved. State-owned banks are more efficient and profitable. Operating restrictions on banks and the recession during sample period are the major reasons. It is also suggested that several state-owned banks should be preserved as a means of improving social welfare.

Cross-Border Bank Acquisitions: Is there a Performance Effect?

This paper uses a unique database that includes deal and bank balance sheet information for 220 cross-border acquisitions between 1994 and 2003 to analyze the characteristics and performance effects of international takeovers on target banks. A discrete choice estimation shows that banks are more likely to get acquired in a cross-border deal if they are large, bad performers, in a small country, and when the banking sector is concentrated. Post-acquisition performance for target banks does not improve in the first two years relative to domestically-owned financial institutions. This result is explained by a decrease in the banks’ net interest margin in developed countries and an increase in overhead costs in emerging economies.

Do weak supervisory systems encourage bank risk-taking?

Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.

Impact of Merger Announcements on Shareholders' Wealth: Evidence from Indian Private Sector Banks

This study analyses five mergers in the Indian banking sector to capture the returns to shareholders as a result of the merger announcements using the event study methodology (Brown and Warner, 1980, 1985; and MacKinlay, 1997). These are mergers of the Times Bank with the HDFC Bank, the Bank of Madura with the ICICI Bank, the ICICI Ltd. with the ICICI Bank, the Global Trust Bank with the Oriental Bank of Commerce, and the Bank of Punjab with the Centurion Bank. The Fama and Miller (1972) market model and Cox and Portes. (1998) twofactor model form the theoretical framework of this study. The aim is to understand the shareholder wealth effects of bank mergers. Using the single-factor model, the study finds that the average cumulative abnormal return (CAR) of the bidder banks is positive and substantial. These results are also statistically significant. Thus, the bidder banks got significant positive abnormal returns. The two-factor model results reveal that the merger announcement in the Indian private sector banks generated a positive and statistically significant CAR of 5.24 per cent, 7.83 per cent, and 8.59 per cent in a one-day, two-day, and three-day run-up window respectively to the shareholders of the bidder banks. The single-factor model finds that the combined CAR for all the target banks is positive, significant, and substantial. The combined CAR has been propped up due to very high CAR registered by the Bank of Madura. The bidder banks created a wealth of Rs 4,117.98 million in a one-day window (singlefactor model) as a result of the merger announcements. In the case of target banks, the shareholders of the Global Trust Bank and the Bank of Punjab appear to be the losers; they lost Rs 382.55 million in a one-day run-up window (single-factor model) and Rs 128.74 million in a one-day window (single-factor model) respectively. The Oriental Bank of Commerce and the Global Trust Bank combined lost 14.78 per cent in value on a weighted average basis in a 11-day period (-5, 5) window. This merger was the first major move to bail out a sick bank. The merger announcements in the Indian banking industry have positive and significant shareholder wealth effect both for bidder and target banks. The market value weighted CAR of the combined bank portfolio as a result of merger announcement is 4.29 per cent in a threeday period (-1, 1) window and 9.71 per cent in a 11-day period (-5, 5) event window.

Bank Mergers and Lending Relationships

This paper analyses the effects of bank mergers on bank firm relationships. Using matched bank-firm level data, I find that mergers disrupt lending relationships, specially to small borrowers of target banks. However, I find significant positive effects of mergers for borrowers that continue the lending relationship with the consolidated bank. On average, consolidated banks reduce loan interest rates. The most beneficial mergers from the borrower point of view are those involving two large banks and commercial banks. While the reduction in interest rates is larger when the acquirer and the target have some market overlap, the decline is much smaller when there is a significant increase in local banking market concentration. JEL Classification: G21, G34

Characteristics of acquired firms: the case of the banking industry

Purpose – The purpose of the paper is twofold: to determine firm characteristics that explain mergers in the banking industry and to predict the likelihood of a merger.Design/methodology/approach – A logit model is used to estimate coefficients. The paper also tests the effect of the Financial Services Modernization Act on market structure and uses a national sample from 1997 to 2003.Findings – Results indicate that profitability (PROF), size (SIZE), asset management (ASSETMGT), and solvency (SOLV) are factors in explaining mergers in the full sample model. Poor ASSETMGT, large target banks, low PROF, and solvent banks represent merged firms in the full sample model. The results also indicate that loan activity is not a factor in explaining mergers. It appears that banks merged before the Financial Services Modernization Act (Pre‐1999 Merger Model) are characterized by poor ASSETMGT, and are solvent. In contrast, the only factor explaining mergers after the Financial Services Modernization Act (Post‐1999 ...

