The choice of IPO versus M&A: evidence from banking industry

Abstract

This study investigates factors influencing private banks' exit strategy between going public (Initial Public Offering (IPO)) and being a target in Merger and Acquisitions (M&A). Evidence indicates that a bank with high liquidity, operating in a geographical deregulatory environment is more likely to go for the M&A option. Larger and older institutions, improved economic environment, increased recent trend of choosing IPOs and smaller difference in premiums paid between the alternative choices are likely to encourage banks to opt for IPO as an exit strategy. We observe the existence of self-selection in making the exit choice and find that the average transaction value of bank IPOs (M&As) would have been higher (lower) had the banks chosen to engage in M&A (IPOs).

What influences a bank's decision to go public?

“…On the other hand, the return on equity, the ratio of total loans to total assets, and the size of the institution are not important determinants of a bank's decision to go public. Francis, Hasan, and Siregar (2009) use 272 U.S. banks from the Securities Data Company Global New Issues database in the logistical regression to distinguish the IPO decision from mergers and acquisitions. They demonstrate that a bank is less likely to go public during difficult economic times.…”

Firms in Transition: A Review of the Venture Capital, IPO, and M&A Literature

“…Based on a sample of U.S. banks that went public and U.S. banks with M&A deals in the period 1985 to 1999, Francis, Hasan, and Siregar () investigate factors influencing private banks' choice of exit strategy between an IPO or M&A. They found that banks with high liquidity, and operating in a geographically deregulated environment, are more likely to use the M&A option.…”