Further analysis of mergers and shareholder wealth effects in European banking

Abstract

Although bank mergers have been a topic of ongoing research in the USA, particularly in view of reforms instituted by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the evidence on shareholder wealth effects in European bank mergers is thin. A key question is whether the changes in the banking industry are applicable worldwide or reflect segmentation at the regional level. In this paper results are provided from a larger and more recent sample than previous studies. In contrast to previous findings, findings here are more consistent with those of US bank mergers, leading to the conclusion that there is less geographical heterogeneity in the industry than previous studies indicated. In particular, low target abnormal returns are found, which, it is believed, stem from the fact that acquirers are not willing to pay high premiums in a competitive environment in which profitability levels are eroding. It was found that abnormal returns are higher in bank-to-bank rather than cross-product deals, suggesting that there is still scope for exploiting economies of scale and market power within the banking sector. The evidence in relation to cross-border deals compared to national deals is mixed, giving some weak evidence in favour of the view that there are gains to geographical diversification.

Revisiting the merger and acquisition performance of European banks

“…In general, the results are in line with the majority of studies that report value creation for the shareholders of the targets, albeit lower in comparison to many of them, especially to those dealing with European banks (Cybo-Ottone and Murgia, 2000, Beitel and Schiereck, 2001, Ismail and Davidson, 2005 indicating that acquirers in Europe do not generally pay relatively high prices for target banks. A possible explanation for this is that the increasing competition observed in the European banking industry during the period under examination in the present study made acquiring banks more cautious during their expansion with their management priority focusing on cost rationalisation and the maintenance of present position and secondarily on expansion.…”

“…Also, the CARs are statistically significant at all event windows. These results are derived despite the fact that approximately one third of the CARs is negative, evidence also reported by Ismail and Davidson (2005). In addition, information concerning the deal appears to be gradually leaking into the market starting from a few days before the actual announcement takes place.…”

“…The sample used in this study differs from those of other studies examining the European market (e.g. Cybo-Ottone and Murgia, 2000, Beitel and Schiereck, 2001, Beitel et al, 2004, Lepetit et al, 2004, Ismail and Davidson, 2005, Campa and Hernando, 2006 in that: a) it spans a longer period (1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004); b) it focuses only on banking deals within EU-15 and Eastern Europe, in contrast to other studies that utilised a sample included companies from the financial sector in general; c) it does not restrict the sample requiring both the acquiring and the target bank having their shares listed on an organised stock exchange and therefore conclusions can be reached regarding the potential different reaction of the market to deals involving banks not listed on an exchange (i.e. due to information asymmetries); and d) it utilises balance-sheet data, an approach followed only by Bietel et al (2004) and to some extend by Campa and Hernando (2006).…”

“…However, there are observed significant quantitatively differences between the studies that analyse European M&As, mainly due to the period under examination or the number of firms that were included in the sample used. The first studies (Cybo-Ottone andMurgia, 2000, Bietel andSchiereck, 2001) report relatively higher abnormal returns, closer to those observed in US studies, while the latest studies (Ismail andDavidson, 2004, Campa andHernando, 2006) present more conservative results, still positive and statistically significant though, with the difference attributed to the different structure of the utilised samples.…”

“…Campa and Hernando, 2006, Ismail and Davidson, 2005, Lepetit et al, 2004, Altunbas and Ibanez, 2004, Beitel et al, 2004, Beitel and Schiereck, 2001, Cybo-Ottone and Murgia, 2000. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Thomson Financial Securities Data Company.…”