Long Term Effects of Bank Acquisitions in Central and Eastern Europe

We study the long term effects on the target banks of 84 bank acquisitions in 17 countries in Central and Eastern Europe and the Commonwealth of Independent States. Applying median difference tests we analyse the post merger gains in profitability and cost efficiency as well the expansion of the loan portfolios. Though the absolute values of profitability and efficiency of the target banks three years after the acquisition do not differ from those of domestic banks not involved in M&A activities, the improvements in performance and loan growth are significantly better in the post merger phase. Furthermore we investigate determinates explaining the individual changes of the target banks' characteristics. In contrast to prior research we can not confirm that western acquirer achieve a better post merger performance than domestic acquirer. Performance improvements are strictly positively related to the cost efficiency and profitability of the acquirer. Loan growth after the acquisition is mainly driven by country specific factors. Large acquirers from western countries with a strong economy seem to invest in targets located in nations with a high GDP growth and low corporate income tax rates.

Asset restructuring strategies in bank acquisitions: Does distance between dealing partners matter?

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 transaction-based products, at the expense of small and informationally opaque borrowers. These changes may be the result of two distinct restructuring strategies pursued by the acquirer with respect to the asset portfolio of the acquired bank: a cleaning strategy (CS), in which the acquirer makes a clean sweep of all the negative net present value activities in the portfolio of the acquired bank, and a portfolio strategy (PS), 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 distinguish acquisitions according to their geographic diversifying character and to the physical and cultural distances that separate acquiring from acquired banks. When we look at the mean value, we do not find clear evidence of a primacy either of CSs or PSs. When we separate in-market from out-of-market bank acquisitions, however, results show that the CSs prevail only in the former type of deals, while in the latter the portfolio of acquired banks is subject to PSs. Finally, we find that differences in asset restructuring strategies can be explained by differences in corporate culture and the workplace environment of the dealing partners.

The Determinants of Target Returns in European Bank Mergers

Announcement period abnormal returns for target banks are generally considered low compared to non-bank mergers. In this paper the factors that influence those returns in European bank mergers is examined. Sixty-seven deals from the EU, Norway and Switzerland are studied for which both targets and acquirers were listed companies (some of these being cross-border mergers and acquisitions), and find that European cross-border acquisitions tend to generate higher returns than national acquisitions. Cash deals and deals that are settled by a mix of cash, equity and loan notes create higher returns than equity transactions. It was also found that the target profitability and the relative asset growth rate have significant positive relation with the stock return. In addition, the significance of loan quality, the relative cost to income ratio and the ratio of loans to deposits, all point to the importance of efficiency in the European financial services industry.

Factors Determining Mergers of Banks in Malaysia’s Banking Sector Reform

What was termed government-guided merger was a unique banking sector reform implemented in 2002 by the central bank of Malaysia guiding a larger number of depository institutions to form 10 large banks. This paper identifies the factors entering this massive merger exercise. Similar to the finding in bank merger literature, we find larger banks became acquirers. Also, low risk banks had higher probability of becoming an acquiring bank while high-risk banks became targets for takeover. Surprisingly managerial performance—financial ratios and changes in productivity reported as significant factors in prior market-based merger studies—was not significant in this study. Banks closely connected to government had greater chance of becoming acquiring banks while the reverse is true of target banks. These findings have not been reported in other studies of mergers, and are likely to be useful to central banks considering similar reforms.